-----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, E54NGG/q9nYURLIYJT3ME+bH7tp1RseepHNeP4lGv6Qf89u9U52kT0Gj5N7gSe6G 61s0uRx3+30+6AySBOCn9g== 0001095811-00-001215.txt : 20000502 0001095811-00-001215.hdr.sgml : 20000502 ACCESSION NUMBER: 0001095811-00-001215 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000501 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-K SEC ACT: SEC FILE NUMBER: 001-11313 FILM NUMBER: 614152 BUSINESS ADDRESS: STREET 1: 1200 NORTH HARBOR BOULEVARD CITY: ANAHEIM STATE: CA ZIP: 92801 BUSINESS PHONE: 7147745796 MAIL ADDRESS: STREET 1: 1200 NORTH HARBOR BLVD CITY: ANAHEIM STATE: CA ZIP: 92801 10-K 1 FORM 10-K YEAR ENDED JANUARY 31, 2000 1 Securities and Exchange Commission Washington, D.C. 20549 (Mark One) () ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2000 or () TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 1-13192 FORM 10-K CKE RESTAURANTS, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0602639 (State or other jurisdiction of of (I.R.S. employer identification no.) incorporation or organization)
401 W. CARL KARCHER WAY ANAHEIM, CALIFORNIA 92801 (Address of principal executive offices) (714) 774-5796 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 2000 was $285,892,727. The number of outstanding shares of the registrant's common stock was 50,501,421 as of March 31, 2000. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Proxy Statement for the 2000 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after January 31, 2000, are incorporated by reference into Part III of this Report. The Exhibit Index is contained in Part IV herein on Page 55. 2 CKE RESTAURANTS, INC. AND SUBSIDIARIES INDEX TO ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended January 31, 2000 ------------------------------------------------------------------------------------- PART I Page ------------------------------------------------------------------------------------- Item 1. Business 1 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 ------------------------------------------------------------------------------------- PART II ------------------------------------------------------------------------------------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Financial and Operating Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25 ------------------------------------------------------------------------------------- PART III ------------------------------------------------------------------------------------- Item 10. Directors and Executive Officers of the Registrant 25 Item 11. Executive Compensation 25 Item 12. Security Ownership of Certain Beneficial Owners and Management 26 Item 13. Certain Relationships and Related Transactions 26 ------------------------------------------------------------------------------------- PART IV ------------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 28
3 1 - PART I ITEM 1. Business OVERVIEW CKE Restaurants, Inc. (the "Company") owns, operates and franchises 3,865 quick-service restaurants, primarily under the Carl's Jr., Hardee's and Taco Bueno brand names. Our Hardee's and Carl's Jr. chains are the fourth and seventh largest quick-service hamburger restaurant chains in the United States, respectively, based on domestic systemwide sales. Based on publicly available data, our company-operated Carl's Jr. and Taco Bueno restaurants generate restaurant-level operating margins that are among the highest of the major quick-service restaurant chains. Carl's Jr.(R) - Carl's Jr. was founded in 1956 and is located primarily in the Western United States, with a leading market presence in California. The Carl's Jr. menu features several charbroiled hamburgers, chicken sandwiches, steak sandwiches and other signature items, including the Famous Star, Western Bacon Cheeseburger(R), Super Star(R), Charbroiler Chicken Sandwiches(R), Crispy Chicken Sandwiches(R), the Charbroiled Sirloin Steak Sandwich, the Sourdough Bacon Cheeseburger and the Spicy Chicken Sandwich. Carl's Jr. differentiates itself from its competitors by offering menu items that are generally made-to-order, meet exacting quality standards and have a strong reputation for quality and taste. As of January 31, 2000, our Carl's Jr. system included 934 restaurants, of which we operated 563 restaurants and our franchisees and licensees operated 371 restaurants. Hardee's(R) - We acquired Hardee's in July 1997. This acquisition enabled us to expand the scope of our operations and become one of the leading nationwide operators of quick-service hamburger restaurants. Hardee's was founded in 1961 and has significant market presence in the Southeastern and Midwestern United States. We believe there is significant value in Hardee's and Carl's Jr.'s complementary geographic markets and relative menu strengths. Hardee's strength is in its breakfast menu, which generates approximately 35% of its overall revenues. This represents one of the highest percentages in the quick-service hamburger restaurant industry. Since we acquired Hardee's, we have acquired nearly 700 Hardee's restaurants from franchisees in key markets, including 557 restaurants operated by Flagstar Enterprises, Inc. ("FEI"), then the largest Hardee's franchisee. These additional acquisitions have enabled us to exercise further control over the Hardee's brand. As of January 31, 2000, our Hardee's system