-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, To1BMZSpxLMVonEenrtlApTwD1zun3aotDnxHzqpUHZIpa4HLEuAgU4dpGLr5rFw QCOaPkLd6qLkJdqScGjxGA== 0000892569-98-003328.txt : 19981218 0000892569-98-003328.hdr.sgml : 19981218 ACCESSION NUMBER: 0000892569-98-003328 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981102 FILED AS OF DATE: 19981217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CKE RESTAURANTS INC CENTRAL INDEX KEY: 0000919628 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 330602639 STATE OF INCORPORATION: DE FISCAL YEAR END: 0127 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11313 FILM NUMBER: 98771220 BUSINESS ADDRESS: STREET 1: 1200 N HARBOR BLVD CITY: ANAHEIM STATE: CA ZIP: 92801 BUSINESS PHONE: 7147745796 MAIL ADDRESS: STREET 1: 1200 NORTH HARBOR BLVD 10-Q 1 FORM 10-Q PERIOD ENDED NOVEMBER 2, 1998 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended November 2, 1998 -------------------------- 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.) 1200 North Harbor Boulevard, Anaheim, CA 92801 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (714) 774-5796 ------------------ NOT APPLICABLE - -------------------------------------------------------------------------------- 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 --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 47,131,017 shares of Common Stock, par value $.01 per share, as of December 9, 1998 2 CKE RESTAURANTS, INC. INDEX
Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of November 2, 1998 and January 26, 1998... 3 Consolidated Statements of Income for the twelve and forty weeks ended November 2, 1998 and November 3, 1997 .......................... 4 Consolidated Statements of Cash Flows for the forty weeks ended November 2, 1998 and November 3, 1997 ................................ 5-6 Notes to Consolidated Financial Statements ............................... 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............................. 11-17 Part II. Other Information Item 2. Changes in Securities and Use of Proceeds............................ 18 Item 6. Exhibits and Reports on Form 8-K .................................... 18-20
3 PART 1. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CKE RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) ASSETS
November 2, January 26, 1998 1998 ------------ ----------- Current assets: Cash and cash equivalents $ 33,869 $ 30,382 Accounts receivable 33,215 27,317 Related party receivables 1,160 1,171 Inventories 23,013 17,024 Prepaid expenses 12,916 13,045 Other current assets 941 3,217 ---------- ---------- Total current assets 105,114 92,156 Property and equipment, net 936,498 627,026 Property under capital leases, net 84,584 47,528 Long-term investments 35,153 48,089 Notes receivable 6,412 11,162 Related party receivables 8,251 7,626 Costs in excess of assets acquired, net 231,051 95,744 Other assets 37,792 28,037 ---------- ---------- $1,444,855 $ 957,368 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 30,587 $ 15,812 Current portion of capital lease obligations 7,966 5,499 Accounts payable 71,922 60,303 Deferred income taxes, net 5,990 5,675 Other current liabilities 109,664 89,195 ---------- ---------- Total current liabilities 226,129 176,484 ---------- ---------- Long-term debt 298,551 138,793 Convertible subordinated notes 167,225 -- Capital lease obligations 92,612 56,801 Other long-term liabilities 93,875 86,778 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 47,131,017 and 46,523,179 shares 471 465 Additional paid-in capital 373,585 366,110 Retained earnings 192,407 131,937 ---------- ---------- Total stockholders' equity 566,463 498,512 ---------- ---------- $1,444,855 $ 957,368 ========== ==========
See Accompanying Notes to Consolidated Financial Statements 3 4 CKE RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited)
Twelve Weeks Ended Forty Weeks Ended ----------------------------- ----------------------------- November 2, November 3, November 2, November 3, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Revenues: Company-operated restaurants: Carl's Jr $ 124,197 $ 113,826 $ 411,736 $ 371,606 Hardee's 267,515 150,027 811,988 203,925 Taco Bueno 18,679 17,211 62,453 57,289 Other 8,048 25,812 49,779 101,836 ----------- ----------- ----------- ----------- 418,439 306,876 1,335,956 734,656 ----------- ----------- ----------- ----------- Franchised and licensed restaurants and other: Carl's Jr 22,446 18,687 72,904 61,089 Hardee's 16,590 21,628 50,830 28,240 Other 130 264 967 928 ----------- ----------- ----------- ----------- 39,166 40,579 124,701 90,257 ----------- ----------- ----------- ----------- Total revenues 457,605 347,455 1,460,657 824,913 ----------- ----------- ----------- ----------- Operating costs and expenses: Restaurant operations: Food and packaging 123,574 95,530 401,972 225,591 Payroll and other employee benefits 127,325 96,838 410,118 220,576 Occupancy and other operating expenses 85,263 60,863 259,549 148,635 ----------- ----------- ----------- ----------- 336,162 253,231 1,071,639 594,802 Franchised and licensed restaurants and other 25,169 27,459 82,996 69,668 Advertising expenses 26,185 17,431 78,406 42,293 General and administrative expenses 29,195 24,240 91,950 55,759 ----------- ----------- ----------- ----------- Total operating costs and expenses 416,711 322,361 1,324,991 762,522 ----------- ----------- ----------- ----------- Operating income 40,894 25,094 135,666 62,391 Interest expense (10,922) (4,444) (32,764) (12,027) Other income (expense), net (2,899) 1,192 (296) 6,733 ----------- ----------- ----------- ----------- Income before income taxes and extraordinary item 27,073 21,842 102,606 57,097 Income tax expense 10,927 8,740 41,124 22,864 ----------- ----------- ----------- ----------- Income before extraordinary item 16,146 13,102 61,482 34,233 Extraordinary item - gain on early retirement of debt, net of applicable income tax expense of $1,750 2,738 -- 2,738 -- ----------- ----------- ----------- ----------- Net income $ 18,884 $ 13,102 $ 64,220 $ 34,233 =========== =========== =========== =========== Basic income per common share before extraordinary item $ 0.34 $ 0.28 $ 1.31 $ 0.83 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - Basic 0.06 -- 0.06 -- ----------- ----------- ----------- ----------- Basic net income per share $ 0.40 $ 0.28 $ 1.37 $ 0.83 =========== =========== =========== =========== Basic weighted average shares outstanding 47,105 46,112 46,833 41,066 =========== =========== =========== =========== Diluted income per common share before extraordinary item $ 0.34 $ 0.27 $ 1.26 $ 0.81 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - Diluted 0.05 -- 0.05 -- ----------- ----------- ----------- ----------- Diluted net income per share $ 0.39 $ 0.27 $ 1.31 $ 0.81 =========== =========== =========== =========== Diluted weighted average shares outstanding 51,978 47,673 51,613 42,317 =========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements 4 5 CKE RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Forty Weeks Ended -------------------------- November 2, November 3, 1998 1997 ----------- ----------- Net cash flow from operating activities: Net income $ 64,220 $ 34,233 Adjustments to reconcile net income to net cash provided by operating activities, excluding the effect of acquisitions and dispositions: Extraordinary gain on early retirement of debt (4,488) -- Depreciation and amortization 57,771 34,583 Loss on sale of property and equipment and capital leases 1,179 2,172 Net noncash investment and dividend income (872) (2,734) Deferred income taxes -- 6,266 Loss on noncurrent asset and liability transactions 5,148 716 Net change in receivables, inventories, prepaid expenses and other current assets (3,633) (4,110) Net change in accounts payable and other current liabilities 409 (18,773) --------- --------- Net cash provided by operating activities 119,734 52,353 --------- --------- Cash flow from investing activities: Purchases of: Marketable securities -- (393) Property and equipment (85,986) (70,499) Long-term investments -- (14,054) Proceeds from sales of: Marketable securities and long-term investments 12,500 393 Property and equipment 9,325 2,918 Increase in notes receivable, related party receivables and leases receivable (2,314) (464) Collections on notes receivable, related party receivables and leases receivable 5,566 5,812 Net change in other assets 548 (388) Acquisitions, net of cash acquired (405,529) (321,132) Dispositions, net of cash surrendered 940 16,286 --------- --------- Net cash used in investing activities (464,950) (381,521) --------- --------- Cash flow from financing activities: Net proceeds from common stock offering -- 222,343 Net change in bank overdraft 14,268 1,803 Short-term borrowings -- 20,000 Repayments of short-term borrowings (435) (8,750) Long-term borrowings 287,870 114,389 Proceeds from convertible subordinated notes 197,225 -- Repayments of long-term debt (113,731) (20,418) Repurchase of convertible subordinated notes (24,723) -- Repayments of capital lease obligations (6,332) (3,728) Deferred financing costs (10,384) (4,118) Net change in other long-term liabilities 2,257 (933) Payment of dividends (3,780) (3,012) Exercise of stock options 6,468 3,225 --------- --------- Net cash provided by financing activities 348,703 320,801 --------- --------- Net increase (decrease) in cash and cash equivalents 3,487 (8,367) Cash and cash equivalents at beginning of period 30,382 46,330 --------- --------- Cash and cash equivalents at end of period $ 33,869 $ 37,963 ========= =========
