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 May 17, 1999
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934.
for the transition period from __________ to __________
Commission file number 1-13192
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CKE RESTAURANTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0602639
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
401 W. Carl Karcher Way, 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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1200 N. Harbor Boulevard, Anaheim, CA 92801
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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.
52,020,861 shares of Common Stock, par value $.01 per share,
as of June 18, 1999
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
INDEX
Page
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Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of May 17, 1999 and January 25, 1999......... 3
Consolidated Statements of Income for the sixteen weeks ended
May 17, 1999 and May 18, 1998.......................................... 4
Consolidated Statements of Cash Flows for the sixteen weeks ended
May 17, 1999 and May 18, 1998.......................................... 5
Notes to Consolidated Financial Statements.................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................ 16
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
May 17, January 25,
1999 1999
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ASSETS
Current assets:
Cash and cash equivalents $ 45,529 $ 46,297
Accounts receivable, net 38,720 46,820
Related party receivables 1,225 1,474
Inventories 25,068 22,507
Prepaid expenses 17,710 12,349
Other current assets 3,154 4,845
---------- ----------
Total current assets 131,406 134,292
Property and equipment, net 981,723 940,178
Property under capital leases, net 78,866 81,895
Long-term investments 33,362 34,119
Notes receivable 7,572 7,898
Related party receivables 7,407 7,020
Costs in excess of assets acquired, net 251,453 252,035
Other assets 46,094 39,477
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$1,537,883 $1,496,914
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,276 $ 4,273
Current portion of capital lease obligations 7,511 7,838
Accounts payable 82,828 88,462
Other current liabilities 102,991 101,074
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Total current liabilities 197,606 201,647
---------- ----------
Long-term debt 195,381 360,684
Senior subordinated notes 200,000 --
Convertible subordinated notes 159,225 162,225
Capital lease obligations 88,843 90,373
Deferred income taxes, net 15,029 15,029
Other long-term liabilities 77,648 80,114
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
51,866,131 and 51,850,249 shares 519 519
Additional paid-in capital 380,387 380,423
Retained earnings 223,245 205,900
---------- ----------
Total stockholders' equity 604,151 586,842
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$1,537,883 $1,496,914
========== ==========
See Accompanying Notes to Consolidated Financial Statements
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
Sixteen Weeks Ended
------------------------
May 17, May 18,
1999 1998
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Revenues:
Company-operated restaurants $ 546,744 $ 478,607
Franchised and licensed restaurants and other 48,979 49,604
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Total revenues 595,723 528,211
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Operating costs and expenses:
Restaurant operations:
Food and packaging 163,732 144,850
Payroll and other employee benefits 165,579 148,703
Occupancy and other operating expenses 110,835 90,890
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440,146 384,443
Franchised and licensed restaurants 35,528 33,301
Advertising expenses 32,679 27,449
General and administrative expenses 39,765 37,384
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Total operating costs and expenses 548,118 482,577
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Operating income 47,605 45,634
Interest expense (15,678) (9,237)
Other income (expense), net (266) 1,396
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Income before income taxes and extraordinary item 31,661 37,793
Income tax expense 12,531 15,061
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Income before extraordinary item 19,130 22,732
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes of $186 290 --
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Net income $ 19,420 $ 22,732
========= =========
Basic income per share before extraordinary item $ 0.36 $ 0.44
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes - basic .01 --
--------- ---------
Net income per share - basic $ 0.37 $ 0.44
========= =========
Weighted average shares outstanding - basic 51,860 51,229
========= =========
Diluted income per share before extraordinary item $ 0.36 $ 0.43
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes - diluted .01 --
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Net income per share - diluted $ 0.37 $ 0.43
========= =========
Weighted average shares outstanding - diluted 56,341 55,581
========= =========
See Accompanying Notes to Consolidated Financial Statements
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Sixteen Weeks Ended
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May 17, May 18,
1999 1998
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Net cash flow from operating activities:
Net income $ 19,420 $ 22,732
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 (476) --
Depreciation and amortization 27,923 19,649
Loss on sale of property and equipment and capital leases 435 376
Net noncash income (140) (387)
Loss on noncurrent asset and liability transactions 370 233
Net change in receivables, inventories, prepaid expenses and
other current assets 2,123 9,474
Net change in accounts payable and other current liabilities (6,459) 5,973