included 2,788 restaurants, of which we operated 1,354 restaurants and our franchisees and licensees operated 1,434 restaurants. Taco Bueno(R) - As of January 31, 2000, we owned and operated 121 Taco Bueno quick-service Mexican restaurants located in Texas and Oklahoma and licensed one restaurant. Taco Bueno differentiates itself from its competitors by offering a diverse menu featuring generous portions of freshly prepared, high-quality food items. In addition to typical quick-service Mexican offerings, such as burritos, tacos, tostadas and combination meals, Taco Bueno features a number of signature menu items, such as its Mexidips & Chips, Muchaco, Bueno Chilada Platter, Two-handed Taco and BOB ("Big Ol' Burrito"). STRATEGY Our strategy is to operate and manage restaurant concepts nationwide. We believe that our ability to deliver high-quality food with superior service in a clean and friendly environment is critical to our operating success. We have developed food, labor and customer service management practices that allow us to effectively monitor restaurant-level operations, control costs, benchmark restaurant performance statistics and communicate systemwide best practices across restaurant concepts. As a result of our strategies, we have improved the operating results of Carl's Jr. and Taco Bueno. From fiscal 1995 through fiscal 2000, company-operated Carl's Jr. average unit sales increased from $966,000 to $1,086,000, while we improved restaurant-level operating margins from 18.4% to 24.1%, excluding the Hardee's-to-Carl's Jr. conversion restaurants in Oklahoma, Texas and Kansas. Since we acquired Taco Bueno in October 1996, we have increased average unit sales of our Taco Bueno restaurants from $600,000 to $807,000. In addition, we aggressively promote and enhance awareness of each of our brands through innovative advertising and remodeling programs. The revitalization of Hardee's is the most important element of our growth strategy. We are attempting to successfully turn Hardee's around based on the success we have experienced at Carl's Jr. and Taco Bueno. Through our disciplined approach and through our refranchising strategy discussed below, we believe that the Hardee's brand is capable of generating meaningful profits and positive same-store sales. The key elements of our growth strategy are to: Revitalize the Hardee's Brand to Grow Same-Store Sales. We are continuing our focus on revitalizing the Hardee's brand to generate same-store sales growth. We introduced certain made-to-order lunch and dinner 4 2 menu items that are currently served in our Carl's Jr. restaurants, such as the Famous Star, and eliminated unprofitable product offerings. We also introduced the Carl's Jr.-style limited table service and added "all-you-can-drink" beverage bars in all of our Hardee's restaurants. Additionally, we are remodeling our Hardee's restaurants into a new "Star Hardee's" format, which we designed to revitalize the Hardee's brand with the menu and operating qualities of Carl's Jr. In addition to the menu enhancements, a Star Hardee's remodel involves installing charbroilers in the kitchens, remodeling the interior and exterior of the restaurant and installing new signage that accents the Hardee's name with the Carl's Jr. Star logo. In addition, our franchisees are remodeling restaurants to the Star Hardee's format and continue to support our initiatives. We also plan to enhance brand awareness through our new advertising campaign, which was introduced in March 2000 and promotes Hardee's to our target audience of high-volume lunch and dinner customers. As of January 31, 2000, 639 company and franchise operated Hardee's had been remodeled to Star Hardee's and we continue to see improvement in revenue after a remodel is completed. We plan to remodel up to 160 restaurants in fiscal 2001, and our Hardee's franchisees advise us that they plan to remodel between 200 to 300 restaurants to the Star Hardee's format during that period. Refranchise Company-operated Restaurants to New and Existing Franchisees. We intend to increase our proportion of franchised restaurants to company-operated restaurants. During fiscal 2000 we sold 24 Carl's Jr. restaurants to franchisees for approximately $18.3 million and 61 Hardee's restaurants to franchisees for approximately $18.5 million. During fiscal 2001, we plan to sell up to 500 Hardee's restaurants, which should generate proceeds of approximately $200.0 million. This strategy is intended to increase the number and quality of our Hardee's franchisees to help us turn around those restaurants, to generate cash to pay down borrowings under our senior credit facility, and to allow us to focus on running the balance of our Hardee's system with a smaller number of company-operated restaurants. Continue to Increase Hardee's Profitability. We have improved restaurant-level operating margins and reduced corporate overhead by implementing the operating initiatives, management practices and disciplined operating strategy that we employ at Carl's Jr. Restaurant-level operating margins at our company-operated Hardee's restaurants increased to 13.6% in fiscal 2000, excluding the $42.0 million store closure reserve and asset impairment charge recorded in the fourth quarter of fiscal 2000, compared with 6.2% for the year ended December 31, 1996, the year prior to our acquisition. We expect to