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 21, 2001
------------------
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 25, 2001
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of May 21, 2001 and January 31, 2001...... 2
Consolidated Statements of Operations for the sixteen weeks ended
May 21, 2001 and May 22, 2000.......................................... 3
Consolidated Statements of Cash Flows for the sixteen weeks ended
May 21, 2001 and May 22, 2000.......................................... 4
Notes to Consolidated Financial Statements............................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K......................................... 16
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
May 21, January 31,
2001 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 25,461 $ 16,860
Accounts receivable, net 48,931 73,956
Related party receivables 3,219 2,505
Inventories 18,887 17,694
Prepaid expenses 9,761 10,212
Other current assets 2,451 2,534
Property held for sale 61,224 66,912
----------- -----------
Total current assets 169,934 190,673
Property and equipment, net 659,605 700,698
Property under capital leases, net 70,951 73,617
Long-term investments 3,457 3,461
Notes receivable 12,248 14,098
Costs in excess of net assets acquired, net 201,361 203,900
Other assets 21,175 27,582
----------- -----------
$ 1,138,731 $ 1,214,029
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 120,316 $ 67,332
Current portion of capital lease obligations 10,012 9,845
Accounts payable 49,427 53,759
Other current liabilities 90,908 83,045
----------- -----------
Total current liabilities 270,663 213,981
Long-term debt 5,160 106,760
Senior subordinated notes 200,000 200,000
Convertible subordinated notes 159,225 159,225
Capital lease obligations 78,054 81,173
Other long-term liabilities 113,214 103,333
----------- -----------
Total liabilities 826,316 864,472
----------- -----------
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 (60,716) (23,574)
Treasury stock, at cost, 1,585,000 shares (10,406) (10,406)
----------- -----------
Total stockholders' equity 312,415 349,557
----------- -----------
$ 1,138,731 $ 1,214,029
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Sixteen Weeks Ended
------------------------
May 21, May 22,
2001 2000
--------- ---------
Revenues:
Company-operated restaurants $ 395,115 $ 527,373
Franchised and licensed restaurants and other 76,375 56,955
--------- ---------
Total revenues 471,490 584,328
--------- ---------
Operating costs and expenses:
Restaurant operations:
Food and packaging 118,854 162,517
Payroll and other employee benefits 128,418 165,563
Occupancy and other operating expenses 91,294 116,843
--------- ---------
338,566 444,923
Franchised and licensed restaurants and other 59,482 43,752
Advertising expenses 24,709 33,673
General and administrative expenses 35,279 45,677
Facility action charges (gains), net 28,220 (918)
--------- ---------
Total operating costs and expenses 486,256 567,107
--------- ---------
Operating income (loss) (14,766) 17,221
Interest expense (22,545) (20,695)
Other income (expense), net 1,079 (487)
--------- ---------
Loss before income taxes (36,232) (3,961)
Income tax expense (benefit) 910 (1,510)
--------- ---------
Net loss $ (37,142) $ (2,451)
========= =========
Basic and diluted loss per share $ (0.74) $ (0.05)
========= =========
Weighted average shares outstanding - basic and diluted 50,501 50,501
========= =========
See Accompanying Notes to Consolidated Financial Statements
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Sixteen Weeks Ended
-----------------------
May 21, May 22,
2001 2000
--------- ---------
Net cash flow from operating activities:
Net loss $(37,142) $ (2,451)
Adjustments to reconcile net loss to net cash provided
by operating activities, excluding the effect of
acquisitions and dispositions:
Depreciation and amortization 28,002 35,827
Provision for losses on accounts and notes receivable 1,070 --
Gain on sale of property and equipment and capital leases (1,389) 387
Facility action charges (gains), net 28,220 (918)
Gain on noncurrent asset and liability transactions (1,867) (374)
Net change in receivables, inventories, prepaid expenses
and other current assets 23,124 (2,649)
Net change in accounts payable and other current liabilities (3,343) (103)
-------- ---------
Net cash provided by operating activities 36,675 29,719
-------- ---------
Cash flow from investing activities:
Purchases of:
Property and equipment (5,531) (31,022)
Long term investments -- (2,250)
Proceeds from sale of:
Property and equipment 28,008 5,611
Long term investments 1,871 --