See Accompanying Notes to Consolidated Financial Statements. 5 6 CKE RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Dollars in thousands) (Unaudited)
Forty Weeks Ended -------------------------- November 2, November 3, 1998 1997 ----------- ----------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of amounts capitalized) $ 28,749 $ 9,559 Income taxes 28,754 15,433 Noncash investing and financing activities: Hardee's Acquisition: Tangible assets acquired at fair value $ -- $ 461,978 Costs in excess of net assets acquired -- 24,848 Liabilities assumed at fair value -- (159,826) --------- --------- Total purchase price $ -- $ 327,000 ========= ========= FEI Acquisition: Tangible assets acquired at fair value $ 361,547 $ -- Costs in excess of net assets acquired 106,451 -- Liabilities assumed at fair value (87,361) -- --------- --------- Total purchase price $ 380,637 $ -- ========= ========= Disposition of Assets: Tangible assets disposed at book value $ -- $ 18,832 Liabilities relieved at book value -- (8,410) --------- --------- Total cash proceeds $ -- $ 10,422 ========= ========= Disposition of Assets: Tangible assets disposed at book value $ 31,723 $ -- Liabilities relieved at book value (20,678) -- --------- --------- Transfer to unconsolidated equity investment $ 11,045 $ -- ========= =========
6 7 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 2, 1998 AND NOVEMBER 3, 1997 NOTE (A) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of CKE Restaurants, Inc. and its consolidated wholly-owned subsidiaries (the "Company" or "CKE") and have been prepared in accordance with generally accepted accounting principles, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements should be read in conjunction with the audited consolidated financial statements presented in the Company's 1998 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 1998 consolidated financial statements to conform to the fiscal 1999 presentation. Share and per share information has been retroactively adjusted to reflect the ten percent stock dividend paid in February 1998. NOTE (B) ACQUISITIONS On April 1, 1998, the Company acquired Flagstar Enterprises, Inc. ("FEI"), the largest franchisee in the Hardee's system, previously operating 557 Hardee's restaurants located primarily in the Southeastern United States. In connection with the acquisition, which was accounted for as a purchase, the Company acquired all of the issued and outstanding shares of common stock of FEI from Advantica Restaurant Group, Inc. ("Advantica") for cash consideration of $380.6 million (which includes miscellaneous expenses paid to Advantica) and the assumption of approximately $45.6 million in capital lease obligations. On March 13, 1998, the Company completed a $197.2 million private placement of convertible subordinated notes (see Note (D)), and on April 1, 1998, the Company amended its existing credit facility, incurring an additional $213.2 million in indebtedness (see Note (C)). The net proceeds from the convertible subordinated notes and borrowings under the Company's credit facility were used primarily to finance the acquisition of FEI. On July 15, 1997, the Company acquired Hardee's Food Systems, Inc. ("Hardee's"), the operator and franchisor of the Hardee's(R) quick-service hamburger restaurant concept. In connection with the acquisition, which was accounted for as a purchase, the Company acquired all of the issued and outstanding shares of Hardee's for cash consideration of $327.0 million. The purchase price remains subject to adjustment to an amount to be agreed upon by the Company and Imasco Holdings, Inc. ("Imasco"), which represents the net asset value of Hardee's as of July 15, 1997. The Company issued 9,171,250 shares of the Company's common stock to the public for net proceeds of $222.3 million in conjunction with borrowings of $133.9 million under the Company's credit facility to finance the acquisition. Selected unaudited pro forma combined results of operations for the 40-week periods ended November 2, 1998 and November 3, 1997, assuming the acquisitions occurred on January 28, 1997, using actual restaurant-level margins and general and administrative expenses prior to the acquisitions, are presented as follows:
Forty Weeks Ended ------------------------------------ November 2, 1998 November 3, 1997 ---------------- ---------------- Total revenues $1,581,854 $1,683,615 Income before extraordinary item $ 59,861 $ 26,664 Net income $ 62,599 $ 26,664 Basic net income per share $ 1.34 $ 0.58 Diluted net income per share $ 1.28 $ 0.56
7 8 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOVEMBER 2, 1998 AND NOVEMBER 3, 1997 NOTE (C) LONG TERM DEBT On April 1, 1998, the Company amended its existing credit facility (the "Senior Credit Facility") to increase the aggregate principal amounts of the lenders' commitments under the term loan facility (the "Term Loan Facility") to $250.0 million and under the revolving credit facility (the "Revolving Credit Facility") to $250.0 million, which includes a $65.0 million letter of credit subfacility, and to extend the final maturity date from July 2002 to April 2003. The Company incurred borrowings of $213.2 million thereunder to finance a portion of the purchase price of the FEI acquisition (see Note (B)). Principal repayments under the Term Loan Facility are due in quarterly installments, commencing in July 1998 and continuing thereafter until the final maturity of the Senior Credit Facility in April 2003, resulting in annual reductions of $20.0 million in the first year of the Term Loan Facility and annual reductions thereafter ranging from $40.0 million to $70.0 million. Additional borrowings under the Revolving Credit Facility may be used for working capital and other general corporate purposes, including permitted investments and acquisitions, and any outstanding amounts thereunder will become due in April 2003. The Company will be required to repay borrowings under the Senior Credit Facility with the proceeds from (i) certain asset sales (unless the net proceeds of such sales are reinvested in the Company's business), (ii) the issuance of certain equity securities or (iii) the issuance of additional indebtedness. Of the various options the Company has regarding interest rates, it has selected LIBOR plus a margin, with future margin adjustments dependent on certain financial ratios from time to time. Borrowings and other obligations of the Company under the Senior Credit Facility are general unsubordinated obligations of the Company and are secured by a pledge of the capital stock of certain of the Company's present and future subsidiaries, which subsidiaries guarantee such borrowings and other obligations, and are secured by certain franchise rights, accounts receivable, contract rights, general intangibles (including trademarks) and other assets of the Company and such subsidiaries. The Senior Credit Facility contains a number of significant covenants that, among other things, (i) restrict the ability of the Company and its subsidiaries to incur additional indebtedness and incur liens on their assets, in each case subject to specified exceptions, (ii) impose specified financial tests as a precondition to the Company's and its subsidiaries' acquisition of other businesses, and (iii) limit the Company and its subsidiaries from making capital expenditures and certain restricted payments (including dividends and repurchases of stock), subject in certain circumstances to specified financial tests. In addition, the Company is required to comply with specified financial ratios and tests, including minimum EBITDA requirements, minimum interest coverage and fixed charge coverage ratios, minimum consolidated tangible net worth requirements and maximum leverage ratios. As of November 2, 1998, the Company is in compliance with all of its debt covenants. NOTE (D) CONVERTIBLE SUBORDINATED NOTES On March 13, 1998, the Company completed a private placement of $197.2 million aggregate principal amount of convertible subordinated notes (the "Notes"), in which the Company received net proceeds of approximately $192.3 million, of which $24.1 million was used to repay indebtedness under the Term Loan Facility. The Notes, which represent unsecured general obligations of the Company subordinate in right of payment to certain other obligations, including obligations under the Senior Credit Facility, are due in 2004, are convertible into the Company's common stock at an initial conversion price of $48.204 and carry a 4.25% coupon rate. The remaining net proceeds from the Notes, together with borrowings under the Senior Credit Facility, were used to fund the acquisition of FEI on April 1, 1998 (see Note (B)). During the third quarter of fiscal 1999, the Company's Board of Directors approved the buyback of up to $50.0 million aggregate principal amount of Notes. To date, the Company has repurchased $35.0 million of Notes on the open market for $28.8 million in cash, including accrued interest thereon, of which $30.0 million was repurchased during the third quarter. In connection with the $30.0 million repurchase, the Company recognized an extraordinary gain in the third quarter on the early retirement of debt of $4.5 million, net of applicable taxes of $1.8 million. 