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 1, 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
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Commission file number 1-13192
CKE RESTAURANTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0602639
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
401 W. Carl Karcher Way, Anaheim, CA 92801
- ---------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (714) 774-5796
-----------------------
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
--- ---
As of December 6, 1999, 50,501,421 shares of the Registrant's Common
Stock were outstanding
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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 November 1, 1999 and
January 25, 1999............................................. 3
Consolidated Statements of Income for the twelve and forty
weeks ended November 1, 1999 and November 2, 1998............ 4
Consolidated Statements of Cash Flows for the forty weeks
ended November 1, 1999 and November 2, 1998.................. 5-6
Notes to Consolidated Financial Statements..................... 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................11-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................... 19
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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)
November 1, January 25,
1999 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 40,450 $ 46,297
Accounts receivable 42,821 46,820
Related party receivables 1,402 1,474
Inventories 25,937 22,507
Prepaid expenses 21,591 12,349
Other current assets 2,699 4,845
----------- -----------
Total current assets 134,900 134,292
Property and equipment, net 1,068,708 940,178
Property under capital leases, net 86,324 81,895
Long-term investments 32,173 34,119
Notes receivable 6,323 7,898
Related party receivables 7,689 7,020
Costs in excess of assets acquired, net 259,331 252,035
Other assets 46,010 39,477
----------- -----------
$ 1,641,458 $ 1,496,914
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 700 $ 4,273
Current portion of capital lease obligations 9,404 7,838
Accounts payable 73,515 88,462
Other current liabilities 110,372 101,074
----------- -----------
Total current liabilities 193,991 201,647
----------- -----------
Long-term debt 287,017 360,684
Senior subordinated notes 200,000 --
Convertible subordinated notes 159,225 162,225
Capital lease obligations 94,416 90,373
Deferred income taxes, net 15,029 15,029
Other long-term liabilities 76,907 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
52,085,513 and 51,850,249 shares 521 519
Additional paid-in capital 382,504 380,423
Retained earnings 234,468 205,900
Treasury stock at cost; 378,300 shares and 0 shares (2,620) --
----------- -----------
Total stockholders' equity 614,873 586,842
----------- -----------
$ 1,641,458 $ 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)
Twelve Weeks Ended Forty Weeks Ended
------------------------------- ---------------------------
November 1, November 2, November 1, November 2,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues:
Company-operated restaurants $ 415,519 $ 418,439 $ 1,385,687 $ 1,335,956
Franchised and licensed restaurants and other 38,104 39,166 128,918 124,701
----------- ----------- ----------- -----------
Total revenues 453,623 457,605 1,514,605 1,460,657
----------- ----------- ----------- -----------
Operating costs and expenses:
Restaurant operations:
Food and packaging 127,641 123,574 417,871 401,972
Payroll and other employee benefits 129,066 127,325 426,940 410,118
Occupancy and other operating expenses 91,691 85,263 286,706 259,549
----------- ----------- ----------- -----------
348,398 336,162 1,131,517 1,071,639
Franchised and licensed restaurants and other 26,619 25,169 93,344 82,996
Advertising expenses 27,467 26,185 88,760 78,406
General and administrative expenses 31,766 29,195 102,859 91,950
----------- ----------- ----------- -----------
Total operating costs and expenses 434,250 416,711 1,416,480 1,324,991
----------- ----------- ----------- -----------
Operating income 19,373 40,894 98,125 135,666
Interest expense (13,798) (10,922) (42,968) (32,764)
Other income (expense), net (833) (2,899) (1,910) (296)
----------- ----------- ----------- -----------
Income before income taxes and extraordinary item 4,742 27,073 53,247 102,606
Income tax expense 1,735 10,927 20,812 41,124
----------- ----------- ----------- -----------
Income before extraordinary item 3,007 16,146 32,435 61,482
Extraordinary item - gain on early
retirement of debt, net of applicable
income tax expense of $186 and $1,750 -- 2,738 290 2,738
----------- ----------- ----------- -----------
Net income $ 3,007 $ 18,884 $ 32,725 $ 64,220
=========== =========== =========== ===========
Basic income per common share before
extraordinary item $ 0.06 $ 0.31 $ 0.62 $ 1.19
Extraordinary item - gain on early retirement of
debt, net of applicable income taxes - Basic -- 0.05 0.01 0.05
----------- ----------- ----------- -----------
Basic net income per share $ 0.06 $ 0.36 $ 0.63 $ 1.24
=========== =========== =========== ===========
