-----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, VGWWiIy8PfDLpwITU4tDUX7Wv60g9MCpaqwZkV8TTHiqlF5j4jDs5ykDIPZWvi6Q 9zx5h39fC2M46k3FQET6LQ== 0000892569-01-501289.txt : 20020413 0000892569-01-501289.hdr.sgml : 20020413 ACCESSION NUMBER: 0000892569-01-501289 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011105 FILED AS OF DATE: 20011214 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: 0125 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11313 FILM NUMBER: 1813542 BUSINESS ADDRESS: STREET 1: 401 WEST CARL KARCHER WAY CITY: ANAHEIM STATE: CA ZIP: 92801 BUSINESS PHONE: 7147745796 MAIL ADDRESS: STREET 1: 401 WEST CARL KARCHER WAY CITY: ANAHEIM STATE: CA ZIP: 92801 10-Q 1 a77885e10-q.txt FORM 10-Q QUARTER ENDED NOVEMBER 5, 2001 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 5, 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 of (I.R.S. Employer Identification No.) 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) 898-4200 -------------- 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 December 3, 2001, 50,532,056 shares of the Registrant's Common Stock were outstanding. CKE RESTAURANTS, INC. AND SUBSIDIARIES INDEX
Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of November 5, 2001 and January 31, 2001 1 Consolidated Statements of Operations for the twelve and forty weeks ended November 5, 2001 and November 6, 2000 ........................ 2 Consolidated Statements of Cash Flows for the forty weeks ended November 5, 2001 and November 6, 2000 .............................. 3 Notes to Consolidated Financial Statements ............................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 21 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K ................................. 22
PART 1. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ( Dollars in thousands)
(Unaudited) November 5, January 31, 2001 2001 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 14,179 $ 16,860 Accounts receivable, net 39,445 73,956 Related party receivables 2,840 2,505 Inventories 17,924 17,694 Prepaid expenses 6,782 10,212 Other current assets 2,288 2,534 Property held for sale -- 66,912 ----------- ----------- Total current assets 83,458 190,673 Property and equipment, net 551,529 656,214 Property under capital leases, net 66,835 73,617 Long-term investments 3,442 3,461 Notes receivable 14,707 14,098 Costs in excess of assets acquired, net 190,658 203,900 Other assets 38,035 65,574 ----------- ----------- Total assets $ 948,664 $ 1,207,537 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt and bank indebtedness $ 7,055 $ 67,332 Current portion of capital lease obligations 10,284 9,845 Accounts payable 40,985 53,759 Other current liabilities 91,262 83,045 ----------- ----------- Total current liabilities 149,586 213,981 Long-term debt and bank indebtedness 4,882 106,760 Capital lease obligations 73,073 81,173 Convertible subordinated notes 159,225 159,225 Senior subordinated notes 200,000 200,000 Other long-term liabilities 87,878 96,841 ----------- ----------- Total liabilities 674,644 857,980 ----------- ----------- 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 383,126 383,016 Accumulated deficit (99,221) (23,574) Treasury stock at cost, 1,585,000 shares (10,406) (10,406) ----------- ----------- Total stockholders' equity 274,020 349,557 ----------- ----------- Total liabilities and stockholders' equity $ 948,664 $ 1,207,537 =========== ===========
See Accompanying Notes to Consolidated Financial Statements 1 CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share amounts) (Unaudited)
Twelve Weeks Ended Forty Weeks Ended -------------------------- -------------------------- November 5, November 6, November 5, November 6, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenue: Company-operated restaurants $ 259,612 $ 356,254 $ 931,943 $1,270,478 Franchised and licensed restaurants and other 67,016 51,295 205,845 159,895 ---------- ---------- ---------- ---------- Total revenue 326,628 407,549 1,137,788 1,430,373 ---------- ---------- ---------- ---------- Operating costs and expenses: Restaurant operations: Food and packaging 79,629 110,563 284,392 393,906 Payroll and other employee benefits 82,389 118,728 303,545 407,990 Occupancy and other operating expenses 59,266 86,508 212,226 294,410 ---------- ---------- ---------- ---------- 221,284 315,799 800,163 1,096,306 Franchised and licensed restaurants and other 49,613 36,082 158,028 115,650 Advertising expenses 15,696 22,305 59,022 79,340 General and administrative expenses 27,089 30,847 86,770 109,476 Facility action charges, net 2,121 34,343 60,827 51,310 ---------- ---------- ---------- ---------- Total operating costs and expenses 315,803 439,376 1,164,810 1,452,082 ---------- ---------- ---------- ---------- Operating income (loss) 10,825 (31,827) (27,022) (21,709) Interest expense (11,752) (16,265) (46,783) (53,510) Other income (expense), net (467) (1,494) 362 (1,084) ---------- ---------- ---------- ---------- Loss before income taxes (1,394) (49,586) (73,443) (76,303) Income tax expense (benefit) 337 (20,157) 2,204 (30,493) ---------- ---------- ---------- ---------- Net loss $ (1,731) $ (29,429) $ (75,647) $ (45,810) ========== ========== ========== ========== Basic and diluted loss per share $ (0.03) $ (0.58) $ (1.50) $ (0.91) ---------- ---------- ---------- ---------- Weighted average shares outstanding-basic and diluted 50,507 50,501 50,505 50,501 ========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements 2 CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Forty Weeks Ended ------------------------- November 5, November 6, 2001 2000 ---------- ---------- Net cash flow from operating activities: Net loss $ (75,647) $ (45,810) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 61,367 86,255 Provision for losses on accounts and notes receivable 3,970 -- Loss on sale of property and equipment (1,659) (4,490) Facility action charges, net 60,827 51,310 Other (1,849) (71) Net change in receivables, inventories, prepaid expenses and other current assets, exclusive of assets disposed of 39,634 (30,224) Net change in accounts payable and other current liabilities, exclusive of assets disposed of (3,790) (51,314) --------- --------- Net cash provided by operating activities 82,853 5,656 --------- --------- Cash flow from investing activities: Purchase of: Property and equipment (16,012) (62,969) Long-term investments -- (2,952) Proceeds from sale of: Property and equipment 63,708 104,587 Long-term investments 1,871 1,948 Increase in notes receivable and related party receivables (4,666) (11,039) Collections on notes receivable and related party receivables 2,251 13,725 Net change in other assets (7,544) 2,831 Dispositions of brand, net of cash surrendered 61,224 -- --------- --------- Net cash provided by investing activities 100,832 46,131 --------- --------- Cash flow from financing activities: Net change in bank overdraft (618) (223) Long-term borrowings 92,289 207,500 Repayments of long-term debt (254,443) (258,307) Repayments of capital lease principal (7,750) (7,888) Payment of deferred financing costs (1,602) (904) Net change in other long-term liabilities (14,353) (612) Payment of dividends -- (2,084) Exercise of stock options 111 -- --------- --------- Net cash used in financing activities (186,366) (62,518) --------- --------- Net decrease in cash and cash equivalents (2,681) (10,731) Cash and cash equivalents at beginning of period 16,860 36,505 --------- --------- Cash and cash equivalents at end of period $ 14,179 $ 25,774 ========= ========= Supplemental disclosures of cash flow information: Cash (paid)/received during the period for: Interest $ (16,901) $ (59,054) ========= ========= Income tax refund $ 32,313 $ -- ========= ========= Non-cash transactions: Restaurants acquired from franchisees $ 486 $ -- ========= =========
See Accompanying Notes to Consolidated Financial Statements 3 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $120.4 million revolving credit facility, which includes a $75.0 million letter of credit sub-facility and has a maturity date of February 2002. As of November 5, 2001, the total amount of $6.8 million outstanding under the revolving credit facility is classified as a current liability in the consolidated balance sheet. NOTE (3) FACILITY ACTION CHARGES, NET In late fiscal 2000, the Company embarked on a refranchising initiative to reduce outstanding borrowings under its revolving credit facility, as well as increase the number of franchise-operated stores. In addition, we identified and closed under-performing stores. 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. During the first three quarters of fiscal 2002, the Company identified 31 restaurants 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. 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 two 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 150 Hardee's company-operated restaurants during the first three quarters of fiscal 2002. 4 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of these facility action charges for the third quarter and year to date for fiscal 2002 and fiscal 2001 were as follows:
Twelve Weeks Ended Forty Weeks Ended ------------------------ ------------------------ November 5, November 6, November 5, November 6, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (Dollars in thousands) Hardee's Store closure reserves provided, net $ 1,331 2,400 $ 9,395 2,400 Impairment on stores closed, to be closed or sold 1,018 -- 37,700 -- Impairment on stores that will continue to be operated 193 -- 2,075 -- Losses on sales of restaurants, net 540 34,843 6,239 53,984 -------- -------- -------- -------- 3,082 37,243 55,409 56,384 -------- -------- -------- -------- Carl's Jr. Store closure reserves provided, net 107 -- 655 -- Impairment on stores closed, to be closed or sold 483 -- 5,701 -- Impairment on stores that will continue to be operated 183 -- 7,853 -- Gains on sales of restaurants, net (1,734) (2,900) (13,498) (5,074) -------- -------- -------- -------- (961) (2,900) 711 (5,074) -------- -------- -------- -------- Rally's and Taco Bueno Losses on sales of restaurants, net -- -- 4,707 -- -------- -------- -------- -------- -- -- 4,707 -- -------- -------- -------- -------- Total Store closure reserves provided, net 1,438 2,400 10,050 2,400 Impairment on stores closed, to be closed or sold 1,501 -- 43,401 -- Impairment on stores that will continue to be operated 376 -- 9,928 -- Losses (gains) on sales of restaurants, net (1,194) 31,943 (2,552) 48,910 -------- -------- -------- -------- $ 2,121 $ 34,343 $ 60,827 $ 51,310 ======== ======== ======== ========
Included in the impairment on stores closed, to be closed or sold for the 40-weeks ended November 5, 2001 is $7,860,000 related to additional asset impairment charges made on stores recognized as being impaired in previous reporting periods. 5 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Impairment charges were recorded for the following accounts:
Twelve Weeks Ended Forty Weeks Ended ------------------------ ------------------------ November 5, November 6, November 5, November 6, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (Dollars in thousands) Property and equipment, net: Hardee's $ 1,115 2,400 $ 29,997 2,400 Carl's Jr. 666 -- 13,553 -- -------- -------- -------- -------- 1,781 2,400 43,550 2,400 -------- -------- -------- -------- Cost in excess of net assets acquired, net Hardee's 96 -- 9,780 -- Carl's Jr. -- -- -- -- -------- -------- -------- -------- 96 -- 9,780 -- -------- -------- -------- -------- Total Hardee's 1,211 2,400 39,777 2,400 Carl's Jr. 666 -- 13,553 -- -------- -------- -------- -------- $ 1,877 2,400 $ 53,330 2,400 ======== ======== ======== ========
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.
