1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
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 22, 2000
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ___________
Commission file number 1-13192
-------
CKE RESTAURANTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0602639
- ------------------------------- -------------------
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
50,501,421 shares of Common Stock, par value $.01 per share,
were outstanding as of June 23, 2000
------------------------------------------------------------
2
CKE RESTAURANTS, INC. AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of May 22, 2000 and
January 31, 2000...................................... 3
Consolidated Statements of Operations for the
sixteen weeks ended May 22, 2000 and May 17, 1999..... 4
Consolidated Statements of Cash Flows for the
sixteen weeks ended May 22, 2000 and May 17, 1999..... 5
Notes to Consolidated Financial Statements............... 6
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
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
May 22, January 31,
2000 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 17,514 $ 36,505
Accounts receivable, net 47,285 42,928
Related party receivables 5,334 5,006
Inventories 25,525 26,463
Prepaid expenses 13,953 14,717
Other current assets 2,523 2,454
---------- ----------
Total current assets 112,134 128,073
Property and equipment, net 1,047,878 1,051,480
Property under capital leases, net 82,086 84,482
Long-term investments 5,239 3,002
Notes receivable 8,208 7,383
Related party receivables -- 583
Deferred income taxes, net 15,006 15,006
Costs in excess of assets acquired, net 241,569 243,304
Other assets 34,838 35,201
---------- ----------
$1,546,958 $1,568,514
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,473 $ 5,532
Current portion of capital lease obligations 9,774 9,603
Accounts payable 80,450 99,204
Other current liabilities 94,394 97,582
----------- -----------
Total current liabilities 190,091 211,921
----------- -----------
Long-term debt 290,849 274,996
Senior subordinated notes 200,000 200,000
Convertible subordinated notes 159,225 159,225
Capital lease obligations 89,637 92,063
Other long-term liabilities 75,934 84,552
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
52,086,421 shares 521 521
Additional paid-in capital 383,016 383,016
Retained earnings 168,091 172,626
Treasury stock, at cost, 1,585,000 shares (10,406) (10,406)
----------- -----------
Total stockholders' equity 541,222 545,757
----------- -----------
$ 1,546,958 $ 1,568,514
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
3
4
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Sixteen Weeks Ended
--------------------------
May 22, May 17,
2000 1999
--------- ---------
Revenues:
Company-operated restaurants $ 527,373 $ 546,744
Franchised and licensed restaurants and other 56,955 48,979
--------- ---------
Total revenues 584,328 595,723
--------- ---------
Operating costs and expenses:
Restaurant operations:
Food and packaging 162,517 163,732
Payroll and other employee benefits 165,563 165,579
Occupancy and other operating expenses 116,843 110,835
--------- ---------
444,923 440,146
Franchised and licensed restaurants 43,752 35,528
Advertising expenses 33,673 32,679
General and administrative expenses 45,677 39,765
--------- ---------
Total operating costs and expenses 568,025 548,118
--------- ---------
Operating income 16,303 47,605
Interest expense (20,695) (15,678)
Other income (expense), net 431 (266)
--------- ---------
Income (loss) before income taxes and extraordinary item (3,961) 31,661
Income tax expense (benefit) (1,510) 12,531
--------- ---------
Income (loss) before extraordinary item (2,451) 19,130
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes of $186 -- 290
--------- ---------
Net income (loss) $ (2,451) $ 19,420
========= =========
Basic income (loss) per share before extraordinary item $ (0.05) $ 0.36
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes - basic -- .01
--------- ---------
Net income (loss) per share - basic $ (0.05) $ 0.37
========= =========
Weighted average shares outstanding - basic 50,501 51,860
========= =========
Diluted income (loss) per share before extraordinary item $ (0.05) $ 0.36
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes - diluted -- .01
--------- ---------
Net income (loss) per share - diluted $ (0.05) $ 0.37