Basic weighted average shares outstanding 52,054 51,816 51,974 51,516
=========== =========== =========== ===========
Diluted income per common share before
extraordinary item $ 0.06 $ 0.31 $ 0.62 $ 1.15
Extraordinary item - gain on early retirement of
debt, net of applicable income taxes - Diluted -- 0.04 -- 0.04
----------- ----------- ----------- -----------
Diluted net income per share $ 0.06 $ 0.35 $ 0.62 $ 1.19
=========== =========== =========== ===========
Diluted weighted average shares outstanding 52,239 57,176 52,497 56,774
=========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Forty Weeks Ended
-----------------------------
November 1, November 2,
1999 1998
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Net cash flow from operating activities:
Net income $ 32,725 $ 64,220
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) (4,488)
Depreciation and amortization 75,987 57,771
Loss on sale of property and equipment and capital leases 1,377 1,179
Noncash litigation settlement 722 --
Net noncash investment and dividend income (140) (872)
Loss on noncurrent asset and liability transactions 1,279 5,148
Net change in receivables, inventories, prepaid expenses
and other current assets (6,377) (3,633)
Net change in accounts payable and other current liabilities (10,070) 409
--------- ---------
Net cash provided by operating activities 95,027 119,734
--------- ---------
Cash flow from investing activities:
Purchases of property and equipment (204,635) (85,986)
Proceeds from sales of property and equipment 14,008 9,325
Proceeds from sale of long-term investments -- 12,500
Increase in notes receivable, related party receivables
and leases receivable (901) (2,314)
Collections on notes receivable, related party receivables
and leases receivable 2,463 5,566
Net change in other assets (9,610) 548
Acquisitions, net of cash acquired (1,958) (405,529)
Dispositions, net of cash surrendered -- 940
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Net cash used in investing activities (200,633) (464,950)
--------- ---------
Cash flow from financing activities:
Net change in bank overdraft 4,422 14,268
Long-term borrowings 177,000 287,870
Proceeds from senior subordinated notes 200,000 --
Repayments of short-term borrowings (3,600) (435)
Proceeds from convertible subordinated notes -- 197,225
Repayments of long-term debt (253,165) (138,454)
Repayments of capital lease obligations (5,726) (6,332)
Deferred financing costs (10,686) (10,384)
Net change in other long-term liabilities (3,209) 2,257
Payment of dividends (4,158) (3,780)
Purchase of treasury stock (2,620) --
Exercise of stock options 1,501 6,468
--------- ---------
Net cash provided by financing activities 99,759 348,703
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Net increase (decrease) in cash and cash equivalents (5,847) 3,487
Cash and cash equivalents at beginning of period 46,297 30,382
--------- ---------
Cash and cash equivalents at end of period $ 40,450 $ 33,869
========= =========
See Accompanying Notes to Consolidated Financial Statements.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
Forty Weeks Ended
-----------------------------
November 1, November 2,
1999 1998
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 40,268 $ 28,749
Income taxes 14,928 28,754
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 $ -- $ 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 1, 1999 AND NOVEMBER 2, 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) 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 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
40-week period ended November 2, 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:
Forty Weeks Ended
November 2, 1998
-----------------
Total revenues $1,581,854
Net income $ 62,599
Net income per share - basic $ 1.22
Net income per share - diluted $ 1.16
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 and has a maturity date of February 2004.
Subsequent to November 1, 1999, the Company amended its senior credit
facility such that certain of the covenants governing this senior credit
facility were modified for the third and fourth quarters of fiscal 2000 and for
future measurement periods. In addition, the revolving commitments under the
senior credit facility were reduced to $400.0 million and will be further
reduced by the first $75.0 million in proceeds from the sale of restaurants. The
final maturity date of February 2004 remains unchanged; however the applicable
margin used to determine the interest rate payable on outstanding borrowings was
increased and up to $200.0 million of revolving borrowings will be converted,
subject to lender approvals, to term
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOVEMBER 1, 1999 AND NOVEMBER 2, 1998
borrowings with an interest rate not subject to adjustment on the basis of
certain financial ratios. The term loan component will provide for principle
payments of $4.2 million each quarter beginning in March 2001, with all
remaining principle due on the maturity date. As a result of the amendment, the
Company was in compliance as of November 1, 1999 with all of its covenants
related to its senior credit facility.
