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 2, 1998
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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
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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:
47,131,017 shares of Common Stock, par value $.01 per share,
as of December 9, 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 November 2, 1998 and January 26, 1998... 3
Consolidated Statements of Income for the twelve and forty weeks
ended November 2, 1998 and November 3, 1997 .......................... 4
Consolidated Statements of Cash Flows for the forty weeks ended
November 2, 1998 and November 3, 1997 ................................ 5-6
Notes to Consolidated Financial Statements ............................... 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 11-17
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds............................ 18
Item 6. Exhibits and Reports on Form 8-K .................................... 18-20
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
ASSETS
November 2, January 26,
1998 1998
------------ -----------
Current assets:
Cash and cash equivalents $ 33,869 $ 30,382
Accounts receivable 33,215 27,317
Related party receivables 1,160 1,171
Inventories 23,013 17,024
Prepaid expenses 12,916 13,045
Other current assets 941 3,217
---------- ----------
Total current assets 105,114 92,156
Property and equipment, net 936,498 627,026
Property under capital leases, net 84,584 47,528
Long-term investments 35,153 48,089
Notes receivable 6,412 11,162
Related party receivables 8,251 7,626
Costs in excess of assets acquired, net 231,051 95,744
Other assets 37,792 28,037
---------- ----------
$1,444,855 $ 957,368
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 30,587 $ 15,812
Current portion of capital lease obligations 7,966 5,499
Accounts payable 71,922 60,303
Deferred income taxes, net 5,990 5,675
Other current liabilities 109,664 89,195
---------- ----------
Total current liabilities 226,129 176,484
---------- ----------
Long-term debt 298,551 138,793
Convertible subordinated notes 167,225 --
Capital lease obligations 92,612 56,801
Other long-term liabilities 93,875 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
47,131,017 and 46,523,179 shares 471 465
Additional paid-in capital 373,585 366,110
Retained earnings 192,407 131,937
---------- ----------
Total stockholders' equity 566,463 498,512
---------- ----------
$1,444,855 $ 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)
Twelve Weeks Ended Forty Weeks Ended
----------------------------- -----------------------------
November 2, November 3, November 2, November 3,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues:
Company-operated restaurants:
Carl's Jr $ 124,197 $ 113,826 $ 411,736 $ 371,606
Hardee's 267,515 150,027 811,988 203,925
Taco Bueno 18,679 17,211 62,453 57,289
Other 8,048 25,812 49,779 101,836
----------- ----------- ----------- -----------
418,439 306,876 1,335,956 734,656
----------- ----------- ----------- -----------
Franchised and licensed restaurants and other:
Carl's Jr 22,446 18,687 72,904 61,089
Hardee's 16,590 21,628 50,830 28,240
Other 130 264 967 928
----------- ----------- ----------- -----------
39,166 40,579 124,701 90,257
----------- ----------- ----------- -----------
Total revenues 457,605 347,455 1,460,657 824,913
----------- ----------- ----------- -----------
Operating costs and expenses:
Restaurant operations:
Food and packaging 123,574 95,530 401,972 225,591
Payroll and other employee benefits 127,325 96,838 410,118 220,576
Occupancy and other operating expenses 85,263 60,863 259,549 148,635
----------- ----------- ----------- -----------
336,162 253,231 1,071,639 594,802
Franchised and licensed restaurants and other 25,169 27,459 82,996 69,668
Advertising expenses 26,185 17,431 78,406 42,293
General and administrative expenses 29,195 24,240 91,950 55,759
----------- ----------- ----------- -----------
Total operating costs and expenses 416,711 322,361 1,324,991 762,522
----------- ----------- ----------- -----------
Operating income 40,894 25,094 135,666 62,391
