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 November 6, 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 Identification No.)
Incorporation or Organization)
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 12, 2000, 50,501,421 shares of the Registrant's Common
Stock were outstanding.
2
CKE RESTAURANTS, INC. AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of November 6, 2000 and January 31, 2000....... 2
Consolidated Statements of Operations for the twelve and forty weeks
ended November 6, 2000 and November 1, 1999............................... 3
Consolidated Statements of Cash Flows for the forty weeks ended
November 6, 2000 and November 1, 1999..................................... 4
Notes to Consolidated Financial Statements.................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 17
Part II. Other Information
Item 6. Exhibits and Current Reports on Form 8-K................................. 18
1
3
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
November 6, January 31,
2000 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 25,774 $ 36,505
Accounts receivable, net 77,538 42,928
Related party receivables 2,146 5,006
Inventories 19,797 26,463
Prepaid expenses 11,383 14,717
Other current assets 2,549 2,454
----------- -----------
Total current assets 139,187 128,073
Property and equipment, net 894,177 1,051,480
Property under capital leases, net 77,854 84,482
Long-term investments 3,690 3,002
Notes receivable 12,284 7,383
Related party receivables -- 583
Deferred income taxes, net 15,006 15,006
Costs in excess of assets acquired, net 238,441 243,304
Other assets 30,099 35,201
----------- -----------
$ 1,410,738 $ 1,568,514
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 224,237 $ 5,532
Current portion of capital lease obligations 10,198 9,603
Accounts payable 49,774 99,204
Other current liabilities 95,475 97,582
----------- -----------
Total current liabilities 379,684 211,921
----------- -----------
Long-term debt 5,484 274,996
Senior subordinated notes 200,000 200,000
Convertible subordinated notes 159,225 159,225
Capital lease obligations 84,542 92,063
Other long-term liabilities 83,940 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 124,732 172,626
Treasury stock, at cost, 1,585,000 shares (10,406) (10,406)
----------- -----------
Total stockholders' equity 497,863 545,757
----------- -----------
$ 1,410,738 $ 1,568,514
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
2
4
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Twelve Weeks Ended Forty Weeks Ended
---------------------------- -----------------------------
November 6, November 1, November 6, November 1,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues:
Company-operated restaurants $ 356,254 $ 415,519 $ 1,270,478 $ 1,385,687
Franchised and licensed restaurants and other 51,295 38,104 159,895 128,918
--------- ----------- ----------- -----------
Total revenues 407,549 453,623 1,430,373 1,514,605
--------- ----------- ----------- -----------
Operating costs and expenses:
Restaurant operations:
Food and packaging 110,564 127,641 393,906 417,871
Payroll and other employee benefits 118,728 129,066 407,990 426,940
Occupancy and other operating expenses 88,907 91,691 296,810 286,706
--------- ----------- ----------- -----------
318,199 348,398 1,098,706 1,131,517
Franchised and licensed restaurants and other 36,082 26,619 115,650 93,344
Advertising expenses 22,305 27,467 79,340 88,760
General and administrative expenses 30,847 31,766 109,476 102,859
--------- ----------- ----------- -----------
Total operating costs and expenses 407,433 434,250 1,403,172 1,416,480
--------- ----------- ----------- -----------
Operating income 116 19,373 27,201 98,125
Interest expense (16,265) (13,798) (53,510) (42,968)
Other expense, net (33,437) (833) (49,994) (1,910)
--------- ----------- ----------- -----------
Income (loss) before income taxes and extraordinary item (49,586) 4,742 (76,303) 53,247
Income tax expense (benefit) (20,157) 1,735 (30,493) 20,812
--------- ----------- ----------- -----------
Income (loss) before extraordinary item (29,429) 3,007 (45,810) 32,435
Extraordinary item - gain on early retirement of
debt, net of applicable income taxes of $186 -- -- -- 290
--------- ----------- ----------- -----------
Net income (loss) $ (29,429) $ 3,007 $ (45,810) $ 32,725
========= =========== =========== ===========
Basic income (loss) per share before extraordinary item $ (0.58) $ 0.06 $ (0.91) $ 0.62
Extraordinary item - gain on early retirement of
debt, net of income taxes - basic -- -- -- 0.01
--------- ----------- ----------- -----------
Net income (loss) per share - basic $ (0.58) $ 0.06 $ (0.91) $ 0.63
--------- ----------- ----------- -----------
Weighted average shares outstanding - basic 50,501 52,054 50,501 51,974