8 9 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOVEMBER 2, 1998 AND NOVEMBER 3, 1997 NOTE (E) DISPOSITION OF JB'S FAMILY RESTAURANTS, INC. On September 1, 1998, the Company completed two transactions which resulted in the disposition of the entire JB's Restaurant system and Galaxy Diner restaurants. First, the Company sold 14 Company-operated JB's Restaurants and two Galaxy Diner restaurants to Timber Lodge Steakhouse, Inc. for 687,890 shares of Timber Lodge common stock, which was converted into Santa Barbara Restaurant Group, Inc. ("SBRG"), formerly GB Foods Corporation, common stock in connection with the merger of Timber Lodge and SBRG. Second, the Company sold its wholly owned subsidiary, JB's Family Restaurants, Inc., which consisted of the remaining 48 Company-operated JB's Restaurants and the JB's franchise system together with four Galaxy Diner restaurants, to SBRG for one million shares of SBRG common stock. Together, these transactions give the Company approximately 13% ownership in SBRG. NOTE (F) SALE OF INVESTMENT IN STAR BUFFET, INC. On November 2, 1998, the Company completed its sale of two million shares of Star Buffet, Inc. ("Star Buffet") common stock to Star Buffet, for a cash sales price of $12.5 million. The proceeds consisted of $5.0 million in cash and a $7.5 million promissory note, which was paid in full on November 2, 1998. In connection with the sale, the Company recognized a non-recurring gain of $10.3 million, which is included in other income (expense), net. Additionally, effective November 2, 1998, William P. Foley II, the Company's chairman and chief executive officer, resigned as Star Buffet's chairman and from its board of directors, and Tom Thompson, the Company's president and chief operating officer, also resigned from Star Buffet's board of directors. NOTE (G) INVESTMENT IN BOSTON WEST, L.L.C. During the third quarter of fiscal 1999, the Company signed an agreement with Boston West, L.L.C. ("Boston West"), to provide administrative and management services to the Boston Market franchises in Southern California operated by Boston West. The Company, through its subsidiary Boston Pacific, Inc., holds an 11% common equity interest in Boston West. The Company also signed a transition services agreement with Boston Chicken, Inc. ("BCI"), operator and franchisor of the Boston Market chain, for BCI to provide certain accounting and administrative services on an interim basis, through the end of the calendar year with an option to extend to January 31, 1999. BCI and its Boston Market subsidiaries filed for protection under Chapter 11 of the Federal Bankruptcy Code on October 5, 1998. In a separate action, on November 9, 1998, Boston West filed a voluntary petition under Chapter 11 of the Federal Bankruptcy Code in order to restructure its overall operations. The Company recorded a $15.0 million one-time charge to its Boston West investment during the third quarter of fiscal 1999 to reflect the estimated remaining value of the Boston West business. The write-down is reflected in other income (expense), net. NOTE (H) NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period covered by that financial statement. SFAS 130 requires an enterprise to (a) 9 10 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOVEMBER 2, 1998 AND NOVEMBER 3, 1997 classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company did not have any additional items that were required to be disclosed under SFAS 130. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets, information about the revenues derived from the enterprise's products or services, and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Management has not determined whether the adoption of SFAS 131 will have a material impact on the Company's segment reporting. In December 1997, the American Institute of Certified Public Accountants approved for issuance the Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that costs incurred during a start-up activity (including organization costs) be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company currently amortizes pre-opening costs over one year from the time they are incurred. The impact of the adoption of SOP 98-5 on the Company's consolidated financial position or results of operations will not be material. 10 11 CKE RESTAURANTS, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Consolidated net income for the 12-week period ended November 2, 1998 increased 44.1% to $18.9 million, or $0.39 per share on a diluted basis as compared with net income of $13.1 million, or $0.27 per share on a diluted basis for the prior year quarter. Net income for the 40-week period ended November 2, 1998 increased 87.6% to $64.2 million, or $1.31 per share on a diluted basis as compared with net income of $34.2 million, or $0.81 per share on a diluted basis for the prior year period. Net income, excluding the $4.5 million extraordinary gain on the early retirement of debt and one-time charges of $15.0 million relating to the writedown of the Company's investment in Boston West and the gain of $10.3 million from the Company's sale of its investment in Star Buffet, increased 44.7% and 87.8% for the 12 and 40-week periods ended November 2, 1998, respectively, to $19.0 million, or $0.39 per share on a diluted basis, and $64.3 million, or a $1.31 per share on a diluted basis, respectively. These improved results were primarily due to the additional operations of Hardee's Food Systems, Inc. ("Hardee's"), which was acquired on July 15, 1997, and Flagstar Enterprises, Inc. ("FEI"), a former franchisee of Hardee's with 557 Hardee's restaurants, which was acquired on April 1, 1998. Also contributing to the increase in net income was improved operating performance of the Company's Carl's Jr. and Taco Bueno chains due to continued same-store sales growth and improvements in operating efficiencies. Operating results for the 40 weeks ended November 2, 1998 include 40 weeks of operations for Hardee's and 31 weeks of operations for the Hardee's restaurants operated by FEI. The corresponding period of the prior fiscal year includes 16 weeks of operations for Hardee's and does not include the results of operations of any of the Hardee's restaurants operated by FEI, but includes the royalty income from the 557 Hardee's restaurants operated by FEI. The Company is continuing with the conversion of certain of its existing Carl's Jr. restaurants into Carl's Jr./Green Burrito dual-brand restaurants, pursuant to an amended agreement with Santa Barbara Restaurant Group, Inc. ("SBRG"), formerly GB Foods Corporation. During the third quarter, the Company opened an additional eight dual-brand Company-operated restaurants and its franchisees opened five dual-brand restaurants for a total of 133 Company-operated and 24 franchised restaurants operating as of November 2, 1998. During the first quarter of fiscal 1999, the Company made a significant step toward balancing the number of Hardee's franchise and Company-operated stores with the acquisition of FEI for the purchase price of $380.6 million plus the assumption of $45.6 million in capital lease obligations. (See Note (B) of Notes to the Company's consolidated financial statements as of and for the period ended November 2, 1998). As of November 2, 1998, the Company operates approximately 51% of the Hardee's system. The acquisition was financed in part by $192.3 million in net proceeds the Company raised from a private placement of convertible subordinated notes, which was completed on March 13, 1998, and in part by the Company's increased credit facility. This Quarterly Report on Form 10-Q contains forward looking statements, which are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the impact of competitive products and pricing; success of operating initiatives; advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; changes in prevailing interest rates and the availability of financing; food, labor, and employee benefit costs; changes in, or the failure to comply with, government regulations; weather conditions; construction schedules; demands placed on management and capital resources by the substantial increase in the size of the Company resulting from the acquisition of Hardee's and FEI, changes in the Company's integration plans for Hardee's and its expansion plans; risks that sales growth resulting from the Company's current and future remodeling and dual-branding of restaurants and other operating strategies can be sustained at the current levels experienced; and other risks detailed in the Company's filings with the Securities and Exchange Commission. 