improve further the profitability of our company-operated Hardee's restaurants by increasing restaurant sales with the help of our new advertising campaign, remodeling restaurants to the Star Hardee's format, continuing our customer-focused, disciplined operating strategy and executing our refranchising strategy which will enable us to operate a smaller number of Hardee's restaurants more effectively. Expand Successful Carl's Jr. and Taco Bueno Chains. We intend to continue expanding our Carl's Jr. and Taco Bueno chains by opening new restaurants and continuing to improve our innovative advertising campaigns. In fiscal 2000, the Carl's Jr. system grew by a total of 75 new restaurants and our Taco Bueno chain grew by a total of 12 new restaurants. In fiscal 2001, if cash flows from operations permits, we plan to open up to 30 new Carl's Jr. restaurants and up to five new Taco Bueno restaurants in established markets. Our Carl's Jr. and Hardee's franchisees plan to open up to 35 and 65 new Carl's Jr. and Hardee's restaurants, respectively, in fiscal 2001. RESTAURANT OPERATIONS CARL'S JR. Concept. We believe that our Carl's Jr. restaurants' superior food quality, diverse menu and attentive customer service differentiate Carl's Jr. from its competitors and are critical to its success. Unlike many quick-service restaurants that emphasize lower prices, Carl's Jr. restaurants focus on offering customers a higher quality dining experience at a reasonable price. Carl's Jr.'s menu features freshly prepared food items that appeal to a broad audience. We generally make Carl's Jr. charbroiled hamburgers, chicken sandwiches and signature items at the time of the customer's order, applying exacting quality standards and offering them in generous portions. By providing partial table service, unlimited drink refills and an attractive restaurant decor, Carl's Jr. restaurants offer a pleasant, customer-friendly environment. We believe that our focus on customers and customer service, superior food quality and generous portions enables Carl's Jr. restaurants to maintain a strong price-value image with customers. Menu and Restaurant Design. Carl's Jr. restaurants offer a variety of products that have a strong reputation for quality and taste. The Carl's Jr. menu is relatively uniform throughout the chain and features several charbroiled 5 3 - hamburgers and chicken sandwiches, including the Famous Star, Western Bacon Cheeseburger, Super Star, Charbroiler Chicken Sandwiches, Crispy Chicken Sandwiches, the Charbroiled Sirloin Steak Sandwich, the Sourdough Bacon Cheeseburger and the Spicy Chicken Sandwich. We also offer a fish sandwich, stuffed baked potatoes, prepackaged salads, french fries, onion rings and fried zucchini. Most restaurants also have self-service salad bars and a breakfast menu including eggs, bacon, sausage, French Toast Dips(R), the Sunrise Sandwich(R) and a breakfast burrito. In addition, the restaurants sell a variety of promotional products on a limited basis. Carl's Jr. was also among the first to offer self-service salad bars and all-you-can-drink beverage bars. Most Carl's Jr. restaurants are freestanding, ranging in size from 2,500 to 4,000 square feet, with a seating capacity of 65 to 115 persons and drive-thru facilities. Some restaurants are located in shopping malls and other in-line facilities. Currently, several building designs and floor plans are in use system-wide, depending upon operational needs, local zoning requirements and real estate availability. We have completed remodeling substantially all of our Carl's Jr. restaurants to provide them with a fresh, contemporary look. Exterior improvements include brighter colors, red awnings and a large, tilted Happy Star(R) logo. The new interiors feature the same bright colors, food murals, display cases for salads and desserts and accent lighting throughout the dining area. We believe that Carl's Jr.'s new restaurant design will further increase consumer awareness of the Carl's Jr. brand. Operations. We strive to maintain high standards in all products and equipment used by our restaurants, as well as our operations related to food preparation, service and cleanliness. We generally prepare or assemble hamburgers and chicken and steak sandwiches at Carl's Jr. restaurants after the customer has placed an order and serve them promptly. We charbroil hamburger patties, chicken breasts and sirloin steaks in a gas-fired double broiler that sears the meat on both sides in a uniform heating and cooking time. Each company-operated Carl's Jr. restaurant is operated by a general manager who has received nine to 13 weeks of management training. This training program involves a combination of classroom instruction and on-the-job training in specially designated training restaurants. The restaurant manager trains other employees in accordance with our guidelines. District managers, who are responsible for 11 to 14 restaurants, also supervise restaurant managers. Approximately 56 district managers are under the supervision of six regional vice presidents, all of whom regularly inspect the operations in their respective districts and regions. Dual-Branding. Dual-branding allows a single restaurant to offer consumers two distinct brand menus. In May 1995, we entered into an agreement with Santa Barbara Restaurant Group, Inc. ("SBRG") to offer The Green Burrito menu at