Increases in notes receivable and related party receivables (120) (6,614)
Collections on and sale of notes receivable, related party
receivables and leases receivable 1,627 6,356
Net change in other assets 501 77
-------- ---------
Net cash provided by (used in) investing activities 26,356 (27,842)
-------- ---------
Cash flow from financing activities:
Net change in bank overdraft 2,268 (21,839)
Long-term borrowings 39,539 104,000
Repayments of long-term debt (88,155) (88,206)
Repayments of capital lease obligations (3,151) (3,217)
Payment of deferred financing costs (1,113) (904)
Net change in other long-term liabilities (3,818) (8,618)
Payment of dividends -- (2,084)
-------- ---------
Net cash used in financing activities (54,430) (20,868)
-------- ---------
Net increase (decrease) in cash and cash equivalents 8,601 (18,991)
Cash and cash equivalents at beginning of period 16,860 36,505
-------- ---------
Cash and cash equivalents at end of period $ 25,461 $ 17,514
======== =========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 21,996 $ 26,417
Income taxes -- $ 139
See Accompanying Notes to Consolidated Financial Statements
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 21, 2001
NOTE (1) 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 accounting
principles generally accepted in the United States of America, 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 2001 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 2001 consolidated financial statements to conform to the
fiscal 2002 presentation.
NOTE (2) 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 2002. The facility has since
been reduced, pursuant to asset sales, to approximately $216.0 million as of May
21, 2001. As of June 30, 2001, the Company can only borrow at a rate of interest
equal to the prime rate plus the applicable margin on all outstanding
borrowings. As a result of the changing of the maturity date of the facility to
February 2002, the total amount outstanding under the senior credit facility of
$120.0 million as of May 21, 2001 has been classified as a current liability on
the consolidated balance sheet.
NOTE (3) FACILITY ACTION CHARGES (GAINS)
As described in the summary of significant accounting policies in Note 1
of Notes to Consolidated Financial Statements for the fiscal year ended January
31, 2001, the Company reviews the performance of company-operated restaurants
for the likelihood of future profitability. During the first quarter of fiscal
2002, the Company decided to close certain under-performing restaurants that
management believes are in locations where the population or demographics have
changed so significantly that there is minimal opportunity for improvement. The
Company provides store closure reserves for these assets under the criteria
described in Note 1 of Notes to Consolidated Financial Statements for the fiscal
year ended January 31, 2001. Additionally, during the first quarter of fiscal
2002, the Company identified seven restaurants that it believed it should
continue operating, but whose cash flow from operations did not support their
related net asset value and, accordingly, an impairment provision was recorded.
The Company estimates the impairment provision for these assets under the
criteria described in the summary of significant accounting policies in Note 1
of Notes to Consolidated Financial Statements for the fiscal year ending January
31, 2001.
In late fiscal 2000, the Company embarked on a refranchising initiative
to move to a well-balanced system of nationwide restaurant concepts that are
primarily franchisee-operated and to reduce outstanding borrowings on its senior
credit facility. As a result, the Company has sold several restaurants to new
and existing franchisees.
The results of these strategies have caused the following transactions
to be recorded in the financial statements as facility action charges (gains):
o gains (losses) on the sale of restaurants;
o store closure costs; and
o impairment of long-lived assets for restaurants the Company intends
to continue to operate and restaurants the Company intends to close
beyond the quarter in which the closure decision is made.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 21, 2001
(Continued)
The components of these actions for the first quarter of fiscal 2002 and
2001 were as follows:
Sixteen Weeks Ended
--------------------
May 21, May 22,
(Dollars in thousands) 2001 2000
-------- -------
Hardee's
Store closure reserves $ 16,705 $ --
Impairment on stores to be closed or sold 5,494 --
Impairment on stores that will continue to be operated -- --
Losses (gains) on sales of restaurants, net 2,099 (362)
-------- -----
24,298 (362)
-------- -----
Carl's Jr.
