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 August 13, 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 1-11313
CKE RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0602639
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
3916 State Street, Ste. 300, Santa Barbara, CA 93105
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (805) 898-6000
401 W. Carl Karcher Way, Anaheim, CA 92801
Former Name, Former Address and Former Fiscal Year, if changed since
last report.
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of September 14, 2001, 50,530,062 shares of the Registrant's Common Stock
were outstanding.
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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 August 13, 2001 and January 31, 2001.......... 2
Consolidated Statements of Operations for the twelve and twenty-eight weeks
ended August 13, 2001 and August 14, 2000................................... 3
Consolidated Statements of Cash Flows for the twenty-eight weeks ended
August 13, 2001 and August 14, 2000......................................... 4
Notes to Consolidated Financial Statements...................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 22
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders....................... 23
Item 6. Exhibits and Reports on Form 8-K.......................................... 24
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
August 13, 2001 January 31, 2001
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 27,049 $ 16,860
Accounts receivable, net 35,655 73,956
Related party receivables 3,268 2,505
Inventories 19,721 17,694
Prepaid expenses 8,213 10,212
Other current assets 2,080 2,534
Property held for sale -- 66,912
----------- -----------
Total current assets 95,986 190,673
Property and equipment, net 564,446 656,214
Property under capital leases, net 68,961 73,617
Long-term investments 3,448 3,461
Notes receivable 12,132 14,098
Costs in excess of assets acquired, net 192,516 203,900
Other assets 45,481 65,574
----------- -----------
Total assets $ 982,970 $ 1,207,537
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt and bank
indebtedness $ 19,808 $ 67,332
Current portion of capital lease obligations 10,158 9,845
Accounts payable 41,605 53,759
Other current liabilities 103,735 83,045
----------- -----------
Total current liabilities 175,306 213,981
----------- -----------
Long-term debt and bank indebtedness 5,032 106,760
Senior subordinated notes 200,000 200,000
Convertible subordinated notes 159,225 159,225
Capital lease obligations 75,514 81,173
Other long-term liabilities 92,154 96,841
----------- -----------
Total liabilities 707,231 857,980
----------- -----------
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 52,113,425 shares and
52,086,421 shares 521 521
Additional paid-in capital 383,116 383,016
Accumulated deficit (97,492) (23,574)
Treasury stock at cost, 1,585,000 shares (10,406) (10,406)
----------- -----------
Total stockholders' equity 275,739 349,557
----------- -----------
$ 982,970 $ 1,207,537
=========== ===========
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)
Twelve Weeks Ended Twenty-eight Weeks Ended
--------------------------- -----------------------------
August 13, August 14, August 13, August 14,
2001 2000 2001 2000
--------- --------- --------- -----------
Revenues:
Company-operated restaurants $ 277,217 $ 386,851 $ 672,331 $ 914,225
Franchised and licensed
restaurants and other 63,505 51,645 139,880 108,601
--------- --------- --------- -----------
Total revenues 340,722 438,496 812,211 1,022,826
--------- --------- --------- -----------
Operating costs and expenses:
Restaurant operations:
Food and packaging 85,908 120,825 204,763 283,343
Payroll and other employee benefits 92,738 123,699 221,156 289,262
Occupancy and other
operating expenses 61,666 91,060 152,960 207,903
--------- --------- --------- -----------
240,312 335,584 578,879 780,508
Franchised and licensed
restaurants and other 48,933 35,816 108,415 79,568
Advertising expenses 18,616 23,362 43,325 57,035
General and administrative expenses 24,401 32,953 59,680 78,630
Facility action charges, net 30,487 17,885 58,707 16,966
--------- --------- --------- -----------
Total operating costs and expenses 362,749 445,600 849,006 1,012,707
--------- --------- --------- -----------
Operating income (loss) (22,027) (7,104) (36,795) 10,119
Interest expense (12,487) (16,550) (35,031) (37,245)
Other income (expense), net (1,300) (897) (222) 408
--------- --------- --------- -----------
Loss before income taxes (35,814) (22,757) (72,048) (26,718)
Income tax expense (benefit) 955 (8,827) 1,866 (10,337)
--------- --------- --------- -----------
Net loss $ (36,769) $ (13,930) $ (73,914) $ (16,381)
========= ========= ========= ===========
Basic and diluted loss per share $ (0.73) $ (0.28) $ (1.46) $ (0.32)
--------- --------- --------- -----------
Weighted average shares outstanding -
basic and diluted 50,505 50,501 50,503 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)
Twenty-eight Weeks Ended
-------------------------------
August 13, August 14,
2001 2000
--------- ---------
Net cash flow from operating activities:
Net loss $ (73,914) $ (16,381)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 45,525 61,687
Provision for losses on accounts and notes receivable 4,025 --
Loss on sale of property and equipment 4,406 3,596
Facility action charges, net 58,707 16,966
Other (1,858) (399)
Net change in receivables, inventories, prepaid expenses
and other current assets 34,296 (12,797)
Net change in accounts payable and other current liabilities 4,941 (35,429)
--------- ---------
Net cash provided by operating activities 76,128 17,243
--------- ---------
Cash flow from investing activities:
Purchase of:
Property and equipment (10,040) (58,047)
Long-term investments -- (2,782)
Proceeds from sale of:
Property and equipment 51,007 66,709
Long-term investments 1,871 --
Increase in notes receivable and related party receivables (878) (10,593)
Collections on notes receivable and related party receivables 2,475 10,356
Net change in other assets 2,278 1,581
Net proceeds from sale of Taco Bueno 61,224 --
--------- ---------
Net cash provided by investing activities 107,937 7,224
--------- ---------
Cash flow from financing activities:
Net change in bank overdraft (2,121) (4,841)
Long-term borrowings 84,539 177,000
Repayments of long-term debt (233,791) (198,431)
Repayments of capital lease obligations (5,345) (5,493)
Payment of deferred financing costs (1,602) (904)
Net change in other long-term liabilities (15,656) (1,385)
Payment of dividends -- (2,084)
Exercise of stock options 100 --
--------- ---------
Net cash provided by (used in) financing activities (173,876) 36,138
--------- ---------
Net increase (decrease) in cash and cash equivalents 10,189 (11,671)
Cash and cash equivalents at beginning of period 16,860 36,505
--------- ---------
Cash and cash equivalents at end of period $ 27,049 $ 24,834
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 25,620 $ 37,052
Income taxes -- --
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 13, 2001 AND AUGUST 14, 2000
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 Annual Report on Form 10-K for the fiscal year ended January 31,
2001. 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) BANK INDEBTEDNESS
The Company's senior credit facility, as amended, consists of a $135.1
million revolving credit facility which includes a $75.0 million letter of
credit sub-facility and has a maturity date of February 2002. As the maturity
date of the facility is February 2002, the total amount outstanding under the
senior credit facility of $19.5 million as of August 13, 2001 has been
classified as a current liability on the consolidated balance sheet.