========= =========
Weighted average shares outstanding - diluted 50,501 56,341
========= =========
See Accompanying Notes to Consolidated Financial Statements
4
5
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Sixteen Weeks Ended
--------------------------
May 22, May 17,
2000 1999
--------- --------
Net cash flow from operating activities:
Net income (loss) $ (2,451) $ 19,420
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 35,827 27,923
(Gain) loss on sale of property and equipment and capital leases (531) 435
Net noncash income -- (140)
(Gain) loss on noncurrent asset and liability transactions (374) 370
Net change in receivables, inventories, prepaid expenses
and other current assets (2,649) 2,123
Net change in accounts payable and other current liabilities (103) (6,459)
--------- ---------
Net cash provided by operating activities 29,719 43,196
--------- ---------
Cash flow from investing activities:
Purchases of:
Property and equipment (31,022) (67,183)
Long term investments (2,250) --
Proceeds from sale of property and equipment 5,611 3,404
Increases in notes receivable and related party receivables (6,614) (569)
Collections on notes receivable, related party receivables
and leases receivable 6,356 890
Net change in other assets 77 558
--------- ---------
Net cash used in investing activities (27,842) (62,900)
--------- ---------
Cash flow from financing activities:
Net change in bank overdraft (21,839) 2,743
Long-term borrowings 104,000 237,000
Repayments of long-term debt (88,206) (204,825)
Repayments of capital lease obligations (3,217) (1,858)
Deferred financing costs (904) (9,686)
Net change in other long-term liabilities (8,618) (2,467)
Payment of dividends (2,084) (2,075)
Exercise of stock options -- 104
--------- ---------
Net cash provided by (used in) financing activities (20,868) 18,936
--------- ---------
Net decrease in cash and cash equivalents $ (18,991) $ (768)
========= =========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest (net of amount capitalized) 26,417 15,703
Income taxes 139 5,957
See Accompanying Notes to Consolidated Financial Statements
5
6
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 22, 2000 AND MAY 17, 1999
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 2000 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.
NOTE (B) LONG-TERM DEBT
The senior credit facility, as amended, consists of a $400.0 million
revolving credit facility and includes a $75.0 million letter of credit
sub-facility and has a maturity date of February 2004.
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.
In April 2000, the Company amended its senior credit facility effective
January 31, 2000, to amend certain of the covenants contained therein. The
amended senior credit facility provides that the revolving commitments
thereunder shall be reduced by the first $100.0 million in net proceeds from
sales of restaurants and 75% of the second $100.0 million in net proceeds from
sales of restaurants, and by the entire net proceeds from the sale of any of the
Company's Carl's Jr. or Taco Bueno restaurants. The senior credit facility, as
amended, prohibits the Company from purchasing shares of its common stock,
purchasing its senior subordinated notes or convertible notes, from prepaying
subordinated indebtedness and from increasing cash dividends paid from current
levels. In addition, capital expenditures were reduced and construction of new
restaurants is limited to construction already begun or committed to begin. The
final maturity date remains unchanged; however, the interest rate payable on
outstanding borrowings was increased. Failure to complete an asset sale or sales
aggregating $125.0 million in net proceeds by the end of October 2000 will
result in a further increase in the interest rate until such sales are
completed. The Company was in compliance as of May 22, 2000 with all of its
covenants governing its senior credit facility, as amended. As of May 22, 2000,
the Company had $34.9 million of borrowings available under its senior credit
facility.
NOTE (C) 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
6
7
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 22, 2000 AND MAY 17, 1999
(Continued)
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.
NOTE (D) CONVERTIBLE SUBORDINATED NOTES
During the first quarter of fiscal 2000, the Company repurchased $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.