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Net cash provided by operating activities 43,196 58,050
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Cash flow from investing activities:
Purchases of:
Property and equipment (67,183) (23,666)
Proceeds from sale of:
Property and equipment 3,404 5,372
Increases in notes receivable and related party receivables (569) (23)
Collections on notes receivable, related party receivables and
leases receivable 890 2,332
Net change in other assets 558 (1,213)
Acquisitions, net of cash acquired -- (384,711)
Dispositions, net of cash surrendered -- 4,328
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Net cash used in investing activities (62,900) (397,581)
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Cash flow from financing activities:
Net change in bank overdraft 2,743 2,450
Long-term borrowings 237,000 410,445
Repayments of long-term debt (204,825) (41,397)
Repayments of capital lease obligations (1,858) (1,404)
Deferred financing costs (9,686) (10,196)
Net change in other long-term liabilities (2,467) 2,192
Payment of dividends (2,075) (1,895)
Exercise of stock options 104 672
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Net cash provided by financing activities 18,936 360,867
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Net increase (decrease) in cash and cash equivalents $ (768) $ 21,336
========= =========
See Accompanying Notes to Consolidated Financial Statements
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Sixteen Weeks Ended
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May 17, May 18,
1999 1998
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Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest (net of amount capitalized) $15,703 $ 6,654
Income taxes 5,957 7,244
FEI Acquisition:
Tangible assets acquired at fair value $ -- $ 317,056
Costs in excess of net assets acquired -- 152,989
Liabilities assumed at fair value -- (89,408)
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Total purchase price $ -- $ 380,637
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 17, 1999 AND MAY 18, 1998
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 1999 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
1999 consolidated financial statements to conform to the fiscal 2000
presentation. Share and per share information has been retroactively adjusted to
reflect the ten percent stock dividend paid in January 1999.
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
$380.6 million (which included miscellaneous expenses paid to Advantica) and the
assumption of approximately $45.6 million in capital lease obligations. The
Company used the majority of the net proceeds from the issuance of $197.2
million of convertible subordinated notes together with borrowings of $213.2
million under its senior credit facility to finance the acquisition.
Selected unaudited pro forma combined results of operations for the
16-week period ended May 18, 1998, assuming the acquisition occurred on January
27, 1998, using actual restaurant-level margins and general and administrative
expenses prior to the acquisition, is as follows:
Sixteen Weeks Ended
May 18, 1998
--------------------
Total revenues $649,408
Net income $ 21,949
Net income per share - basic $ 0.43
Net income per share - diluted $ 0.41
NOTE (C) LONG-TERM DEBT
On March 4, 1999, the Company amended its existing senior credit
facility, which consisted of a $250.0 million term loan facility and a $250.0
million revolving credit facility. The senior credit facility, as amended,
consists of a $500.0 million revolving credit facility and includes a $75.0
million letter of credit sub-facility. The senior credit facility will be
reduced beginning in March 2001 by a minimum of $50.0 million each year, for the
three subsequent years. Additional borrowings under the senior credit facility
may be used for working capital or other general corporate purposes, including
permitted investments and acquisitions, and any amounts outstanding thereunder
will become due in February 2004.
Borrowings and other obligations of the Company under the senior credit
facility are general unsubordinated obligations of the Company and 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, contract rights,
general intangibles (including trademarks) and other assets of the Company and
such
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 17, 1999 AND MAY 18, 1998
(Continued)
subsidiaries. The Company is required to repay borrowings under the senior
credit facility with the proceeds from certain asset sales (unless the net
proceeds of such sales are reinvested in the Company's business), from the
issuance of certain equity securities and from 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.
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 May 17, 1999, the Company
was in compliance with all of its covenants related to its senior credit
facility.
NOTE (D) SENIOR SUBORDINATED NOTES
On March 4, 1999, the Company completed a private placement of $200.0
million aggregate principal amount of senior subordinated notes, in which the
Company received net proceeds of approximately $194.8 million, of which $190.0
million was used to repay indebtedness under the senior credit facility. The
senior subordinated notes are due in May 2009, carry a 9.125% coupon rate and
are redeemable by the Company beginning on May 1, 2004. The indenture relating
to the senior subordinated notes imposes restrictions on the Company's ability
(and the ability of its subsidiaries) to incur additional indebtedness, pay
dividends on, redeem or repurchase its capital stock, make investments, incur
liens on its assets, sell assets other than in the ordinary course of business,
and enter into certain transactions with its affiliates. The senior subordinated
notes represent unsecured general obligations subordinate in right of payment to
the Company's senior indebtedness including its senior credit facility.