NOTE (3) FACILITY ACTION CHARGES, NET
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 and second quarters
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, the Company
re-evaluates the adequacy of the established reserves and modifies the
assumptions used based on actual results attained from selling surplus
properties and terminating leases, as well as utilizing estimated property
values obtained from real estate brokers. The Company closed 24 Carl's Jr. and
148 Hardee's company-operated stores during the first half of fiscal 2002.
Additionally, during the second quarter of fiscal year 2002 the Company reversed
lease reserves related to 22 restaurants it decided not to close.
During the first and second quarters of fiscal 2002, the Company
identified 7 and 23 restaurants respectively, that it believed it should
continue operating, but whose cash flow from operations did not support their
related net asset values 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 contained in its Annual Report on
Form 10-K the fiscal year ended January 31, 2001.
In late fiscal 2000, the Company embarked on a refranchising initiative
to reduce outstanding borrowings under its senior credit facility as well as,
achieve a well-balanced system of nationwide restaurant concepts that are
primarily franchisee-operated. 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, net:
- gains (losses) on the sale of restaurants;
- store closure costs; and
- impairment of long-lived assets for restaurants
the Company plans 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
AUGUST 13, 2001 AND AUGUST 14, 2000
The components of these charges for the second and year to date quarters of
fiscal 2002 and 2001 were as follows:
Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------------ ------------------------------
August 13, August 14, August 13, August 14,
2001 2000 2001 2000
--------- --------- --------- ---------
(Dollars in thousands)
Hardee's
Store closure reserves provided,
(reversed) net $ (8,641) -- $ 8,064 --
Impairment on stores closed, to be
closed or sold 31,190 -- 36,684 --
Impairment on stores that will
continue to be operated 1,882 -- 1,882 --
Losses on sales of restaurants, net 3,600 19,503 5,699 19,141
-------- -------- -------- --------
28,031 19,503 52,329 19,141
-------- -------- -------- --------
Carl's Jr
Store closure reserves provided,
(reversed) net (41) -- 548 --
Impairment on stores closed, to be
closed or sold 2,981 -- 5,218 --
Impairment on stores that will
continue to be operated 7,670 -- 7,670 --
Gains on sales of restaurants, net (8,361) (1,618) (11,764) (2,175)
-------- -------- -------- --------
2,249 (1,618) 1,672 (2,175)
-------- -------- -------- --------
Rally's and Taco Bueno
Losses on sales of restaurants, net 207 -- 4,707 --
-------- -------- -------- --------
207 -- 4,707 --
-------- -------- -------- --------
Total
Store closure reserves provided,
(reversed) net (8,682) -- 8,612 --
Impairment on stores closed, to be
closed or sold 34,171 -- 41,902 --
Impairment on stores that will
continue to be operated 9,552 -- 9,552 --
Losses (gains) on sales of restaurants, net (4,554) 17,885 (1,358) 16,966
-------- -------- -------- --------
$ 30,487 $ 17,885 $ 58,708 $ 16,966
======== ======== ======== ========
Included in the impairment on stores closed, to be closed or sold is $7,860
related to additional asset impairment charges made on stores previously
impaired.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 13, 2001 AND AUGUST 14, 2000
(Continued)
Impairment charges were made against the following accounts:
Twelve Weeks Ended Twenty-Eight Weeks Ended
---------------------------- ------------------------
August 13, August 14, August 13, August 14,
2001 2000 2001 2000
--------- --------- --------- ---------
(Dollars in thousands)
Fixed assets:
Hardee's $25,152 -- $28,882 --
Carl's Jr 10,651 -- 12,888 --
------- ------- ------- -------
35,803 -- 41,770 --
------- ------- ------- -------
Cost in excess of net assets
acquired, net
Hardee's 7,920 -- 9,684 --
Carl's Jr -- -- -- --
------- ------- ------- -------
7,920 -- 9,684 --
------- ------- ------- -------
Total
Hardee's 33,072 -- 38,566 --
Carl's Jr 10,651 -- 12,888 --
------- ------- ------- -------
$43,723 -- $51,454 --
======= ======= ======= =======
The following table is a roll forward 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 $ 51,695
New decisions 22,822
Usage (8,637)
Reversal of reserves for stores that will not be closed (6,440)
Favorable dispositions of surplus properties (7,770)
Other 565
--------
Balance at August 13, 2001 52,235
Less: Current portion 11,252
--------
Long-term portion $ 40,983
========
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 13, 2001 AND AUGUST 14, 2000
NOTE (4) LOSS PER SHARE
The Company presents "basic" loss per share, which represents net loss,
divided by the weighed 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)
Twelve Weeks Ended Twenty-eight Weeks Ended
------------------------------ ------------------------------
August 13, August 14, August 13, August 14,
2001 2000 2001 2000
--------- --------- --------- ---------
Basic Loss Per Share
Net loss $(36,769) $(13,930) $(73,914) $(16,381)
======== ======== ======== ========
Weighted average number of
common shares outstanding during
the period 50,505 50,501 50,503 50,501
======== ======== ======== ========
Loss per share -- basic and diluted $ (0.73) $ (0.28) $ (1.46) $ (0.32)
======== ======== ======== ========
For the 12-week periods ended August 13, 2001 and August 14, 2000, 3.4
million shares and 7.0 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. For the 28-week periods ended August 13, 2001 and August 14,
2000, 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 which was sold during the second
quarter. The activity of the Taco Bueno chain is included in the "Other"
segment. The Company considers it's Carl's Jr. and Hardee's 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
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 2001.