7
8
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 22, 2000 AND MAY 17, 1999
(Continued)
NOTE (E) EARNINGS (LOSS) PER SHARE
The Company presents "basic" earnings (loss) per share which represents net
earnings (loss) divided by the weighted average shares outstanding excluding all
common stock equivalents and "diluted" earnings (loss) per share reflecting the
dilutive effect of all common stock equivalents. The following table illustrates
the computation of basic and diluted earnings (loss) per share:
(In thousands, except
per share amounts)
Sixteen Weeks Ended
-------------------------
May 22, May 17,
2000 1999
-------- ---------
Basic Earnings (Loss) Per Share
Income (loss) before extraordinary item $ (2,451) $19,130
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes of $186 -- 290
-------- -------
Net income (loss) $ (2,451) $19,420
======== =======
Weighted average number of common shares outstanding
during the period 50,501 51,860
======== =======
Basic income (loss) per share before extraordinary item $ (0.05) $ 0.36
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes - basic -- 0.01
-------- -------
Basic income (loss) per share $ (0.05) $ 0.37
======== =======
Diluted Earnings (Loss) Per Share
Income (loss) before extraordinary item $ (2,451) $19,130
Interest expense and amortization of debt issuance costs,
net of income tax effect applicable to convertible subordinated notes -- 1,415
-------- -------
Diluted income (loss) before extraordinary item (2,451) 20,545
Extraordinary item - gain on early retirement of debt, net of applicable
income taxes of $186 -- 290
-------- -------
Diluted net income (loss) $ (2,451) $20,835
======== =======
Weighted average number of common shares outstanding
during the period 50,501 51,860
Incremental common shares attributable to:
Exercise of outstanding options -- 839
Issuance of convertible subordinated notes -- 3,642
-------- -------
Total shares 50,501 56,341
======== =======
Diluted net income (loss) per share before extraordinary item (0.05) $ 0.36
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes - diluted -- 0.01
-------- -------
Diluted income (loss) per share $ (0.05) $ 0.37
======== =======
8
9
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 22, 2000 AND MAY 17, 1999
(Continued)
For the periods ended May 22, 2000 and May 17, 1999, 6.1 million shares and 5.5
million shares, respectively, relating to the possible exercise of outstanding
stock options, and for the period ended May 22, 2000, 3.6 million shares
issuable upon conversion of convertible subordinated notes, were not included in
the computation of diluted earnings (loss) per share as their effect would have
been anti-dulitive.
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 operating income or loss. 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 31, 2000.
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
operating income or loss, income and expense not allocated to reportable
segments.
Sixteen Weeks Ended
CARL'S JR. HARDEE'S TACO BUENO OTHER TOTAL
---------- -------- ---------- ----- -----
MAY 22, 2000:
Revenues $224,715 $ 325,681 $30,272 $ 3,660 $ 584,328
Segment operating income (loss) 17,192 1,052 2,053 (3,994) 16,303
Capital expenditures 14,314 9,637 4,059 3,012 31,022
Depreciation and amortization 8,552 22,206 1,363 3,706 35,827
Total assets 387,767 1,053,771 81,124 24,296 1,546,958
MAY 17, 1999:
Revenues $207,851 $ 356,230 $27,616 $ 4,026 $ 595,723
Segment operating income (loss) 23,086 25,780 3,272 (4,533) 47,605
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
Total assets (as of January 31, 2000) 383,124 1,089,867 77,507 18,016 1,568,514
NOTE (G) STOCK REPURCHASES
During the third quarter of fiscal 2000, the Company's Board of Directors
authorized the re-purchase of up to five million shares of the Company's common
stock on the public market. As of May 22, 2000, the Company had repurchased
1,585,000 shares of common stock for $10.4 million, at an average price of $6.53
per share.
NOTE (H) RECENT DEVELOPMENTS
In November 1999, the Company announced its decision to create a single
support and administration center for all of its restaurant concepts by
consolidating the majority of the corporate functions of its Hardee's
subsidiary, located in Rocky Mount, North Carolina, within its corporate
headquarters in Anaheim, California. As a result of this decision, the Company
accrued $2.1 million of termination benefits for a total of approximately 150
employees that would be laid-off in phases that began in January 2000 and will
continue through August 2000. In the first quarter of fiscal 2001, the Company
paid $0.9 million of termination benefits to approximately 46 employees who were
involuntarily terminated during the quarter. Such amounts were charged against
the severance reserve. As of May 22, 2000, approximately $0.9 million remained
accrued for employees to be laid off during the remainder of fiscal 2001.