11 12 CKE RESTAURANTS, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS Revenues from Company-operated restaurants increased $111.6 million, or 36.4 %, to $418.4 million and $601.3 million, or 81.8%, to $1.336 billion for the 12- and 40-week periods ended November 2, 1998, respectively. Carl's Jr., Hardee's and Taco Bueno Company-operated revenues contributed $10.4 million, $117.5 million and $1.5 million, respectively, to the increase in revenues in the 12-week period and $40.1 million, $608.1 million and $5.2 million, respectively, to the increase in revenues in the 40-week period. Offsetting these increases was the decrease in revenues from the Company's HomeTown Buffet and Casa Bonita Restaurants which were sold to Star Buffet in connection with its initial public offering in September 1997, and the Company's JB's Restaurants and Galaxy Diner restaurants which were sold to SBRG on September 1, 1998. On a same-store sales basis (calculated using only restaurants that were in operations for the full periods being compared), revenues from Company-operated Carl's Jr. restaurants increased 2.6% in the 12-week period ended November 2, 1998, on top of a 2.1% same-store sales increase in the third quarter of fiscal 1998, marking the 14th consecutive quarter of same-store sales increases. Same-store sales for Taco Bueno increased 7.1% in the third quarter of fiscal 1999 as compared with a 4.5% increase in the third quarter last year, also the 14th consecutive quarter of same-store sales increases. Company-operated Hardee's same-store sales decreased 7.2% for the third quarter, a 3.6% improvement from the 10.8% decline experienced in the first quarter of fiscal 1999. The increase in revenues for the Company's Carl's Jr. restaurants are primarily attributable to the continued focus on promoting great-tasting new and existing food products through increased advertising, the conversion of existing Carl's Jr. locations to Carl's Jr./Green Burrito dual-brand restaurants, the image enhancement of its restaurants, which was completed in December 1997 and the increase in the number of Company-operated Carl's Jr. restaurants operating in fiscal 1999 as compared with fiscal 1998. The increase in revenues for the Taco Bueno chain is due in part to a new advertising campaign, which, similar to Carl's Jr., focuses on great-tasting food products. Additionally, the Company has been focusing on more prime real estate than previously targeted for its new restaurants. The four Taco Bueno restaurants that have opened since October 1997 have generated average unit volumes substantially higher than the rest of the Taco Bueno system. Much of the decrease in same-store sales at Hardee's can be attributed to menu deletions made since the acquisition as well as the discontinuation of promotional discounting and monthly new product introductions. Average unit volumes at the Company's Carl's Jr. and Taco Bueno restaurants concepts continued to increase and reached $1,190,700 and $726,800 on a rolling 13-period basis, respectively, at the end of the third quarter. Average unit volumes for the Company's Hardee's restaurants ended the quarter at $808,100. Revenues from franchised and licensed restaurants and other for the 12-week period ended November 2, 1998 decreased 3.5% to $39.2 million over the comparable prior year period while for the 40-week period ended November 2, 1998, these revenues increased 38.2% to $124.7 million over the same prior year period. The revenue decrease in the current quarter reflects the conversion of certain Hardee's franchised restaurants into Company-owned restaurants, including the purchase of FEI on April 1, 1998. (See Note (B) of Notes to the Company's consolidated financial statements as of and for the period ended November 2, 1998). The revenue increases for the year-to-date period were mainly due to royalties from the Hardee's franchise system, increased royalties from, and food purchases by, Carl's Jr. franchisees as a result of higher sales volume at Carl's Jr. franchised restaurants and the increase in the number of Carl's Jr. franchised restaurants operating in fiscal 1999 as compared with fiscal 1998. The Company's consolidated restaurant-level margins of its Company-operated restaurants increased 2.2% in the 12-week period ended November 2, 1998 to 19.7% as compared with the same period of the prior year, primarily reflecting the improvement in operating margins at each of the Company's three core chains. Although Hardee's restaurant-level margins are substantially lower than the rest of the Company's quick-service concepts, the Company successfully increased these margins in the third quarter of fiscal 1999 to 17.2% of Company-operated revenues as compared with 13.7% in the third quarter of the prior year for the Company-operated Hardee's restaurants acquired from Imasco. The Company has accomplished this increase in Hardee's margins 12 13 CKE RESTAURANTS, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) through many of the successful cost-saving measures it executed at its Carl's Jr. restaurants over the past several years, including the introduction of the Carl's Jr. labor matrix to improve labor usage, a focus on safety and accident prevention as a method of lowering workers' compensations costs, a reduction of food waste and theft tolerance levels, and a decrease in food and paper costs through the realization of certain purchasing synergies. Restaurant-level margins for the Company's Carl's Jr. restaurants reached 25.2% and 25.6% for the 12- and 40-week periods ended November 2, 1998, respectively, an increase of 1.4% over both prior year periods. The improved results in operating margins reflect the Company's continued commitment to improving the cost structure at its Carl's Jr. restaurants, principally in the areas of increased purchasing savings in food and paper, improving labor productivity and decreasing worker's compensation costs. As a percentage of revenues from Carl's Jr. Company-operated restaurants, food and packaging costs have decreased 1.0% and 0.9% to 28.8% and 28.9%, respectively, for the 12- and 40-week periods ended November 2, 1998, as compared with the same periods a year ago despite increased pressure from commodity prices and a change in the product mix as a result of the promotion of larger, more expensive sandwiches. As a percentage of revenues from Company-operated restaurants, Carl's Jr. payroll and other employee benefits have increased 0.1% to 25.7%, and 0.2% to 25.9%, respectively, for the 12- and 40-week periods ended November 2, 1998 as compared with the comparable periods in the prior year. The recent federal and California minimum wage increases contributed to the rise in payroll and employee benefit costs. Occupancy and other operating expenses as a percentage of revenues from Carl's Jr. Company-operated restaurants have decreased 0.5% to 20.3%, and 0.7% to 19.6%, respectively, for the 12- and 40-week periods as compared with the same periods of the prior year. These costs are generally fixed in nature and, as such, decrease as a percentage of revenues from Company-operated restaurants as sales increase. Taco Bueno's restaurant-level margins for the 12- and 40-week periods ended November 2, 1998 increased 1.5% to 25.9% and increased 1.5% to 26.2%, respectively, as compared with the prior year periods. Second and third quarter restaurant-level margins at the Taco Bueno chain were negatively impacted by increased commodity costs for cheese and tomatoes and increased lease expense for the new point-of-sale equipment installed in all of the Taco Bueno restaurants. The Company's hourly employees are paid rates related to the federal and state minimum wage laws. Legislation increasing the federal minimum wage in October 1996 and September 1997 has resulted in higher labor costs to the Company and its franchisees. Moreover, the California state minimum wage was increased effective March 1998 to rates above the federal minimum wage. The Company anticipates that any future increases in minimum wage levels may be offset through pricing and other cost control efforts; however, there can be no assurance that the Company or its franchisees will be able to pass such additional costs on to customers in whole or in part. Franchised and licensed restaurant and other costs have decreased 8.3% for the 12-week period ended November 2, 1998 and increased 19.1% for the 40-week period ended November 2, 1998 over the same periods of the prior year. The decrease in the current quarter mirrors the decrease in franchise revenue due to the conversion of certain Hardee's franchised restaurants to Company-operated restaurants and the absorption of certain costs associated with that franchise revenue stream. The increase in costs on a year-to-date basis is primarily due to increased food and other products purchased from the Company by Carl's Jr. franchisees, as well as the costs associated with the Hardee's franchise system. As a percentage of revenues from franchised and licensed restaurants, these costs have decreased 3.4% and 10.6%, respectively, in the 12- and 40-week periods as compared with the prior year. While Carl's Jr. earns its income from both royalties paid and food purchases by franchisees, Hardee's earns the majority of its income from royalties paid by its franchisees, who purchase food, supplies and other products from independent vendors and distributors. Accordingly, the cost structure associated with the Hardee's royalty stream of income is substantially lower than that associated with the Carl's Jr. franchise and license operations. 