Interest expense (10,922) (4,444) (32,764) (12,027)
Other income (expense), net (2,899) 1,192 (296) 6,733
----------- ----------- ----------- -----------
Income before income taxes and extraordinary item 27,073 21,842 102,606 57,097
Income tax expense 10,927 8,740 41,124 22,864
----------- ----------- ----------- -----------
Income before extraordinary item 16,146 13,102 61,482 34,233
Extraordinary item - gain on early retirement of debt,
net of applicable income tax expense of $1,750 2,738 -- 2,738 --
----------- ----------- ----------- -----------
Net income $ 18,884 $ 13,102 $ 64,220 $ 34,233
=========== =========== =========== ===========
Basic income per common share before
extraordinary item $ 0.34 $ 0.28 $ 1.31 $ 0.83
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes - Basic 0.06 -- 0.06 --
----------- ----------- ----------- -----------
Basic net income per share $ 0.40 $ 0.28 $ 1.37 $ 0.83
=========== =========== =========== ===========
Basic weighted average shares outstanding 47,105 46,112 46,833 41,066
=========== =========== =========== ===========
Diluted income per common share
before extraordinary item $ 0.34 $ 0.27 $ 1.26 $ 0.81
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes - Diluted 0.05 -- 0.05 --
----------- ----------- ----------- -----------
Diluted net income per share $ 0.39 $ 0.27 $ 1.31 $ 0.81
=========== =========== =========== ===========
Diluted weighted average shares outstanding 51,978 47,673 51,613 42,317
=========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Forty Weeks Ended
--------------------------
November 2, November 3,
1998 1997
----------- -----------
Net cash flow from operating activities:
Net income $ 64,220 $ 34,233
Adjustments to reconcile net income to net
cash provided by operating activities,
excluding the effect of acquisitions and dispositions:
Extraordinary gain on early retirement of debt (4,488) --
Depreciation and amortization 57,771 34,583
Loss on sale of property and equipment and capital leases 1,179 2,172
Net noncash investment and dividend income (872) (2,734)
Deferred income taxes -- 6,266
Loss on noncurrent asset and liability transactions 5,148 716
Net change in receivables, inventories, prepaid
expenses and other current assets (3,633) (4,110)
Net change in accounts payable and other current liabilities 409 (18,773)
--------- ---------
Net cash provided by operating activities 119,734 52,353
--------- ---------
Cash flow from investing activities:
Purchases of:
Marketable securities -- (393)
Property and equipment (85,986) (70,499)
Long-term investments -- (14,054)
Proceeds from sales of:
Marketable securities and long-term investments 12,500 393
Property and equipment 9,325 2,918
Increase in notes receivable, related party receivables
and leases receivable (2,314) (464)
Collections on notes receivable, related party receivables
and leases receivable 5,566 5,812
Net change in other assets 548 (388)
Acquisitions, net of cash acquired (405,529) (321,132)
Dispositions, net of cash surrendered 940 16,286
--------- ---------
Net cash used in investing activities (464,950) (381,521)
--------- ---------
Cash flow from financing activities:
Net proceeds from common stock offering -- 222,343
Net change in bank overdraft 14,268 1,803
Short-term borrowings -- 20,000
Repayments of short-term borrowings (435) (8,750)
Long-term borrowings 287,870 114,389
Proceeds from convertible subordinated notes 197,225 --
Repayments of long-term debt (113,731) (20,418)
Repurchase of convertible subordinated notes (24,723) --
Repayments of capital lease obligations (6,332) (3,728)
Deferred financing costs (10,384) (4,118)
Net change in other long-term liabilities 2,257 (933)
Payment of dividends (3,780) (3,012)
Exercise of stock options 6,468 3,225
--------- ---------
Net cash provided by financing activities 348,703 320,801
--------- ---------
Net increase (decrease) in cash and cash equivalents 3,487 (8,367)
Cash and cash equivalents at beginning of period 30,382 46,330
--------- ---------
Cash and cash equivalents at end of period $ 33,869 $ 37,963
========= =========
See Accompanying Notes to Consolidated Financial Statements.