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, Taco Bueno operations and,
as it relates to segment operating income or loss, income and expense not
allocated to reportable segments.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 13, 2001 AND AUGUST 14, 2000
TWELVE WEEKS ENDED
Carl's Jr. Hardee's Other Total
--------- --------- -------- ---------
AUGUST 13, 2001:
Revenues $165,124 $ 167,628 $ 7,970 $ 340,722
Segment operating income (loss) 8,494 (29,174) (1,347) (22,027)
Capital expenditures 1,867 2,066 576 4,509
Depreciation and amortization 4,554 9,897 2,344 17,265
AUGUST 14, 2000:
Revenues $174,497 $ 237,985 $ 26,014 $ 438,496
Segment operating income (loss) 14,483 (19,527) (2,060) (7,104)
Capital expenditures 12,798 10,634 3,593 27,025
Depreciation and amortization 6,491 15,197 4,172 25,860
TWENTY-EIGHT WEEKS ENDED
Carl's Jr. Hardee's Other Total
---------- --------- -------- -----------
AUGUST 13, 2001:
Revenues $380,804 $ 388,312 $ 43,114 $ 812,211
Segment operating income (loss) 27,497 (55,313) (8,979) (36,795)
Capital expenditures 3,910 4,629 1,501 10,040
Depreciation and amortization 10,893 23,993 10,639 45,525
Total assets 291,805 676,662 14,503 982,970
AUGUST 14, 2000:
Revenues $399,212 $ 563,668 $ 59,946 $ 1,022,826
Segment operating income (loss) 32,230 (18,112) (3,999) 10,119
Capital Expenditures 27,112 20,271 10,664 58,047
Depreciation and amortization 15,043 37,403 9,241 61,687
Total assets (as of January 31, 2001) 372,654 736,645 98,238 1,207,537
NOTE (6) SALE OF TACO BUENO
On June 10, 2001, the Company completed the sale of its Taco Bueno
concept to an affiliate of Jacobson Partners ("Jacobson") 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 purchase price is subject to
adjustment based on the working capital deficit assumed by Jacobson on the date
of purchase. The Company does not believe there will be a material adjustment to
the purchase price.
Twelve Weeks Ended Twenty-eight Weeks Ended
--------------------------- ----------------------------
August 13, August 14, August 13, August 14,
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues $6,370 $23,117 $37,538 $53,388
Operating Income 1,200 1,704 3,693 3,757
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 13, 2001 AND AUGUST 14, 2000
NOTE (7) RELATED PARTY TRANSACTIONS
In July 2001, the Company's Board of Directors approved the adoption of
CKE Restaurants, Inc. Employee Stock Purchase Loan Plan ("Loan Plan") and the
Non-Employee Director Stock Purchase Loan Program ("Loan Program") or
collectively the "Programs". The purpose of the Loan Plan and Loan Program is to
provide key employees and directors with further incentive to maximize
stockholder value. The Company offered an aggregate of $2 million in loans. Loan
Plan and Loan Program funds must be used to make private or open market
purchases of Company common stock through a broker-dealer designated by the
Company. All loans are full recourse and unsecured, and have a five-year term.
Interest accrues on the loans at a rate of 6.0% per annum, due at maturity.
However, in the event that the stock is sold, transferred or pledged, the
interest rate is adjusted to the prime rate plus 4%. These loans may be prepaid
anytime without penalty. As of August 13, 2001, loans had been made in the
amount of $1.5 million to purchase 300,000 shares of Company common stock at an
average purchase price of $5.16 per share, (which included 189,900 shares for
$1.1 million from Santa Barbara Restaurant Group, Inc., whose chairman is the
chairman of the Company).
On May 23, 2001, the Company sold 17 Carl's Jr. restaurants for net
proceeds of $11.8 million to a former Chief Executive Officer and member of the
Board of Directors. This transaction resulted in a gain of $6.3 million.
Additionally, on July 12, 2001, the Company sold 6 Carl's Jr. restaurants for
net proceeds of $4.0 million to an affiliate of a member of the Board of
Directors. This transaction resulted in a gain of $2.5 million.
NOTE (8) NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141") which supersedes Accounting
Principles Board ("APB") Opinion No. 16, "Business Combinations." SFAS 141
eliminates the pooling-of-interests method of accounting for business
combinations and modifies the application of the purchase accounting method.
SFAS 141 also specifies criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported separately from
goodwill. The elimination of the pooling-of-interests method is effective for
transactions initiated after June 30, 2001. The remaining provisions of SFAS 141
will be effective for transactions accounted for using the purchase method that
are completed after June 30, 2001.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and
Intangible Assets" ("SFAS 142") which supersedes APB Opinion No. 17, "Intangible
Assets." SFAS 142 eliminates the current requirement to amortize goodwill and
indefinite-lived intangible assets, addresses the amortization of intangible
assets with a defined life and addresses the impairment testing and recognition
for goodwill and intangible assets. SFAS 142 will apply to goodwill and
intangible assets arising from transactions completed before and after the
effective date. SFAS 142 is effective for fiscal year 2002.
The Company's business combinations have historically consisted
primarily of acquiring the stock of restaurant companies and restaurants from
our franchisees, and have been accounted for using the purchase method of
accounting. The primary intangible asset that historically has been allocated
value in these business combinations is goodwill.
In connection with SFAS 142's transitional goodwill impairment
evaluation, the Statement will require the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
operations.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 13, 2001 AND AUGUST 14, 2000
(Continuation)
NOTE (8) NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
Because of the extensive effort needed to comply with adopting SFAS 141
and 142, it is not practicable to reasonably estimate the impact of adopting
these Statements on the Company's financial statements at the date of this
report, including whether it will be required to recognize any transitional
impairment losses as the cumulative effect of a change in accounting principle,
except that the Company will no longer amortize goodwill. Goodwill amortization
is charged to general and administration expenses and amounted to $1.3 million
and $1.5 million for the 12 week periods ended August 13, 2001 and August 14,
2000, respectively and $3.2 million and $3.1 million for the corresponding
year-to-date periods.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION AND SAFE HARBOR DISCLOSURE
CKE Restaurants, Inc. and Subsidiaries (collectively referred to as the
"Company") is comprised of the worldwide operations of Carl's Jr. and Hardee's.