========= =========== =========== ===========
Diluted income (loss) per share before extraordinary item $ (0.58) $ 0.06 $ (0.91) $ 0.62
Extraordinary item - gain on early retirement of
debt, net of applicable taxes - diluted -- -- -- --
--------- ----------- ----------- -----------
Net income (loss) per share - diluted $ (0.58) $ 0.06 $ (0.91) $ 0.62
--------- ----------- ----------- -----------
Weighted average shares outstanding - diluted 50,501 52,239 50,501 52,497
========= =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
3
5
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Forty Weeks Ended
---------------------------
November 6, November 1,
2000 1999
----------- -----------
Net cash flow from operating activities:
Net income (loss) $ (45,810) $ 32,725
Adjustments to reconcile net income (loss) 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 86,255 75,987
Loss on sale of property and equipment and capital leases 46,820 1,377
Noncash litigation settlement -- 722
Net noncash investment and dividend income -- (140)
Loss (gain) on noncurrent asset and liability transactions (71) 1,279
Net change in receivables, inventories and other
current assets and prepaid expenses (30,224) (6,377)
Net change in accounts payable and other current liabilities (51,314) 1,228
--------- ---------
Net cash provided by operating activities 5,656 106,325
--------- ---------
Cash flow from investing activities:
Purchases of:
Property and equipment (62,969) (204,635)
Long term investments (2,952) --
Proceeds from sale of:
Property and equipment 25,381 14,008
Long term investments 1,948 --
Increase in notes receivable and related party receivables (11,039) (901)
Collections on notes receivable and related party receivables 13,725 2,463
Net change in other assets 2,831 (9,610)
Acquisitions, net of cash acquired -- (1,958)
Dispositions, net of cash surrendered 79,206 --
--------- ---------
Net cash provided by (used in) investing activities 46,131 (200,633)
--------- ---------
Cash flow from financing activities:
Net change in bank overdraft (223) (6,876)
Long-term borrowings 207,500 177,000
Proceeds from senior subordinated notes -- 200,000
Repayments of short-term borrowings -- (3,600)
Repayments of long-term debt (258,307) (253,165)
Repayments of capital lease obligations (7,888) (5,726)
Deferred financing costs (904) (10,686)
Net change in other long-term liabilities (612) (3,209)
Payment of dividends (2,084) (4,158)
Purchase of treasury stock -- (2,620)
Exercise of stock options -- 1,501
--------- ---------
Net cash provided by (used in) financing activities (62,518) 88,461
--------- ---------
Net decrease in cash and cash equivalents (10,731) (5,847)
Cash and cash equivalents at beginning of period 36,505 46,297
--------- ---------
Cash and cash equivalents at end of period $ 25,774 $ 40,450
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 59,054 $ 40,268
Income taxes -- 14,928
See Accompanying Notes to Consolidated Financial Statements.
4
6
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 6, 2000 AND NOVEMBER 1, 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. Certain reclassifications have been
made to the fiscal 2000 consolidated financial statements to conform to the
fiscal 2001 presentation.
NOTE (B) LONG TERM DEBT
The Company's 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 facility has since
been reduced, pursuant to asset sales, to approximately $283.0 million as of
November 6, 2000.
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 and subordinated debt), 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 and then
further amended the credit facility effective August 14, 2000. The amended
senior credit facility provides that the revolving commitments thereunder shall
be reduced by the entire net proceeds from the sale of any of the Company's
restaurants. The senior credit facility, as amended, also prohibits the Company
from purchasing shares of its common stock, purchasing its senior subordinated
notes or convertible notes, from prepaying subordinated indebtedness and from
paying cash dividends. 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. The amended
facility required the Company to complete an asset sale or sales aggregating
$150.0 million by the end of October 2000. The Company did not meet this
requirement thus resulting in an additional increase to the interest rate of 50
basis points until such sales are completed. The amended credit facility also
requires the Company to meet certain benchmarks during the months of November
2000, December 2000 and January 2001 relating to asset sales. If these
benchmarks are not met, the lenders may request that the Company pledge specific
collateral to further secure the senior credit facility.