Store closure reserves 589 --
Impairment on stores to be closed sold 2,236 --
Impairment on stores that will continue to be operated -- --
Gains on sales of restaurants, net (3,403) (556)
-------- -----
(578) (556)
-------- -----
Other (Taco Bueno)
Store closure reserves -- --
Impairment on stores to be closed or sold -- --
Impairment on stores that will continue to be operated -- --
Losses on sales of restaurants, net 4,500 --
-------- -----
4,500 --
-------- -----
Total
Store closure reserves 17,294 --
Impairment on stores to be closed or sold 7,730 --
Impairment on stores that will continue to be operated -- --
Losses (gains) on sales of restaurants, net 3,196 (918)
-------- -----
$ 28,220 $(918)
======== =====
Impairment charges were made against the following accounts:
Sixteen Weeks Ended
---------------------
May 21, May 22,
(Dollars in thousands) 2001 2000
-------- -------
Fixed assets:
Hardee's $ 3,730 $ --
Carl's Jr. 2,236 --
Other -- --
-------- -----
5,966 --
-------- -----
Cost in excess of net assets acquired, net
Hardee's 1,764 --
Carl's Jr. -- --
Other -- --
-------- -----
1,764 --
-------- -----
Total
Hardee's 5,494 --
Carl's Jr. 2,236 --
Other -- --
-------- -----
$ 7,730 $ --
======== =====
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 21, 2001
(Continued)
The following table is a rollforward of the activity in the store closure
reserve. The Company believes that the remaining carrying amounts are adequate
to complete its disposal actions.
Balance at January 31, 2001 $ 58,187
New decisions 17,294
Usage (3,277)
Other 1,090
--------
Balance at May 21, 2001 73,294
Less: Current portion 12,623
--------
Long-term portion $ 60,671
========
NOTE (4) LOSS PER SHARE
The Company presents "basic" loss per share which represents net loss
divided by the weighted average shares outstanding, excluding all potentially
dilutive common shares and "diluted" loss per share reflecting the dilutive
effect of all potentially dilutive common shares. The following table
illustrates the computation of basic and diluted loss per share:
(In thousands except
per share amounts)
Sixteen Weeks Ended
-------------------------
May 21, May 22,
2001 2000
-------- --------
Basic and Diluted Loss Per Share
Net loss $(37,142) $ (2,451)
======== ========
Weighted average number of common shares
outstanding during the period 50,501 50,501
======== ========
Loss per share - basic and diluted $ (0.74) $ (0.05)
======== ========
For the 16-week periods ended May 21, 2001 and May 22, 2000, 7.3 million
shares and 6.9 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
loss per share as their effect would have been anti-dilutive.
NOTE (5) SEGMENT INFORMATION
The Company is engaged principally in developing, operating and
franchising its Carl's Jr. and Hardee's quick-service restaurants, each of which
are considered strategic businesses that are managed and evaluated separately.
Additionally, during the first quarter of fiscal 2002, the Company operated one
chain that was held for sale, Taco Bueno (see Note 6). The activity of the Taco
Bueno chain is included in the "other" segment. 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. General and administrative expenses are attributed to each
segment based on management's analysis of the resources applied to each segment.