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
Forty Weeks Ended
--------------------------
November 2, November 3,
1998 1997
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 28,749 $ 9,559
Income taxes 28,754 15,433
Noncash investing and financing activities:
Hardee's Acquisition:
Tangible assets acquired at fair value $ -- $ 461,978
Costs in excess of net assets acquired -- 24,848
Liabilities assumed at fair value -- (159,826)
--------- ---------
Total purchase price $ -- $ 327,000
========= =========
FEI Acquisition:
Tangible assets acquired at fair value $ 361,547 $ --
Costs in excess of net assets acquired 106,451 --
Liabilities assumed at fair value (87,361) --
--------- ---------
Total purchase price $ 380,637 $ --
========= =========
Disposition of Assets:
Tangible assets disposed at book value $ -- $ 18,832
Liabilities relieved at book value -- (8,410)
--------- ---------
Total cash proceeds $ -- $ 10,422
========= =========
Disposition of Assets:
Tangible assets disposed at book value $ 31,723 $ --
Liabilities relieved at book value (20,678) --
--------- ---------
Transfer to unconsolidated equity investment $ 11,045 $ --
========= =========
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 2, 1998 AND NOVEMBER 3, 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) ACQUISITIONS
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
$380.6 million (which includes miscellaneous expenses paid to Advantica) and the
assumption of approximately $45.6 million in capital lease obligations.
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. ("Imasco"), which represents the net asset
value of Hardee's as of July 15, 1997. The Company issued 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 acquisition.
Selected unaudited pro forma combined results of operations for the
40-week periods ended November 2, 1998 and November 3, 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:
Forty Weeks Ended
------------------------------------
November 2, 1998 November 3, 1997
---------------- ----------------
Total revenues $1,581,854 $1,683,615
Income before extraordinary item $ 59,861 $ 26,664
Net income $ 62,599 $ 26,664
Basic net income per share $ 1.34 $ 0.58
Diluted net income per share $ 1.28 $ 0.56
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOVEMBER 2, 1998 AND NOVEMBER 3, 1997
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 July 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. As of November 2, 1998, the Company is in compliance with all of its
debt covenants.
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)).
During the third quarter of fiscal 1999, the Company's Board of
Directors approved the buyback of up to $50.0 million aggregate principal amount
of Notes. To date, the Company has repurchased $35.0 million of Notes on the
open market for $28.8 million in cash, including accrued interest thereon, of
which $30.0 million was repurchased during the third quarter. In connection with
the $30.0 million repurchase, the Company recognized an extraordinary gain in
the third quarter on the early retirement of debt of $4.5 million, net of
applicable taxes of $1.8 million.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOVEMBER 2, 1998 AND NOVEMBER 3, 1997
NOTE (E) DISPOSITION OF JB'S FAMILY RESTAURANTS, INC.
On September 1, 1998, the Company completed two transactions which
resulted in the disposition of the entire JB's Restaurant system and Galaxy
Diner restaurants. First, the Company sold 14 Company-operated JB's Restaurants
and two Galaxy Diner restaurants to Timber Lodge Steakhouse, Inc. for 687,890
shares of Timber Lodge common stock, which was converted into Santa Barbara
Restaurant Group, Inc. ("SBRG"), formerly GB Foods Corporation, common stock in
connection with the merger of Timber Lodge and SBRG. Second, the Company sold
its wholly owned subsidiary, JB's Family Restaurants, Inc., which consisted of
the remaining 48 Company-operated JB's Restaurants and the JB's franchise system
together with four Galaxy Diner restaurants, to SBRG for one million shares of
SBRG common stock. Together, these transactions give the Company approximately
13% ownership in SBRG.
NOTE (F) SALE OF INVESTMENT IN STAR BUFFET, INC.
On November 2, 1998, the Company completed its sale of two million
shares of Star Buffet, Inc. ("Star Buffet") common stock to Star Buffet, for a
cash sales price of $12.5 million. The proceeds consisted of $5.0 million in
cash and a $7.5 million promissory note, which was paid in full on November 2,
1998. In connection with the sale, the Company recognized a non-recurring gain
of $10.3 million, which is included in other income (expense), net.