Additional borrowings under the senior credit facility may be used for
working capital or other general corporate purposes, including permitted
investments and acquisitions. 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 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.
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 guarantees 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.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOVEMBER 1, 1999 AND NOVEMBER 2, 1998
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 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 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.
FORTY WEEKS ENDED
------------------------------------------------------------------------
CARL'S JR. HARDEE'S TACO BUENO OTHER TOTAL
----------- ---------- ---------- ---------- ----------
NOVEMBER 1, 1999:
Revenues ...................... $ 535,668 $ 899,217 $ 69,823 $ 9,897 $1,514,605
Segment profit (loss) ......... 50,874 10,937 6,048 (14,612) 53,247
Total assets .................. 367,328 1,113,855 81,766 78,509 1,641,458
Capital expenditures........... 51,440 121,649 16,889 14,657 204,635
Depreciation and amortization.. 20,468 47,237 3,003 5,279 75,987
NOVEMBER 2, 1998:
Revenues ...................... $ 484,640 $ 862,818 $ 62,462 $ 50,737 $1,460,657
Segment profit (loss).......... 55,882 54,590 6,143 (14,009) 102,606
Total assets
(as of January 25, 1999)..... 280,201 1,072,594 62,539 81,580 1,496,914
Capital expenditures .......... 35,180 36,218 4,710 9,878 85,986
Depreciation and amortization.. 17,448 31,872 2,240 6,211 57,771
NOTE (G) STOCK REPURCHASES
During the third quarter of fiscal 2000, the Company's Board of
Directors authorized the purchase of up to five million shares of the Company's
common stock. As of November 1, 1999, the Company repurchased 378,300 shares of
common stock for $2.6 million, or an average price of $6.92 per share. As of
December 1, 1999, the Company has repurchased a total of 1.6 million shares of
common stock for $10.4 million, or an average price of $6.57 per share.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOVEMBER 1, 1999 AND NOVEMBER 2, 1998
NOTE (H) HURRICANE FLOYD
On September 15, 1999, the Company's Hardee's headquarters, located in
Rocky Mount, North Carolina, suffered extensive flood damage as a result of
Hurricane Floyd. As of November 1, 1999, the Company incurred costs totaling
$5.0 million in damages sustained to various buildings and property, plant and
equipment and the related clean-up expenses as a result of the flood. The
Company expects to receive flood insurance proceeds of $4.9 million. These flood
expenses and the insurance proceeds to be received are reflected as part of
general and administrative expenses.
NOTE (I) RECENT DEVELOPMENTS
On November 11, 1999, the Company announced that it would consolidate
the majority of the corporate functions of its subsidiary Hardee's Food Systems,
Inc. within the Company's corporate headquarters in Anaheim, creating a single
support and administration center for the Company's Carl's Jr., Hardee's and
Taco Bueno restaurants. The Company expects to layoff approximately 150
employees in three phases, with the first phase in mid-January 2000 and the
final phase in June 2000. The Company has established a retention pay program
for employees affected by the consolidation who will stay until the lay-off
process is complete.
The decision to consolidate the administration functions at Hardee's
was accelerated by two recent events. Following Hurricane Floyd, the Company was
faced with what would be a costly reinvestment in its flood-damaged buildings if
it were to leave Hardee's corporate functions in Rocky Mount. In addition, the
Company recently announced that it is the Company's intention to reposition and
rebalance the Company so that it will have a larger proportion of franchised
restaurants rather than Company-operated restaurants. The Company plans to sell
a significant number of Carl's Jr. and Hardee's restaurants to existing and new
franchisees which ultimately will leave the Company with fewer Company-operated
restaurants to support. The Company announced last quarter that it plans to
divest 350 restaurants within 12 months. The Company believes it will
significantly exceed its plan.
During the fourth quarter of fiscal 2000, the Company has already
completed the sale of eight Carl's Jr. restaurants, generating net proceeds of
$3.9 million and a gain of approximately $3.4 million. The Company has also
executed definitive agreements for the sale of 61 Hardee's units, which will
generate net proceeds of approximately $18.5 million and a gain of $5.4 million.
Further, the Company has signed letters of intent to sell 175 Carl's Jr.
restaurants and 471 Hardee's restaurants. If these transactions are completed
according to the terms of the letters, these sales will generate proceeds of
approximately $129.6 million and $180.3 million, respectively, and will generate
expected gains of $69.7 million from the sales of Carl's Jr. restaurants and
expected losses of $41.9 million with respect to the Hardee's restaurants.