As of the end of our second quarter of fiscal 2001, the Company was not
in compliance with certain covenants governing its senior credit facility. The
Company has received a waiver of this non-compliance through January 29, 2001,
including its third quarter. It is the Company's intention to repay outstanding
borrowings on its senior credit facility with the net proceeds from its asset
sales during the next twelve months. Accordingly, the total
5
7
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
(Continued)
amount outstanding under the senior credit facility of $219 million as of
November 6, 2000 has been classified as a current liability on the consolidated
balance sheet. As of November 6, 2000, the Company had $20.8 million of
borrowings available under its senior credit facility. In the event the senior
credit facility is declared accelerated, the senior subordinated notes and the
convertible subordinated notes may also become accelerated under certain
circumstances and after all cure periods have expired.
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,
payable semi-annually, 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.
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.
6
8
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
(Continued)
NOTE (E) INCOME (LOSS) PER SHARE
The Company presents "basic" income (loss) per share which represents net
income (loss) divided by the weighted average shares outstanding excluding all
potentially dilutive common shares and "diluted" income (loss) per share
reflecting the dilutive effect of all potentially dilutive common shares. The
following table illustrates the computation of basic and diluted income (loss)
per share:
(In thousands except per share amounts)
Twelve Weeks Ended Forty Weeks Ended
------------------------- -------------------------
November 6, November 1, November 6, November 1,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Basic Income (Loss) Per Share
Income (loss) before extraordinary item $(29,429) $ 3,007 $(45,810) $32,435
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes of $186 -- -- -- 290
-------- ------- -------- -------
Net income (loss) $(29,429) $ 3,007 $(45,810) $32,725
======== ======= ======== =======
Weighted average number of common shares outstanding
during the period 50,501 52,054 50,501 51,974
======== ======= ======== =======
Basic income (loss) per share before extraordinary item $ (0.58) $ 0.06 $ (0.91) $ 0.62
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes - basic -- -- -- 0.01
-------- ------- -------- -------
Net income (loss) per share - basic $ (0.58) $ 0.06 $ (0.91) $ 0.63
======== ======= ======== =======
Diluted Income (Loss) Per Share
Income (loss) before extraordinary item $(29,429) $ 3,007 $(45,810) $32,435
Interest expense and amortization of debt issuance costs,
net of income tax effect applicable to convertible
subordinated notes -- -- -- --
-------- ------- -------- -------
Diluted income (loss) before extraordinary item (29,429) 3,007 (45,810) 32,435
Extraordinary item - gain on early retirement of debt, net of
applicable income taxes of $186 -- -- -- 290
-------- ------- -------- -------
Diluted net income (loss) $(29,429) $ 3,007 $(45,810) $32,725
======== ======= ======== =======
Weighted average number of common shares outstanding
during the period 50,501 52,054 50,501 51,974
Incremental common shares attributable to:
Exercise of outstanding options -- 185 -- 523
Conversion of convertible subordinated notes -- -- -- --
-------- ------- -------- -------
Total shares 50,501 52,239 50,501 52,497
======== ======= ======== =======
Diluted net income (loss) per share before extraordinary item (0.58) 0.06 (0.91) 0.62
Extraordinary item - gain on early retirement of debt,
net of applicable income taxes - diluted -- -- -- --
-------- ------- -------- -------
Net income (loss) per share - diluted $ (0.58) $ 0.06 $ (0.91) $ 0.62
======== ======= ======== =======
7
9
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
(Continued)
For the 12-week periods ended November 6, 2000 and November 1, 1999,
6.9 million shares and 5.7 million shares, respectively, relating to the
possible exercise of outstanding stock options and 3.6 million shares issuable
upon conversion of convertible subordinated notes were not included in the
computation of diluted income (loss) per share as their effect would have been
anti-dilutive.
For the 40-week periods ended November 6, 2000 and November 1, 1999,
6.9 million shares and 5.4 million shares, respectively, relating to the
possible exercise of outstanding stock options and 3.6 million shares issuable
upon conversion of convertible subordinated notes were not included in the
computation of diluted income (loss) per share as their effect would have been
anti-dilutive.
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 ended 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.