Additionally, effective November 2, 1998, William P. Foley II, the
Company's chairman and chief executive officer, resigned as Star Buffet's
chairman and from its board of directors, and Tom Thompson, the Company's
president and chief operating officer, also resigned from Star Buffet's board of
directors.
NOTE (G) INVESTMENT IN BOSTON WEST, L.L.C.
During the third quarter of fiscal 1999, the Company signed an agreement
with Boston West, L.L.C. ("Boston West"), to provide administrative and
management services to the Boston Market franchises in Southern California
operated by Boston West. The Company, through its subsidiary Boston Pacific,
Inc., holds an 11% common equity interest in Boston West.
The Company also signed a transition services agreement with Boston
Chicken, Inc. ("BCI"), operator and franchisor of the Boston Market chain, for
BCI to provide certain accounting and administrative services on an interim
basis, through the end of the calendar year with an option to extend to January
31, 1999.
BCI and its Boston Market subsidiaries filed for protection under
Chapter 11 of the Federal Bankruptcy Code on October 5, 1998. In a separate
action, on November 9, 1998, Boston West filed a voluntary petition under
Chapter 11 of the Federal Bankruptcy Code in order to restructure its overall
operations.
The Company recorded a $15.0 million one-time charge to its Boston West
investment during the third quarter of fiscal 1999 to reflect the estimated
remaining value of the Boston West business. The write-down is reflected in
other income (expense), net.
NOTE (H) 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 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)
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOVEMBER 2, 1998 AND NOVEMBER 3, 1997
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 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that costs incurred during
a start-up activity (including organization costs) be expensed as incurred. SOP
98-5 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. The impact of the adoption of SOP 98-5 on the Company's
consolidated financial position or results of operations will not be material.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
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 2, 1998
increased 44.1% to $18.9 million, or $0.39 per share on a diluted basis as
compared with net income of $13.1 million, or $0.27 per share on a diluted basis
for the prior year quarter. Net income for the 40-week period ended November 2,
1998 increased 87.6% to $64.2 million, or $1.31 per share on a diluted basis as
compared with net income of $34.2 million, or $0.81 per share on a diluted basis
for the prior year period. Net income, excluding the $4.5 million extraordinary
gain on the early retirement of debt and one-time charges of $15.0 million
relating to the writedown of the Company's investment in Boston West and the
gain of $10.3 million from the Company's sale of its investment in Star Buffet,
increased 44.7% and 87.8% for the 12 and 40-week periods ended November 2, 1998,
respectively, to $19.0 million, or $0.39 per share on a diluted basis, and $64.3
million, or a $1.31 per share on a diluted basis, respectively. 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 of Hardee's with 557 Hardee's
restaurants, which was acquired 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 same-store sales growth and
improvements in operating efficiencies. Operating results for the 40 weeks ended
November 2, 1998 include 40 weeks of operations for Hardee's and 31 weeks of
operations for the Hardee's restaurants operated by FEI. The corresponding
period of the prior fiscal year includes 16 weeks of operations for Hardee's and
does not include the results of operations of any of the Hardee's restaurants
operated by FEI, but includes the royalty income from the 557 Hardee's
restaurants operated by FEI.
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 Santa Barbara Restaurant Group, Inc.
("SBRG"), formerly GB Foods Corporation. During the third quarter, the Company
opened an additional eight dual-brand Company-operated restaurants and its
franchisees opened five dual-brand restaurants for a total of 133
Company-operated and 24 franchised restaurants operating as of November 2, 1998.
During the first quarter of fiscal 1999, the Company made a significant
step toward balancing the number of Hardee's franchise and Company-operated
stores with the acquisition of FEI for the purchase price of $380.6 million plus
the assumption of $45.6 million in capital lease obligations. (See Note (B) of
Notes to the Company's consolidated financial statements as of and for the
period ended November 2, 1998). As of November 2, 1998, the Company operates
approximately 51% of the Hardee's system. The acquisition was financed in part
by $192.3 million in net proceeds the Company raised from a private placement of
convertible subordinated notes, which was completed on March 13, 1998, and in
part by 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; 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; and other risks
detailed in the Company's filings with the Securities and Exchange Commission.