9
10
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 22, 2000 AND MAY 17, 1999
(Continued)
In the fourth quarter of fiscal 2000, the Company recorded a store closure
reserve at Hardee's of $16.3 million for 105 Hardee's restaurants to be closed
during fiscal 2001. The store closure reserve relates primarily to the net
present value of any remaining lease obligations after the expected closure
date, net of estimated sublease income. During the first quarter, the Company
utilized $0.5 million of this reserve. As of May 22, 2000, approximately $15.8
million remained accrued for the store closure reserve.
In fiscal 2001 through June 30, 2000, the Company has completed the sale of
21 Hardee's restaurants, generating net proceeds of approximately $12.6 million
and a gain of $1.7 million, of which two of these restaurants were sold in the
first quarter. In addition, in fiscal 2001 through June 30, 2000, the Company
has completed the sale of 9 Carl's Jr. restaurants, generating net proceeds of
approximately $5.2 million and a gain of $2.5 million. In accordance with the
terms of the senior credit facility, as amended, the results of these asset
sales have reduced the revolving commitments to approximately $355 million. The
Company also has definitive agreements for the sale of 251 Hardee's units, which
are expected to generate proceeds of approximately $73 million and a loss of
approximately $36 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
Consolidated net income (loss) for the 16-week period ended May 22, 2000
decreased 112.6% to a net loss of $2.5 million, or ($0.05) per share on a
diluted basis as compared with net income of $19.4 million, or $0.37 per share
on a diluted basis for the prior year quarter.
The decline in consolidated net income (loss) was primarily due to
declining sales at our Hardee's restaurants, combined with the fixed nature of
certain of our operating costs. In addition, we incurred a significant increase
in interest expense in connection with our private placement of $200 million of
senior subordinated notes on March 4, 1999 and increased borrowings on our
senior credit facility as well as an increase in general and administrative
costs.
On a diluted basis, the number of shares outstanding decreased 10.4% as
compared with the first quarter of fiscal 2000. 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. These shares were not included in the diluted shares outstanding
calculation in the current year due to their anti-dilutive nature.
During the first quarter of fiscal 2001, we opened 8 new Carl's Jr.
restaurants while our franchisees opened 10 new restaurants. As of May 22, 2000,
our Carl's Jr. system consisted of 570 company-operated restaurants, 353
franchised restaurants and 24 international restaurants for a system total of
947 Carl's Jr. restaurants. At the end of the quarter, our Hardee's system
consisted of 1,339 company-operated restaurants, 1,314 franchised restaurants
and 121 international restaurants for a system total of 2,774 Hardee's
restaurants. Additionally, we opened 3 Taco Bueno restaurants for a total of 124
company-operated restaurants.
We remodeled 17 restaurants to the Star Hardee's format during the first
quarter of fiscal 2001 and our franchisees remodeled 58 restaurants to the Star
Hardee's format, bringing the total number of restaurants remodeled to 724,
which represents approximately 26.1% of the system. Star Hardee's is designed to
showcase the new and improved Hardee's menu and to bring customers back to
Hardee's. After testing various combinations of both brands in certain markets,
we are now remodeling Hardee's restaurants to the new Star Hardee's format by
installing charbroilers in the kitchens, remodeling the interior and exterior of
the restaurants and installing new signage that retains the Hardee's name but
shares space with the Carl's Jr. Star logo. In addition, we, along with some
franchisees, are considering a limited remodel which consists primarily of the
addition of a charbroiler and certain interior and exterior enhancements.