The various agreements for the sale of restaurants are expected to
close in the fourth quarter of fiscal 2000 and the first two quarters of fiscal
2001. These sales contemplate additional development within the given markets
and the agreements require that the Hardee's restaurants receive the "Star
Hardee's" remodel. In almost all cases, these agreements require full royalties
at four percent of net sales. The Company plans to use the net proceeds from
these asset sales to repay outstanding borrowings under its senior credit
facility and to potentially purchase additional shares of its common stock.
During the fourth quarter, the Company also plans to record
non-recurring pretax charges of approximately $60.0 million to $80.0 million.
These charges, which will be primarily non-cash in nature, include: establishing
a reserve for up to 90 Hardee's restaurants that the Company plans to close
within the next 12 months; providing reserves for the consolidation of Hardee's
administration functions to Anaheim; writing-off certain deferred financing
costs associated with our senior credit facility and Year 2000 costs associated
with restaurant computer systems.
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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 1, 1999
decreased 84.1% to $3.0 million, or $0.06 per share on a diluted basis, as
compared with net income of $18.9 million, or $0.35 per share on a diluted
basis, for the prior year quarter. The prior 12-week period included an
extraordinary gain on the early retirement of debt of $2.7 million. Excluding
this extraordinary gain in the prior year, net income decreased 81.4% or $13.1
million. Net income for the 40-week period ended November 1, 1999 decreased
49.0% to $32.7 million, or $0.62 per share on a diluted basis, as compared with
net income of $64.2 million, or $1.19 per share on a diluted basis for the
comparable period of the prior year. Net income, excluding the $0.3 million and
$2.7 million extraordinary gain on the early retirement of debt for the current
and prior year, respectively, decreased 47.2% for the 40-week period ended
November 1, 1999 to $32.4 million. The decrease in net income in the third
quarter was primarily due to declining sales levels at our Carl's Jr. and
Hardee's restaurants, combined with the fixed nature of certain of our operating
costs. On a year to date basis, increased interest expense in connection with
our recent financings also contributed to the decrease in net income. Operating
results for the prior-year 40 weeks ended November 2, 1998 include 31 weeks of
operations for the 557 Hardee's restaurants acquired with our acquisition of
Flagstar Enterprises, Inc. ("FEI") from Advantica Restaurant Group, Inc.
("Advantica") on April 1, 1998. Operating results for Carl's Jr. for the 12- and
40-week periods ended November 1, 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 corresponding prior year
periods.
On a diluted basis, the number of shares outstanding decreased 8.6% and
7.5% for the 12 and 40-week periods ended November 1, 1999, respectively, as
compared with the comparable periods of the prior year. The decrease is due
primarily to reflecting our convertible subordinated notes as if they were
converted into shares of our common stock in the calculation of diluted shares
outstanding in the prior year periods. These shares were not included in the
diluted shares outstanding calculation in the current year periods due to their
anti-dilutive nature.
During the third quarter of fiscal 2000, we opened 21 new Carl's Jr.
restaurants and closed two restaurants. Our franchisees opened six new
restaurants during the 12 weeks ended November 1, 1999. As of November 1, 1999,
our Carl's Jr. system included 575 company-operated restaurants, 316 franchised
restaurants and 23 international restaurants, for a system total of 914 Carl's
Jr. restaurants. We also opened two new Taco Bueno restaurants in the third
quarter, bringing the total of company-operated restaurants to 115, with one
licensed restaurant, for a system total of 116. At the end of the quarter, our
Hardee's system consisted of 1,416 company-operated restaurants, 1,267
franchised restaurants and 111 international restaurants, for a system total of
2,794 Hardee's restaurants.
We have remodeled approximately 114 company-operated Hardee's
restaurants to the Star Hardee's format during the third quarter and our
franchisees have remodeled approximately 24 restaurants, with approximately 573
Hardee's restaurants remodeled to the Star Hardee's format as of November 1,
1999, representing approximately 20% of the Hardee's system. 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, installing new signage and adding updated computerized point of sale
systems.