11
12
CKE RESTAURANTS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
Revenues from Company-operated restaurants increased $111.6 million, or
36.4 %, to $418.4 million and $601.3 million, or 81.8%, to $1.336 billion for
the 12- and 40-week periods ended November 2, 1998, respectively. Carl's Jr.,
Hardee's and Taco Bueno Company-operated revenues contributed $10.4 million,
$117.5 million and $1.5 million, respectively, to the increase in revenues in
the 12-week period and $40.1 million, $608.1 million and $5.2 million,
respectively, to the increase in revenues in the 40-week period. Offsetting
these increases was the decrease in revenues from the Company's HomeTown Buffet
and Casa Bonita Restaurants which were sold to Star Buffet in connection with
its initial public offering in September 1997, and the Company's JB's
Restaurants and Galaxy Diner restaurants which were sold to SBRG on September 1,
1998. On a same-store sales basis (calculated using only restaurants that were
in operations for the full periods being compared), revenues from
Company-operated Carl's Jr. restaurants increased 2.6% in the 12-week period
ended November 2, 1998, on top of a 2.1% same-store sales increase in the third
quarter of fiscal 1998, marking the 14th consecutive quarter of same-store sales
increases. Same-store sales for Taco Bueno increased 7.1% in the third quarter
of fiscal 1999 as compared with a 4.5% increase in the third quarter last year,
also the 14th consecutive quarter of same-store sales increases.
Company-operated Hardee's same-store sales decreased 7.2% for the third quarter,
a 3.6% improvement from the 10.8% decline experienced in the first quarter of
fiscal 1999.
The increase in revenues for the Company's Carl's Jr. restaurants are
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, the
image enhancement of its restaurants, which was completed in December 1997 and
the increase in the number of Company-operated Carl's Jr. restaurants operating
in fiscal 1999 as compared with fiscal 1998. The increase in revenues for the
Taco Bueno chain is due in part to a new advertising campaign, which, similar to
Carl's Jr., focuses on great-tasting food products. Additionally, the Company
has been focusing on more prime real estate than previously targeted for its new
restaurants. The four 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 the Company's Carl's Jr. and Taco Bueno
restaurants concepts continued to increase and reached $1,190,700 and $726,800
on a rolling 13-period basis, respectively, at the end of the third quarter.
Average unit volumes for the Company's Hardee's restaurants ended the quarter at
$808,100.
Revenues from franchised and licensed restaurants and other for the
12-week period ended November 2, 1998 decreased 3.5% to $39.2 million over the
comparable prior year period while for the 40-week period ended November 2,
1998, these revenues increased 38.2% to $124.7 million over the same prior year
period. The revenue decrease in the current quarter reflects the conversion of
certain Hardee's franchised restaurants into Company-owned restaurants,
including the purchase of FEI on April 1, 1998. (See Note (B) of Notes to the
Company's consolidated financial statements as of and for the period ended
November 2, 1998). The revenue increases for the year-to-date period were mainly
due to royalties from the Hardee's franchise system, increased royalties from,
and food purchases by, Carl's Jr. franchisees as a result of higher sales volume
at Carl's Jr. franchised restaurants and the increase in the number of Carl's
Jr. franchised restaurants operating in fiscal 1999 as compared with fiscal
1998.
The Company's consolidated restaurant-level margins of its
Company-operated restaurants increased 2.2% in the 12-week period ended November
2, 1998 to 19.7% as compared with the same period of the prior year, primarily
reflecting the improvement in operating margins at each of the Company's three
core chains. Although Hardee's restaurant-level margins are substantially lower
than the rest of the Company's quick-service concepts, the Company successfully
increased these margins in the third quarter of fiscal 1999 to 17.2% of
Company-operated revenues as compared with 13.7% in the third quarter of the
prior year for the Company-operated Hardee's restaurants acquired from Imasco.