13 14 CKE RESTAURANTS, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Advertising expenses increased $8.8 million and $36.1 million, respectively, from the 12- and 40-week periods ended November 3, 1997, mainly due to the additional advertising support at Hardee's. Advertising has become increasingly important in the current competitive environment, and, as a result, advertising expenses have increased in terms of dollars spent in fiscal 1999 as compared with fiscal 1998, while remaining relatively consistent as a percentage of revenues from Company-operated restaurants. The Company has seen same-store sales growth in its Carl's Jr. restaurants in each quarter since the Company began its current advertising campaign in May 1995. During the fourth quarter of fiscal 1998, the creators of the successful Carl's Jr. commercials launched a new, humorous advertising campaign for Taco Bueno, which has contributed in driving the same-store sales increases in fiscal 1999. In addition, new commercials for the Company's Hardee's restaurants began airing in April 1998. General and administrative expenses increased $5.0 million and $36.2 million to $29.2 million and $92.0 million for the 12- and 40-week periods ended November 2, 1998 over the same periods of the prior year. As a percentage of revenues, these expenses have decreased 0.6% and 0.5% in the 12- and 40-week periods of fiscal 1999 as compared with the same periods of fiscal 1998. The decrease in general and administrative expenses as a percent of total revenues reflects the economies of scale the Company is realizing by absorbing certain costs associated with FEI into the Company's existing infrastructure. Interest expense for the 12- and 40-week periods ended November 2, 1998 increased $6.5 million and $20.7 million, respectively, as compared with the prior year periods, principally as a result of higher levels of borrowings outstanding and the assumption of capital leases as a result of the acquisitions of Hardee's in July 1997 and FEI in April 1998. Other income (expense), net, is mainly comprised of interest income, lease income, dividend income, gains and losses on sales of restaurants, income and loss on long-term investments, property management expenses and other non-recurring income and expenses. Other income (expense), net, decreased $4.1 million and $7.0 million, respectively, for the 12- and 40-week periods ended November 2, 1998, over the comparable prior year periods. This decrease was primarily due to the one-time charge of $15.0 million to reflect the Company's investment in Boston West at its estimated remaining value, offset in part by a non-recurring gain of $10.3 million resulting from the disposition of the Company's investment in Star Buffet during the third quarter. (See Notes (F) and (G) of Notes to the Company's consolidated financial statements as of and for the period ended November 2, 1998). Decreases in lease and interest income and losses recorded from the Company's long-term investment in Rally's Hamburgers, Inc., offset in part by interest earned on the Company's notes receivable from franchisees, also contributed to the overall decrease. During the third quarter of fiscal 1999, the Company's Board of Directors approved the buyback of up to $50.0 million aggregate principal amount of Notes. To date, the Company has repurchased $35.0 million of convertible subordinated notes (the "Notes") on the open market for $28.8 million in cash, including accrued interest thereon, of which $30.0 million was repurchased during the third quarter. In connection with the $30.0 million repurchase, the Company recognized an extraordinary gain in the third quarter on the early retirement of debt of $4.5 million, net of applicable taxes of $1.8 million. FINANCIAL CONDITION For the 40 weeks ended November 2, 1998, the Company generated cash flows from operating activities of $119.7 million, compared with $52.4 million for the same period of the prior year. This increase was mainly due to the added operations of the Company's Hardee's restaurants and increased revenues and improved operating margins at the Company's Carl's Jr. and Taco Bueno restaurants. Cash and cash equivalents for the period increased $3.5 million as the Company received cash proceeds of $12.5 million from the sale of the Company's investment in Star Buffet, $5.6 million from collections on notes receivable, related party receivables and leases receivable, and $6.5 million from the exercise of stock options in addition to the increase 14 15 CKE RESTAURANTS, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) in cash flow from operations. The Company used excess cash flow from operations to fund capital additions of approximately $86.0 million, to repay capital lease obligations of $6.3 million, to repay long-term borrowings of $113.7 million, to repurchase $24.7 million of convertible subordinated notes, to pay $10.4 million of deferred financing costs associated with the FEI acquisition and to pay dividends to its stockholders of $3.8 million. A portion of the $197.2 million convertible subordinated notes, combined with the majority of the increase in long-term borrowings of $287.9 million, was used to purchase FEI for $380.6 million. Total cash and cash equivalents available to the Company as of November 2, 1998 was $33.9 million. On April 1, 1998, the Company amended its existing credit facility (the "Senior Credit Facility") to increase the aggregate principal amounts of the lenders' commitments under the term loan facility (the "Term Loan Facility") to $250.0 million and under the revolving credit facility (the "Revolving Credit Facility") to $250.0 million, which includes a $65.0 million letter of credit subfacility, and to extend the final maturity date from July 2002 to April 2003. The Company incurred borrowings of $213.2 million thereunder to finance a portion of the purchase price of the FEI acquisition (see Note (B) of Notes to the Company's consolidated financial statements as of and for the period ended November 2, 1998). Principal repayments under the Term Loan Facility are due in quarterly installments, commencing in July 1998 and continuing thereafter until the final maturity of the Senior Credit Facility in April 2003, resulting in annual reductions of $20.0 million in the first year of the Term Loan Facility and annual reductions thereafter ranging from $40.0 million to $70.0 million. Additional borrowings under the Revolving Credit Facility may be used for working capital and other general corporate purposes, including permitted investments and acquisitions, and any outstanding amounts thereunder will become due in April 2003. The Company will be required to repay borrowings under the Senior Credit Facility with the proceeds from (i) certain asset sales (unless the net proceeds of such sales are reinvested in the Company's business), (ii) the issuance of certain equity securities or (iii) the issuance of additional indebtedness. Of the various options the Company has regarding interest rates, it has selected LIBOR plus a margin, with future margin adjustments dependent on certain financial ratios from time to time. Borrowings and other obligations of the Company under the Senior Credit Facility are general unsubordinated obligations of the Company and are secured by a pledge of the capital stock of certain of the Company's present and future subsidiaries, which subsidiaries guarantee such borrowings and other obligations, and are secured by certain franchise rights, accounts receivable, contract rights, general intangibles (including trademarks) and other assets of the Company and such subsidiaries. The Senior Credit Facility contains a number of significant covenants that, among other things, (i) restrict the ability of the Company and its subsidiaries to incur additional indebtedness and incur liens on their assets, in each case subject to specified exceptions, (ii) impose specified financial tests as a precondition to the Company's and its subsidiaries' acquisition of other businesses, and (iii) limit the Company and its subsidiaries from making capital expenditures and certain restricted payments (including dividends and repurchases of stock), subject in certain circumstances to specified financial tests. In addition, the Company is required to comply with specified financial ratios and tests, including minimum EBITDA requirements, minimum interest coverage and fixed charge coverage ratios, minimum consolidated tangible net worth requirements and maximum leverage ratios. As of November 2, 1998, the Company is in compliance with all of its debt covenants. On March 13, 1998, the Company completed a private placement of $197.2 million aggregate principal amount of Notes, in which the Company received net proceeds of approximately $192.3 million, of which $24.1 million was used to prepay indebtedness under the Term Loan Facility. The Notes, which represent unsecured general obligations of the Company subordinate in right of payment to certain other obligations, including obligations under the Senior Credit Facility, are due in 2004, are convertible into the Company's common stock at an initial conversion price of $48.204 and carry a 4.25% coupon rate. The remaining net proceeds from the Notes, together with borrowings under the Senior Credit Facility, were used to fund the acquisition of FEI on April 1, 1998. To date, the Company repurchased $35.0 million aggregate principal amount of Notes on the open market for $28.8 million in cash, including accrued interest thereon. The repurchase of Notes was funded by a combination of cash flows from operations and borrowings under the Company's Senior Credit Facility. 