selected Carl's Jr. locations. We believe The Green Burrito's position in the popular Mexican food segment and its dinner menu orientation complement the Carl's Jr. menu. Customers of the Carl's Jr./Green Burrito dual-brand restaurants are able to order items from both Carl's Jr.'s and The Green Burrito's menu boards located at the same counter. Both menus are also available to customers utilizing the drive-thru. The Green Burrito menu offered at the dual-brand restaurants features a wide variety of traditional Mexican food items, including burritos, tostadas, enchiladas, tacos, taquitos and nachos as well as combination meals which are served with rice and beans. A variety of condiments such as jalapeno peppers, hot sauce and mild and hot salsa are available at self-serve salsa bars so that customers can spice and garnish their meals according to individual taste. We believe that this dual-branding program has attracted new customers, while increasing the frequency of customer visits at converted restaurants. In order to convert an existing Carl's Jr. restaurant to a Carl's Jr./Green Burrito restaurant, the additional equipment necessary to offer The Green Burrito menu is added to the Carl's Jr. restaurant, as well as new menu boards and new signage, both inside and outside, indicating the offering of both brands. In most cases, changes to the seating area or other parts of the physical structure of the restaurant are unnecessary. Our agreement with SBRG provides for the conversion of a total of 192 Carl's Jr. restaurants to Carl's Jr./Green Burrito dual-brand restaurants by calendar 2002. We are required to pay an initial franchise fee for each restaurant opened and remit royalties on The Green Burrito food sales to SBRG. At the end of fiscal 1996, we elected to sub-franchise, and shortly thereafter began offering, the Carl's Jr./Green Burrito dual-brand to our franchise community. As of January 31, 2000, 42 franchised Carl's Jr. restaurants have been converted to the Carl's Jr./Green Burrito concept. We receive a portion of the fee for each franchise conversion and royalties from our franchisees' Green Burrito food sales. Franchised and Licensed Operations. Our franchise strategy is designed to further the development of the Carl's Jr. chain and reduce the total capital we need to develop new Carl's Jr. restaurants. Franchise arrangements with Carl's Jr. franchisees, who operate in Arizona, California, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oklahoma, Oregon, Texas and Utah, generally provide for initial fees and continuing royalty payments to us based upon a 6 4 percentage of sales and provide for a minimum percentage of sales each month for advertising. Additionally, most franchisees purchase food, paper and other supplies from us. Franchisees may also be obligated to remit lease payments for the use of company-owned or leased restaurant facilities and to pay related occupancy costs, which include maintenance, insurance and property taxes. We also plan to continue to pursue non-traditional franchise development opportunities through innovative formats, including gasoline stations, convenience stores and institutional food service outlets. Our franchising philosophy is that only candidates with appropriate operational experience and financial stability are considered for the program. Specific net worth and liquidity requirements must be satisfied. Area development agreements generally require franchisees to open a specified number of Carl's Jr. restaurants in a designated geographic area within a specified time period. As of January 31, 2000, 371 Carl's Jr. restaurants were operated by our Carl's Jr. franchisees and licensees. The majority of our Carl's Jr. franchisees own more than one restaurant, with 15 franchisees owning seven or more restaurants. We presently anticipate that our Carl's Jr. franchisees and licensees will open up to 35 new Carl's Jr. restaurants during fiscal 2001. HARDEE'S Concept. Hardee's has a leading market presence in the Southeastern and Midwestern United States. The Hardee's restaurant chain offers a variety of menu items targeted at a broad audience in a quick-service, uniform format. Hardee's restaurants emphasize hometown hospitality by providing generous portions at reasonable prices in a friendly environment. Hardee's restaurant promotions often include "two-for-two" campaigns, which offer two menu items for two dollars. Menu and Restaurant Design. Hardee's restaurants currently offer hamburgers, chicken sandwiches, roast beef sandwiches and fish sandwiches for lunch and dinner, as well as fried chicken in our restaurants located in the Southeastern markets. Unlike many quick-service hamburger restaurants, Hardee's strength has been in its breakfast sales, which generate approximately 35% of its overall operating revenue, one of the highest in the quick-service hamburger industry. Hardee's breakfast menu features "made-from-scratch" biscuits, biscuit breakfast sandwiches and other items such as hash rounds and breakfast platters. Substantially all of Hardee's restaurants have drive-thru facilities, and selected restaurants are open 24 hours a day, primarily on weekends. Most Hardee's restaurants are freestanding, ranging in size from 3,000 to 3,500 square feet, with a seating capacity of 75 to 100 persons. Currently, several building designs and floor plans are