The Company's senior credit facility is guaranteed on a secured basis by
the Company's direct and indirect subsidiaries (the "Subsidiary Guarantors"),
other than non-guarantor subsidiaries which conduct no material operations, have
no significant assets on a consolidated basis and account for only an
insignificant share of the Company's consolidated revenues. Each of the
Subsidiary Guarantors also fully and unconditionally guarantee the Company's
9.125% senior subordinated notes due 2009 on a joint and several basis. Separate
financial statements and other disclosures concerning the Subsidiary Guarantors
are not presented because management has determined that such information is not
material to investors.
NOTE (E) CONVERTIBLE SUBORDINATED NOTES
During the first quarter of fiscal 2000, the Company repurchased an
additional $3.0 million aggregate principal amount of convertible subordinated
notes for $2.5 million in cash, including accrued interest thereon. The Company
recognized an extraordinary gain on the early retirement of debt of $0.3
million, net of applicable income taxes of $0.2 million. To date, the Company
has repurchased a total of $38.0 million aggregate principal amount of
convertible subordinated notes.
NOTE (F) SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131") in its fiscal year ending January 25, 1999.
The Company is engaged principally in developing, operating and
franchising its Carl's Jr., Hardee's and Taco Bueno quick-service restaurants,
each of which are considered strategic businesses that are managed and evaluated
separately. As such, the Company considers its Carl's Jr., Hardee's and Taco
Bueno chains to each be a reportable
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 17, 1999 AND MAY 18, 1998
(Continued)
segment. Management evaluates the performance of its segments and allocates
resources to them based on several factors, of which the primary financial
measure is segment profit before taxes. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies in Note 1 of Notes to Consolidated Financial Statements for the fiscal
year ending January 25, 1999.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "other" column includes corporate
related items, results of insignificant operations and, as it relates to segment
profit or loss, income and expense not allocated to reportable segments. The
amounts reported for Hardee's reflect only the periods subsequent to the
acquisition date of April 1, 1998 for FEI.
Sixteen Weeks Ended
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Carl's Jr. Hardee's Taco Bueno Other Total
---------- ---------- ---------- -------- ----------
May 17, 1999:
Revenues $207,851 $ 356,230 $27,616 $ 4,026 $ 595,723
Segment profit (loss) 21,288 12,738 2,932 (5,297) 31,661
Total assets 345,830 1,059,755 67,904 64,394 1,537,883
Capital expenditures 9,187 47,182 5,418 5,396 67,183
Depreciation and amortization 7,785 17,219 1,022 1,897 27,923
May 18, 1998:
Revenues $190,233 $ 288,788 $24,584 $ 24,606 $ 528,211
Segment profit (loss) 23,060 15,498 2,533 (3,298) 37,793
Total assets (as of
January 25, 1999) 280,201 1,072,594 62,539 81,580 1,496,914
Capital expenditures 10,325 10,485 836 2,020 23,666
Depreciation and amortization 6,981 9,396 830 2,442 19,649
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
OVERVIEW
Consolidated net income for the 16-week period ended May 17, 1999
decreased 14.6% to $19.4 million, or $0.37 per share on a diluted basis as
compared with net income of $22.7 million, or $0.43 per share on a diluted basis
for the prior year quarter. Net income, excluding the $0.3 million extraordinary
gain on the early retirement of debt, decreased 15.8% for the 16-week period
ended May 17, 1999 to $19.1 million, or $0.36 per share on a diluted basis. The
decline in consolidated net income was primarily due to increased interest
expense incurred in connection with our recent financings. While consolidated
net income reflected a decrease from the level achieved in the prior year
quarter, operating income for the consolidated group continued to grow in the
first quarter of fiscal 2000, increasing 4.3% over the prior year quarter to
$47.6 million. The increase in operating income was largely attributable to the
additional income generated by the 557 previously franchised Hardee's
restaurants as a result of our acquisition of Flagstar Enterprises, Inc. ("FEI")
from Advantica Restaurant Group, Inc. ("Advantica") on April 1, 1998. Operating
results for the 16 weeks ended May 17, 1999 include 16 weeks of operations for
Hardee's Food Systems, Inc. and 16 weeks of operations for FEI. The
corresponding period of the prior fiscal year includes 16 weeks of operations
for Hardee's Food Systems, Inc. and seven weeks of operations for FEI's 557
Hardee's restaurants.
Operating results for Carl's Jr. for the 16-week period ended May 17,
1999 include the results of 63 Hardee's-to-Carl's Jr. conversions in Oklahoma,
Texas and Kansas. These restaurants were included in Hardee's results for the 16
weeks ended May 18, 1998.