The Company has accomplished this increase in Hardee's margins
12
13
CKE RESTAURANTS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
through many of the successful cost-saving measures it 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.
Restaurant-level margins for the Company's Carl's Jr. restaurants
reached 25.2% and 25.6% for the 12- and 40-week periods ended November 2, 1998,
respectively, an increase of 1.4% over both prior year periods. The improved
results in operating margins reflect the Company's continued commitment to
improving the cost structure at its Carl's Jr. restaurants, principally in the
areas of increased purchasing savings in food and paper, improving labor
productivity and decreasing worker's compensation costs. As a percentage of
revenues from Carl's Jr. Company-operated restaurants, food and packaging costs
have decreased 1.0% and 0.9% to 28.8% and 28.9%, respectively, for the 12- and
40-week periods ended November 2, 1998, 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 restaurants, Carl's Jr. payroll and
other employee benefits have increased 0.1% to 25.7%, and 0.2% to 25.9%,
respectively, for the 12- and 40-week periods ended November 2, 1998 as compared
with the comparable periods in the prior year. The recent federal and California
minimum wage increases contributed to the rise in payroll and employee benefit
costs. Occupancy and other operating expenses as a percentage of revenues from
Carl's Jr. Company-operated restaurants have decreased 0.5% to 20.3%, and 0.7%
to 19.6%, respectively, for the 12- and 40-week periods as compared with the
same periods of the prior year. These costs are generally fixed in nature and,
as such, decrease as a percentage of revenues from Company-operated restaurants
as sales increase.
Taco Bueno's restaurant-level margins for the 12- and 40-week periods
ended November 2, 1998 increased 1.5% to 25.9% and increased 1.5% to 26.2%,
respectively, as compared with the prior year periods. Second and third quarter
restaurant-level margins at the Taco Bueno chain were negatively impacted by
increased commodity costs for cheese and tomatoes and increased lease expense
for the new point-of-sale equipment installed in all of the Taco Bueno
restaurants.
The Company's hourly employees are paid 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 March 1998 to rates above the federal minimum wage. The
Company anticipates that any future increases in minimum wage levels may be
offset through pricing and other cost control efforts; however, there can be no
assurance that the Company or its franchisees will be able to pass such
additional costs on to customers in whole or in part.
Franchised and licensed restaurant and other costs have decreased 8.3%
for the 12-week period ended November 2, 1998 and increased 19.1% for the
40-week period ended November 2, 1998 over the same periods of the prior year.
The decrease in the current quarter mirrors the decrease in franchise revenue
due to the conversion of certain Hardee's franchised restaurants to
Company-operated restaurants and the absorption of certain costs associated with
that franchise revenue stream. The increase in costs on a year-to-date basis is
primarily due to increased food and other products purchased 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 3.4% and 10.6%, respectively, in the 12-
and 40-week periods as compared with the prior year. 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.
13
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Advertising expenses increased $8.8 million and $36.1 million,
respectively, from the 12- and 40-week periods ended November 3, 1997, 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 increases in fiscal 1999. In addition, new
commercials for the Company's Hardee's restaurants began airing in April 1998.
General and administrative expenses increased $5.0 million and $36.2
million to $29.2 million and $92.0 million for the 12- and 40-week periods ended
November 2, 1998 over the same periods of the prior year. As a percentage of
revenues, these expenses have decreased 0.6% and 0.5% in the 12- and 40-week
periods of fiscal 1999 as compared with the same periods of fiscal 1998. The
decrease in general and administrative expenses as a percent of total revenues
reflects the economies of scale the Company is realizing by absorbing certain
costs associated with FEI into the Company's existing infrastructure.
Interest expense for the 12- and 40-week periods ended November 2, 1998
increased $6.5 million and $20.7 million, respectively, as compared with the
prior year periods, principally as a result of higher levels of borrowings
outstanding and the assumption of capital leases as a result of the acquisitions
of Hardee's in July 1997 and FEI in April 1998.