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, 2001.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 21, 2001
(Continued)
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 OTHER TOTAL
---------- --------- -------- -----------
MAY 21, 2001:
Revenues $215,681 $ 220,684 $ 35,125 $ 471,490
Segment operating income (loss) 19,004 (26,140) (7,630) (14,766)
Total assets 324,906 741,225 72,600 1,138,731
Capital expenditures 2,043 2,563 925 5,531
Depreciation and amortization 6,774 14,096 7,132 28,002
MAY 22, 2000:
Revenues $224,715 $ 325,681 $ 33,932 $ 584,328
Segment operating income (loss) 17,748 1,052 (1,579) 17,221
Total assets (as of January 31, 2001) 356,266 773,103 84,660 1,214,029
Capital expenditures 14,314 9,637 7,071 31,022
Depreciation and amortization 8,552 22,206 5,069 35,827
NOTE (6) SUBSEQUENT EVENT
Subsequent to the end of the first quarter of fiscal 2002, the Company
completed the sale of its Taco Bueno concept for net proceeds of approximately
$61.2 million. An additional loss of $4.5 million was recorded in facility
action charges in the first quarter as a result of this final disposition. The
net proceeds from this sale were used to reduce indebtedness under the Company's
senior credit facility. The Taco Bueno concept had revenue of $31.2 million and
$30.3 million, respectively, and operating income of $2.5 million and $2.1
million, respectively, for the 16-week periods ended May 21, 2001 and May 22,
2000.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 21, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following table is presented to facilitate Management's Discussion
and Analysis of the first quarter results:
(Dollars in thousands, except average check data) First Quarter FY 2002
----------------------------------------------------------
Carl's Jr. Hardee's Other Total
--------- --------- -------- ---------
Number of restaurants (end of period):
Company-operated 471 836 146 1,453
Franchised domestic 462 1,593 0 2,055
Licensed international 36 137 0 173
--------- --------- -------- ---------
Total 969 2,566 146 3,681
========= ========= ======== =========
Company-operated sales $ 161,985 $ 198,005 $ 35,125 $ 395,115
========= ========= ======== =========
Company-operated average unit volumes
(trailing 13-periods) $ 1,079 $ 712
========= =========
Average check $ 4.83 $ 3.60
========= =========
Company-operated same-store sales increase (decrease)
0.7% (4.2)%
Operating costs (as a % of company-operated sales)
Food and paper 28.96% 31.23%
Payroll and other employee benefits 28.65 35.65
Occupancy and other operating costs 22.36 24.53
Gross margin 20.04% 8.58%
Franchising income $ 6,291 $ 10,602
========= =========
Operating income (loss) excluding facility
action charges $ 18,426 $ (1,842) $ (3,130) $ 13,454
Facility action charges (578) 24,298 4,500 28,220
--------- --------- -------- ---------
Operating income (loss) $ 19,004 $ (26,140) $ (7,630) $ (14,766)
========= ========= ======== =========
EBITDA excluding facility action charges $ 25,417 $ 12,783 $ 446 $ 38,646
Facility action charges (578) 24,298 4,500 28,220
--------- --------- -------- ---------
EBITDA $ 25,995 $ (11,515) $ (4,054) $ 10,426
========= ========= ======== =========
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 21, 2001
(Continued)
(Dollars in thousands, except average check data) First Quarter FY 2001
----------------------------------------------------------
Carl's Jr. Hardee's Other Total
--------- --------- -------- ---------
Number of restaurants (end of period):
Company-operated 570 1,339 145 2,054
Franchised domestic 353 1,314 0 1,667
Licensed international 24 121 0 145
--------- --------- -------- ---------
Total 947 2,774 145 3,866
========= ========= ======== =========
Company-operated sales $ 189,376 $ 304,065 $ 33,932 $ 527,373
========= ========= ======== =========
Company-operated average unit volumes
(trailing 13-periods) $ 1,089 $ 755
========= =========
Average check $ 4.59 $ 3.50
========= =========
Company-operated same-store sales increase (decrease)
3.6% (6.2)%
Operating costs (as a % of company-operated sales)
Food and paper 29.49% 31.82%
Payroll and other employee benefits 27.32 33.89
Occupancy and other operating costs 21.31 23.18
Gross margin 21.87% 11.12%
Franchising income $ 2,679 $ 10,524
========= =========
Operating income (loss) excluding facility
action charges $ 17,192 $ 690 $ (1,579) $ 16,303
Facility action charges (gains), net (556) (362) 0 (918)
--------- --------- -------- ---------
Operating income (loss) $ 17,748 $ 1,052 $ (1,579) $ 17,221
========= ========= ======== =========
EBITDA excluding facility action charges $ 25,544 $ 22,628 $ 3,471 $ 51,643
Facility action charges (gains), net (556) (362) 0 (918)
--------- --------- -------- ---------
EBITDA $ 26,100 $ 22,990 $ 3,471 $ 52,561
========= ========= ======== =========
Overview and Safe Harbor Disclosure
Consolidated net loss for the 16-week period ended May 21, 2001
increased to $37.1 million or $(0.74) per share on a fully diluted basis, as
compared to $2.5 million, or $(0.05) per share on a fully diluted basis, for the
prior-year period. The increase in the net loss was due mainly to facility
action charges during the current year of $28.2 million, as well as a charge of
$3.9 million recorded as interest expense reflecting the write-off of deferred
loan costs as a result of the modification of the senior credit facility in the
current quarter (see "Repositioning Charges" below).