We have remodeled approximately 160 company-operated Hardee's
restaurants to the Star Hardee's format during the quarter and our franchisees
have remodeled approximately 55 restaurants, with approximately 325 Hardee's
restaurants remodeled to the Star Hardee's format system-wide, at quarter-end.
In addition to menu enhancements, a Star Hardee's remodel involves installing
charbroilers in the kitchens, remodeling the interior and exterior of the
restaurant, introducing Carl's Jr.-style limited table service, adding
"all-you-can-drink" beverage bars and installing new signage. We plan to remodel
300 to 400 company-operated restaurants and our franchisees plan to remodel 100
to 200 restaurants to the Star Hardee's format this fiscal year. The restaurants
that have already been converted are seeing sales improvements in the range of 8
to 10% above pre-conversion levels.
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 our actual results, performance, or achievements 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 our size resulting from the acquisitions of Hardee's and FEI;
changes in our integration plans for Hardee's and our expansion plans; risks
that sales growth resulting from our 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 our filings with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
Revenues from company-operated restaurants increased $68.1 million or
14.2% to $546.7 million in the first quarter of fiscal 2000 over the same period
in the prior year. Carl's Jr., Hardee's and Taco Bueno company-operated
restaurant revenues accounted for sales increases of $16.5 million, $68.7
million and $3.0 million, respectively, offset in part by the decrease in
revenues from our JB's Restaurants and Galaxy Diner restaurants which were sold
to Santa Barbara Restaurant Group, Inc. ("SBRG") in September 1998. On a
same-store sales basis, our Carl's Jr. sales decreased 4.8% for the quarter,
which reflects strong comparisons in the first quarter of the last two fiscal
years, with same-store sales increases of 5.2% for the first quarter of fiscal
1999 and 6.1% for the same period in fiscal 1998. Also included in the current
year same-store sales comparisons are results of the 63 Hardee's-to-Carl's Jr.
conversions in Oklahoma, Texas and Kansas. These are essentially new markets for
Carl's Jr. where additional time is needed to fully realize the brand potential.
Without the inclusion of these restaurants, same-store sales for the quarter
would have
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
(Continued)
declined 3.8%. Same-store sales for our company-operated Hardee's restaurants
were down 4.8% for the quarter, including both the restaurants initially
purchased from Imasco Holdings, Inc. in July 1997 and the FEI restaurants
purchased in April 1998. Excluding the 557 FEI restaurants, same-store sales for
Hardee's would have been up 0.5% for the quarter. Same-store sales for our
company-operated Taco Bueno restaurants increased 10.6%, marking the 16th
consecutive quarter of same-store sales increases for the chain. The increase in
company-operated revenue from our Carl's Jr. restaurants was primarily
attributable to an increase in the number of restaurants open and operating in
the first quarter of fiscal 2000 as compared with the first quarter of the prior
year and the inclusion of $12.0 million of revenue from the 63
Hardee's-to-Carl's Jr. converted restaurants. The increase in Hardee's
company-operated revenues was primarily due to including a full quarter of
operations of the FEI restaurants acquired from Advantica in April 1998. Taco
Bueno's increase in revenues is due mainly to our advertising campaign, which
focuses on great-tasting food products, the image enhancement program for our
Taco Bueno restaurants, which was begun in fiscal 1999, and the focus on real
estate that is better located and more heavily trafficked than the properties
previously targeted for development of Taco Bueno restaurants. Average unit
volumes for the trailing 52-week period ending May 17, 1999 for our
company-operated Carl's Jr. restaurants, excluding the 63 Hardee's-to-Carl's
conversions were $1,169,000. Average unit volumes at our company-operated
Hardee's restaurants were $797,000, while Taco Bueno's average unit volumes
continued to rise and increased to $768,000 as of May 17, 1999 for the trailing
52-week period.
Our revenues from franchised and licensed restaurants for the 16-week
period ended May 17, 1999 decreased $0.6 million, or 1.3%, to $49.0 million from
the comparable period in fiscal 1999. This decrease is mainly due to the
acquisition of previously franchised Hardee's restaurants during fiscal 1999,
including the 557 formerly franchised FEI restaurants we acquired in April 1998
and the loss of franchised revenues from our JB's restaurants, which were sold
to SBRG in September 1998. Offsetting these factors were increased royalties
from, and food purchases by, Carl's Jr. franchisees and licensees as a result of
an increase in the number of Carl's Jr. franchised restaurants operating in the
first quarter of fiscal 2000 as compared with the first quarter of fiscal 1999
and an increase in equipment sales to Hardee's franchisees in connection with
the remodeling of Hardee's restaurants to the Star Hardee's format.