Other income (expense), net, is mainly comprised of interest income,
lease income, dividend 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 (expense), net, decreased $4.1
million and $7.0 million, respectively, for the 12- and 40-week periods ended
November 2, 1998, over the comparable prior year periods. This decrease was
primarily due to the one-time charge of $15.0 million to reflect the Company's
investment in Boston West at its estimated remaining value, offset in part by a
non-recurring gain of $10.3 million resulting from the disposition of the
Company's investment in Star Buffet during the third quarter. (See Notes (F) and
(G) of Notes to the Company's consolidated financial statements as of and for
the period ended November 2, 1998). Decreases in lease and interest income and
losses recorded from the Company's long-term investment in Rally's Hamburgers,
Inc., offset in part by interest earned on the Company's notes receivable from
franchisees, also contributed to the overall decrease.
During the third quarter of fiscal 1999, the Company's Board of
Directors approved the buyback of up to $50.0 million aggregate principal amount
of Notes. To date, the Company has repurchased $35.0 million of convertible
subordinated notes (the "Notes") on the open market for $28.8 million in cash,
including accrued interest thereon, of which $30.0 million was repurchased
during the third quarter. In connection with the $30.0 million repurchase, the
Company recognized an extraordinary gain in the third quarter on the early
retirement of debt of $4.5 million, net of applicable taxes of $1.8 million.
FINANCIAL CONDITION
For the 40 weeks ended November 2, 1998, the Company generated cash
flows from operating activities of $119.7 million, compared with $52.4 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 for the period increased $3.5 million as
the Company received cash proceeds of $12.5 million from the sale of the
Company's investment in Star Buffet, $5.6 million from collections on notes
receivable, related party receivables and leases receivable, and $6.5 million
from the exercise of stock options in addition to the increase
14
15
CKE RESTAURANTS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
in cash flow from operations. The Company used excess cash flow from operations
to fund capital additions of approximately $86.0 million, to repay capital lease
obligations of $6.3 million, to repay long-term borrowings of $113.7 million, to
repurchase $24.7 million of convertible subordinated notes, to pay $10.4 million
of deferred financing costs associated with the FEI acquisition and to pay
dividends to its stockholders of $3.8 million. A portion of the $197.2 million
convertible subordinated notes, combined with the majority of the increase in
long-term borrowings of $287.9 million, was used to purchase FEI for $380.6
million. Total cash and cash equivalents available to the Company as of November
2, 1998 was $33.9 million.
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
November 2, 1998). Principal repayments under the Term Loan Facility are due in
quarterly installments, commencing in July 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. As of November 2, 1998, the Company is in compliance with all of its
debt covenants.
On March 13, 1998, the Company completed a private placement of $197.2
million aggregate principal amount of 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. To date,
the Company repurchased $35.0 million aggregate principal amount of Notes on the
open market for $28.8 million in cash, including accrued interest thereon. The
repurchase of Notes was funded by a combination of cash flows from operations
and borrowings under the Company's Senior Credit Facility.
15
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 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 dual-brand concepts and capital expenditures to be
incurred in connection with the Company's integration of Hardee's and FEI. The
Company opened 24 Company-operated Carl's Jr. restaurants through the third
quarter of fiscal 1999 and plans to open up to 13 new Company-operated Carl's
Jr. restaurants in the fourth quarter. 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.
In light of the success of the Carl's Jr. and Taco Bueno chains and the
turnaround in progress at Hardee's, the Company has established new goals with
respect to future development. Plans are to open 75-100 Company-operated Carl's
Jr. restaurants in fiscal 2000, 125-150 in fiscal 2001 and 200 restaurants in
fiscal 2002. Taco Bueno anticipates opening up to 15, 25 and 35 new
Company-operated restaurants in fiscal 2000, 2001 and 2002, respectively.