The following Management's Discussion and Analysis should be read in conjunction
with the unaudited Condensed Consolidated Financial Statements contained herein,
and our Annual Report on Form 10-K for the fiscal year ended January 31, 2001
(collectively, the "2001 Financial Statements"). All Note references herein
refer to the accompanying notes to the Condensed Consolidated Financial
Statements ("Financial Statements").
Matters discussed in this Form 10-Q contain certain forward-looking
statements that are based on management's beliefs and assumptions derived from
information currently known to management. Forward-looking statements may
include, but are not limited to, descriptions of plans or objectives of
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
management with respect to future events and are subject to risks and
uncertainties, such as changes in the fast food industry and changes to our
plans, objectives, expectations and intentions. Should one or more of these
risks materialize or should underlying beliefs or assumptions prove incorrect,
our actual results could differ materially from those discussed in this 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, changes in commodity prices, availability and
cost of energy, workers' compensation and general liability claim experience,
the impact of competitive products and pricing, changes in our suppliers'
ability to provide quality and timely products to us, the operational success of
our franchisees, availability of financing for us and our franchisees,
unfavorable outcomes on litigation and other factors as discussed in our filings
with the Securities and Exchange Commission.
11
13
CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
AUGUST 13, 2001 AND AUGUST 14, 2000
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
See NOTE (8)
SIGNIFICANT KNOWN EVENTS, TRENDS, OR UNCERTAINTIES EXPECTED TO IMPACT FISCAL
2002 COMPARISONS WITH FISCAL 2001
The following factors impacted comparability of operating performance
for the quarter and year-to-date ended August 13, 2001 to the quarter and
year-to-date ended August 14, 2000 or could impact comparisons for the remainder
of 2001.
Store Porfolio Strategy
In late fiscal 2000, we embarked on a refranchising initiative to reduce
outstanding borrowings on our senior credit facility as well as, achieve a
well-balanced system of nationwide restaurant concepts that are primarily
franchise operated. Additionally, as sales trends for the Hardee's stores and
certain Carl's Jr. stores (primarily in the Oklahoma area) continued to decline
in fiscal 2000 through fiscal 2001 we determined that it was necessary to close
stores for which a return to profitability was not likely. As such, through
August 13, 2001, we identified 40 Carl's Jr. and 294 Hardee's stores for
closure. These actions or repositioning activities resulted in the charges
reflected in our financial statements as repositioning charges. As the number of
company operated stores declined, we made significant reductions to operating
expenses.
During the second quarter of fiscal 2002, we recorded repositioning charges of
$31.7 million. These charges, which were primarily non-cash in nature, consisted
of net facility action charges of $30.5 million, $1.0 million relating to
severance payments for a reduction in force and $258,000 reflecting the
write-off of deferred loan costs as a result of a reduction in borrowing
capacity resulting from the asset sale program during the quarter. The net
facility action charges of $30.5 million consisted of (a) an impairment charge
of $9.1 million for restaurants that we plan to continue to operate, but for
which the net book value is not supported by current estimated future cash
flows, (b) an impairment charge and store closure expense of $32.3 million, for
60 Hardee's and four Carl's Jr. restaurants that we have closed or plan to
close, consisting of asset impairments of $21.1 million, $5.7 million goodwill
impairment and $5.5 for additional store closure expense reserves, (c) net gains
on restaurants sold to franchisees during the quarter of $5.7 million and (d) a
net credit of $5.2 million related to asset impairment charges and store closure
expenses for stores previously identified for closure, principally representing
the reversal of lease reserves on restaurants that we decide not to close.
During the second quarter of fiscal 2001, we recorded facility action charges of
$17.9 million relating to net losses on the sale of certain Carl's Jr. and
Hardee's restaurants.
For the 28-week period ended August 13, 2001, we recorded repositioning
charges of $63.8 million which consisted of (a) net facility action charges of
$58.7 million (b) a charge of $4.1 million recorded as interest expense
reflecting the write-off of deferred loan costs primarily as a result of the
modification of our senior credit facility and (c) $1.0 million relating to
severance. During the 28-week period ended August 14, 2000 we recorded facility
action charges of $17.0 million relating to net losses on the sale of certain
Carl's Jr. and Hardee's restaurants.
12
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
AUGUST 13, 2001 AND AUGUST 14, 2000
While we believe we have substantially completed our repositioning
activities and are now able to focus on the operations of our core brands Carl's
Jr. and Hardee's, there can be no guarantee that we will not determine in the
future that additional repositioning activities will be necessary. Revitalizing
Hardee's continues to be a primary focus for our management team. Even though
Hardee's has experienced a same-store-sales increase for the first time in many
years (see discussion below), Hardee's is still an underperforming brand.
Through mid fiscal 2001, we tried various strategies to turn around Hardee's
that met with limited, if any, success. Then, in June 2001, while continuing to
identify and close unprofitable stores as well as execute our refranchising
program, we took a more basic approach to addressing the issues in the Hardee's
stores and launched a program focusing on quality, service, and cleanliness.
This is a program that focuses on the fundamentals: hiring good people, focusing
them on the guests, serving hot quality food to the guests, and keeping the
restaurants clean for the guests. We have gone back to salaried managers running
the stores, which adds an extra manager to hire, train and manage our workforce.
We reduced the span of control for District Managers from 10 restaurants to 8 so
that they can focus better on hiring, training and executing. We changed
incentive plans to reward operators for building sales and providing great
service to our guests. Additionally, we realized that we have to acknowledge and
respect regional differences. We adjusted product promotions and advertising to
a regional scope. Our success will depend on the successful execution of our
operational plans as well as the following items that are discussed in detail in
our 2001 Financial Statements:
- implementation of our strategies by our franchisees,
- opening additional company-operated and franchised restaurants,
- remodeling our restaurants,
- our ability to compete with our major competitors, many of which
have substantially greater financial, marketing and other
resources than we have, which may give competitive advantages,
- changes in consumer tastes,
- adverse weather conditions,
- changes in national, regional and local economic conditions, and
- management's ability to anticipate, identify and respond to
changing conditions.
If we are unable to further improve Hardee's sales and operating
margins, it would significantly effect our future profitability and cash flows,
which, in turn, would effect our ability to access financing in the future, both
in terms of the amount of financing available to us and the terms of such
financing.
See additional discussion regarding defaults under our debt agreements
in the "Financial Condition and Liquidity" section below.