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; our ability to complete proposed sales of
restaurants and to reduce outstanding borrowings; quality of management;
availability, terms and deployment of capital; changes in
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CKE RESTAURANTS, INC. AND SUBSIDIARIES (Continued)
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 decreased $2.9 million, or
0.7%, to $415.5 million for the 12-week period ended November 1, 1999, while
increasing $49.7 million, or 3.7%, to $1,385.7 million for 40-week period ended
November 1, 1999 over the same prior year periods. Carl's Jr. and Taco Bueno
company-operated revenues increased by $17.7 million and $2.3 million,
respectively, while Hardee's revenues from company-operated restaurants
decreased by $17.6 million in the 12-week period ended November 1, 1999. For the
40-week period ended November 1, 1999, Carl's Jr., Hardee's and Taco Bueno
contributed $48.6 million, $33.6 million and $7.4 million, respectively, to the
increase in revenues. Offsetting these increases was 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 company-operated Carl's Jr. sales decreased 1.8% in the 12-week
period ended November 1, 1999. Same-store sales for our company-operated
Hardee's restaurants were down 5.2% for the third quarter. Same-store sales for
our company-operated Taco Bueno restaurants increased 7.0%, marking the 18th
consecutive quarter of same-store sales increases for the chain. The increase in
revenue from our company-operated Carl's Jr. restaurants was primarily
attributable to an increase in the number of restaurants open and operating in
the third quarter of fiscal 2000, as compared with the third quarter of the
prior year, and the inclusion of $8.9 million and $30.1 million of revenue from
the 63 Hardee's-to-Carl's Jr. converted restaurants for the 12- and 40-week
periods ended November 1, 1999, respectively. Hardee's revenues decreased during
the third quarter of fiscal 2000 primarily due to the chain's continued
same-store sales decreases and as a result of including in the prior year third
quarter the revenues from the 63 Hardee's-to-Carl's Jr. converted restaurants.
The increase in Hardee's company-operated revenues for the 40-week period ended
November 1, 1999 was primarily due to including in the current year a full 40
weeks of operations of the 557 Hardee's restaurants acquired from Advantica in
April 1998, as compared with 31 weeks of operations for those restaurants
included in the prior year period. Taco Bueno's increase in revenues is due
mainly to the image enhancement program for our Taco Bueno restaurants, which
was begun in fiscal 1999 and the increase in the number of restaurants open and
operating. Average unit volumes for the trailing 52-week period ending November
1, 1999 for our company-operated Carl's Jr., Hardee's and Taco Bueno restaurants
were $1,088,000, $786,000, and $791,000 respectively.
Our revenues from franchised and licensed restaurants for the 12-week
period ended November 1, 1999 decreased $1.1 million, or 2.7%, to $38.1 million,
while for the 40-week period ended November 1, 1999 these revenues increased
$4.2 million, or 3.4%, to $128.9 million, over the same prior year periods. The
decrease in revenues for the 12-week period ended November 1, 1999, was due to
the acquisition of previously franchised Hardee's restaurants during fiscal 1999
and the loss of franchised revenues from our JB's restaurants, which were sold
to SBRG in September 1998. The revenue increase for the 40-week period was
mainly due to 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 fiscal 2000 as compared with 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 2.9% to 22.3% and 2.0% to 23.6% for the 12- and 40-week periods ended
November 1, 1999, respectively, from the comparable periods of fiscal 1999,
mainly due to increases in payroll and other employee benefits and occupancy and
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CKE RESTAURANTS, INC. AND SUBSIDIARIES (Continued)
other operating expenses. As a percentage of revenues from company-operated
Carl's Jr. restaurants, food and packaging costs increased 0.5% during the
12-week period ended November 1, 1999 from 28.8% to 29.3%, while reflecting a
slight decrease for the 40-week period ended November 1, 1999 of 0.1% to 28.8%.
The increase in the current quarter was primarily due to an increase in beef
commodity prices, combined with a price-discounting program for select
sandwiches. Partially offsetting these increases in the current quarter and
contributing to the decrease for the 40-week period were the continued
purchasing economies achieved as a result of the consolidated buying power
directly realized from our addition of the Hardee's 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 1.2% to 26.9%
and 0.7% to 26.6%, respectively, for the 12- and 40-week periods ended November
1, 1999, as compared with the comparable periods in the prior year. The overall
tighter labor market and the increased competitive pressures in attracting and
retaining qualified employees have impacted our average hourly wage rate, as
well as an increase in worker's compensation costs after several years of
reduced costs. The increase in the number of our Carl's Jr./Green Burrito
dual-brand restaurants also contributed to the rise in payroll and employee
benefit costs 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 1.2% to 21.5%
and 1.4% to 21.0% for the 12- and 40-week periods as compared with the same
periods of the prior year, respectively, 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.