15 16 CKE RESTAURANTS, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company's primary source of liquidity is its revenues from Company-operated restaurants, which are generated in cash. Future capital needs will arise primarily for the construction of new restaurants, the remodeling of existing Taco Bueno and Hardee's restaurants, the repurchase of certain Hardee's restaurants from franchisees, the conversion of certain restaurants to the Carl's Jr./Green Burrito dual-brand concepts and capital expenditures to be incurred in connection with the Company's integration of Hardee's and FEI. The Company opened 24 Company-operated Carl's Jr. restaurants through the third quarter of fiscal 1999 and plans to open up to 13 new Company-operated Carl's Jr. restaurants in the fourth quarter. In addition, the Company and Imasco Holdings continue to discuss certain post-closing purchase price adjustments arising from the Hardee's acquisition. The Company believes that any payments required or to be received as a result of such purchase price adjustments would not materially affect the Company's financial condition. In light of the success of the Carl's Jr. and Taco Bueno chains and the turnaround in progress at Hardee's, the Company has established new goals with respect to future development. Plans are to open 75-100 Company-operated Carl's Jr. restaurants in fiscal 2000, 125-150 in fiscal 2001 and 200 restaurants in fiscal 2002. Taco Bueno anticipates opening up to 15, 25 and 35 new Company-operated restaurants in fiscal 2000, 2001 and 2002, respectively. Hardee's intends to open 25, 50 and 100 new Company-operated Hardee's restaurants over the next three fiscal years. The quick-service restaurant business generally receives simultaneous payment for sales. The Company presently reinvests the majority of the cash received in long-term assets, primarily for the remodeling and construction of restaurants, while normal operating expenses for inventories and current liabilities normally carry longer payment terms (usually 15 to 30 days). As such, the Company typically maintains current liabilities in excess of current assets. The Company believes that cash generated from its various restaurant concept operations, along with cash and cash equivalents on hand as of November 2, 1998 and amounts available under the Senior Credit Facility, will provide the Company with the funds necessary to meet all of its capital spending and working capital requirements for the foreseeable future. If those sources of capital are insufficient to satisfy the Company's capital spending and working capital requirements, or if the Company determines to make any significant acquisitions of or investments in other businesses, the Company may be required to sell additional equity or debt securities or obtain additional credit facilities. In addition, substantially all of the real properties owned by the Company and used for its restaurant operations are unencumbered and could be used by the Company as collateral for additional debt financing or could be sold and subsequently leased back to the Company; however, there can be no assurance that real estate financing or other financing could be obtained on terms acceptable to the Company. Sales, if any, of additional equity or debt securities could result in additional dilution to the Company's stockholders. YEAR 2000 The Company is currently working to resolve the potential impact of the Year 2000 on the processing of data-sensitive information by the Company's computerized information systems. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Company has investigated the impact of the Year 2000 problem on its business, including the Company's operational, information and financial systems. Based on this investigation, the Company does not expect the Year 2000 problem, including the cost of making the Company's computerized information systems Year 2000 compliant, to have a material adverse impact on the Company's financial position or results of operations in future periods. However, the inability of the Company to resolve all potential Year 2000 problems in a timely manner could have a material adverse impact on the Company. 16 17 CKE RESTAURANTS, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company has also initiated communications with significant suppliers and vendors on which the Company relies in an effort to determine the extent to which the Company's business is vulnerable to the failure by these third parties' to remediate their Year 2000 problems. While the Company has not been informed of any material risks associated with the Year 2000 problem for these entities, there can be no assurance that the computerized information systems of these third parties will be Year 2000 compliant on a timely basis. The inability of these third parties to remediate their Year 2000 problems could have a material adverse impact on the Company. The Company has completed a review of its information systems and is involved in a comprehensive program to upgrade computer systems and applications in connection with its effort to fully integrate its recent restaurant acquisitions. In conjunction with this computer upgrade process, the Company believes it will have addressed any potential Year 2000 issues. Total expenditures related to the upgrade of the information systems are expected to range from $18.0 million to $20.0 million and will be capitalized or expensed in accordance with generally accepted accounting principles. As of November 2, 1998, the Company has incurred approximately $12.0 million of expenditures consisting of internal staff costs as well as outside consulting and other expenditures related to this upgrade process. These costs are being funded through operating cash flows. To the extent possible, the Company will be developing and executing contingency plans designed to allow continued operation in the event of failure of the Company's or third parties' computer information systems. 17 18 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS: (c) Since the fourth quarter of fiscal 1998, the Company has issued an aggregate of 320,729 shares of common stock for the purchase of 22 Hardee's restaurants from three Hardee's franchisees. The shares of common stock were issued pursuant to Section 4 (2) of the Securities Act of 1933 as transactions by an issuer not involving any public offering. The Company believes that all of the purchasers were familiar with and had access to information concerning the operations and financial condition of the Company and had the required investment intent. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: 10.38 Amendment No. 1 dated October 23, 1998 to Amended and Restated Credit Agreement by and among CKE Restaurants, Inc., Banque Paribas, as Agent, and the Lenders party thereto. 11 Calculation of Earnings per Share 27.1 Financial Data Schedule (included in electronic filing only). 27.2 Financial Data Schedule restated for the quarterly period ending November 3, 1997 (included only with electronic filing). 27.3 Financial Data Schedule restated for the quarterly period ending November 4, 1996 (included only with electronic filing). (b) Current Reports on Form 8-K: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CKE RESTAURANTS, INC. --------------------- (Registrant) December 16, 1998 By: /s/ CARL A. STRUNK - ----------------- ------------------------------- Date Executive Vice President, Chief Financial Officer 18 19 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 10.38 Amendment No. 1 dated October 23, 1998 to Amended and Restated Credit Agreement by and among CKE Restaurants, Inc., Banque Paribas, as Agent, and the Lenders party thereto. 11 Calculation of Earnings Per Share. 27.1 Financial Data Schedule (included only with electronic filing). 