The asset sales arising from our repositioning activities have resulted,
and will continue to result, in a decline in restaurant revenue and costs simply
because we operate fewer stores. Additionally, the closure of unprofitable
stores should improve our overall profit margin. The following table summarizes
the historical operating results of stores that we sold, closed or identified to
be closed through August 13, 2001:
13
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
AUGUST 13, 2001 AND AUGUST 14, 2000
(Dollars in $000's) Twelve Weeks Ended Twenty-Eight Weeks Ended
------------------------------------------------ -------------------------------------------------
August 13, 2001 August 14, 2000 August 13, 2001 August 14, 2000
--------------------- --------------------- -------------------- ----------------------
Oper. Oper. Oper. Oper.
Income/ Income/ Income/ Income/
Revenue (Loss) Revenue (Loss) Revenue (Loss) Revenue (Loss)
------- ------- -------- ------- ------- ------- -------- --------
Carls Jr
Stores sold $ 1,015 $ (333) $ 28,614 $ 3,749 $ 9,210 $ 482 $ 67,778 $ 9,226
Stores closed or
to be closed 428 (245) 3,299 (1,025) 2,261 (864) 8,409 (1,680)
------- ------- -------- ------- ------- ------- -------- --------
Total 1,443 (578) 31,913 2,724 11,471 (382) 76,187 7,546
------- ------- -------- ------- ------- ------- -------- --------
Hardee's
Stores sold 1,793 140 47,691 (632) 4,215 153 127,175 3,264
Stores closed or
to be closed 8,363 (1,993) 30,858 (5,291) 28,832 (8,639) 74,174 (1,519)
------- ------- -------- ------- ------- ------- -------- --------
Total 10,156 (1,853) 78,549 (5,923) 33,047 (8,486) 201,349 1,745
------- ------- -------- ------- ------- ------- -------- --------
Taco Bueno
Stores sold 6,370 1,200 23,117 1,704 37,538 3,693 53,388 3,757
------- ------- -------- ------- ------- ------- -------- --------
Total
Stores sold 9,178 $ 1,007 99,422 4,821 50,963 4,328 248,341 16,247
Stores closed or
to be closed 8,791 (2,238) 34,157 (6,316) 31,093 (9,503) 82,583 (12,253)
------- ------- -------- ------- ------- ------- -------- --------
Total $17,969 $(1,231) $133,579 ($1,495) $82,056 ($5,175) $330,924 $ 3,994
======= ======= ======== ======= ======= ======= ======== ========
As a result of these circumstances, we have reduced costs, principally
general and administrative expenses, which reflects a reduction in headcount as
well as other expenses.
14
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
AUGUST 13, 2001 AND AUGUST 14, 2000
Franchisees' Operations
Like others in the quick service restaurant industry, from time to time,
some of our franchise operators experience financial difficulties with respect
to their franchise operations. At present, certain franchise operators,
principally in the Hardee's system, are experiencing varying degrees of
financial problems. We intend to continue to proactively work with financially
troubled franchise operators in an attempt to positively resolve their issues.
Depending upon the facts and circumstances of each situation, and in the absence
of an improvement in business trends, there are a number of potential
resolutions of these financial issues. These include, but are not limited to, a
sale of some or all of the operator's restaurants to us or another Hardee's
franchisee, a restructuring of the operator's business and/or finances, or, if
necessary, a termination of the operators franchise. We charged expenses of $2.9
million in the current quarter and $4.2 million year-to-date related to
allowances for doubtful franchise accounts and notes receivables. These costs
were reported as franchises and licensed restaurant operating costs and expenses
and other income, net. These charges have increased the already substantial
allowance for doubtful accounts at Hardee's from 38% of the gross balance of
accounts and notes receivable at the beginning of the year to 54% at the end of
the second quarter. On an ongoing basis, we assess our exposure from
franchise-related risks, which include estimated uncollectibility of accounts
receivable related to franchise and license fees, contingent lease liabilities,
guarantees to support certain third party financial arrangements with
franchisees and potential claims by franchisees. Although the ultimate impact of
these franchise financial issues cannot be predicted with certainty at this
time, we have provided for the current estimate of our probable loss as of
August 13, 2001. However, there can be no assurance that the number of franchise
operators or restaurants experiencing financial difficulties will not change
from our current estimates, nor can there be any assurance that we will be
successful in resolving financial issues relating to any specific franchise
operator.
Change in Workers' Compensation Accident Year
We experienced a substantial increase to our actuarially
determined self-insurance reserves programs related to workers' compensation and
general liability insurance in the second quarter of fiscal 2002. These
increases relate primarily to increases in workers' compensation reserves for
accident year 2001, the last fiscal year for which we continue to experience
adverse development, as well as rising healthcare costs. We charged $3.9 million
to restaurant operations payroll and other employee benefits for this increase
in workers' compensation reserves in the second quarter of fiscal 2002. Reported
claims are down for the current accident year which is expected given the
reduced number of company-operated restaurants. Although the number of incidents
for the current fiscal year and the related severity of each claim cannot be
predicted with certainty at this time, the current estimate of the probable loss
as of August 13, 2001, is based upon an independent actuarial analysis.
15
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
AUGUST 13, 2001 AND AUGUST 14, 2000
OPERATING REVIEW
The following tables are presented to facilitate Management's Discussion and
Analysis of the second quarter and year-to date results. The term "EBITDA"
refers to earnings loss before interest, income takes and depreciation and
amortization.