Hardee's restaurant-level margins for the 12- and 40-week periods ended
November 1, 1999 decreased 5.0% to 12.2% and 2.1% to 15.0%, respectively.
Hardee's food and packaging costs increased during the 12- and 40-week periods
ended November 1, 1999, up 1.8% to 31.7% and 0.3% to 31.1% of revenues from
company-operated restaurants, respectively. This increase was due to special
promotional discounts and an increase in commodity prices, partially offset by 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, increased 0.9% to 33.4% in the 12-week
period ended November 1, 1999 from the same prior year period, and increased
0.3% to 33.0% as a percentage of company-operated revenues for the 40-week
period ended November 1, 1999, as compared with the equivalent period of fiscal
1999. This increase in labor is a result of the initial increased labor required
to implement the Star Hardee's conversions and the operational changes required
in the converted restaurants and higher average hourly wage rates as a result of
a tighter labor market. As a percentage of revenues from Hardee's
company-operated restaurants, occupancy and other operating expenses increased
2.3% to 22.7% for the 12-week period and 1.6% to 20.9% for the 40-week period
ended November 1, 1999 over the comparable prior year periods. The percentage
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 decreased 2.1% to 23.8%
and 0.7% to 25.5% for the 12 and 40 weeks ended November 1, 1999. While overall
Taco Bueno restaurant-level margins reflected a modest decrease, food and
packaging costs as a percentage of sales increased by 0.6% to 29.0% and by 0.6%
to 28.5%, respectively, and payroll and other employee benefit costs increased
1.6% to 31.7% and 0.8% to 31.3%, respectively, as a percentage of sales for the
12- and 40-week periods ended November 1, 1999. These increases were partially
offset by a decrease in occupancy and other operating expenses of 0.1% to 15.6%
and 0.7% to 14.7%, as a percentage of sales for the 12- and 40-week periods
ended November 1, 1999 over the similar prior year periods, respectively. The
increases in food and packaging costs were mainly attributable to higher
commodity costs and a change in packaging materials used, while the increase in
payroll and other employee benefit costs was primarily due to an increase in
workers compensation costs as a result of a reevaluation of our historical
workers compensation experience rating. The offsetting decrease in occupancy and
other expenses was a result of the fixed nature of these costs combined with the
increase in revenues.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES (Continued)
Franchised and licensed restaurant and other costs increased 5.8% to
$26.6 million and 12.5% to $93.3 million for the 12 and 40 weeks ended November
1, 1999, respectively, over the prior year. These increases are 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 fiscal 2000 periods from the appropriate prior year
periods, 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 5.6% and 5.8% as a
percentage of revenue from franchised and licensed restaurants for the 12- and
40-week periods of fiscal 2000, respectively, over the comparable fiscal 1999
periods. Further, Hardee's had previously established allowances for certain
franchisee notes and royalties receivable based upon the historical collection
rates experienced by them. Since our acquisition of Hardee's, we have worked to
restore Hardee's relationships with its franchisees. As a result of our improved
relations with our franchisees and their improved operating performance, the
collection rate on notes receivable and royalties receivable has improved. As
such, during the 12 weeks ended November 2, 1998, we reversed certain allowances
on royalties receivable which proved to be unnecessary.
Advertising expenses increased $1.3 million and $10.4 million,
respectively, from the 12- and 40-week periods ended November 2, 1998, mainly
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 both dollars spent and as a
percentage of company-operated revenues in the current fiscal year as compared
with the prior fiscal year.
General and administrative expenses increased $2.6 million, or 0.6% of
total revenues, and $10.9 million, or 0.5% of total revenues, to $31.8 million
and $102.9 million, respectively, for the 12- and 40-week periods ended November
1, 1999 over the same periods of the prior year. This increase in general and
administrative expenses reflects the planned addition of regional general and
administrative expenses in the FEI markets that did not exist in the prior year,
including additional quality assurance and regional human resources support;
higher training expenses for the accelerated Star Hardee's remodel rollout; and,
an increase in information technology costs associated with the implementation
of PeopleSoft and Year 2000 compliance. Lower revenue levels combined with the
planned increase in general and administrative costs resulted in higher general
and administrative expenses as a percentage of total revenues.