Restaurant-level margins for our company-operated Carl's Jr. restaurants
decreased 2.1% to 23.8% for the 16-week period ended May 17, 1999 from the first
quarter of fiscal 1999, primarily due to increases in occupancy and other
operating expenses. Excluding the 63 Hardee's-to-Carl's Jr. converted
restaurants, Carl's Jr.'s restaurant-level margins would have been 24.8% for the
first quarter of fiscal 2000. Carl's Jr. food and packaging costs continued to
decrease during the first quarter of fiscal 2000, down 0.8% to 28.3% of revenues
from company-operated Carl's Jr. restaurants, as compared with 29.1% in the
comparable prior year period. This decrease was primarily attributable to
continued purchasing economies achieved as a result of the consolidated buying
power directly realized from our addition of other restaurant concepts,
including our Green Burrito dual-brand restaurants. Payroll and other employee
benefits for our Carl's Jr. restaurant chain, as a percentage of revenues from
company-operated Carl's Jr. restaurants, increased 0.7% to 26.5% in the 16 weeks
ended May 17, 1999 as compared with the same prior year period. The March 1998
California minimum wage increase contributed to the rise in payroll and employee
benefit costs in the first quarter of fiscal 2000, and the increasing number of
our Carl's Jr./Green Burrito dual-brand restaurants added to the greater labor
cost due to the more labor intensive nature of the Green Burrito system. Carl's
Jr. occupancy and other operating expenses, as a percentage of revenues from
company-operated Carl's Jr. restaurants, increased 2.2% to 21.4% for the 16-week
period ended May 17, 1999 over the comparable prior year period, primarily due
to the fixed nature of these costs combined with a decrease in the same-store
revenue base as well as increased repair and maintenance costs and increased
rent expense as a result of scheduled increases in long-term lease contracts.
Although our Hardee's restaurant-level operating margins are
substantially lower than our Carl's Jr. and Taco Bueno quick-service restaurant
concepts, we have increased Hardee's company-operated restaurant-level operating
margins to 16.8% for the first quarter of fiscal 2000, as compared with 16.3%
for the comparable period of fiscal 1999 by implementing many of the same cost
saving measures we implemented at our Carl's Jr. restaurants over the past four
to five years. Hardee's food and packaging costs continued to decrease during
the first quarter of fiscal 2000, down 0.2% to 30.9% of revenues from
company-operated restaurants, as compared with 31.1% in the comparable prior
year period. This decrease was mainly due to a reduction in food waste and theft
tolerance levels and continued purchasing economies achieved as a result of our
increased consolidated buying power. Payroll and other employee benefits as a
percentage of revenues from company-operated Hardee's restaurants, decreased
1.6% to 32.3% in the
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
(Continued)
first quarter of fiscal 2000 from the first quarter of the prior year. This
decrease is a result of using the Carl's Jr. labor matrix to refine labor usage
and a focus on safety and accident prevention as a method of lowering workers'
compensation costs. As a percentage of revenues from Hardee's company-operated
restaurants, occupancy and other operating expenses increased 1.3% to 20.0% for
the 16-week period ended May 17, 1999 over the comparable prior year period. The
increase in occupancy and other operating expenses is due to the fixed nature of
the costs combined with a decrease in the same-store revenue base as well as
increased depreciation costs in connection with the remodeling program of the
Hardee's restaurants to the Star Hardee's format.
Taco Bueno's restaurant-level operating margins were 27.2% for the first
quarters of both fiscal 2000 and 1999. While overall Taco Bueno restaurant-level
margins remained constant, food and packaging costs as a percentage of sales
increased by 0.8%, which was offset by a decrease in occupancy and other
operating expenses as a percentage of sales of 0.8%. The increase in food and
packaging was mainly attributable to a change in packaging materials used, while
the decrease in occupancy and other was a result of the fixed nature of these
costs combined with the increase in revenues.
Franchised and licensed restaurant and other costs increased 6.7% to
$35.5 million for the 16 weeks ended May 17, 1999 over the 16-week period ended
May 18, 1998. The increase is primarily due to increased food and other products
purchased from us by Carl's Jr. franchisees and licensees and increased
equipment purchases from us by Hardee's franchisees and licensees. While
royalties from Hardee's franchised and licensed restaurants decreased during the
first quarter in fiscal 2000 from the prior year quarter, revenues from
equipment sales to Hardee's franchised and licensed restaurants increased; the
cost structure associated with equipment sales is much higher than that
associated with the royalty stream of income. As a result, franchised and
licensed restaurant and other costs increased 5.4% as a percentage of revenue
from franchised and licensed restaurants for the first quarter of fiscal 2000
over the first quarter of fiscal 1999.