(Dollars in Thousands) Balance at January 31, 2001 $ 58,187 New decisions 24,260 Usage (14,315) Reversal of reserves for stores that will not be closed (6,440) Favorable dispositions of surplus properties (7,770) Discount amortization (4,943) -------- Balance at November 5, 2001 48,979 Less: current portion, included in other current liabilities 11,097 -------- Long-term portion, included in other long-term liabilities $ 37,882 --------
6 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE (4) LOSS PER SHARE The Company presents "basic" loss per share, which represents net loss, divided by the weighted average shares outstanding excluding all potentially dilutive common shares and "diluted" loss per share reflecting the effect of all potentially dilutive common shares. For the 12-week periods ended November 5, 2001 and November 6, 2000, 7.3 million shares and 6.9 million shares, respectively, relating to the possible exercise of outstanding stock options, and 3.6 million shares issuable upon conversion of convertible subordinated notes, were not included in the computation of diluted loss per share as their effect would have been anti-dilutive. For the 40-week periods ended November 5, 2001 and November 6, 2000, 7.4 million shares and 6.9 million shares, respectively, relating to the possible exercise of outstanding stock options, and 3.6 million shares issuable upon conversion of convertible subordinated notes were not included in the computation of diluted loss per share as their effect would have been anti-dilutive. The following table illustrates the computation of basic and diluted loss per share: (In thousands except per share amounts)
Twelve Weeks Ended Forty Weeks Ended ------------------------ ------------------------ November 5, November 6, November 5, November 6, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Basic and Diluted Loss Per Share Net loss $ (1,731) $(29,429) $(75,647) $(45,810) ======== ======== ======== ======== Weighted average number of common shares outstanding during the period 50,507 50,501 50,505 50,501 ======== ======== ======== ======== Loss per share - basic and diluted $ (0.03) $ (0.58) $ (1.50) $ (0.91) ======== ======== ======== ========
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 is considered an operating segment that is 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 individually insignificant operations, Taco Bueno operations until its disposal date, and general and administrative expenses not allocated to reportable segments. 7 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TWELVE WEEKS ENDED
Carl's Jr. Hardee's Other Total ---------- -------- ----- ----- NOVEMBER 5, 2001: Revenue $ 166,016 $ 160,612 $ -- $ 326,628 Segment operating income (loss) 16,748 (2,323) (3,600) 10,825 Capital expenditures 1,013 3,083 1,876 5,972 Depreciation and amortization 4,645 9,456 5,880 19,981 NOVEMBER 6, 2000: Revenue $ 173,100 $ 208,991 $ 25,458 $ 407,549 Segment operating income (loss) 10,392 (38,908) (3,311) (31,827) Capital expenditures 1,452 2,069 1,401 4,922 Depreciation and amortization 7,341 14,972 2,255 24,568
FORTY WEEKS ENDED
Carl's Jr. Hardee's Other Total ---------- -------- ----- ----- NOVEMBER 5, 2001: Revenue $ 546,820 $ 547,873 $ 43,095 $1,137,788 Segment operating income (loss) 44,245 (58,686) (12,581) (27,022) Capital expenditures 4,923 7,712 3,377 16,012 Depreciation and amortization 15,266 33,449 12,652 61,367 Total assets 225,973 653,549 69,142 948,664 NOVEMBER 6, 2000: Revenue $ 572,311 $ 772,658 $ 85,404 $1,430,373 Segment operating income (loss) 42,620 (58,825) (5,504) (21,709) Capital expenditures 27,723 23,292 11,954 62,969 Depreciation and amortization 21,847 52,375 12,033 86,255 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. Taco Bueno was written down to its estimated sales value at January 31, 2001, and another $4.5 million of loss was recorded in the first quarter. The net proceeds from this sale were used to reduce indebtedness under the Company's revolving credit facility. Taco Bueno's results included in the Company's accompanying statements of operations are as follows:
Twelve Weeks Ended Forty Weeks Ended ------------------------ ------------------------ November 5, November 6, November 5, November 6, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenue $ -- $ 22,657 $ 37,538 $ 76,046 Operating income -- 965 3,693 4,721
8 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 and the Non-Employee Director Stock Purchase Loan Program (collectively the "Programs"). The purpose of the Programs is to provide key employees and directors with further incentive to maximize stockholder value. The Programs' 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 November 5, 2001, loans had been made in the amount of $4.2 million to purchase 739,900 shares of Company common stock at an average purchase price of $5.70 per share (which included 189,900 shares for $1.1 million from Santa Barbara Restaurant Group, Inc., whose chairman is an affiliate of the Company, see Note (8)). The Company entered into an agreement with an affiliate of Fidelity National Financial, Inc. (whose Chairman of the Board is also the Chairman of the Board of CKE) to assist in the disposition of surplus real estate properties and negotiate the termination of leases for closed restaurants. The affiliate is paid a fee of up to $75,000 and incentives up to $137,500, based on rental savings. During the third quarter of fiscal year 2002, the rate paid to the affiliate for the sale of fee-based properties was increased from 1.0% to 1.75% of the selling price during the 40 weeks ended November 5, 2001. The Company paid commissions to another affiliate of Fidelity National Financial, Inc. in the amount of $77,500 for the sale of restaurants. NOTE (8) SANTA BARBARA RESTAURANT GROUP, INC. On November 19, 2001, the Company announced it had signed a letter of intent to acquire Santa Barbara Restaurant Group, Inc. ("SBRG"). Under the terms of the letter of intent, each outstanding share of SBRG stock will be converted into 0.5 shares of Company common stock. The acquisition is expected to be complete in March 2002. On the date the transaction was announced, the Company's stock was trading at $7.85 per share and SBRG had 12.9 million shares of stock outstanding and 6.4 million of options and warrants outstanding. For the forty weeks ended October 1, 2001, SBRG reported revenue and net income of $67.8 million and $2.6 million, respectively. NOTE (9) 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 assets 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. 