(Dollars in thousands, except average check data) SECOND QUARTER FY 2002
---------------------------------------------------------------
Carl's Hardee's Other Total
--------- --------- ------- ---------
Number of restaurants (end of period):
Company-operated 444 760 1,204
Franchised domestic 487 1,594 2,081
Licensed international 37 138 175
--------- --------- ---------
Total 968 2,492 3,460
========= ========= =========
Company-operated sales $ 119,991 $ 149,256 $ 7,970 $ 277,217
========= ========= ======= =========
Company-operated average unit volumes (trailing
13-periods) $ 1,087 $ 726
--------- ---------
Average check $ 5.11 $ 3.78
--------- ---------
Company-operated same store sales increase (decrease) 2.3% 1.0%
Franchise-operated same-store sales increase (decrease) (0.5)% Flat
Co-oper. Same-store sales increase (decrease)
excluding stores sold, closed or to be closed 2.4% 1.2%
Company operated average unit volumes, excluding
stores sold, closed or to be closed 1,115 764
Operating costs (as a% of co.-operated sales)
Food and paper 29.51% 32.03%
Payroll and other employee benefits 31.30 35.19
Occupancy and other operating costs 21.76 22.77
Gross margin 17.42% 10.01%
Net franchising income $ 5,720 $ 8,852 $ 14,572
========= ========= =========
Oper. Income (loss) excluding facility action charges $ 10,743 $ (1,143) $(1,140) $ 8,460
Facility action charges 2,249 28,031 207 30,487
--------- --------- ------- ---------
Operating income (loss) $ 8,494 $ (29,174) $(1,347) $ (22,027)
========= ========= ======= =========
EBITDA excluding facility action charges $ 15,586 $ 7,062 $ 1,773 $ 24,421
--------- --------- ------- ---------
Facility action charges (gains) 2,249 28,031 207 30,487
--------- --------- ------- ---------
EBITDA $ 13,337 $ (20,969) $ 1,566 $ (6,066)
========= ========= ======= =========
EBITDA excluding stores sold, closed or to be closed
and facility actions charges $ 16,154 $ 8,426 $ 575 $ 25,155
========= ========= ======= =========
SECOND QUARTER FY 2001
-------------------------------------------------------
Carl's Hardee's Other Total
-------- -------- ------- --------
Number of restaurants (end of period):
Company-operated 569 1,132 146 1,847
Franchised domestic 364 1,503 0 1,867
Licensed international 29 127 0 156
-------- -------- ------- --------
Total 962 2,762 146 3,870
======== ======== ======= ========
Company-operated restaurant sales $144,594 $216,244 $26,013 $386,851
======== ======== ======= ========
Company-operated average unit volumes (trailing 13-periods) $ 1,087 $ 740
-------- --------
Average check $ 4.85 $ 3.60
======== ========
16
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
AUGUST 13, 2001 AND AUGUST 14, 2000
(Continued)
SECOND QUARTER FY 2001 (CONTINUED)
------------------------------------------------------------
Carl's Hardee's Other Total
-------- -------- ------- --------
Company-operated same-store sales increase (decrease) 2.3% (8.4)%
Franchise-operated same-store sales increase (decrease) 5.7% (5.1)%
Co-oper. store sales increase (decrease) excluding
stores sold, closed or to be closed 2.1% (6.7)%
Company operated average unit volumes, excluding
stores sold, closed or to be closed 1,110 793
Operating costs (as a % of co.-operated sales)
Food and paper 29.58% 32.59%
Payroll and other employee benefits 28.11 34.61
Occupancy and other operating costs 21.66 25.42
-------- --------
Gross margin 20.65% 7.37%
Net franchising income $ 2,722 $ 13,108 $ 15,830
======== ======== ========
Oper. income (loss) excluding facility action charges $ 12,865 $ (24) $(2,060) $ 10,781
Facility action charges (gains), net (1,618) 19,503 0 17,885
-------- -------- ------- --------
Operating income (loss) $ 14,483 $(19,527) $(2,060) $ (7,104)
EBITDA excluding facility action charges $ 20,168 $ 15,707 $ 1,664 $ 37,539
-------- -------- ------- --------
Facility action charges (gains), net (1,618) 19,503 0 17,885
-------- -------- ------- --------
EBITDA $ 21,786 $ (3,796) $ 1,664 $ 19,654
======== ======== ======= ========
EBITDA excluding stores sold, closed or to be closed
and facility action charges $ 16,218 $ 16,310 $(1,111) $ 31,417
======== ======== ======= ========
YEAR-TO-DATE FY 2002
--------------------------------------------------------------
Carl's Hardee's Other Total
-------- --------- -------- ---------
Number of restaurants (end of period):
Company-operated 444 760 1,204
Franchised domestic 487 1,594 2,081
Licensed international 37 138 175
-------- --------- ---------
Total 968 2,492 3,460
======== ========= =========
Company-operated restaurant sales $281,975 $ 347,261 $ 43,095 $ 672,331
======== ========= ======== =========
Operating costs (as a % of co.-operated sales)
Food and paper 29.19% 31.58%
Payroll and other employee benefits 29.78 35.46
Occupancy and other operating costs 22.11 23.77
-------- ---------
Gross margin 18.92% 9.20%
Net franchising income $ 12,011 $ 19,454 $ 31,465
======== ========= =========
Oper. income (loss) excluding facility action charges $ 29,168 $ (2,984) $ (4,272) $ (21,912)
Facility action charges 1,671 52,329 4,707 58,707
-------- --------- -------- ---------
Operating income (loss) $ 27,497 $ (55,313) $ (8,979) $ (36,795)
EBITDA excluding facility action charges $ 41,003 $ 19,845 $ 2,227 $ 63,075
-------- --------- -------- ---------
Facility action charges 1,671 52,329 4,707 58,507
-------- --------- -------- ---------
EBITDA $ 39,332 $ (32,484) $ (2,480) $ 4,368
======== ========= ======== =========
EBITDA excluding stores sold, closed or to be closed
and facility action charges $ 41,081 $ 26,532 $ (1,421) $ 66,192
======== ========= ======== =========
17
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
AUGUST 13, 2001 AND AUGUST 14, 2000
YEAR-TO-DATE FY 2001
---------------------------------------------------------------
Carl's Hardee's Other Total
--------- --------- -------- --------
Number of restaurants (end of period):
Company-operated 569 1,132 146 1,847
Franchised domestic 364 1,503 0 1,867
Licensed international 29 127 0 156
--------- --------- -------- --------
Total 962 2,762 146 3,870
========= ========= ======== ========
Company-operated restaurant sales $ 333,970 $ 520,309 $ 59,946 $914,225
========= ========= ======== ========
Operating costs (as a % of co.-operated sales)
Food and paper 29.53% 32.14%
Payroll and other employee benefits 27.66 34.19
Occupancy and other operating costs 21.47 24.11
--------- ---------
Gross margin 21.34% 9.56%
Net franchising income $ 5,400 $ 23,633 $ 29,033
========= ========= ========
Operating income (loss) excluding facility action charges $ 30,056 $ 1,028 $ (3,999) $ 27,085
========= ========= ======== ========
Facility action charges (gains), net (2,174) 19,140 0 16,966
Oper. income (loss) $ 32,230 $ (18,112) $ (3,999) $ 10,119
EBITDA excluding facility action charges $ 45,711 $ 38,334 $ 5,136 $ 89,181
--------- --------- -------- --------
Facility action charges (gains), net (2,174) 19,140 0 16,966
--------- --------- -------- --------
EBITDA $ 47,885 $ 19,194 $ 5,136 $ 72,215
========= ========= ======== ========
EBITDA excluding stores sold, closed or to be closed
and facility charges $ 35,220 $ 32,428 $ (1,085) $ 66,563
========= ========= ======== ========
Carl's Jr.