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 21, 2001
(Continued)
Matters discussed in this Quarterly Report on Form 10-Q contain certain
forward-looking statements that are based on management's beliefs and
assumptions derived from information currently known to the Company's
management. Forward-looking statements may include, but are not limited to,
descriptions of plans or objectives of the Company's management for future or
past operations, products or services, earnings or other measures of economic
performance including statements of profitability of business segments and
subsidiaries, estimates of recoverability of long-lived assets, current bank
relationships, and current repositioning activities including anticipated store
closures. Such statements reflect the view of the Company's management with
respect to future events and are subject to risks and uncertainties, such as
changes in the fast food industry and changes to the Company's plans,
objectives, expectations and intentions. The Company has also experienced an
increase in utility costs and rolling blackouts in some areas. There is a
possibility that these blackouts may spread to other areas and could materially
impact the Company's business. Should one or more of these risks materialize or
should underlying beliefs or assumptions prove incorrect, the Company's actual
results could differ materially from those discussed in this Quarterly Report on
Form 10-Q. Factors that could cause or contribute to such differences are
effectiveness of operating initiatives and advertising and promotional efforts,
changes in economic conditions, the impact of competitive products and pricing,
changes in the Company's suppliers' ability to provide quality and timely
products to the Company, the operational success of our franchisees,
availability of financing for the Company and its franchisees and other factors
as discussed in the Company's filings with the Securities and Exchange
Commission.
Carl's Jr.
During the first quarter, we opened two new Carl's Jr. restaurants,
acquired one from a franchisee, sold three to franchisees and closed 20,
primarily in Oklahoma. Carl's Jr. franchisees and licensees opened 10 new
restaurants, sold one to us and acquired three from us. As of May 21, 2001, the
Carl's Jr. system consisted of 471 company-operated restaurants, 462 franchised
restaurants and 36 international restaurants, for a system total of 969 Carl's
Jr. restaurants.
Revenues from company-operated Carl's Jr. restaurants decreased $27.4
million, or 14.5%, to $162.0 million for the 16-week period ended May 21, 2001,
as compared to the prior year comparable period. The decrease in revenues is due
primarily to the sale of company-operated restaurants to franchisees, as well as
the closure of company-operated restaurants. See the table above for the number
of company-operated restaurants at the end of the first quarter of each year.
While revenues from company-operated restaurants are down, franchising income
has more than doubled in the current year for Carl's Jr. This is attributable
primarily to an increase in the number of franchisee-operated restaurants.
Same-store sales for company-operated Carl's Jr. restaurants increased 0.7% in
the current quarter and Carl's Jr. company-operated restaurant average unit
volumes were $1,079,000 for the trailing thirteen periods ended May 21, 2001,
and the average check was $4.83 as compared to $4.59 in the comparable period of
the prior year.