9 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continuation) 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 of the SFAS. 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. NOTE (10) 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 November 5, 2001 and November 6, 2000, respectively, and $4.5 million and $4.7 million for the corresponding year-to-date periods. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which will be effective for the Company beginning fiscal year 2004. SFAS 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121") and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for the disposal of a segment of a business. SFAS 144 retains many of the fundamental provisions of SFAS 121, but resolves certain implementation issues associated with that statement. SFAS 144 will be effective for the Company for the fiscal year 2003. We have not yet determined the impact of adopting SFAS 143 or SFAS 144 on the Company's Financial Statements. 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"). 10 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS 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 the Company's management. Forward-looking statements may include, but are not limited to, descriptions of plans or objectives of the Company's management for future or past operations, products or services, earnings or other measures of economic performance including statements of profitability of business segments and subsidiaries, estimates of recoverability of long-lived assets, current bank relationships, and current repositioning activities including anticipated store closures. Such statements reflect the view of the Company's management with respect to future events and are subject to risks and uncertainties, such as changes in the fast food industry and changes to the Company's plans, objectives, expectations and intentions. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, the Company's actual results could differ materially from those discussed in this Form 10-Q. Factors that could cause or contribute to such differences are consumers' concerns or adverse publicity regarding the Company's products, 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 the Company's suppliers' ability to provide quality and timely products to the Company, delays in opening new restaurants or completing remodels, the operational success of the Company's franchisees, availability of financing for the Company and its franchisees, unfavorable outcomes on litigation, changes in accounting policies and practices, new legislation or government regulation and other factors as discussed in the Company's filings with the Securities and Exchange Commission. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED See NOTE (9) of Notes to Consolidated Financial Statements. 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 November 5, 2001 to the quarter and year-to-date ended November 6, 2000, or could impact comparisons for the remainder of 2001. RESTAURANT PORTFOLIO STRATEGY In late fiscal 2000, we embarked on a refranchising initiative to reduce outstanding borrowings on our senior credit facility, as well as increase the number of franchise-operated stores. Additionally, as sales trends for the Hardee's restaurants and certain Carl's Jr. restaurants (primarily in the Oklahoma area) continued to decline in fiscal 2000 through fiscal 2001, we determined that it was necessary to close restaurants for which a return to profitability was not likely. As such, through November 5, 2001, we identified 40 Carl's Jr. and 296 Hardee's restaurants for closure. These actions or repositioning activities resulted in the charges generally reflected in our financial statements as facility action charges. As the number of company operated restaurants declined, we made reductions to operating expenses. During the third quarter of fiscal 2002, we recorded repositioning charges of $2.1 million. These charges, which were primarily non-cash in nature, consisted of (a) an impairment charge of $400,000 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 $2.2 million for 22 Hardee's restaurants that we have closed or plan to close, consisting of asset impairments of $1.5 million and $500,000 for additional store closure expense reserves, (c) net gains on restaurants sold to franchisees and surplus properties during the quarter of $1.2 million, and (d) office closure expense of $900,000 related to Hardee's closure of regional offices. During the third quarter of fiscal 2001, we recorded facility action charges of $34.3 million relating to net losses on the sale of certain Carl's Jr. and Hardee's restaurants. 11 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS For the 40-week period ended November 5, 2001, we recorded repositioning charges of $65.9 million which consisted of (a) net facility action charges of $60.8 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 40-week period ended November 5, 2000, we recorded facility action charges of $51.3 million relating to net losses on the sale of certain Carl's Jr. and Hardee's restaurants. 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. We are finalizing the closure of the under-performing restaurants identified previously and have a restaurant sale transaction scheduled to close in December 2001 (those stores have sales of $25.8 and operating income of $2.5). However, there can be no guarantee that we will not determine in the future that additional repositioning activities will be necessary or that we would not take advantage of opportunities to further improve our financial position through additional sales which could result in losses, which may be material. 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 success, if any. Then, in June 2001, while continuing to identify and close unprofitable restaurants as well as execute our refranchising program, we took a more basic approach to addressing the issues in the Hardee's restaurants 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 eight so that they can focus better on hiring, training and executing. We changed incentive plans to reward operators for building sales, providing great service to our guests and reducing accidents. 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 Annual Report on Form 10-K for the fiscal year ended January 31, 2001: - 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. 12 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS 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 November 5, 2001:
(Dollars in $000's) Twelve Weeks Ended Forty Weeks Ended ------------------ ----------------- November 5, 2001 November 6, 2000 November 5, 2001 November 6, 2000 -------------------- -------------------- -------------------- -------------------- Oper. Oper. Oper. Oper. Income/ Income/ Income/ Income/ Revenue (Loss) Revenue (Loss) Revenue (Loss) Revenue (Loss) -------- -------- -------- -------- -------- -------- -------- -------- Carl's Jr. Stores sold $ 587 $ 131 $ 28,441 $ 3,836 $ 685 $ (335) $ 12,141 $ 883 Stores closed or to be closed -- (61) 3,218 (1,026) 5,154 (1,207) 105,556 11,086 -------- -------- -------- -------- -------- -------- -------- -------- Total 587 70 31,659 2,810 5,839 (1,542) 117,697 11,969 -------- -------- -------- -------- -------- -------- -------- -------- Hardee's Stores sold 711 (1,198) 24,890 (1,989) 8,926 (3,329) 156,564 1,831 Stores closed or to be closed 152 (735) 26,320 (8,380) 23,613 (8,894) 94,951 (18,485) -------- -------- -------- -------- -------- -------- -------- -------- Total 863 (1,933) 51,210 (10,369) 32,539 (12,223) 251,515 (16,654) -------- -------- -------- -------- -------- -------- -------- -------- Taco Bueno Stores sold -- -- 22,657 965 37,538 3,693 76,046 4,721 -------- -------- -------- -------- -------- -------- -------- -------- Total Stores sold 1,298 (1,067) 75,988 2,812 47,149 29 244,751 7,435 Stores closed or to be closed 152 (796) 29,538 (9,406) 28,767 (10,101) 200,507 (7,399) -------- -------- -------- -------- -------- -------- -------- -------- Total $ 1,450 $ (1,863) $105,526 $ (6,594) $ 75,916 $(10,072) $445,258 $ 36 ======== ======== ======== ======== ======== ======== ======== ========
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. 13 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS 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. In the first and second quarters of this fiscal year, we recorded a $3.5 million provision related to allowances for doubtful franchise accounts and notes receivables. These costs were reported as franchised and licensed restaurant operating costs and expenses and other income, net. In the first half of the year, these charges 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 49% at the end of the third quarter. During the third quarter, we did not make substantial increases to the total allowance as we had not had the adverse trends we noted previously. On a quarterly 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 November 5, 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. 14 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS OPERATING REVIEW The following tables are presented to facilitate Management's Discussion and Analysis of the third quarter and year-to date results. The term "EBITDA" refers to earnings/(loss) before interest, income taxes and depreciation and amortization.
(Dollars in thousands, except average check data) THIRD QUARTER FY 2002 --------------------- Carl's Hardee's Other Total --------- --------- --------- --------- Number of restaurants (end of period): Company-operated 441 751 1,192 Franchised domestic 490 1,564 2,054 Licensed international 40 142 182 --------- --------- --------- Total 971 2,457 3,428 ========= ========= ========= Company-operated sales $ 120,644 $ 138,968 $ 259,612 Company-operated average unit volumes (trailing 13-periods) $ 1,175 $ 741 Average check $ 5.13 $ 3.74 Company-operated same-store sales increase (decrease) 6.1% 1.0% Franchise-operated same-store sales increase (decrease) 5.5% (1.2)% Co-oper. same-store sales increase (decrease) excluding stores sold, closed or to be closed 6.2% 1.0% Company operated average unit volumes, excluding stores sold, closed or to be closed 1,131 756 Operating costs (as a % of co.- operated sales): Food and paper 28.76% 32.34% Payroll and other employee benefits 28.47% 34.57% Occupancy and other operating costs 21.77% 23.73% --------- --------- Gross margin 21.00% 9.36% Franchising revenue: Royalties $ 4,872 $ 8,932 $ 13,804 Distribution center 33,543 3,754 37,297 Other 6,957 8,958 15,915 --------- --------- --------- Total $ 45,372 $ 21,644 $ 67,016 ========= ========= ========= Net franchising income $ 4,593 $ 12,810 $ 17,403 ========= ========= ========= Oper. income (loss) excluding facility action charges $ 15,787 $ 759 $ (3,600) $ 12,946 Facility action charges (gains), net (961) 3,082 -- 2,121 --------- --------- --------- --------- Operating income (loss) $ 16,748 $ (2,323) $ (3,600) $ 10,825 ========= ========= ========= ========= EBITDA $ 21,534 $ 6,262 $ (1,597) $ 26,199 Facility action charges (gains), net (961) 3,082 -- 2,121 --------- --------- --------- --------- EBITDA excluding facility action charges $ 20,573 $ 9,344 $ (1,597) $ 28,320 ========= ========= ========= ========= EBITDA excluding stores sold, closed or to be closed and facility actions charges $ 20,516 $ 10,593 $ (1,597) $ 29,512 ========= ========= ========= =========
15 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