During the current second quarter, we sold 23 restaurants to
franchisees and closed four. Carl's Jr. franchisees and licensees opened four
new restaurants, acquired 23 from us and closed one. As of August 13, 2001, the
Carl's Jr. system consisted of 444 company-operated restaurants, 487 franchised
restaurants and 37 international restaurants, for a system total of 968 Carl's
Jr. restaurants.
Revenues from company-operated Carl's Jr. restaurants decreased
$24.6 million, or 17.0%, to $120.0 million for the 12-week period ended August
13, 2001, and $52.0 million, or 15.6%, to $282.0 million for the 28-week period
ended August 13, 2001, when compared to the prior year comparable periods. The
decrease in revenues for both time periods 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 second quarter of each fiscal
year. While revenues from company-operated restaurants are down, net franchising
income in both the 12- and 28-week periods has more than doubled in the current
fiscal 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 2.3% in the current quarter and Carl's Jr.
company-operated restaurant average unit volumes were $1,087,000 for the
trailing thirteen periods ended August 13, 2001, and the average check for the
second quarter was $5.11 as compared to $4.85 in the comparable period of the
prior fiscal year.
Restaurant-level margins for our company-operated Carl's Jr.
restaurants decreased 3% in the 12-week period ended August 13, 2001 from 20.7%
in the prior-year quarter to 17.4% in the current quarter, when measured as a
percentage of company-operated restaurant revenue. Food and packaging expenses
and occupancy and other operating expenses remained fairly constant in the
current year quarter as compared to the prior year quarter. The decrease in
margins is due mainly to an increase in payroll and other employee benefits,
which increased 3.2% in the current year quarter as compared to the prior year
quarter, from 28.1% to 31.3% as a percentage of company-operated restaurant
revenue. The increase in payroll and other employee benefits is due mainly to an
increase in our
18
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
AUGUST 13, 2001 AND AUGUST 14, 2000
workers' compensation as discussed above. Payroll and other employee benefits
were also impacted by the 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.
Restaurant-level margins for our company-operated Carl's Jr. restaurants
decreased 2.4% in the 28-week period ended August 13, 2001 from 21.3% in the
prior year period to 18.9% in the current year period, when measured as a
percentage of company-operated restaurant revenue. Food and packaging expenses
decreased 0.3% as a percentage of sales from company-operated restaurants,
primarily as a result of the less emphasis on price discounting programs in the
current year period. Payroll and other employee benefits increased 2.1% in the
current year 28-week period as compared to the prior year from 27.7% to 29.8% as
a percentage of company-operated restaurant revenue. This fluctuation is due to
the adverse development associated with our workers' compensation reserves as
discussed above. Occupancy and other operating expenses for the year-to-date
period increased 0.6% from 21.5% to 22.1% as a percentage of company-operated
restaurant revenue. This is due primarily to an increase in the cost of natural
gas at the restaurants. Although we have seen these costs come down in the
second quarter, the year-to-date results are impacted by this increase in gas
costs in the first quarter.
Hardee's
During the current second quarter, we acquired one restaurant from a
franchisee, sold 13 to franchisees and closed 64 restaurants. Hardee's
franchisees and licensees opened two new restaurants, sold one restaurant to us,
acquired 13 restaurants from us and closed 12. As of August 13, 2001, the
Hardee's system consisted of 760 company-operated restaurants, 1,594 franchised
restaurants and 138 international restaurants, for a system total of 2,492
Hardee's restaurants.
Revenues from company-operated Hardee's restaurants decreased $67.0
million, or 31.0%, to $149.3 million for the 12-week period ended August 13,
2001, and $173.0 million, or 33.3%, to $347.3 million for the 28-week period
ended August 13, 2001, when compared to the prior year comparable periods. The
decrease in revenues for both time periods 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 second quarter of each fiscal
year. Net franchising revenue is also down in both current year periods as
compared to the prior fiscal year. This is due primarily to the decreased
revenue at Hardee's equipment division as a result of the slowdown in remodel
activity by the franchisees. Same-store sales for company-operated Hardee's
restaurants increased 1.0% in the current quarter and Hardee's company-operated
restaurant average unit volumes were $726,000 for the trailing thirteen periods
ended August 13, 2001, and the average check for the second quarter was $3.78 as
compared to $3.60 in the comparable period of the prior fiscal year.
Restaurant-level margins for company-operated Hardee's restaurants
increased 2.6% in the 12-week period ended August 13, 2001 from 7.4% in the
prior year quarter to 10.0% in the current quarter, when measured as a
percentage of company-operated restaurant revenue. Payroll and other employee
benefits increased 0.6% in the current year quarter as compared to the prior
year quarter, primarily due to a conscious decision to continue to increase
labor in our restaurants in an effort to maintain quality guest service. This
increase was offset by a decrease in food and packaging costs of 0.6%. However,
occupancy and other operating expenses decreased 2.6% in the current year
quarter. This decrease was due primarily to a reduction in discretionary
expenses at the restaurants, primarily repair and maintenance expenses.
Restaurant-level margins for company-operated Hardee's restaurants
decreased 0.4% in the 28-week period ended August 13, 2001 from 9.6% in the
prior-year to 9.2% in the current year, when measured as a percentage of
company-operated restaurant revenue. Food and packaging costs decreased 0.6%
from 32.2% to 31.6% as a percentage of company-operated restaurant revenue
primarily due a reduced emphasis on discounting in the current year. Occupancy
and other operating expenses decreased 0.3% as a percentage of company-operated
restaurant revenue as a result of reduced depreciation expense and repair and
maintenance expenses at the restaurants offset by an increase in general
liability insurance as a result of overall rising healthcare costs. These
favorable variances were more than offset by an unfavorable variance in payroll
and other employee benefits of 1.3%. These costs, which were 34.2% in the prior
year, increased to 35.5% in the current year. This increase was mainly due to a
deliberate decision to continue to increase labor in our restaurants in an
effort to maintain quality guest service.