27.2 Financial Data Schedule restated for the quarterly period ending November 3, 1997 (included only with electronic filing). 27.3 Financial Data Schedule restated for the quarterly period ending November 4, 1996 (included only with electronic filing). EX-10.38 2 AMENDMENT 1 TO AMENDED & RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.38 AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT This AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") is entered into as of October 23, 1998 among CKE Restaurants, Inc., the Lenders and Banque Paribas, as Agent. RECITALS CKE Restaurants, Inc., a Delaware corporation (the "Borrower"), certain financial institutions (the "Lenders") and Banque Paribas, as agent (in such capacity, the "Agent") are parties to that certain Amended and Restated Credit Agreement, dated as of April 1, 1998 (as amended, restated supplemented or otherwise modified, the "Credit Agreement"). Pursuant to that certain Subordinated Note Indenture dated as of March 13, 1998 between the Borrower and Chase Manhattan Bank and Trust Company, N.A., as trustee (the "Indenture"), the Borrower issued Convertible Subordinated Notes in the aggregate principal amount of $197,225,000 (the "Subordinated Notes"). The Borrower now desires to redeem and repurchase certain of the Subordinated Notes and to use proceeds of Revolving Loans made under the Credit Agreement to consummate such redemption and repurchase (collectively, the "Redemption"). The Borrower has requested that the Agent and the Lenders amend certain provisions of the Credit Agreement in connection with the consummation of the Redemption, all as more fully described herein. The Agent and the Lenders have agreed to amend the Credit Agree- ment upon the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned thereto in the Credit Agreement. 2 Section 2. AMENDMENTS. Subject to the terms and conditions set forth herein, the Credit Agreement is hereby amended as follows: (a) Definitions. Section 1.1 of the Credit Agreement is hereby amended as follows: (i) The definition of "Consolidated EBITDA" contained in Section 1.1 of the Credit Agreement is hereby amended by in serting the following new clauses (v) and (vi) immediately after the comma appearing in the seventh line thereof: plus (v) to the extent deducted in the calculation of Consolidated Net Income for such period, all extraordinary losses for such period, minus (vi) to the extent included in the calculation of Consolidated Net Income for such period, all extraordinary gains for such period. (ii) the following new definition is hereby added to Section 1.1 of the Credit Agreement in proper alphabetical order: "Permitted Redemption" shall mean the redemption and repurchase by the Borrower of Subordinated Notes for a purchase price not to exceed $85,000,000 in the aggregate, provided that (i) the purchase price paid by the Borrower for such Subordinated Notes shall be made at a discount equal to no less than 15% of the par value of such Subordinated Notes in the aggregate, (ii) no redemption or repurchase shall occur on or after the date that is 9 months after October 23, 1998 and (iii) any such Subordinated Notes that are redeemed and repurchased shall be delivered to the "trustee" under the Subordinated Note Indenture for cancellation and shall not be reissued. (b) Use of Proceeds. Section 2.20 of the Credit Agreement is hereby amended by inserting the phrase "to redeem and repurchase Subordinated Notes in connection with the Permitted Redemption," immediately after the phrase "Credit Facility," as it appears in the third line of such section. (c) Dividends. Section 7.7 of the Credit Agreement is hereby amended by amending and restating, in its entirety, clause (ii) of subsection (b) thereof to read as follows: (ii) declare and pay cash dividends to its stockholders and purchase, redeem, retire or otherwise acquire shares of its own outstanding capital stock for cash during any fiscal year of the Borrower if 2 3 after giving effect thereto the aggregate amount of such dividends, purchases, redemptions, retirements and acquisitions paid or made during such fiscal year would be less than the amount of (A) 30% of Consolidated Net Income of the Borrower for each fiscal year of the Borrower (commencing with the fiscal year ending January 26, 1998) up to and including the fiscal year immediately preceding the year in which such dividend, purchase, redemption, retirement or acquisition is paid or made, less (B) the aggregate amount of any sinking fund payments, payments, prepayments, redemptions, defeasances, and purchases or acquisitions for value paid pursuant to Section 7.10(d) during such fiscal year (excluding, however, the aggregate amount of payments made in connection with the Permitted Redemption), less (C) the aggregate amount of all such dividends, purchases, redemptions, retirements and acquisitions paid and made by the Borrower after January 26, 1998 through and including the end of such immediately preceding fiscal year; and. (d) Voluntary Payments. Section 7.10 of the Credit Agreement is hereby amended by amending and restating, in its entirety, subsection (d) thereof to read as follows: (d) make or offer to make any sinking fund payment, payment, prepayment, redemption, defeasance, purchase or acquisi- tion for value (including, without limitation, by way of depositing with the trustee with respect thereto money or securities before due for the purpose of paying when due) or otherwise segregate funds with respect to the Subordinated Notes (other than (i) in connection with the Permitted Redemption, (ii) regularly scheduled semi-annual interest payments required to be made in cash and (iii) conversions of the Subordinated Notes into common stock of the Borrower) to the extent that the aggregate amount of all such sinking fund payments, payments, prepayments, redemptions, defeasances, and purchases or acquisitions for value would exceed the sum of (A) 30% of the Consolidated Net Income of the Borrower for each fiscal year of the Borrower (commencing with the fiscal year ending January 26, 1998 up to and including the fiscal year immediately preceding the year in which sinking fund payment, payment, prepayments redemption, defeasances, purchase or acquisition is made, less (B), together with the aggregate amount of all dividends, purchases, redemptions, retirements and acquisitions paid or made pursuant to Section 7.7(b)(ii), less (C) the aggregate amount of all such sinking fund payments, payments, prepayments, redemptions, defeasances, and purchases or acquisitions for value paid and made by the Borrower after January 26, 1998 through and including the end of such immediately preceding fiscal year. 3 4 Section 3. CONDITIONS TO EFFECTIVENESS OF AMENDMENT. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent: (a) Amendment. This Amendment shall have been duly executed and delivered by the Borrower, the Agent and the Required Lenders; and (b) Fee Letter. The Agent shall have received an executed copy of that certain Fee Letter, dated as of October 26, 1998 between the Agent and the Borrower, duly executed by the parties thereto. Section 4. REPRESENTATIONS AND WARRANTIES. The Borrower repre- sents and warrants to the Agent and the Lenders, as of the date hereof, that both before and after giving effect to this Amendment: (a) no Default or Event of Default has occurred and is continuing; and (b) all of the representations and warranties contained in the Credit Agreement and in the other Loan Documents (other than those that expressly speak only as of a different date) are true and correct on and as of the date hereof. Section 5. MISCELLANEOUS. (a) EFFECT; RATIFICATION. The amendments set forth herein are effective solely for the purposes set forth herein and shall be limited precisely as written, and shall not be deemed to (i) be a consent to any amendment, consent or modification of any other term or condition of the Credit Agreement or of any other instrument or agreement referred to therein; or (ii) prejudice any right or remedy which the Agent or the Lenders may now have or may have in the future under or in connection with the Credit Agreement or any other instrument or agreement referred to therein. Each reference in the Credit Agreement to "this Agreement", "herein", "hereof" and words of like import and each reference in the other Loan Documents to the "Agreement" or the "Credit Agreement" shall mean the Credit Agreement as amended hereby. This Amendment shall be construed in connection with and as part of the Credit Agreement and all terms, conditions, representations, warranties, covenants and agreements set forth in the Credit Agreement and each other instrument or agreement referred to therein, except as herein amended, are hereby ratified and confirmed and shall remain in full force and effect. 