THIRD QUARTER FY 2001 --------------------- Carl's Hardee's Other Total --------- --------- --------- --------- Number of restaurants (end of period): Company-operated 554 1,027 146 1,727 Franchised domestic 389 1,566 -- 1,955 Licensed international 30 131 -- 161 --------- --------- --------- --------- Total 973 2,724 146 3,843 ========= ========= ========= ========= Company-operated restaurant sales $ 142,686 $ 188,110 $ 25,458 $ 356,254 Company-operated average unit volumes (trailing 13-periods) $ 1,150 $ 732 Average check $ 4.77 $ 4.08 Company-operated same-store sales increase (decrease) 1.1% (6.3)% Franchise-operated same-store sales increase (decrease) 5.1% (3.1)% Co-oper. Same-store sales increase (decrease) excluding stores sold, closed or to be closed 1.4% (4.3)% Company operated average unit volumes, excluding stores sold, closed or to be closed 1,129 788 Operating costs (as a % of co.-operated sales): Food and paper 29.58% 32.49% Payroll and other employee benefits 30.10% 35.70% Occupancy and other operating costs 22.77% 26.10% --------- --------- Gross margin 17.55% 5.71% Franchising revenue: Royalties $ 3,173 $ 10,292 $ 13,465 Distribution center 21,673 5,931 27,604 Other 5,568 4,658 10,226 --------- --------- --------- Total $ 30,414 $ 20,881 $ 51,295 ========= ========= ========= Net franchising income $ 3,491 $ 11,722 $ 15,213 ========= ========= ========= Oper. income (loss) excluding facility action charges $ 8,294 $ (2,467) $ (3,311) $ 2,516 Facility action charges (gains), net (2,098) 36,441 -- 34,343 --------- --------- --------- --------- Operating income (loss) $ 10,392 $ (38,908) $ (3,311) $ (31,827) ========= ========= ========= ========= EBITDA $ 17,632 $ (24,991) $ (1,321) $ (8,680) Facility action charges (gains), net (2,098) 36,441 -- 34,343 --------- --------- --------- --------- EBITDA excluding facility action charges $ 15,534 $ 11,450 $ (1,321) $ 25,663 ========= ========= ========= ========= EBITDA excluding stores sold, closed or to be closed and facility actions charges $ 11,363 $ 14,922 $ (3,339) $ 22,946 ========= ========= ========= =========
16 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
YEAR-TO-DATE FY 2002 -------------------- Carl's Hardee's Other Total --------- --------- --------- --------- Company-operated restaurant sales $ 402,619 $ 486,229 $ 43,095 $ 931,943 ========= ========= ========= ========= Operating costs (as a % of co.-operated sales): Food and paper 29.06% 31.79% Payroll and other employee benefits 29.39% 35.20% Occupancy and other operating costs 22.00% 23.76% --------- --------- Gross margin 19.55% 9.25% Franchising revenue: Royalties $ 15,281 $ 33,631 $ 48,912 Distribution center 105,065 11,184 116,249 Other 23,855 16,829 40,684 --------- --------- --------- Total $ 144,201 $ 61,644 $ 205,845 ========= ========= ========= Net franchising income $ 16,602 $ 31,215 $ 47,817 ========= ========= ========= Oper. income (loss) excluding facility action charges $ 44,955 $ (3,276) $ (7,874) $ 33,805 Facility action charges (gains), net 710 55,410 4,707 60 827 --------- --------- --------- --------- Operating income (loss) $ 44,245 $ (58,686) $ (12,581) $ (27,022) ========= ========= ========= ========= EBITDA $ 60,866 $ (26,221) $ (4,075) $ 30,570 Facility action charges (gains), net 710 55,410 4,707 60,827 --------- --------- --------- --------- EBITDA excluding facility action charges $ 61,576 $ 29,189 $ 632 $ 91,397 ========= ========= ========= ========= EBITDA excluding stores sold, closed or to be closed and facility action charges $ 61,022 $ 37,003 $ (3,061) $ 94,964 ========= ========= ========= =========
YEAR-TO-DATE FY 2001 -------------------- Carl's Hardee's Other Total --------- --------- --------- ---------- Company-operated restaurant sales $ 476,655 $ 708,419 $ 85,404 $1,270,478 ========= ========= ========= ========== Operating costs (as a % of co.-operated sales): Food and paper 29.54% 32.23% Payroll and other employee benefits 28.39% 34.59% Occupancy and other operating costs 21.86% 24.64% --------- --------- Gross margin 20.21% 8.54% Franchising revenue: Royalties $ 10,083 $ 32,388 $ 42,471 Distribution center 69,002 18,776 87,778 Other 16,571 13,075 29,646 --------- --------- ---------- Total $ 95,656 $ 64,239 $ 159,895 ========= ========= ========== Net franchising income $ 8,524 $ 35,721 $ 44,245 ========= ========= ========== Operating income (loss) excluding facility action charges $ 38,348 $ (3,243) $ (5,504) $ 29,601 Facility action charges (gains), net (4,272) 55,582 0 51,310 --------- --------- --------- ---------- Oper. income (loss) $ 42,620 $ (58,825) $ (5,504) $ (21,709) ========= ========= ========= ========== EBITDA $ 65,517 $ (5,797) $ 4,028 $ 63,748 Facility action charges (gains), net (4,272) 55,582 0 51,310 --------- --------- --------- ---------- EBITDA excluding facility action charges $ 61,245 $ 49,785 $ 4,028 $ 115,058 ========= ========= ========= ========== EBITDA excluding stores sold, closed or to be closed and facility charges $ 46,159 $ 47,116 $ (4,165) $ 89,110 ========= ========= ========= ==========
17 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS CARL'S JR. During the current third quarter, we sold four restaurants to franchisees and opened one. Carl's Jr. franchisees and licensees opened four new restaurants, acquired four from us and closed two. As of November 5, 2001, the Carl's Jr. system consisted of 441 company-operated restaurants, 490 franchised restaurants and 40 international restaurants, for a system total of 971 Carl's Jr. restaurants. Revenue from company-operated Carl's Jr. restaurants decreased $22.0 million, or 15.5%, to $120.6 million for the 12-week period ended November 5, 2001, and decreased $74.0 million, or 15.5%, to $402.6 million for the 40-week period ended November 5, 2001, when compared to the prior year comparable periods. The decrease in revenue 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 third quarter of each fiscal year. While revenue from company-operated restaurants are down, net franchising income in both the 12- and 40-week periods has increased approximately 50% 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 6.1% in the current quarter and Carl's Jr. company-operated restaurant average unit volumes were $1.175 million for the trailing thirteen periods ended November 5, 2001, and the average check for the third quarter was $5.13 as compared to $4.77 in the comparable period of the prior fiscal year. Restaurant-level margins for our company-operated Carl's Jr. restaurants increased 3.4% in the 12-week period ended November 5, 2001 from 17.6% in the prior-year quarter to 21.0% in the current quarter, when measured as a percentage of company-operated