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
10
11
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
MAY 22, 2000 AND MAY 17, 1999
(Continued)
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 our Hardee's and FEI
restaurants; 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 $19.4 million or 3.5%
to $527.4 million in the first quarter of fiscal 2001 as compared with the prior
year first quarter. Revenues from our Carl's Jr. and Taco Bueno concepts were up
$10.9 million and $2.7 million, respectively, while revenues from our Hardee's
concept decreased $32.6 million from the prior year period. On a same-store
sales basis, our company-operated Carl's Jr. sales increased 3.6% for the
quarter while our company-operated Hardee's and Taco Bueno concepts sales
decreased 6.2% and 1.9%, respectively, compared with the first quarter of fiscal
2000. The increase in revenue from our Carl's Jr. restaurants was primarily
attributable to an increase in the number of restaurants open and operating
during the first quarter of fiscal 2001 as compared with the comparable period
of the prior year. The increase in revenue from our Taco Bueno concept was due
to an increase in the number of restaurants open and operating during the first
quarter of fiscal 2001 as compared to fiscal 2000. Hardee's revenues decreased
in the first quarter of fiscal 2001 due primarily to the concept's continued
same-store sales declines and the sale of several restaurants to franchisees in
the fourth quarter of fiscal 2000. Average unit volumes for the trailing 52-week
period ended May 22, 2000 for our company-operated Carl's Jr., Taco Bueno and
Hardee's chains were $1,089,000, $800,000, and $779,000, respectively.
Our revenues from franchised and licensed restaurants for the 16-week
period ended May 22, 2000 increased $8.0 million, or 16.3%, to $57.0 million
from the comparable period in fiscal 2000. This increase is primarily due to an
increase in 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 2001 as compared with the
first quarter of fiscal 2000, an increase in the number of Hardee's franchised
restaurants operating in the first quarter of fiscal 2001 as compared to fiscal
2000, 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 1.9% to 21.9% for the 16-week period ended May 22, 2000 from the
corresponding period of the prior year, primarily due to increases in food and
packaging and payroll and other employee benefits. As a percentage of revenues
from company-operated Carl's Jr. restaurants, food and packaging costs increased
1.1% to 29.5%. The increase over the prior year period was primarily due to an
increase in beef commodity prices, combined with the effect of a
price-discounting program for selected sandwiches, primarily the $0.99 Spicy
Chicken Sandwich. Payroll and other employee benefits for our Carl's Jr. chain,
as a percentage of revenues from company-operated restaurants, increased 0.9% to
27.3% for the first quarter of fiscal 2001. This increase was primarily due to
the overall tighter labor market and the increased competitive pressures in
attracting and retaining qualified employees, which has led to a higher average
hourly wage rate during the quarter. In addition, we made a conscious decision
to increase labor in our restaurants in an effort to maintain quality guest
service. Occupancy and other operating expenses have decreased 0.1% to 21.3% in
the current quarter as compared to the corresponding quarter of the prior year.
This was primarily due to the fixed nature of certain operating costs.
Restaurant-level margins for our company-operated Hardee's restaurants
decreased 5.6% to 11.1% for the first quarter of fiscal 2001 as compared to the
first quarter of fiscal 2000. This decrease was primarily due to increases in
payroll and other employee benefits and occupancy and other operating expenses.
Food and packaging costs at the
11
12
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
MAY 22, 2000 AND MAY 17, 1999
(Continued)
Hardee's chain increased 0.9% to 31.8% for the quarter. This increase was due to
higher food cost items comprising a larger percentage of the Hardee's product
mix, primarily chicken products. Payroll and other employee benefits, as a
percentage of revenues from company-operated Hardee's restaurants, increased
1.6% to 33.9% for the first quarter of fiscal 2001. This increase was primarily
due to the overall tighter labor market and the increased competitive pressures
in attracting and retaining qualified employees, which has led to higher average
manager and crew wages. Occupancy and other operating expenses increased 3.2% to
23.2% for the current year quarter. This was primarily due to an increase in
repair and maintenance expense during the current year quarter as compared to
the prior year quarter, as well as an increase in depreciation as a result of
new equipment being installed in the Hardee's restaurants over the past year in
conjunction with the Star Hardee's remodels.
Taco Bueno's restaurant-level margins decreased 4.5% to 22.7% for the
16-week period ended May 22, 2000 from the corresponding period of the prior
year. Taco Bueno's food and packaging costs increased 0.9% from the prior year
to 29.1%. This increase was due primarily to higher commodity costs and the
introduction of the new Popcorn Chicken line, which is a higher cost product.