19
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
AUGUST 13, 2001 AND AUGUST 14, 2000
Other Consolidated Expenses
Advertising expenses decreased $4.7 million, or 20.3%, to $18.6 million
for the 12-week period ended August 13, 2001, as compared to the comparable
period in the prior year. However, as a percentage of total revenues,
advertising expenses has increased 0.7% as a percent of revenues due to the
introduction of new products in the second quarter, advertising decreased $13.7
million or 24% to $43.3 million for the 28-week period ended August 13, 2001 and
remained relatively constant as a percent of total revenues in the current year
period as compared to the prior year period.
General and administrative expenses decreased $8.6 million, or 26%, to
$24.4 million for the 12-week period ended August 31, 2001, as compared to the
12-week period ended August 14, 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. Additionally, we reversed a reserve for a certain litigation claim
due to a favorable resolution.
Other income increased during the twelve and twenty- eight weeks ended
August 13, 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 $10.2 million to $27.0 million in
the 28-week period ended August 13, 2001. During the 28 weeks, we generated cash
flows from operations of $76.1 million, as compared to $17.2 million in the
corresponding period of the prior fiscal year. This increase was due to improved
operating cash flows as well as the receipt of an income tax refund of
approximately $34 million during the current period. Investing activities
generated $107.9 million primarily from asset sales. Financing activities used
$173.9 million primarily to paydown our senior credit facility. Earnings were
insufficient to cover fixed charges by $72.0 million and $26.7 million for the
28-week periods ended August 13, 2001 and August 14, 2000, respectively.
Excluding the effect of the repositioning charges discussed above, earnings
would be insufficient to cover fixed charges by $8.2 million and $9.7 million
for the 28-week period ended August 13, 2001 and August 14, 2000, respectively.
(See Exhibit 12.1).
As discussed above, we have embarked on an asset sale program designed
to generate cash to reduce indebtedness under our senior credit facility. During
the first half of fiscal 2002, we made a net repayment on our senior credit
facility of approximately $149 million, of which approximately $86 million was
provided by cash proceeds from assets sales ($61.2 million from the sale of Taco
Bueno). The balance of the repayment was generated from operations.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
AUGUST 13, 2001 AND AUGUST 14, 2000
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.
The 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 amended our senior credit facility, effective January 31,
2000, August 14, 2000, January 31, 2001 and April 13, 2001, primarily to modify
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 at August 13, 2001, the applicable margin was 2.25% and
our interest rate was 9.25%. On September 30, 2001 the margin will be increased
to 3.0% and an additional fee must be paid to the lenders of 1.5% of the
outstanding commitment. As of August 13, 2001, the outstanding commitment was
$137.1 million. We believe that the impact of this increase in interest rate
pricing will be significantly offset by a decrease in outstanding borrowings.
In the event the senior credit facility is declared accelerated by the
lenders (which can occur only if we are in default under the facility), 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 $19.5
million as of August 13, 2001 has been classified as a current liability in the
consolidated balance sheet.
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
August 13, 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 near future. As of August 13, 2001, we had $67.0
million of borrowings available to us under our senior credit facility.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
AUGUST 13, 2001 AND AUGUST 14, 2000
We are currently actively pursuing entering into a new or amended credit
facility by fiscal year end, however, there can be no assurance that this
refinancing or any other will be completed.
If we do not obtain a new or amended credit facility, then the Company,
in order to meet it's outstanding obligations, will be required to (1) generate
sufficient cash flow from operations; (2) further reduce general administrative
and/or other expenses; (3) limit it's capital expenditure; and/or (4) sell
assets, possibly at a loss. The Company's ability to accomplish the foregoing
may be subject to general economic, financial, competitive, legislative,
regulatory or other factors which may be beyond the Company's control.
Therefore, while the Company currently anticipates that either it will refinance
it's senior credit facility or generate sufficient cash flow by one or all of
the means described above, there is no guarantee that such will occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
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. 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 $19.5 million
remained outstanding as of August 13, 2001. Borrowings under our senior credit
facility now bear interest at the prime rate plus an applicable margin. A
hypothetical increase of 100 basis points in short-term interest rates would
result in a reduction of approximately $195,000 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 as in
effect August 13, 2001.
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 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.
Seasonality
Our restaurant sales and profitability are subject to seasonal
fluctuations and are traditionally higher during the spring and summer months
because of factors such as increased travel and improved weather conditions,
which affect the public's dining habits.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of CKE Restaurants, Inc. was held on
June 12, 2001, for the purpose of electing certain members of the board of
directors.
Management's nominees for directors, whose term expired as of the date
of the Annual Meeting, were elected by the following vote:
Shares Voted Authority to Vote
"For" "Withheld"
------------ -----------------
Byron Allumbaugh 44,271,343 2,671,807
Carl L. Karcher 44,442,230 2,500,920
Frank P. Willey 44,288,935 2,654,215
The following individuals continue to serve on the board of directors:
Peter Churm, William P. Foley II, Carl N. Karcher, Daniel D. Lane and Daniel
Ponder.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit # Description
--------- -----------
10.43 Employee Loan and Stock Purchase Agreement
10.44 Non-Employee Director Loan and Stock Purchase Agreement dated July
23, 2001
10.45 Stock Purchase Agreement by and between the Company and Santa
Barbara Restaurant Group, Inc. dated August 20, 2001
12.1 Computation of Ratios
(b) Current Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CKE RESTAURANTS, INC.
(Registrant)
September 26, 2001 /s/ Dennis J. Lacey
-------------------- Executive Vice President
Date Chief Financial Officer
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EXHIBIT INDEX
Exhibit # Description
--------- -----------
10.43 Employee Loan and Stock Purchase Agreement
10.44 Non-Employee Director Loan and Stock Purchase Agreement dated July
23, 2001
10.45 Stock Purchase Agreement by and between the Company and Santa
Barbara Restaurant Group, Inc. dated August 20, 2001
12.1 Computation of Ratios