Restaurant-level margins for our company-operated Carl's Jr. restaurants
decreased 1.9% from 21.9% in the prior-year period to 20.0% in the current
quarter, as a percentage of company-operated restaurant revenues. Of this
decrease, payroll and other employee benefits contributed 1.3% and occupancy and
other operating expenses contributed 1.1%. These were partially offset by a
favorable variance from the prior year quarter of 0.5% in food and packaging
costs. The increase in payroll and other employee benefits from 27.3% as a
percentage of company-operated restaurants revenues in the prior year quarter to
28.7% in the current year quarter is due mainly to continued competitive
pressures in attracting qualified labor, which is consistent with several other
concepts in the quick service restaurant segment, as well as a conscious
decision to continue to increase labor in our restaurants in an effort to
maintain quality guest service. Occupancy and other operating expenses increased
1.1% as a percentage of company-operated restaurant revenues from 21.3% to
22.4%. This increase is due primarily to an increase in the cost of natural gas
at the restaurants (1.0%), as well as a slight increase in our general liability
insurance as a result of a slightly higher cost per incident (0.3%). The
decrease in food and packaging costs of 0.5%, from 29.5% in the prior year to
29.0% in the current year is largely the result of less emphasis on discounting
programs.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 21, 2001
(Continued)
Hardee's
During the first quarter, Hardee's franchisees and licensees opened 12
new restaurants and remodeled 10 to the Star Hardee's format. During the
quarter, we also remodeled three Hardee's restaurants to the Star Hardee's
format and 84 company-operated restaurants and 19 franchise-operated restaurants
were closed during the quarter. As of May 21, 2001, the Hardee's system
consisted of 836 company-operated restaurants, 1,593 franchised restaurants and
137 international restaurants, for a system total of 2,566 Hardee's restaurants.
Revenues from company-operated Hardee's restaurants decreased $106.1
million, or 34.9%, to $198.0 million for the 16-week period ended May 21, 2001,
as compared to the prior year comparable period. The decrease in revenues is due
primarily to the sale of company-operated restaurants to franchisees, the
closure of company-operated restaurants and continued same-store sales declines.
See the table above for the number of company-operated restaurants at the end of
the first quarter of each year. While revenues from company-operated restaurants
are down, franchising income is up slightly at Hardee's. This is attributable
primarily to an increase in the number of franchisee-operated restaurants offset
by a decrease in income at Hardee's Equipment Division, as a result of a
slowdown in franchisee remodel activity. Same-store sales for company-operated
Hardee's restaurants decreased 4.2 % in the current quarter. This is compared to
a 6.2% decline in the prior year and a 10.9% decline in the fourth quarter of
the last fiscal year. Hardee's company-operated restaurant average unit volumes
were $712,000 for the trailing thirteen periods ended May 21, 2001, and the
average check was $3.60 as compared to $3.50 for the comparable period last
year.
Restaurant-level margins for company-operated Hardee's restaurants
decreased 2.5% from 11.1% in the prior-year period to 8.6% in the current
quarter, as a percentage of company-operated restaurant revenues. Of this
decrease, payroll and other employee benefits contributed 1.8% and occupancy and
other operating expenses contributed 1.3%. These were partially offset by a
favorable variance from the prior year quarter of 0.6% in food and packaging
costs. The increase in payroll and other employee benefits from 33.9% as a
percentage of company-operated restaurants revenues in the prior year quarter to
35.7% in the current year quarter is due mainly to continued competitive
pressures in attracting qualified labor, which is consistent with several other
concepts in the hamburger quick service restaurant segment, as well as a
conscious decision to continue to increase labor in our restaurants in an effort
to maintain quality guest service. Occupancy and other operating expenses
increased 1.3% as a percentage of company-operated restaurant revenues from
23.2% to 24.5%. This increase is due primarily to an increase in the cost of
natural gas at the restaurants (1.6%). The decrease in food and packaging costs
of 0.6%, from 31.8% in the prior year to 31.2% in the current year is largely
the result of the less emphasis on discounting programs.