Advertising expenses increased $5.2 million in the first quarter of
fiscal 2000 over the comparable period of fiscal 1999 principally due to
increased advertising support for 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 the current fiscal year as
compared with the prior fiscal year, while remaining relatively consistent as a
percentage of company-operated revenues.
General and administrative expenses increased $2.4 million to $39.8
million for the 16 weeks ended May 17, 1999 over the 16-week period ended May
18, 1998. As a percentage of total revenues, general and administrative expenses
decreased 0.4% to 6.7% of total revenues in the first quarter of fiscal 2000,
reflecting the economies of scale we are realizing by absorbing certain costs
associated with FEI into our existing infrastructure. The increases in fiscal
2000 in terms of dollars spent are primarily the result of the added expenses of
supporting FEI's restaurant operations.
Interest expense for the 16-week period ended May 17, 1999 increased
$6.4 million to $15.7 million as compared with the comparable prior year period
due to higher levels of borrowings outstanding under our senior credit facility
and the issuance of convertible subordinated notes in March 1998 and senior
subordinated notes in March 1999. The proceeds from the convertible subordinated
notes, bearing interest at 4.25%, were used to complete the acquisition of FEI
in April 1998, and the proceeds from the senior subordinated notes, bearing
interest at 9.125%, were used to repay existing term loan balances under our
senior credit facility.
Other income (expense), net, mainly consists 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 $1.7
million in the first quarter of fiscal 2000 as compared with the comparable
period in the prior fiscal year. The decrease was due in large part to a
reduction in interest income as a result of our reduced note receivable from
Checkers and reduced notes receivable from our franchisees, and recognition of
income in the prior year quarter from our investment in Star Buffet, Inc., which
was subsequently sold in October 1998.
During the third quarter of fiscal 1999, our Board of Directors approved
the buyback of up to $50.0 million aggregate principal amount of convertible
subordinated notes. In fiscal 1999, we repurchased $35.0 million and, in the
first quarter of fiscal 2000, we repurchased an additional $3.0 million of
convertible subordinated notes for $2.5 million in cash, including accrued
interest thereon. In connection with this repurchase, we recognized an
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
(Continued)
extraordinary gain on the early retirement of debt of $0.3 million, net of
applicable taxes of $0.2 million in the 16-week period ended May 17, 1999.
FINANCIAL CONDITION
Cash and cash equivalents decreased $0.8 million to $45.5 million in the
16 week period ended May 17, 1999. Investing activities absorbed $62.9 million
of our cash to fund capital additions of $67.2 million. Partially generating
some of the funds necessary were $3.4 million from the sale of property and
equipment to our franchisees and $0.9 million from collections on and sale of
notes receivable, related party receivables and leases receivable. Financing
activities provided us with $18.9 million in cash, primarily from the net
proceeds of $194.8 million principal amount of senior subordinated notes and
additional borrowings under our senior credit facility. Cash flows from
operating and financing activities were mainly used to repay existing
indebtedness of $204.8 million, to fund the remodeling of our Hardee's
restaurants to the new Star Hardee's format and to convert certain Carl's Jr.
restaurants to the Carl's Jr./Green Burrito dual-brand concepts, to pay $9.7
million of deferred financing costs associated with our issuance of the senior
subordinated notes, to repay $1.9 million in capital lease obligations and to
pay dividends of $2.1 million.
On March 4, 1999, we completed a private placement of $200.0 million
aggregate principal amount of 9.125% senior subordinated notes due 2009. We
received net proceeds of $194.8 million, of which $190.0 million was used to
repay outstanding term loan balances under our senior credit facility. The
indenture relating to the senior subordinated notes imposes certain restrictions
on our ability (and the ability of our subsidiaries) to incur indebtedness, pay
dividends on, redeem or repurchase our capital stock, make investments, incur
liens on our assets, sell assets other than in the ordinary course of business,
or enter into certain transactions with our affiliates. The senior subordinated
notes represent unsecured general obligations subordinate in right of payment to
our senior indebtedness, including our senior credit facility.