TWELVE WEEKS ENDED
- ------------------
CARL'S JR. HARDEE'S TACO BUENO OTHER TOTAL
---------- -------- ---------- ------- --------
NOVEMBER 6, 2000:
Revenues ........................ $172,748 $ 209,343 $22,657 $ 2,801 $407,549
Segment operating income (loss) . 8,293 (4,863) 964 (4,278) 116
Capital expenditures ............ 1,452 2,069 1,212 189 4,922
Depreciation and amortization ... 7,341 14,972 1,179 1,076 24,568
NOVEMBER 1, 1999:
Revenues ........................ $165,076 $ 264,780 $20,962 $ 2,805 $453,623
Segment operating income (loss) . 14,451 6,782 1,605 (3,465) 19,373
Capital expenditures ............ 28,465 38,514 6,535 4,952 78,466
Depreciation and amortization ... 7,113 15,989 1,057 1,153 25,312
8
10
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
(Continued)
FORTY WEEKS ENDED
- -----------------
CARL'S JR. HARDEE'S TACO BUENO OTHER TOTAL
---------- -------- ---------- -------- ----------
NOVEMBER 6, 2000:
Revenues ............................ $571,959 $ 773,010 $76,045 $ 9,359 $1,430,373
Segment operating income (loss) ..... 38,348 (3,835) 4,721 (12,033) 27,201
Capital expenditures ................ 27,723 23,292 6,581 5,373 62,969
Depreciation and amortization ....... 21,847 52,375 3,595 8,438 86,255
Total assets ........................ 356,878 956,952 81,124 15,784 1,410,738
NOVEMBER 1, 1999:
Revenues ............................ $535,668 $ 899,217 $69,823 $ 9,897 $1,514,605
Segment operating income (loss) ..... 55,512 46,397 6,878 (10,662) 98,125
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
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 November 6, 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. These shares are reflected as treasury stock
on the consolidated balance sheet as of November 6, 2000. The senior credit
facility, as amended, prohibits the repurchase of any additional shares.
NOTE (H) RECENT DEVELOPMENTS
In the fourth quarter of fiscal 2000, the Company recorded a store
closure accrual at Hardee's of $16.3 million for 105 Hardee's restaurants to be
closed during fiscal 2001. In the third quarter of fiscal 2001, the Company
provided an additional $2.4 million reserve for the closure of an additional 17
restaurants. The store closure accrual relates primarily to the net present
value of any remaining lease obligations after the expected closure date, net of
estimated sublease income. Through the third quarter of fiscal 2001, the Company
has closed 45 restaurants and utilized $1.0 million of this accrual. As of
November 6, 2000, approximately $15.3 million remained accrued for the store
closure accrual.
During the 40-week period ended November 6, 2000, the Company has
completed the sale of 259 Hardee's restaurants, generating net after-tax cash
proceeds (as defined in the Company's senior credit facility) of approximately
$72.5 million. In addition, the Company has completed the sale of 21 Carl's Jr.
restaurants during the current fiscal year, generating net after-tax cash
proceeds (as defined in the Company's senior credit facility) of approximately
$12.0 million. These restaurant sales have generated $31.9 million and $48.9
million of losses during the 12- and 40-week periods ended November 6, 2000,
respectively. The Company announced during the second quarter of this fiscal
year that it had signed a letter of intent to sell the Taco Bueno chain for an
amount in excess of $90 million. As this letter of intent has not progressed to
a definitive agreement and closing, the Company is pursuing other alternatives
as they relate to Taco Bueno. The Company is in discussions with other parties
who are interested in purchasing the Taco Bueno brand and is also actively
engaged in pursuing a large sale/leaseback transaction on certain Taco Bueno
real property that could generate approximately $50 million of proceeds without
a sale of the underlying brand.
9
11
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are focused on several goals over the next twelve months, the two
most important being the reduction of debt and the improvement of Hardee's
operations. During the current fiscal year, we have been addressing our
leverage, having reduced our senior credit facility from nearly $300 million at
the end of period 2 of fiscal 2001 to $219 million as of the end of the third
quarter. We announced during the second quarter of this fiscal year that we
signed a letter of intent to sell our Taco Bueno chain for an amount in excess
of $90 million. As this letter of intent has not progressed to a definitive
agreement and closing, we are pursuing other alternatives as they relate to Taco
Bueno. We are in discussions with other parties who are interested in purchasing
the Taco Bueno brand and are also actively engaged in pursuing a large
sale/leaseback transaction on certain Taco Bueno real property that could
generate approximately $50 million of proceeds without a sale of the underlying
brand. We are also proceeding with our refranchising strategy whereby we are
selling up to 500 Hardee's restaurants and 75 to 100 Carl's Jr. restaurants to
new and existing franchisees to rebalance the system to a more predominantly
franchised system. These two initiatives reinforce our strategy and intention to
recover cash to reduce outstanding borrowings on the senior credit facility. We
are also concentrating on improving operations at the Hardee's chain and are
refocusing our efforts on quality, service and cleanliness. The debt reduction
strategy and the attention on improving operations are, and will continue to be,
our main focus over the next twelve months.