in use system-wide, depending upon operational needs, local zoning requirements and real estate availability. Since our acquisition of Hardee's, we introduced certain made-to-order lunch and dinner menu items that are currently served in our Carl's Jr. restaurants, such as the Famous Star, and eliminated unprofitable product offerings. We are continuing our focus on revitalizing the brand to generate same-store sales growth. We are remodeling our Hardee's restaurants into a new "Star Hardee's" format, which we designed to accent the Hardee's brand strength with the menu and operating qualities of Carl's Jr. Star Hardee's is designed to showcase the new and improved Hardee's menu and to bring customers back to Hardee's. After testing various combinations of both brands in certain markets, we are now remodeling Hardee's restaurants to the new Star Hardee's format by installing charbroilers in the kitchens, remodeling the interior and exterior of the restaurants and installing new signage that retains the Hardee's name but shares space with Carl's Jr.'s Star logo. As of January 31, 2000, we had remodeled 491 company restaurants and had installed "all-you-can-drink" beverage bars and had introduced the Carl's Jr.-style limited table service in all of our restaurants. We plan to remodel up to 160 restaurants in fiscal 2001. Operations. We strive to maintain high standards in all products and equipment used by our Hardee's restaurants, as well as the operations related to food preparation, service and cleanliness. As part of our plan to implement our Carl's Jr. operating strategy at Hardee's, we are in the process of installing gas-fired double charbroilers in each existing company-owned Hardee's restaurant. In addition, we are in the process of implementing our Carl's Jr. management practices, including our extensive management training program, at Hardee's. Franchised and Licensed Operations. Franchise agreements with Hardee's franchisees, who operate in the Southeastern and Midwestern United States, generally provide for initial fees and continuing royalty payments to us based upon a percentage of sales. Most franchisees are required to purchase certain inventory and supplies from approved suppliers and are required to spend a minimum percentage of sales each month on advertising. In addition, 7 5 - most franchisees are required to purchase and install all fixtures, furnishings, signs and equipment specified in the approved site layout and plan. Prior to the opening of franchised restaurant, the general manager of each franchise is required to attend and complete our company-sponsored training program. Franchisees may also be required to remit lease payments for the use of our company-owned or leased restaurant facilities and to pay related occupancy costs. Since our acquisition of Hardee's, we have worked to restore Hardee's relationships with its franchisees. We have been supportive in establishing a franchisee association and improved communications with franchisees. As a result, our Hardee's franchisees have collectively increased their level of compliance, as royalty payments and advertising contributions have increased from before the acquisition. Our Hardee's franchisees have joined us in our Star Hardee's remodel program and, as of January 31, 2000, had remodeled 148 franchised Hardee's restaurants. As of January 31, 2000, 1,434 Hardee's restaurants were operated by our franchisees and licensees. The majority of our Hardee's franchisees own more than one restaurant, with 25 franchisees owning 10 or more restaurants. We presently anticipate that our Hardee's franchisees and licensees will open up to 65 new Hardee's restaurants during fiscal 2001. TACO BUENO Taco Bueno differentiates itself from its principal competitors by offering a diverse menu featuring generous portions of freshly prepared, high-quality food items. In addition to typical quick-service Mexican offerings, such as burritos, tacos, tostadas and combination meals, Taco Bueno features a number of signature menu items such as its Mexidips & Chips, Muchaco, Bueno Chilada Platter, Two-handed Taco and BOB ("Big Ol' Burrito"). Taco Bueno's Mexican platters include taco and burrito platters, beef and chicken taco salads and nacho platters, each of which is accompanied by rice, beans, freshly prepared guacamole and chips. The restaurants also feature a salsa bar which includes sliced jalapenos, diced onions, pico de gallo and hot sauce. Taco Bueno restaurants generally feature a "Santa Fe/Pueblo" architecture and exterior decor, which was designed for high visibility and consumer recognition, and generally range in size from 2,400 square feet to 3,200 square feet. Restaurant interiors include wooden tables and chairs, booth seating, stucco walls, warm colors and a southwestern theme, all of which are intended to create a distinctive atmosphere. In the first quarter of fiscal 2000, we began the roll-out of our new Taco Bueno remodel program. The new design features contemporary Mexican architecture, bright, eye-catching colors, serpentine stainless-steel counters and black slate tile. As of January 31, 2000, 21 Taco Bueno restaurants were remodeled. We presently anticipate that we will remodel up to ten Taco Bueno restaurants in fiscal 2001. Our strategy with respect to our Taco Bueno concept is to increase its market share and competitive presence