restaurant revenue. The increase in margins is due to (i) a decrease in food and packaging, which decreased 0.8% in the current year quarter as compared to the prior year quarter, from 29.6% to 28.8% as a percentage of company-operated restaurant revenue, (ii) a decrease in payroll and other employee benefits, which decreased 1.6% in the current year quarter as compared to the prior year quarter, from 30.1% to 28.5% as a percentage of company-operated restaurant revenue, (iii) a decrease in occupancy and other expense, which decreased 1.0% in the current year quarter as compared to the prior year quarter, from 22.8% from 21.8% as a percentage of company-operated revenue. The decrease in food and packaging is primarily due to a supplier rebate received in the current quarter relating to prior period purchases. The decrease in payroll and other employee benefits is due to the fact that the current quarter did not require an increase in self-insurance reserves, as did the previous fiscal year third quarter. Occupancy and other operating expenses decreased due to reduced depreciation levels due to cumulative asset impairment charges reducing the depreciable base of stores this quarter and a reduction in restaurant operating costs due to renegotiated service contracts, offset by higher repair and maintenance costs. Restaurant-level margins for our company-operated Carl's Jr. restaurants decreased slightly in the 40-week period ended November 5, 2001 from 20.2% in the prior year period to 19.6% in the current year period, when measured as a percentage of company-operated restaurant revenue. Food and packaging expenses decreased 0.5% as a percentage of sales from company-operated restaurants. Payroll and other employee benefits increased in the current year 40-week period as compared to the prior year from 28.4% to 29.4% as a percentage of company-operated restaurant revenue. This fluctuation is due to the adverse development associated with our workers' compensation reserves, discussed in our second quarter report on Form 10-Q. Occupancy and other operating expenses for the year-to-date period increased only slightly. A majority of our Carl's Jr. restaurants have a contract with Enron Corp. ("Enron") to purchase electricity at a fixed cost through 2003. Enron filed for bankruptcy in December, 2001. While we have not yet been notified by Enron that the contract will be rejected, we do believe our costs will rise, possibly by as much as $3.0 million per year. 18 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS HARDEE'S During the current quarter, we acquired four restaurants from franchisees, sold 11 to franchisees and closed two restaurants. Hardee's franchisees and licensees opened four new restaurants, acquired 11 restaurants from us and closed 37. As of November 5, 2001, the Hardee's system consisted of 751 company-operated restaurants, 1,564 franchised restaurants and 142 international restaurants, for a system total of 2,457 Hardee's restaurants. Revenue from company-operated Hardee's restaurants decreased $49.1 million, or 26.2%, to $139.0 million for the 12-week period ended November 5, 2001, and $222.2 million, or 31.3%, to $486.2 million for the 40-week period ended November 5, 2001, when compared to the prior year comparable periods. The decrease in revenue 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 third quarter of each fiscal year. Net franchising income increased $1.1 million or 9.3% during the third quarter 2002, as compared to the prior fiscal year. This increase is due primarily to a settlement fee received as a result of the early termination of a franchise agreement. For the 40-week period, net franchising income decreased $4.5 million or 12.6% as compared to the prior fiscal year. This decrease 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 0.9% in the current quarter and Hardee's company-operated restaurant average unit volumes were $741,000 for the trailing thirteen periods ended November 5, 2001, and the average check for the third quarter was $3.74 as compared to $4.08 in the comparable period of the prior fiscal year. Restaurant-level margins for company-operated Hardee's restaurants increased 3.7% in the 12-week period ended November 5, 2001 from 5.7% in the prior year quarter to 9.4% in the current quarter, when measured as a percentage of company-operated restaurant revenue. Food and packaging costs decreased 0.2%. Payroll and other employee benefits decreased 1.1% in the current year quarter as compared to the prior year quarter, because in the prior fiscal year third quarter we increased our self-insurance reserves and were not required to so in the current year third quarter. Occupancy and other operating expenses decreased 2.4% in the current year quarter, also as a result of no required increase in the self-insurance reserves in the current quarter and favorably renegotiated service contracts, offset by higher repair and maintenance service contract costs. Restaurant-level margins for company-operated Hardee's restaurants increased 0.7% in the 40-week period ended November 5, 2001 from 8.5% 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 0.4% from 32.2% to 31.8% as a percentage of company-operated restaurant revenue. Occupancy and other operating expenses decreased 0.9% as a percentage of company-operated restaurant revenue as a result of reduced repair and maintenance costs compared to the prior year. These favorable variances were partially offset by an unfavorable variance in payroll and other employee benefits of 0.6%. These costs, which were 34.6% in the prior year, increased to 35.2% 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 and increase to workers' compensation reserves due to adverse development in the second quarter of fiscal year 2002. OTHER CONSOLIDATED EXPENSES Advertising expenses decreased $6.6 million, or 29.6%, to $15.7 million for the 12-week period ended November 5, 2001, as compared to the comparable period in the prior year. However, as a percentage of total revenue, advertising expenses has increased 0.7% as a percent of revenue due to the introduction of new products in the third quarter. Advertising decreased $20.3 million or 25.6% to $59.0 million for the 40-week period ended November 5, 2001 and remained relatively constant as a percent of total revenue during the current year period as compared to the prior year period. 