In connection with our private placement of senior subordinated notes,
we also amended and restated our senior credit facility to increase the lenders'
commitments under our revolving credit facility to $500.0 million from $250.0
million. Commitments under the amended senior credit facility will be reduced
after two years by a minimum of $50.0 million each year. We also increased our
letter of credit sub-facility to $75.0 million from $65.0 million, and changed
the maturity date of the senior credit facility to February 2004. The term loan
component of the senior credit facility was eliminated as a result of these
transactions. Additional borrowings under the senior credit facility may be used
for working capital and other general corporate purposes, including permitted
investments and acquisitions. We will be required to repay borrowings under the
senior credit facility with the proceeds from (1) certain asset sales (unless
the net proceeds of such sales are reinvested in our business), (2) the issuance
of certain equity securities and (3) the issuance of additional indebtedness. Of
the various options we have regarding interest rates, we have selected LIBOR
plus a margin, with future margin adjustments dependent on certain financial
ratios from time to time.
Our senior credit facility contains the following significant covenants:
o restrictions on our ability to incur additional indebtedness and
incur liens on our assets, subject to specified exceptions;
o requirements that we satisfy specified financial tests as a
precondition to our acquisition of other businesses; and
o limitations on making capital expenditures and certain
restricted payments (including dividends and repurchases of
stock) subject in certain circumstances to specified financial
tests.
In addition, we are required to comply with minimum EBITDA requirements,
minimum interest coverage and fixed charge coverage ratios, minimum consolidated
tangible net worth requirements and maximum leverage ratios. As of May 17, 1999,
we were in compliance with all of our debt covenants.
Our primary source of liquidity is our 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 our
Hardee's
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
(Continued)
restaurants to the Star Hardee's format, the remodeling of existing Taco Bueno
restaurants, purchases of Hardee's franchised restaurants, the conversion of
restaurants to the Carl's Jr./Green Burrito dual-brand concepts and capital
expenditures to be incurred in connection with our integration of Hardee's data
processing systems. In addition, we continue to discuss certain post-closing
purchase price adjustments arising from the Hardee's acquisition with Imasco
Holdings, Inc. We believe that any payments required or to be received as a
result of such purchase price adjustments would not materially affect our
financial condition.
The quick-service restaurant business generally receives simultaneous
cash payment for sales. We presently reinvest the majority of the net cash flow
from operations in long-term assets, primarily for the remodeling and
construction of restaurants. Normal operating expenses for inventories and
current liabilities generally carry longer payment terms (usually 15 to 30
days). As a result, we typically maintain current liabilities in excess of
current assets.
We believe that cash generated from our various restaurant concept
operations, along with cash and cash equivalents on hand as of May 17, 1999 and
amounts available under our senior credit facility, will provide the funds
necessary to meet all of our capital spending and working capital requirements
for the foreseeable future. As of May 17, 1999 we had $262.4 million of
borrowings available to us under our senior credit facility. If those sources of
capital are insufficient to satisfy our capital spending and working capital
requirements, or if we determine to make any significant acquisitions of or
investments in other businesses, we may be required to sell additional equity or
debt securities or obtain additional credit facilities. Any sales of additional
equity or debt securities could result in additional dilution to our
stockholders. In addition, substantially all of the real properties we own and
use for our restaurant operations are unencumbered and could be used by us as
collateral for additional debt financing or could be sold and subsequently
leased back to us.
Year 2000
We are currently working to resolve the potential impact of the Year
2000 ("Y2K") on the processing of data-sensitive information by our computerized
information systems. Y2K problems are the result of computer programs being
written using two-digits (rather than four) to define the applicable year. Any
of our 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.
We have investigated the impact of a Y2K problem on our business,
including our operational, information and financial systems. Based on this
investigation, we do not expect a Y2K problem, including the cost of making our
computerized information systems Y2K compliant, to have a material adverse
impact on our financial position or results of operations in future periods.
However, our inability to resolve all potential Y2K problems in a timely manner
could have a material adverse impact on us.
We have also initiated communications with significant suppliers and
vendors on whom we rely in an effort to determine the extent to which our
business is vulnerable to the failure by these third parties to remediate their
Y2K problems. While we have not been informed of any material risks associated
with a Y2K problem for these entities, we cannot assure you that the
computerized information systems of these third parties will be Y2K compliant on
a timely basis. The inability of these third parties to remediate their Y2K
problems could have a material adverse impact on us.
We have completed a review of our information systems and are involved
in a comprehensive program to upgrade computer systems and applications in
connection with our effort to fully integrate our recent restaurant
acquisitions. In conjunction with this computer upgrade process, we believe we
will have addressed any potential Y2K issues. Total expenditures related to the
upgrade of the information systems are expected to range from $20.0 million to
$25.0 million and will be capitalized or expensed in accordance with generally
accepted accounting principles. Through May 17, 1999, we have incurred
approximately $17.4 million of expenditures consisting of hardware and software
purchases, internal staff costs and outside consulting and other expenditures
related to this upgrade process. These costs are being funded through operating
cash flows.