in existing markets. We believe that the growing popularity of Mexican food and the relatively few national or regional Mexican quick-service restaurant chains provide us with a significant opportunity to expand the Taco Bueno concept within our core markets in Dallas/Ft. Worth, Tulsa and Oklahoma City and to enter into new markets. Since we acquired Taco Bueno in October 1996, we have opened 16 new Taco Bueno restaurants. INVESTMENTS IN OTHER RESTAURANT CONCEPTS We have selectively invested in other restaurant concepts, as follows (see Note 6 of Notes to the Consolidated Financial Statements): Santa Barbara Restaurant Group, Inc. SBRG owns, operates and franchises The Green Burrito and La Salsa quick-service Mexican food restaurants, JB's Restaurants and Galaxy Diner restaurants, which SBRG acquired from us in September 1998, and Timber Lodge Steakhouse. Through our dual-branding relationship with The Green Burrito, we are SBRG's largest franchisee. As of January 31, 2000, we owned approximately 8.9% of SBRG's outstanding common shares. Rally's and Checkers. In August 1999, Rally's Hamburgers, Inc. ("Rally's") merged with Checkers Drive-In Restaurants, Inc. ("Checkers") in a reverse acquisition. Checkers operates and franchises approximately 443 Checkers and 464 Rally's double drive-thru quick-service hamburger restaurants, primarily in the Southeastern and Midwestern United States, of which we operate 21 Rally's restaurants in California and Arizona. We currently have a 16.6% ownership interest in Checkers and the right to acquire common shares representing an additional 7.1% of Checkers. Boston Market. We hold a minority interest in Boston West, LLC ("Boston West"), which operates Boston Market restaurants in designated markets in Southern California as a franchised area developer of Boston Chicken, Inc. ("BCI"), the franchisor of the Boston Market restaurant concept. 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, 8 6 1998, Boston West filed a voluntary petition under Chapter 11 of the Federal Bankruptcy Code in order to restructure its overall operations. Since November 1998, Boston West has closed or sold 42 Boston Market restaurants. During the third quarter of fiscal 1999, we signed an agreement with Boston West to provide administrative and management services to the Boston Market franchises operated by Boston West. As of January 31, 2000, Boston West operated 56 Boston Market restaurants. We intend to continue to review our investments in other restaurant concepts. Although we have no present intention to dispose of or acquire additional interests in other restaurant concepts, we may do so in the future, depending on the business prospects of the restaurant concept, alternative business opportunities available to us and general economic conditions. PURCHASING AND DISTRIBUTION We purchase most of the primary food products and packaging supplies used in our Carl's Jr. restaurant system and warehouse and distribute such items to both company-operated and franchised Carl's Jr. restaurants. Although not required to do so, substantially all of our Carl's Jr. franchisees in California purchase most of their supplies from us. Our Carl's Jr. restaurant chain is one of the few businesses in the quick-service restaurant industry that has elected not to outsource all of its distribution activities. We currently purchase substantially all of the food, packaging and cleaning products sold or used in our Hardee's restaurants from Fast Food Merchandisers, Inc. ("FFM") and MBM Corporation ("MBM"). MBM, which was the primary distributor for FEI, acquired FFM in 1998, and consequently consolidated substantially all of Hardee's distribution requirements. FFM and MBM currently distribute such products to company-operated restaurants and to many of the Hardee's restaurants operated by our Hardee's franchisees. Pursuant to the terms of the distribution agreements, we are obligated to purchase substantially all of our specified product requirements from FFM and MBM for remaining terms of four years and five years, respectively. The prices we pay for FFM and MBM products, and the delivery fees we pay each distribution service, are subject to adjustment in certain circumstances, which may include increases resulting from changes in the distributor's cost structure. We believe our mature procurement process allows us to effectively manage food costs, provide adequate quantities of food and supplies at competitive prices, and generate revenues from Carl's Jr. franchisees by adding a nominal mark-up to cover direct costs and provide better overall service to our restaurants. We seek competitive bids from suppliers on many of our products, approve suppliers of those products and require them to adhere to our established product specifications. COMPETITION The foodservice industry is intensely competitive with respect to the quality and value of food products offered, concept, service, price, dining experience and location. We primarily compete with major restaurant chains, some of which dominate the quick-service restaurant industry, and also compete with a variety of other take-out foodservice companies and fast-food restaurants. Our competitors also include a variety of mid-price, full-service casual-dining restaurants, health and nutrition-oriented restaurants, delicatessens and prepared food stores, as well as supermarkets