Repositioning Charges
During the first quarter of fiscal 2002, we recorded charges of $32.1
million. These charges consisted of (a) facility action charges of $28.2 million
consisting of an additional write-down of $4.5 million of the net assets of Taco
Bueno arising from the final disposition of the concept, a store closure reserve
of $17.3 million for approximately 63 Hardee's and five Carl's Jr. restaurants
that we have closed or plan to close, an impairment charge of $7.7 million, of
which half is for restaurants that we will close and the remainder is for
restaurants we plan to continue to operate, but for which the net book value is
not supported by current estimated future cash flows, partially offset by net
gains on restaurants sold during the quarter of $1.3 million, and (b) a charge
of $3.9 million recorded as interest expense reflecting the write-off of
deferred loan costs as a result of our senior credit facility being modified
this quarter. In the prior year comparable quarter, we recorded $918,000
relating to net gains on restaurants sold during the quarter.
Other Consolidated Expenses
Advertising expenses decreased $9.0 million, or 26.6%, to $24.7 million
for the 16-week period ended May 21, 2001, as compared to the comparable period
in the prior year. However, as a percentage of total revenues, advertising
expenses have remained relatively constant in the current year quarter as
compared to the prior year quarter.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 21, 2001
(Continued)
General and administrative expenses decreased $10.4 million, or 22.8%,
to $35.3 million for the 16-week period ended May 21, 2001, as compared to the
16-week period ended May 22, 2000. This represents a decrease of 0.3% as a
percentage of total revenues. This decrease is attributable not only to a
decrease in headcount, but also to other discretionary expenses such as
contracted labor and professional services. This decline from the prior year is
consistent with the trend that our general and administrative expenses be
commensurate with our mix of company-operated and franchisee-operated
restaurants.
Interest expense for the quarter increased $1.9 million, or 8.9%, when
compared to the comparable prior year period. This increase is the result of the
$3.9 million charge noted above for the write-off of deferred loan costs as a
result of our senior credit facility being modified this quarter, offset by a
decrease in interest expense on our senior credit facility as a result of lower
outstanding borrowings during the current year quarter. Although the applicable
margin used to determine our interest payable on the senior credit facility has
increased as a result of amendments to the facility, the outstanding balance has
decreased from almost $300 million just one year ago to $120 million at May 21,
2001.
Other income (expense) increased during the quarter ended May 21, 2001,
primarily due to gains recorded as a result of the sale of our shares of
Checkers Drive-In Restaurants, Inc.
During the first three quarters of fiscal 2001, we recorded a deferred
tax asset for the tax benefit of operating losses which served to reduce the net
loss reflected in the statement of operations. Commencing with the fourth
quarter of last fiscal year, we ceased to record a deferred tax asset because of
our recurring operating losses. As such, the current quarter's statement of
operations does not reflect a tax benefit from the operating loss, as was the
case in the comparable period of the prior fiscal year.
FINANCIAL CONDITION AND LIQUIDITY
Cash and cash equivalents increased $8.6 million to $25.5 million in the
16-week period ended May 21, 2001. During the quarter, we generated cash flows
from operations of $36.7 million, as compared to $29.7 million in the
corresponding period of the prior fiscal year. This increase was due mainly to
changes in our working capital during the quarter, primarily the receipt of an
income tax refund of approximately $20 million during the current quarter.
Earnings were insufficient to cover fixed charges by $36.2 million and $4.0
million for the 16-week periods ended May 21, 2001 and May 22, 2000,
respectively. Excluding the effect of the repositioning charges discussed above,
earnings would be insufficient to cover fixed charges by $4.1 million and $4.9
million for the 16-week periods ended May 21, 2001 and May 22, 2000,
respectively. Investing activities generated $26.4 million, primarily as a
result of proceeds from the sale of company-operated restaurants and other
surplus properties. Financing activities used $54.4 million, most of which was
for net repayments on our senior credit facility during the quarter.