Consolidated net income for the 12-week period ended November 6, 2000
decreased to a net loss of $29.4 million, or $(0.58) per share on a diluted
basis, as compared with net income of $3.0 million, or $0.06 per share on a
diluted basis, for the prior year quarter. Net income for the 40-week period
ended November 6, 2000 decreased to a net loss of $45.8 million, or $(0.91) per
share on a diluted basis, as compared with net income of $32.7 million, or $0.62
per share on a diluted basis for the comparable period of the prior year.
Excluding the losses on restaurant sales, as well as certain adjustments
relating to our self-insurance reserves and store closure reserves, the net loss
would have been $7.4 million or $(0.15) per share on a diluted basis and $13.4
million or ($0.26) per share on a diluted basis, for the 12- and 40-week periods
ended November 6, 2000, respectively. The decrease in net income for the third
quarter was primarily due to declining sales levels at our Hardee's restaurants,
combined with the fixed nature of certain of our operating costs as well as
losses incurred on restaurant sales. On a year to date basis, interest expense
also contributed to the decrease in net income.
On a diluted basis, for the 12- and 40-week periods, the number of
shares outstanding decreased 3.3% and 3.8%, respectively. The decrease is due
primarily to a decrease in the number of dilutive shares outstanding under our
stock option plans.
During the third quarter of fiscal 2001, we opened five new Carl's Jr.
restaurants, sold 18 to franchisees and closed two restaurants. Our franchisees
opened 11 new restaurants. As of November 6, 2000, our Carl's Jr. system
included 554 company-operated restaurants, 389 franchised restaurants and 30
international restaurants, for a system total of 973 Carl's Jr. restaurants. Our
Taco Bueno chain consisted of 125 company-operated restaurants at quarter end.
At the end of the quarter, our Hardee's system consisted of 1,027
company-operated restaurants (reflecting the closure of 25 restaurants and the
sale of 80 restaurants to franchisees), 1,566 franchised restaurants (reflecting
three new restaurants, 80 restaurants acquired from the Company and the closure
of 17 restaurants) and 131 international restaurants, for a system total of
2,724 Hardee's restaurants.
10
12
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
(Continued)
We remodeled one company-operated Hardee's restaurant to the Star
Hardee's format during the third quarter and our franchisees remodeled 24
restaurants, for a total of 794 Hardee's restaurants remodeled to the Star
Hardee's format as of November 6, 2000, representing approximately 31% of the
Hardee's domestic 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 have changed Hardee's
restaurants to a 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 developing a
limited remodel which consists primarily of the addition of a charbroiler,
signage and certain interior and exterior enhancements. However, due to our debt
reduction strategy, we have significantly scaled back the Star Hardee's remodel
program for company-operated restaurants.
This Quarterly Report on Form 10-Q contains forward-looking statements,
which are subject to known and unknown risks, uncertainties and other factors
which may cause our actual results, performance, or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; the
impact of competitive products and pricing; success of operating initiatives;
advertising and promotional efforts; adverse publicity; changes in business
strategy or development plans; quality of management; availability, terms and
deployment of capital; changes in prevailing interest rates and the availability
of financing; food, labor, and employee benefit costs; changes in, or the
failure to comply with, government regulations; weather conditions; construction
schedules; demands placed on management and capital resources by the substantial
increase in our size resulting from the acquisition of our Hardee's 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 $59.3 million, or
14.3%, to $356.3 million for the 12-week period ended November 6, 2000 and
$115.2 million, or 8.3%, to $1.270 billion for the 40-week period then ended.