Payroll and other employee benefits increased 1.5% to 31.9% for the quarter.
This increase was primarily attributable to the company's decision to keep the
restaurants staffed in light of decreased same-store sales in an effort to
maintain quality guest service. Occupancy and other operating costs increased
2.1% to 16.3% when compared with the prior year first quarter. Contributing to
this increase were mainly depreciation and repair and maintenance costs. The
increase in depreciation as a percentage of company-operated restaurant sales
was due to the completion of several signage projects in the current year which
are now being depreciated, while the increase in repair and maintenance expense
was due to the recent expiration of warranties on the point-of-sale systems at
the Taco Bueno chain.
Franchised and licensed restaurant and other costs increased 23.1% or $8.2
million to $43.8 million for the first 16 weeks of fiscal 2001. 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.
Advertising expenses increased $1.0 million in the first quarter of fiscal
2001 over the comparable period of fiscal 2000 principally due to increased
advertising support for Carl's Jr. 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 $5.9 million to $45.7 million
for the 16-week period ended May 22, 2000, as compared to the 16-week period
ended May 17, 1999. As a percentage of total revenues, general and
administrative expenses increased 1.1% to 7.8% of total revenues for the first
quarter of fiscal 2001. This increase is primarily attributable to an increase
in information technology costs associated with the continued implementation of
our new computer system and depreciation of systems installed during the latter
part of fiscal 2000. In addition, in connection with the previously announced
restructuring and consolidation of administrative functions from Rocky Mount,
North Carolina to Anaheim, California, the company is experiencing duplicative
costs for certain administrative functions during this transition period. These
costs are expected to decline as the consolidation is completed.
Interest expense for the 16-week period ended May 22, 2000 increased $5.0
million to $20.7 million as compared with the comparable prior year period due
to higher levels of borrowings outstanding under our senior credit facility as
well as an overall increase in interest rates. As a result of the amendment to
our senior credit facility subsequent to year-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, which is
required by the senior credit facility, as amended. Also contributing to the
rise in interest expense was the $200.0 million aggregate principal amount of
9.125% senior subordinated notes due 2009. These notes were issued during the
first quarter of fiscal 2000 and as such, the prior year included only a partial
quarter of this interest expense while the current year included a full quarter.
12
13
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
MAY 22, 2000 AND MAY 17, 1999
(Continued)
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 $0.7
million in the first quarter of fiscal 2001 as compared with the comparable
period in the prior fiscal year. The increase in other income (expense), net,
was primarily due to the recognition of a $0.9 million gain on the sale of
restaurants in the current quarter.
During the third quarter of fiscal 1999, the Board of Directors approved
the buyback of up to $50.0 million aggregate principal amount of convertible
subordinated notes. In the first quarter of fiscal 2000, we repurchased $3.0
million of these 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 income taxes
of $0.2 million.
FINANCIAL CONDITION
Cash and cash equivalents decreased $19.0 million to $17.5 million in the
16 week period ended May 22, 2000. Investing activities absorbed $24.0 million
of our cash to fund capital additions of $31.0 million. Partially generating
some of the funds necessary were $5.6 million from the sale of property and
equipment and $4.3 million from collections on and sale of notes receivable,
related party receivables and leases receivable. Financing activities absorbed
$20.9 million in cash, primarily as a result of timing of payments to suppliers.
Cash flows from operating and financing activities were mainly used to fund the
development of Carl's Jr. restaurants and the remodeling of our Hardee's
restaurants to the new Star Hardee's format, to repay $3.2 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 (the commitment has since been amended to $400 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.
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 (i) certain asset sales, (ii) the issuance of
certain equity securities, and (iii) 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
13
14
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
MAY 22, 2000 AND MAY 17, 1999
(Continued)
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.