Under our senior credit facility, borrowings 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 (8.31% at May 21, 2001), with future margin adjustments dependent
on certain financial ratios from time to time. However, as of June 30, 2001, the
Company can only borrow at a rate of interest equal to the prime rate plus the
applicable margin on all outstanding borrowings.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 21, 2001
(Continued)
Our senior credit facility contains 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 requirements
that we satisfy specified financial tests as a precondition to acquisition of
other businesses. We have since amended our senior credit facility, effective
January 31, 2000, August 14, 2000, January 29, 2001 and April 13, 2001, to amend
certain of the covenants contained therein. 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 our restaurants. The senior credit
facility, as amended, also prohibits us from purchasing shares of our common
stock, repurchasing any of our senior subordinated notes or convertible notes,
from prepaying subordinated indebtedness and from paying cash dividends.
In addition, capital expenditure limits were reduced and construction of
new restaurants is limited to construction already begun or committed to begin
and we are required to comply with minimum EBITDA requirements.
As a result of the amendments, the final maturity date of the senior
credit facility was changed to February 1, 2002, and the interest rate payable
on outstanding borrowings was increased. As of June 30, 2001, we can only borrow
at a rate of interest equal to the prime rate plus the applicable margin on all
outstanding borrowings. We believe that the impact of this increase in pricing
will be significantly offset by a decrease in outstanding borrowings.
Also as a result of not achieving certain asset sale requirements, we
have agreed to provide our lenders with specific collateral of our subsidiaries,
consisting primarily of mortgages on a portion of our real properties, as well
as the stock of our subsidiaries, which was already held as collateral.
In the event the senior credit facility is declared accelerated, our
9-1/8% senior subordinated notes due 2009 and our 4.25% convertible subordinated
notes due 2004 may also become accelerated under certain circumstances and after
all cure periods have expired. As a result of the shortening of the maturity
date, the total amount outstanding under the senior credit facility of $120.0
million as of May 21, 2001 has been classified as a current liability on the
consolidated balance sheet.
Subsequent to the end of the first quarter, we completed the sale of our
Taco Bueno concept to an affiliate of Jacobson Partners. The net proceeds from
the sale of $61.2 million were used to repay indebtedness under our senior
credit facility.
The availability of capital sources will depend upon prevailing market
conditions, interest rates and our then-existing financial position. We believe
that cash generated from our various restaurant concept operations, the sale of
company-operated restaurants to new and existing franchisees and the sale of
existing surplus properties along with cash and cash equivalents on hand as of
May 21, 2001, 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 21, 2001, we had
$45.7 million of borrowings available to us under our senior credit facility.
The Company is currently actively pursuing strategies to refinance its
senior credit facility as quickly as possible that may include mortgaging many
of its owned and ground leased properties. There can be no assurance that this
refinancing or any other will be completed.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 21, 2001
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
(since reduced to $216.3 million pursuant to asset sales), of which $120.0
million remained outstanding as of May 21, 2001. 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 2002). A
hypothetical increase of 100 basis points in short-term interest rates would
result in a reduction of approximately $1.2 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 May 21, 2001. Substantially all of our business is transacted in U.S.
dollars. Accordingly, foreign exchange rate fluctuations have never had a
significant impact on us and are not expected to in the foreseeable future.
Commodity Price Risk
We purchase certain products which are affected by commodity prices and
are, therefore, subject to price volatility caused by weather, market conditions
and other factors which are not considered predictable or within our control.
Although many of the products purchased are subject to changes in commodity
prices, certain purchasing contracts or pricing arrangements contain risk
management techniques designed to minimize price volatility. Typically, we use
these types of purchasing techniques to control costs as an alternative to
directly managing financial instruments to hedge commodity prices. In many
cases, we believe we will be able to address commodity cost increases which are
significant and appear to be long-term in nature by adjusting our menu pricing
or changing our product delivery strategy. However, increases in commodity
prices could result in lower restaurant-level operating margins for our
restaurant concepts.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12-1 Computation of Ratios
(b) Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on March 20, 2001,
announcing that it had reached a definitive agreement to sell its
Taco Bueno subsidiary to an affiliate of Jacobson Partners.
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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 3, 2001 /s/ Dennis J. Lacey
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Date Chief Financial Officer
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EXHIBIT INDEX
Exhibit # Description
- --------- -----------
12-1 Computation of Ratios