Carl's Jr. and Taco Bueno company-operated restaurant revenues increased by $0.8
million and $1.7 million, respectively, while Hardee's revenues from
company-operated restaurants decreased by $61.8 million in the 12-week period
ended November 6, 2000, as compared to the comparable prior year period. For the
40-week period ended November 6, 2000, Carl's Jr. revenues increased $16.3
million, Taco Bueno revenues increased $6.2 million and Hardee's revenues
decreased $137.2 million when compared to the prior year-to-date period. The
increase in the Taco Bueno revenues was due mainly to an increase in the number
of company-operated restaurants in the current year as opposed to the prior
year, while the increase in the Carl's Jr. revenues was due mainly to an
increase in same store sales and higher average unit volumes. The decrease in
Hardee's revenues for both the 12-week period and the 40-week period was due
primarily to a decrease in the number of company-operated restaurants in the
current year as compared to the prior year and the continuing same-store sales
declines at the Hardee's company-operated restaurants, which were down 6.3% for
the third quarter. Taco Bueno also experienced negative same-store sales with a
decline of 1.2% for the third quarter of fiscal 2001. The company-operated
Carl's Jr. restaurants, however, experienced same-store sales increases of 1.1%
for the third quarter, the fourth consecutive quarter of same-store sales
increases for the Carl's Jr. chain. Average unit volumes for the trailing
52-week period ended November 6, 2000 for our company-operated Carl's Jr., Taco
Bueno and Hardee's restaurants were $1,087,000, $791,000 and $732,000,
respectively.
11
13
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
(Continued)
Our revenues from franchised and licensed restaurants for the 12- and
40-week periods ended November 6, 2000 increased $13.2 million, or 34.6% to
$51.3 million and $31.0 million, or 24.0%, to $159.9 million from the comparable
period in the prior year. These increases are primarily due to franchise fees
being recognized in connection with the sale of restaurants during the current
fiscal year, as well as an increase in royalties as a result of the significant
increase in the number of Hardee's franchised restaurants open and operating
during the current year as opposed to the prior year. In addition, an increase
in the number of franchised Carl's Jr. restaurants in the current year periods,
as well as an increase in certain commodity costs, has led to an increase in
food purchases by franchisees from our distribution center.
Restaurant-level margins for our company-operated Carl's Jr.
restaurants decreased 4.7%, to 17.6%, and 3.4% to 20.2%, respectively, for the
12- and 40-week periods ended November 6, 2000, from the comparable period of
fiscal 2000. As a percentage of revenues from company-operated Carl's Jr.
restaurants, food and packaging costs increased 0.3% and 0.8% for the 12- and
40-week periods, respectively. This increase was mostly due to an increase in
beef commodity prices, as well as an increase in paper costs for a new type of
cup being used in the Carl's Jr. restaurants. Payroll and other employee
benefits increased 3.2%, to 30.1%, and 1.8%, to 28.4%, respectively, for the 12-
and 40-week periods ended November 6, 2000 as compared to the previous year
periods. 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 an increasing average wage rate. In addition, we
made a conscious decision to increase labor in our restaurants in an effort to
maintain quality guest service. Our payroll and other employee benefit costs for
both the 12- and 40-week periods were also impacted by a charge of $2.1 million
resulting from an increase in the actuarially determined liability for our
workers' compensation self-insurance reserve. Occupancy and other operating
expenses increased 1.2%, to 22.8%, and 0.9%, to 21.9%, for the 12- and 40-week
periods ended November 6, 2000, respectively, as compared to the prior year.
This increase was primarily due to an increase in electricity expense in the
California units, an increase in certain restaurant equipment leases and
increased percentage rents due to higher average unit volumes. Occupancy and
other operating expenses were also impacted by a charge of $0.6 million
resulting from an increase in the actuarially determined liability for our
general self-insurance reserve. Excluding the impact of the adjustments to our
self-insurance reserves noted above, Carl's Jr. restaurant-level margins would
have been 19.5% and 20.8%, for the 12- and 40-week periods ended November 6,
2000, respectively.
Restaurant-level margins for our company-operated Hardee's restaurants
decreased 7.8%, to 4.4%, and 6.8%, to 8.2%, respectively, for the 12- and
40-week periods ended November 6, 2000, from the comparable period of fiscal
2000, primarily due to increases in payroll and other employee benefits and
occupancy and other operating expenses. Food and packaging costs at the Hardee's
chain increased 0.8%, to 32.5%, and 1.2%, to 32.2%, respectively, for the 12-
and 40-week periods ended November 6, 2000, as compared to the comparable prior
year periods. The increase was attributable to increased commodity costs in the
current year periods. Additionally, the 40-week period was impacted by the
effect of the discounting program promoting the $0.59 Big Burger. Payroll and
other employee benefits increased 2.3%, to 35.7%, and 1.6%, to 34.6%,
respectively, for the 12- and 40-week periods ended November 6, 2000, as
compared to the same periods a year ago. This increase was due to a conscious
effort to increase labor in the restaurants in an effort to improve our guest
service, combined with the effect of declining same-store sales. Occupancy and
other operating expenses at Hardee's increased 4.7%, to 27.4%, and 4.1%, to
25.0%, respectively, for the 12- and 40-week periods ended November 6, 2000, as
compared to the same periods of fiscal 2000. This increase was primarily due to
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. The decline in average unit volumes has also negatively impacted our
occupancy and other expenses as a large portion of these costs are fixed in
nature. Finally, occupancy and other operating expenses at Hardee's were
negatively impacted for both the 12- and 40-week periods by a charge of $2.4
million to increase the store closure reserve. Excluding the impact of this
charge, Hardee's restaurant-level margins would have been 5.7% and 8.5%,
respectively, for the 12- and 40-week periods ended November 6, 2000.