Interest expense for the 12- and 40-week periods ended November 1, 1999
increased $2.9 million and $10.2 million, respectively, as compared with the
prior year periods 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. As a result of our
amendment to our senior credit facility subsequent to quarter-end, the
applicable margin used to determine our interest rate payable on outstanding
borrowings was increased. As such, we would expect to see our interest expense
rise in future quarters even if our borrowings outstanding under our senior
credit facility remain unchanged; however, we plan to mitigate the effect of
higher interest rates by reducing outstanding borrowings with proceeds from
sales of restaurants.
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, increased $2.1
million for the 12-week period ended November 1, 1999, while decreasing $1.6
million for the 40-week periods ended November 1, 1999 over the corresponding
prior year periods. The increase in the 12-week period ended November 1, 1999
was primarily due to the one-time charge of $15.0 million in the prior year to
reflect the Company's investment in Boston West, LLC ("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, Inc. ("Star Buffet") during the third quarter of the prior year.
Additionally, a reduction in interest income as a result of our reduced note
receivable from Checkers Drive-In Restaurants, Inc., reduced notes
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CKE RESTAURANTS, INC. AND SUBSIDIARIES (Continued)
receivable from our franchisees, reduced interest income on cash and cash
equivalents, increased property management expenses, the settlement of certain
claims against us relating to our investment in Boston West and recognition of
income in the prior year from our investment in Star Buffet, which was
subsequently sold in October 1998, contributed to the decrease in other income
(expense), net for the 40 weeks ended November 1, 1999.
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. To date, we have repurchased $38.0 million of such notes.
During the 12-week period ended November 2, 1998, we repurchased $30.0 million,
as a result of which the Company recognized an extraordinary gain in the third
quarter of the prior year on the early retirement of debt of $2.7 million, net
of applicable taxes. 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 extraordinary gain on the early retirement of debt of $0.3
million, net of applicable taxes in the 40-week period ended November 1, 1999.
FINANCIAL CONDITION
Cash and cash equivalents decreased $5.8 million to $40.5 million in the
40-week period ended November 1, 1999. Investing activities absorbed $200.6
million of our cash to fund capital additions of $204.6 million. Partially
generating some of the funds necessary for our investing activities were $14.0
million from the sale of property and equipment to our franchisees and $2.5
million from collections on and sale of notes receivable, related party
receivables and leases receivable. Financing activities provided us with $99.8
million in cash, primarily from the net proceeds of the issuance of our 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 $256.8 million, to fund the remodeling of our Hardee's
restaurants to the new Star Hardee's format, to build new Carl's Jr. restaurants
and to build and remodel Taco Bueno restaurants, to pay $10.7 million of
deferred financing costs associated with our issuance of the senior subordinated
notes, to repay $5.7 million in capital lease obligations, to pay dividends of
$4.2 million and to repurchase $2.6 million of our common stock.
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. 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.
Subsequent to November 1, 1999, we amended our senior credit facility
such that certain of the covenants governing this senior credit facility were
modified for the third and fourth quarters of fiscal 2000 and for future
measurement periods. In addition, the revolving commitments under the senior
credit facility were reduced to $400.0 million and will be further reduced by
the first $75.0 million in proceeds from the sale of restaurants. The final
maturity date of February 2004 remains unchanged; however, the applicable margin
used to determine the interest rate payable on outstanding borrowings was
increased and up to $200.0 million of revolving borrowings will be converted,
subject to lender approvals, to term borrowings with an interest rate not
subject to adjustment on the basis of certain financial ratios. The term loan
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CKE RESTAURANTS, INC. AND SUBSIDIARIES (Continued)
component will provide for principle payments of $4.2 million each quarter
beginning in March 2001, with all remaining principle due on the maturity date.
As a result of the amendment, we were in compliance as of November 1, 1999 with
all of our covenants related to our senior credit facility.
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.
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 Carl's Jr. and Taco Bueno restaurants, the
remodeling of our Hardee's restaurants to the Star Hardee's format, the
remodeling of existing Taco Bueno 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 previously announced restructuring and
consolidation of administrative functions from Rocky Mount, North Carolina to
Anaheim, California.
It is our intention to reposition and rebalance our company so that we
will have a larger proportion of franchised restaurants rather than
company-operated restaurants. We are planning to sell a significant number of
Carl's Jr. and Hardee's restaurants to existing and new franchisees. We
announced last quarter that we plan to divest 350 restaurants within 12 months.