Hardee's intends to open 25, 50 and 100 new Company-operated Hardee's
restaurants over the next three fiscal years.
The quick-service restaurant business generally receives simultaneous
payment for sales. The Company presently reinvests the majority of the cash
received in long-term assets, primarily for the remodeling and construction of
restaurants, while normal operating expenses for inventories and current
liabilities normally carry longer payment terms (usually 15 to 30 days). As
such, the Company typically maintains current liabilities in excess of current
assets.
The Company believes that cash generated from its various restaurant
concept operations, along with cash and cash equivalents on hand as of November
2, 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 or could be sold and subsequently
leased back to the Company; 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.
YEAR 2000
The Company is currently working to resolve the potential impact of the
Year 2000 on the processing of data-sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures.
The Company has investigated the impact of the Year 2000 problem on its
business, including the Company's operational, information and financial
systems. Based on this investigation, the Company does not expect the Year 2000
problem, including the cost of making the Company's computerized information
systems Year 2000 compliant, to have a material adverse impact on the Company's
financial position or results of operations in future periods. However, the
inability of the Company to resolve all potential Year 2000 problems in a timely
manner could have a material adverse impact on the Company.
16
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company has also initiated communications with significant suppliers
and vendors on which the Company relies in an effort to determine the extent to
which the Company's business is vulnerable to the failure by these third
parties' to remediate their Year 2000 problems. While the Company has not been
informed of any material risks associated with the Year 2000 problem for these
entities, there can be no assurance that the computerized information systems of
these third parties will be Year 2000 compliant on a timely basis. The inability
of these third parties to remediate their Year 2000 problems could have a
material adverse impact on the Company.
The Company has completed a review of its information systems and is
involved in a comprehensive program to upgrade computer systems and applications
in connection with its effort to fully integrate its recent restaurant
acquisitions. In conjunction with this computer upgrade process, the Company
believes it will have addressed any potential Year 2000 issues. Total
expenditures related to the upgrade of the information systems are expected to
range from $18.0 million to $20.0 million and will be capitalized or expensed in
accordance with generally accepted accounting principles. As of November 2,
1998, the Company has incurred approximately $12.0 million of expenditures
consisting of internal staff costs as well as outside consulting and other
expenditures related to this upgrade process. These costs are being funded
through operating cash flows.
To the extent possible, the Company will be developing and executing
contingency plans designed to allow continued operation in the event of failure
of the Company's or third parties' computer information systems.
17
18
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:
(c) Since the fourth quarter of fiscal 1998, the Company has issued an
aggregate of 320,729 shares of common stock for the purchase of 22
Hardee's restaurants from three Hardee's franchisees. The shares of
common stock were issued pursuant to Section 4 (2) of the
Securities Act of 1933 as transactions by an issuer not involving
any public offering. The Company believes that all of the
purchasers were familiar with and had access to information
concerning the operations and financial condition of the Company
and had the required investment intent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
10.38 Amendment No. 1 dated October 23, 1998 to Amended and
Restated Credit Agreement by and among CKE Restaurants,
Inc., Banque Paribas, as Agent, and the Lenders party
thereto.
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 November 3, 1997 (included only with
electronic filing).
27.3 Financial Data Schedule restated for the quarterly
period ending November 4, 1996 (included only with
electronic filing).
(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.
---------------------
(Registrant)
December 16, 1998 By: /s/ CARL A. STRUNK
- ----------------- -------------------------------
Date Executive Vice President,
Chief Financial Officer
18
19
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.38 Amendment No. 1 dated October 23, 1998 to Amended and
Restated Credit Agreement by and among CKE Restaurants,
Inc., Banque Paribas, as Agent, and the Lenders party thereto.
11 Calculation of Earnings Per Share.
27.1 Financial Data Schedule (included only with electronic filing).
27.2 Financial Data Schedule restated for the quarterly period ending
November 3, 1997 (included only with electronic filing).
27.3 Financial Data Schedule restated for the quarterly period
ending November 4, 1996 (included only with electronic filing).