12
14
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
(Continued)
Taco Bueno's restaurant-level margins decreased 4.1%, to 19.7%, and
3.6%, to 21.9%, respectively, for the 12- and 40-week periods ended November 6,
2000, as compared to the same periods one year ago. Food and packaging costs at
Taco Bueno remained relatively consistent with the prior year periods. Payroll
and other employee benefits increased 2.5%, to 34.1%, and 1.2%, to 32.5%,
respectively, for the 12- and 40-week periods ended November 6, 2000 when
compared to the same periods last year. This increase is primarily due to the
tight labor market in Texas and Oklahoma, as well as an increase in the workers'
compensation self-insurance reserve. Occupancy and other operating expenses also
increased from the prior year 12- and 40-week periods by 2.2%, to 17.8%, and by
2.1%, to 16.8%, respectively. This increase is due primarily to an increase in
depreciation associated with the completion of several signage projects in the
current year.
Franchised and licensed restaurant costs increased $9.5 million, or
35.5%, and $22.3 million, or 23.9%, respectively, for the 12- and 40-week
periods ended November 6, 2000, as compared to the corresponding prior year
periods. This increase was primarily due to an increase in the number of Carl's
Jr. restaurants open and operating during the current year, which has led to
higher volume in our distribution center and an increase in the number of
Hardee's franchisees and licensees purchasing equipment from us.
Advertising expenses decreased $5.2 million, or 18.8%, and $9.4
million, or 10.6%, respectively, for the 12- and 40-week periods ended November
6, 2000, as compared to the comparable periods in the prior year. This decrease
was due primarily to certain expenditures incurred in the prior year periods for
special advertising campaigns.
General and administrative expenses decreased $0.9 million, or 2.9%,
and increased $6.6 million, or 6.4%, respectively, for the 12- and 40-week
periods ended November 6, 2000, as compared to the prior year. As a percentage
of total revenues, this represents a decrease of 0.6% and an increase of 0.9%,
respectively, for the 12- and 40-week periods ended November 6, 2000. The
increase for the 40-week period is due mainly to maintenance incurred on our new
computer systems during the previous two quarters of the current fiscal year as
well as depreciation on those systems. In the current year 12-week period, we
have significantly decreased this contracted labor and have therefore seen a
decrease in G&A when compared to the comparable 12-week period in the prior
year.
Interest expense for the 12- and 40-week periods ended November 6, 2000
increased $2.5 million, or 17.9%, and $10.5 million, or 24.5%, respectively,
when compared to the same periods in the prior year. For the 12-week period, the
increase in interest expense was due to an overall increase in interest rates
charged to us under the senior credit facility. For the 40-week period, this
increase was 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. Given the current rise in interest rates, we would
expect our interest expense to continue to 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 for the 40-week period ended November 6, 2000 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 40-week period included only a partial period of
interest expense while the current year included a full 40-weeks.
Other income (expense), net, mainly consists of interest income, lease
income, dividend income, gains and losses on sales of restaurants, income and
loss on long-term investments, property management expenses and other
non-recurring income and expenses. Other income (expense), net decreased $32.6
million and $48.1 million for the 12- and 40-week periods ended November 6,
2000, respectively. This decrease was primarily due to the inclusion of net
losses on the sale of certain Hardee's and Carl's Jr. restaurants of $31.9
million and $48.9 million, respectively, for the 12- and 40-week periods ended
November 6, 2000.