In April 2000, we amended our senior credit facility effective January 31,
2000, to amend certain of the covenants contained therein. The amended senior
credit facility provides that the revolving commitments thereunder shall be
reduced by the first $100.0 million in net proceeds from sales of restaurants
and 75% of the second $100.0 million in net proceeds from sales of restaurants,
and by the entire net proceeds from the sale of any of our Carl's Jr. or Taco
Bueno restaurants. The senior credit facility, as amended, prohibits us from
purchasing shares of our common stock, purchasing our senior subordinated notes
or convertible notes, from prepaying subordinated indebtedness and from
increasing cash dividends paid from current levels. In addition, capital
expenditures were reduced and construction of new restaurants is limited to
construction already begun or committed to begin. The final maturity date
remains unchanged; however, the interest rate payable on outstanding borrowings
was increased. Failure to complete an asset sale or sales aggregating $125.0
million in net proceeds by the end of October 2000 will result in a further
increase in the interest rate until such sales are completed. We were in
compliance as of May 22, 2000 with all of our covenants governing our senior
credit facility, as amended. As of May 22, 2000, we had $34.9 million of
borrowings available under our senior credit facility.
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 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 up to 500 Hardee's restaurants to existing
and new franchisees during fiscal 2001, which should generate net proceeds to
the company of approximately $200.0 million. We intend to condition such sales
upon the purchasers' agreement to perform additional development with respect to
the purchased restaurants, including the Star Hardee's remodeling, and upon the
execution of royalty agreements providing for full royalties at four percent of
net sales. The net proceeds from these asset sales will be used to repay
outstanding borrowings under our senior credit facility. In the current fiscal
year, the company has completed the sale of 21 Hardee's restaurants, generating
net proceeds of approximately $12.6 million.
The quick-service restaurant business generally receives simultaneous cash
payment for sales. We presently use the net cash flow from operations to repay
outstanding indebtedness and to reinvest 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 22, 2000, 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 22, 2000, we had $34.9 million of
borrowings available to us under our senior credit facility. If those sources of
capital, together with net proceeds from sales of restaurants, are insufficient
to satisfy our capital spending and working capital requirements, we may be
required to sell additional restaurants or obtain additional credit facilities.
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.
14
15
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
MAY 22, 2000 AND MAY 17, 1999
(Continued)
In the event that our Hardee's restaurants continue to show declines in
same-store sales or our Carl's Jr. restaurants begin to experience declines in
same-store sales, and if we are unable to generate proceeds from the sale of
restaurants at prices and on terms sufficient to service our senior credit
facility, we may need to refinance all or a portion of our indebtedness on or
before maturity in order to avoid a short and long term liquidity shortage. The
availability of capital sources will depend upon prevailing market conditions,
interest rates and our then-existing financial position.
YEAR 2000
We have addressed the potential business risks associated with the Year
2000. The Year 2000 issue involved the use of a two-digit year field instead of
a four-digit year field in computer systems. If computer systems cannot
distinguish between the year 1900 and the year 2000, system failures or other
computer errors could result. To date, we are not aware of the occurrence of any
significant Year 2000 problems being reported. Some business risks associated
with the Year 2000 issue may remain throughout 2000. However, it is not
anticipated that future Year 2000 issues, if any, will have a material adverse
effect 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 our $400.0 million senior credit facility,
of which $285.0 million remained outstanding as of May 22, 2000. 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 8.6% in
fiscal 2001). A hypothetical increase of 100 basis points in short-term interest
rates would result in a reduction of approximately $2.9 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 22, 2000. 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.
15
16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.33 Green Burrito Master Franchise Agreement dated
June 5, 2000 by and among the Company and Green
Burrito Grill Franchise Corporation and Santa Barbara
Restaurant Group, Inc.
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)
July 6, 2000 /s/ Carl A. Strunk
- ------------ ------------------------------
Date Executive Vice President,
Chief Financial Officer
16
17
EXHIBIT INDEX
Exhibit # Description
- --------- -----------
10.33 Green Burrito Master Franchise Agreement dated June
5, 2000 by and among the Company and Green Burrito
Grill Franchise Corporation and Santa Barbara
Restaurant Group, Inc.
12.1 Computation of Ratios
27.1 Financial Data Schedule (included only with
electronic filing).