We believe we will significantly exceed our plan.
During the fourth quarter of fiscal 2000, we have already completed the
sale of eight Carl's Jr. restaurants, generating net proceeds of $3.9 million
and a gain of approximately $3.4 million. We have also executed definitive
agreements for the sale of 61 Hardee's units, which will generate net proceeds
of approximately $18.5 million and a gain of $5.4 million. Further, we have
signed letters of intent to sell 175 Carl's Jr. restaurants and 471 Hardee's
restaurants. If these transactions are completed according to the terms of the
letters, these sales will generate proceeds of approximately $129.6 million and
$180.3 million, respectively, and will generate expected gains of $69.7 million
from the sales of Carl's Jr. restaurants and expected losses of $41.9 million
with respect to the Hardee's units.
The various agreements for the sale of restaurants are expected to close
in the fourth quarter of fiscal 2000 and the first two quarters of fiscal 2001.
These sales contemplate additional development within the given markets and the
agreements require that the Hardee's restaurants receive the "Star Hardee's"
remodel. In almost all cases, these agreements require full royalties at four
percent of net sales. We plan to use the net proceeds from these asset sales to
repay outstanding borrowings under our senior credit facility and to potentially
purchase additional shares of our common stock.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES (Continued)
During the fourth quarter, we also plan to record non-recurring pretax
charges of approximately $60.0 million to $80.0 million. These charges, which
will be primarily non-cash in nature, include: establishing a reserve for up to
90 Hardee's restaurants that we plan to close within the next 12 months;
providing reserves for the consolidation of Hardee's administration functions to
the West coast; writing-off certain deferred financing costs associated with our
senior credit facility and Year 2000 costs associated with restaurants computer
systems.
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 November 1, 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 November 2, 1999, under our senior credit
facility, as amended, we had $79.5 million of borrowings available to us. If
those sources of capital, together with net proceeds from sales of restaurants,
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. For any critical supplier or vendor which did not supply us with
satisfactory evidence of their Y2K readiness, contingency plans were developed
which include establishing alternative sources for the product or service
provided. 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
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CKE RESTAURANTS, INC. AND SUBSIDIARIES (Continued)
expected to range from $25.0 million to $30.0 million and will be capitalized or
expensed in accordance with generally accepted accounting principles. Through
November 1, 1999, we have incurred approximately $24.7 million of expenditures
consisting of hardware and software purchases, internal staff costs and outside
consulting and other expenditures related to this upgrade process.
We have established an enterprise-wide program to prepare our computer
systems and applications for Y2K and are utilizing both internal and external
resources to identify, correct and test our systems for Y2K compliance. Our
internal reprogramming and testing efforts have been substantially completed. We
expect that all mission-critical systems will be Y2K ready prior to December 31,
1999. We have completed the inventory and assessment phases of our evaluation of
all information technology equipment. Based on the results of the assessment,
all mission-critical equipment is Y2K ready.
Despite our extensive efforts to assess potential Y2K issues, the
installation of a new enterprise-wide information system, remediation of other
systems, and testing program, unanticipated problems during the early months of
2000 are possible. These problems, which we believe are unlikely, could have a
material adverse impact on us.
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 outstanding borrowings under our $400.0
million senior credit facility, as amended, of which $276.0 million remained
outstanding as of November 1, 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 7.5% in fiscal 2000). A hypothetical
increase of 100 basis points in short-term interest rates, along with an
increase in our applicable margin of approximately 75 basis points as a result
of recent amendments to our senior credit facility, would result in a reduction
of approximately $4.8 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 or composition of debt at November 1, 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:
10.8 Third Amended and Restated Credit Agreement, dated as of
November 24, 1999, by and between the Company and Paribas,
as agent, and the Lenders party thereto.
11 Calculation of Earnings Per Share.
12.1 Computation of Ratios
27.1 Financial Data Schedule (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 14 , 1999 /s/ Carl A. Strunk
- ------------------ ---------------------------------
Date Carl A. Strunk
Executive Vice President,
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.8 Third Amended and Restated Credit Agreement, dated as of
November 24, 1999, by and between the Company and
Paribas, as agent, and the Lenders party thereto.
11 Calculation of Earnings Per Share.
12.1 Computation of Ratios
27.1 Financial Data Schedule (included only with
electronic filing).