13
15
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
(Continued)
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 $10.7 million to $25.8 million in
the 40-week period ended November 6, 2000. Investing activities generated $46.1
million of cash flows, primarily as a result of the sale of company-operated
restaurants, offset by capital additions of $63.0 million. Financing activities
absorbed $62.5 million, primarily due to net repayments on the senior credit
facility during the period. Cash flows from operating and investing activities
were mainly used to fund the development of Carl's Jr. restaurants, to repay
$7.9 million in capital lease obligations, to pay down the senior credit
facility and to pay the first scheduled semi-annual dividend payment 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, subject to
further reduction from asset sales). 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 are 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,
repurchase stock or subordinated debt, pay dividends and incur liens on
our assets, subject to specified exceptions; and
o requirements that we satisfy specified financial tests as a
precondition to our acquisition of other businesses.
14
16
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
(Continued)
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, the Company amended its senior credit facility effective
January 31, 2000, to amend certain of the covenants contained therein and then
further amended the credit facility effective August 14, 2000. The amended
senior credit facility provides that the revolving commitments thereunder shall
be reduced by the entire net proceeds from the sale of any of the Company's
restaurants. The senior credit facility, as amended, also prohibits the Company
from purchasing shares of its common stock, purchasing its senior subordinated
notes or convertible notes, from prepaying subordinated indebtedness and from
paying cash dividends. 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. The amended
facility required the Company to complete an asset sale or sales aggregating
$150.0 million by the end of October 2000. The Company did not meet this
requirement thus resulting in an additional increase to the interest rate of 50
basis points until such sales are completed. The amended credit facility also
requires the Company to meet certain benchmarks during the months of November
2000, December 2000 and January 2001 relating to asset sales. If these
benchmarks are not met, the lenders may request that the Company pledge specific
collateral to further secure the senior credit facility.
As of the end of our second quarter of fiscal 2001, the Company was not
in compliance with certain covenants governing its senior credit facility. The
Company has received a waiver of this non-compliance through January 29, 2001,
including its third quarter. It is the Company's intention to repay outstanding
borrowings on its senior credit facility with the net proceeds from its asset
sales during the next twelve months. Accordingly, the total amount outstanding
under the senior credit facility of $219 million as of November 6, 2000 has been
classified as a current liability on the consolidated balance sheet. As of
November 6, 2000, the Company had $20.8 million of borrowings available under
its senior credit facility. In the event the senior credit facility is declared
accelerated, the senior subordinated notes and the convertible subordinated
notes may also become accelerated under certain circumstances and after all cure
periods have expired.
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 (which has been recently scaled
back due to our plan to reduce leverage) and the conversion of restaurants to
the Carl's Jr./Green Burrito dual-brand concepts (which has also been recently
scaled back due to our plan to reduce leverage).
It is our intention to 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 addition, we have
significantly reduced our capital expenditures in the current year from $27.0
million in the second quarter of fiscal 2001 to $4.9 million in the third
quarter. This step which will help us accomplish our strategic goal of reducing
our leverage. In the current fiscal year, the Company has completed the sale of
280 Hardee's restaurants, generating net after-tax cash proceeds of
approximately $78.4 million.
15
17
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
(Continued)
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 operations,
along with cash and cash equivalents on hand as of November 6, 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 November 6, 2000, we had $20.8 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.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and hedging activities. SFAS
133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters
of fiscal years beginning after December 15, 2000. The Company has not
determined whether the application of this accounting standard will have a
material impact on its financial position, results of operations or liquidity.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB101"). This
Staff Accounting Bulletin summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB101, as amended, is effective for the fourth fiscal quarter of
the fiscal year beginning after December 15, 1999. The adoption of SAB101 is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.
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.
16
18
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
(Continued)
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 $219.0 million remained outstanding as of November 6, 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 9.4% in
fiscal 2001). A hypothetical increase of 100 basis points in short-term interest
rates would result in a reduction of approximately $2.2 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 November 6, 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.
17
19
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOVEMBER 6, 2000 AND NOVEMBER 1, 1999
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12.1 Computation of Ratios
27.1 Financial Data Schedule (included only with
electronic filing)
(b) Current Reports on Form 8-K:
A Current Report on Form 8-K dated September 22, 2000 was
filed during the third quarter of the fiscal year to report
the resignation of C. Thomas Thompson and the appointment of
Andrew F. Puzder as President and Chief Executive Officer of
the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CKE RESTAURANTS, INC.
---------------------
(Registrant)
December 19, 2000 /s/ Carl A. Strunk
- ----------------- -------------------------
Date Executive Vice President,
Chief Financial Officer
18
20
EXHIBIT INDEX
Exhibit # Description
--------- -----------
12.1 Computation of Ratios
27.1 Financial Data Schedule (included only with
electronic filing)
19