We have developed or are in the process of developing contingency plans
to handle our most reasonably likely worst case Y2K scenarios, which we have not
yet identified fully. We intend to complete our determination of worst
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
(Continued)
case scenarios after we have received and analyzed responses to substantially
all of the inquiries we have made of third-parties. Following this analysis,
which we expect to have completed by July 1999, we intend to develop a timetable
for completing our contingency plans.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our principal exposure to financial market risks is the impact that
interest rate changes could have on our $500.0 million senior credit facility,
of which $184.0 million remained outstanding as of May 17, 1999. Borrowings
under our senior credit facility bear interest at the prime rate or at LIBOR
plus an applicable margin based on certain financial ratios (averaging 6.5% in
fiscal 2000). A hypothetical increase of 100 basis points in short-term interest
rates would result in a reduction of approximately $1.8 million in annual
pre-tax earnings. The estimated reduction is based upon the outstanding balance
of our senior credit facility, and assumes no change in the volume, index or
composition of debt at May 17, 1999. Substantially all of our business is
transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have
never had a significant impact on us and are not expected to in the foreseeable
future.
Commodity Price Risk
We purchase certain products which are affected by commodity prices and
are, therefore, subject to price volatility caused by weather, market conditions
and other factors which are not considered predictable or within our control.
Although many of the products purchased are subject to changes in commodity
prices, certain purchasing contracts or pricing arrangements contain risk
management techniques designed to minimize price volatility. Typically we use
these types of purchasing techniques to control costs as an alternative to
directly managing financial instruments to hedge commodity prices. In many
cases, we believe we will be able to address commodity cost increases which are
significant and appear to be long-term in nature by adjusting our menu pricing
or changing our product delivery strategy. However, increases in commodity
prices could result in lower restaurant-level operating margins for our
restaurant concepts.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10-1 Employment Agreement dated as of April 9, 1999 by and between
the Company and William P. Foley, II.
10-2 Employment Agreement dated as of April 9, 1999, by and between
the Company and C. Thomas Thompson.
10-3 Employment Agreement dated as of April 9, 1999, by and between
the Company and Rory J. Murphy.
10-4 Employment Agreement dated as of April 9, 1999, by and between
the Company and Robert W. Wisely.
10-5 Employment Agreement dated as of April 9, 1999, by and between
the Company and Carl A. Strunk.
10-6 Employment Agreement dated as of April 9, 1999, by and between
the Company and Andrew F. Puzder.
10-7 Employment Agreement dated as of April 9, 1999, by and between
the Company and John J. Dunion.
11 Calculation of Earnings Per Share.
27-1 Financial Data Schedule (included only with electronic filing).
(b) Current Reports on Form 8-K:
A Current Report on Form 8-K dated February 19, 1999 was filed
during the first quarter of the fiscal year to report the
Company's intention to raise $200.0 million through a private
placement of senior subordinated notes.
A Current Report on Form 8-K dated February 25, 1999 was filed
during the first quarter of the fiscal year to report matters
relating to the Company's private placement of $200.0 million
senior subordinated notes and the Company's amended and restated
senior credit facility.
A Current Report on Form 8-K dated March 18, 1999 was filed
during the first quarter of the fiscal year to report the
election of John J. Dunion to the newly created position of
Executive Vice President, Chief Administrative Officer of the
Company.
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)
June 30, 1999 /s/ Carl A. Strunk
- ----------------------- -----------------------------------
Date Executive Vice President,
Chief Financial Officer
16
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EXHIBIT INDEX
Exhibit # Description
- --------- -----------
10-1 Employment Agreement dated as of April 9, 1999, by and between the Company and William P. Foley, II.
10-2 Employment Agreement dated as of April 9, 1999, by and between the Company and C. Thomas Thompson.
10-3 Employment Agreement dated as of April 9, 1999, by and between the Company and Rory J. Murphy.
10-4 Employment Agreement dated as of April 9, 1999, by and between the Company and Robert W. Wisely.
10-5 Employment Agreement dated as of April 9, 1999, by and between the Company and Carl A. Strunk.
10-6 Employment Agreement dated as of April 9, 1999, by and between the Company and Andrew F. Puzder.
10-7 Employment Agreement dated as of April 9, 1999, by and between the Company and John J. Dunion.
11 Calculation of Earnings Per Share.
27-1 Financial Data Schedule (included only with electronic filing).
17