19 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS General and administrative expenses decreased $2.8 million to $27.1 million and $22.7 million or 20.7%, for the 12-week and 40-week periods ended November 5, 2001, respectively, as compared to the prior year. These decreases are attributable not only to a decrease in headcount, but also due to curtailing other discretionary expenses such as contracted labor and professional services. This decline from the prior year is consistent with our goal to have general and administrative expenses be commensurate with our mix of company-operated and franchisee-operated restaurants. Other income (expense) improved by $1.0 million during the 12-week period ended November 5, 2001, primarily due to decreased bad debt expense for notes receivable and increased other income, which were partially offset by decreased interest income. For the 40-week period ended November 5, 2001, other income (expense) improved by $1.4 million due to decreased bad debt expense, as compared to the prior year, and increased miscellaneous income, which were partially offset by lower interest income and increases in property management costs. 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 Free cash flow - cash provided by operations less capital expenditures - for the 40-week period ended November 5, 2001 was $66.8 million. Free cash flow, together with proceeds from asset sales, was used primarily to pay back borrowings on our revolving credit facility. During the 40 weeks, we generated cash flows from operations of $82.9 million, as compared to $5.7 million in the corresponding period of the prior fiscal year. This increase was due to improved operations as well as the receipt of an income tax refund of approximately $34.2 million during the current period. Investing activities generated $100.8 million primarily from asset sales. Financing activities used $186.4 million primarily to paydown our senior credit facility. Earnings were insufficient to cover fixed charges by $73.4 million and $76.3 million for the 40-week periods ended November 5, 2001 and November 6, 2000, respectively. Excluding the effect of the repositioning charges discussed above, earnings would be insufficient to cover fixed charges by $12.6 million and $25.0 million for the 40-week periods ended November 5, 2001 and November 6, 2000, respectively. (See Exhibit 12.1). As discussed above, in fiscal year 2000, we embarked on an asset sale program designed to generate cash to reduce indebtedness under our senior credit facility. During the first three quarters of fiscal 2002, we made a net repayment on our revolving credit facility of approximately $162.0 million, of which approximately $126.5 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. Under our revolving credit facility, borrowings may be used for working capital and other general corporate purposes, including permitted investments and acquisitions, as defined. 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 revolving 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 was limited to construction already begun or committed to begin and we are required to comply with minimum EBITDA requirements. 20 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS 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. Commencing 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 November 5, 2001, the applicable margin was 4% and our interest rate was 9%. As of November 5, 2001, the outstanding commitment was $120.4 million. In the event the revolving 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 $6.8 million as of November 5, 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 November 5, 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 November 5, 2001, we had $65 million of borrowings available to us under our revolving credit facility. We are actively pursuing an amendment to our existing credit facility for a longer term by fiscal year end. However, there can be no assurance that this refinancing or any other will be completed. If we do not obtain an amended credit facility, or a new 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 its capital expenditures; and/or (4) sell assets, possibly at a significant loss. The Company's ability to accomplish the foregoing may be subject to general economic, financial, competitive, legislative, regulatory or other factors that may be beyond the Company's control. Therefore, while the Company currently anticipates that either it will refinance its 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 $120.4 million senior credit facility, of which $6.8 million remained outstanding as of November 5, 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 $68,000 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 November 5, 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. 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. 21 PART II. OTHER INFORMATION. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit # Description --------- ----------- 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) December 14, 2001 /s/ Dennis J. Lacey ----------------- ------------------------- Date Executive Vice President Chief Financial Officer 22 EXHIBIT INDEX
Exhibit # Description --------- ----------- 12.1 Computation of Ratios
23 EX-12.1 3 a77885ex12-1.txt EXHIBIT 12.1 EXHIBIT 12.1 CKE RESTAURANTS, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands)
Forty Weeks Ended ----------------- November 5, November 6, 2001 2000 ---------- ---------- Earnings before fixed charges: Loss before income taxes $(73,443) $(76,303) Fixed charges 70,296 80,203 -------- -------- $ (3,147) $ 3,900 ======== ======== Fixed charges: Interest expense $ 46,783 $ 53,510 Interest component of rent expense(1) 23,513 26,693 -------- -------- $ 70,296 $ 80,203 ======== ======== Deficiency of earnings to cover fixed charges $(73,443) $(76,303) ======== ========
- ---------- (1) Calculated as one-third of total rent expense 24 -----END PRIVACY-ENHANCED MESSAGE-----