4 5 (b) LOAN DOCUMENTS. This Amendment is a Loan Document executed pursuant to the Credit Agreement and shall be construed, administered and applied in accordance with the terms and provisions thereof. (c) HEADINGS DESCRIPTIVE. The headings of the several Sections and Subsections of this Amendment are inserted for convenience only and shall not in any way affect the meaning or construction of any provision or term of this Amendment. (d) COUNTERPARTS. This Amendment may be executed in any number of counterparts, each such counterpart constituting an original and all of which when taken together shall constitute one and the same instrument. (e) SEVERABILITY. Any provision contained in this Amendment that is held to be inoperative, unenforceable or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable or invalid without affecting the remaining provisions of this Amendment in that jurisdiction or the operation, enforceability or validity of such provision in any other jurisdiction. (f) GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS. (g) WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS AMENDMENT OR ANY OTHER LOAN DOCUMENT OR ANY MATTER ARISING HEREUNDER OR THEREUNDER. * * * * 5 6 IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Amendment as of the date first above written. CKE RESTAURANTS, INC. By: ___________________________________ Name: _________________________________ Title: ________________________________ BANQUE PARIBAS, as Agent and as a Lender By: ___________________________________ Name: _________________________________ Title: ________________________________ By: ___________________________________ Name: _________________________________ Title: ________________________________ BANK BOSTON, N.A. By: ___________________________________ Name: _________________________________ Title: ________________________________ 6 7 BANK LEUMI (USA) By: ___________________________________ Name: _________________________________ Title: ________________________________ BANK OF MONTREAL By: ___________________________________ Name: _________________________________ Title: ________________________________ BANK UNITED By: ___________________________________ Name: _________________________________ Title: ________________________________ 7 8 BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By: ___________________________________ Name: _________________________________ Title: ________________________________ By: ___________________________________ Name: _________________________________ Title: ________________________________ FIRST AMERICAN NATIONAL BANK By: ___________________________________ Name: _________________________________ Title: ________________________________ FIRST BANK & TRUST By: ___________________________________ Name: _________________________________ Title: ________________________________ 8 9 FLEET NATIONAL BANK By: ___________________________________ Name: _________________________________ Title: ________________________________ GENERAL ELECTRIC CAPITAL CORPORATION By: ___________________________________ Name: _________________________________ Title: ________________________________ MANUFACTURERS BANK By: ___________________________________ Name: _________________________________ Title: ________________________________ 9 10 NATEXIS BANQUE - BFCE By: ___________________________________ Name: _________________________________ Title: ________________________________ By: ___________________________________ Name: _________________________________ Title: ________________________________ NATIONAL BANK OF KUWAIT, S.A.K., GRAND CAYMAN BRANCH By: ___________________________________ Name: _________________________________ Title: ________________________________ By: ___________________________________ Name: _________________________________ Title: ________________________________ 10 11 SUMITOMO BANK OF CALIFORNIA By: ___________________________________ Name: _________________________________ Title: ________________________________ THE DAI-ICHI KANGYO BANK, LTD., LOS ANGELES AGENCY By: ___________________________________ Name: _________________________________ Title: ________________________________ THE FUJI BANK LIMITED, LOS ANGELES AGENCY By: ___________________________________ Name: _________________________________ Title: ________________________________ THE INDUSTRIAL BANK OF JAPAN, LIMITED, LOS ANGELES AGENCY By: ___________________________________ Name: _________________________________ Title: ________________________________ 11 12 THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY By: ___________________________________ Name: _________________________________ Title: ________________________________ THE SANWA BANK, LIMITED By: ___________________________________ Name: _________________________________ Title: ________________________________ THE SUMITOMO TRUST & BANKING CO., LTD., NEW YORK BRANCH By: ___________________________________ Name: _________________________________ Title: ________________________________ U.S. BANK NATIONAL ASSOCIATION By: ___________________________________ Name: _________________________________ Title: ________________________________ 12 13 VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST By: ___________________________________ Name: _________________________________ Title: ________________________________ WELLS FARGO BANK By: ___________________________________ Name: _________________________________ Title: ________________________________ CENTURA BANK By: ___________________________________ Name: _________________________________ Title: ________________________________ 13 EX-11 3 CALCULATION OF EARNINGS PER SHARE 1 EXHIBIT 11 CKE RESTAURANTS, INC. CALCULATION OF EARNINGS PER SHARE (In thousands, except per share amounts)
Twelve Weeks Ended Forty Weeks Ended -------------------------- -------------------------- November 2, November 3, November 2, November 3, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- BASIC EARNINGS PER SHARE Income before extraordinary item $16,146 $13,102 $61,482 $34,233 Extraordinary item - gain on early retirement of debt, net of applicable income tax expense of $1,750 2,738 -- 2,738 -- ------- ------- ------- ------- Net income $18,884 $13,102 $64,220 $34,233 ======= ======= ======= ======= Weighted average shares outstanding 47,105 46,112 46,833 41,066 ======= ======= ======= ======= Basic income per common share before extraordinary item $ 0.34 $ 0.28 $ 1.31 $ 0.83 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - Basic 0.06 -- 0.06 -- ------- ------- ------- ------- Basic net income per share $ 0.40 $ 0.28 $ 1.37 $ 0.83 ======= ======= ======= ======= FULLY DILUTED EARNINGS PER SHARE Income before extraordinary item $16,146 $13,102 $61,482 $34,233 Interest expense and amortization of debt issuance costs, net of income tax effect applicable to convertible subordinated notes 1,242 -- 3,559 -- ------- ------- ------- ------- Diluted income before extraordinary item 17,388 13,102 65,041 34,233 Extraordinary item - gain on early retirement of debt, net of applicable income tax expense of $1,750 2,738 -- 2,738 -- ------- ------- ------- ------- Diluted net income $20,126 $13,102 $67,779 $34,233 ======= ======= ======= ======= Weighted average number of common shares outstanding during the period 47,105 46,112 46,833 41,066 Incremental common shares attributable to: Exercise of outstanding options 1,011 1,561 1,325 1,251 Issuance of convertible subordinated notes 3,862 -- 3,455 -- ------- ------- ------- ------- Total shares 51,978 47,673 51,613 42,317 ======= ======= ======= ======= Diluted income per common share before extraordinary item $ 0.34 $ 0.27 $ 1.26 $ 0.81 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - Diluted 0.05 -- 0.05 -- ------- ------- ------- ------- Diluted net income per share $ 0.39 $ 0.27 $ 1.31 $ 0.81 ======= ======= ======= =======
EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CKE RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AS OF AND FOR THE TWELVE WEEKS ENDED NOVEMBER 2, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 2, 1998. 1,000 3-MOS JAN-25-1999 JAN-27-1998 NOV-02-1998 33,869 0 49,038 0 23,013 105,114 1,387,085 450,587 1,444,855 226,129 0 0 0 471 565,992 1,444,855 418,439 457,605 336,162 416,711 2,899 0 10,922 27,073 10,927 16,146 0 2,738 0 18,884 .40 .39
EX-27.2 5 FINANCIAL DATA SCHEDULE RESTATED FROM NOV. 3, 1997
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CKE RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AS OF AND FOR THE TWELVE WEEKS ENDED NOVEMBER 3, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 3, 1997. 1,000 3-MOS JAN-26-1998 JAN-28-1997 NOV-03-1997 37,963 0 48,981 0 16,812 98,306 855,214 234,694 911,850 172,159 0 0 0 420 471,171 911,850 306,876 347,455 253,231 322,361 (1,192) 0 4,444 21,842 8,740 13,102 0 0 0 13,102 .28 .27
EX-27.3 6 FINANCIAL DATA SCHEDULE RESTATED FROM NOV. 4, 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CKE RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AS OF AND FOR THE TWELVE WEEKS ENDED NOVEMBER 4, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 4, 1996. 1,000 3-MOS JAN-27-1997 JAN-30-1996 NOV-04-1996 15,614 2,512 15,434 0 8,996 53,203 465,846 250,444 363,687 100,872 0 0 0 193 129,239 363,687 143,456 162,093 115,088 150,590 (514) 0 2,759 9,258 3,670 5,588 0 0 0 5,588 .18 .17
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