and convenience stores. We believe we possess the competitive strength to succeed in the markets in which we have restaurants. However, many of our competitors have substantially greater financial, marketing and other resources than we do, which may give them competitive advantages. Certain of the major quick-service restaurant chains have increasingly offered selected food items and combination meals at discounted prices. In recent years, our restaurant sales were adversely affected by aggressive promotions and price reductions by our competitors. Future changes in the pricing or other marketing strategies of one or more of our competitors could have a material adverse effect on our financial condition and results of operations. As our competitors expand operations, we expect competition to intensify. Such increased competition could have a material adverse effect on our financial condition and results of operations. We also face competition from other quick-service operators, retail chains and other companies and developers for desirable site locations, which may adversely affect the cost, implementation and timing of our expansion plans. TRADEMARKS AND SERVICE MARKS We own numerous trademarks and service marks, and have registered many of those marks, including Carl's Jr., the Happy Star logo, Hardee's and proprietary names for a number of the Carl's Jr., Hardee's and Taco Bueno menu items, with the United States Patent and Trademark Office. We believe our trademarks and service marks have significant value and play an important role in our marketing efforts. Green Burrito(R) is a registered trademark of SBRG. 9 7 - GOVERNMENT REGULATIONS Each company-operated and franchised restaurant must comply with regulations adopted by federal agencies and with licensing and other regulations enforced by state and local health, sanitation, safety, fire and other departments. In addition, these restaurants must comply with federal and state environmental regulations, but those regulations have not had a material effect on the restaurants' operations. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors can delay and sometimes prevent development of new restaurants and remodeling of existing restaurants in particular locations. We are also subject to federal laws and a substantial number of state laws regulating the offer and sale of franchises. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises and may also apply substantive standards to the relationship between franchisor and franchisee, including limitations on the ability of franchisors to terminate franchisees and alter franchise arrangements. We believe we are operating in substantial compliance with applicable laws and regulations governing our operations. We and our franchisees must comply with the Fair Labor Standards Act and various federal and state laws governing employment matters, such as minimum wages, overtime and other working conditions and citizenship requirements. Many of our employees are paid hourly rates related to the federal and state minimum wage laws, and, accordingly, increases in the minimum wage increase our labor cost. ENVIRONMENTAL MATTERS We are subject to various federal, state and local environmental laws. These laws govern discharges to air and water from our restaurants, as well as handling and disposal practices for solid and hazardous wastes. These laws may impose liability for damages from and the costs of cleaning up sites of spills, disposals or other releases of hazardous materials. We may be responsible for environmental conditions relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurants or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. Although we cannot assure you that all such environmental conditions have been identified, these conditions include the presence of asbestos-containing materials, leaking underground storage tanks and on-site spills. Further, certain properties formerly had landfills, historic industrial use, gasoline stations and/or dry cleaning businesses located on or near the premises. Corrective action, as required by the regulatory agencies, has been undertaken at some of the sites, although the majority of these sites are being remediated by former landowners or tenants. The enforcement of our rights against third parties for environmental conditions, such as off-site sources of contamination, may result in additional transaction costs for us. We are not aware of any environmental conditions that would have a material adverse effect on our businesses, assets or results of operations taken as a whole. Although environmental site assessments prepared for certain properties recommend limited further investigations or minor repairs, based on the information currently available to us, we do not believe any of these environmental issues would have a material adverse effect on these properties. Nevertheless, we cannot assure you that environmental conditions relating to prior, existing or future restaurants or restaurant sites will not have a material adverse effect on us. Moreover, we cannot assure you that: (1) future laws, ordinances or regulations will not impose any material environmental liability; or (2) the current environmental condition of the properties will not be adversely affected by tenants or other third parties or by the condition of land or operations in the vicinity of the properties. EMPLOYEES As of January 31, 2000, we employed approximately 61,000 persons, of whom approximately 57,000 were hourly restaurant, distribution or clerical employees and the remainder were managerial salaried employees engaged in administrative and supervisory capacities. A majority of our hourly employees are employed on a part-time basis to provide service necessary during peak periods of restaurant operations. None of our employees is currently covered by a collective bargaining agreement. We have never experienced a work stoppage attributable to labor disputes, and we believe our employee relations are good. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS The information contained in this Form 10-K contains forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "pro forma" or "anticipates," or other variations thereof (including their use in the negative), or by discussions of strategies, plans or intentions. A number of factors could cause 10 8 results to differ materially from those anticipated by such forward-looking statements. Among these factors are the Risk Factors described below and: - our ability to grow and implement cost-saving strategies; - increases in our food, labor, occupancy and other operating costs; - our ability to compete in the quick-service restaurant industry; - our ability to pay principal and interest on our substantial debt; - our ability to borrow in the future; - adverse legislation or regulation; - adverse weather conditions; - our ability to sustain or increase historical revenues and profit margins; - continuation of certain trends and general economic conditions in our industry; and - our ability to complete proposed sales of restaurants to qualified franchisees. In addition, such forward-looking statements are necessarily dependent upon assumptions and estimates that may prove to be incorrect. Accordingly, while we believe that the plans, intentions and expectations reflected in such forward-looking statements are reasonable, we cannot assure you that such plans, intentions or expectations will be achieved. The information contained in this Form 10-K, including the Risk Factors section hereof, identifies important factors that could cause such differences. RISK FACTORS LEVERAGE AND ABILITY TO SERVICE DEBT - TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. We have a significant amount of indebtedness. As of January 31, 2000, we had a total of $741.4 million of long-term debt and capital lease obligations, including current portion, and our debt to capitalization ratio was 0.58x. While in the past we have been able to generate sufficient earnings to satisfy our debt service obligations and other fixed charges, our substantial indebtedness could have important consequences to holders of our common stock and other securities. For example, it could: - make it more difficult for us to satisfy our obligations under our debt securities and other indebtedness; - increase our vulnerability to general adverse economic and industry conditions; - require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - place us at a competitive disadvantage compared to our competitors that have less debt; and - limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds. Failure to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on us. Our ability to make payments on or to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. Our ability to generate cash from our operations is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control, including seasonality. In addition, we cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule, that we will generate proceeds from the sale of restaurants at prices and terms considered by us to be appropriate, or that future borrowings will be available to us under our senior credit facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. 11 9 - In the event that our Hardee's restaurants do not show improvements in same-store sales or our Carl's Jr. restaurants were to experience declines in same-store sales, and if we are unable to generate proceeds from the sale of restaurants at prices and on terms sufficient to service our senior credit facility, we may need to refinance all or a portion of our indebtedness on or before maturity in order to avoid short and long-term liquidity shortage. The availability of capital resources will depend upon prevailing market conditions, interest rates and our then-existing financial position. UNCERTAINTIES RELATED TO THE REVITALIZATION OF HARDEE'S - WE WILL CONTINUE TO FACE CHALLENGES IN OUR ATTEMPT TO IMPROVE OUR HARDEE'S OPERATIONS. Revitalizing Hardee's will continue to challenge our management team. Hardee's is a well-established but underperforming brand. When we acquired Hardee's, it was experiencing declining system-wide same-store sales and a declining market share in the quick-service hamburger restaurant industry. Our initial turnaround strategy for Hardee's focused on managing costs and realizing purchasing strategies. We have been able to improve our Hardee's restaurant-level operating margins above their historical, pre-acquisition levels and we are continuing our focus on increasing sales by revitalizing the Hardee's brand. Specifically, we are investing large amounts of capital into reconfiguring our Hardee's restaurants' kitchens, replacing equipment, and remodeling restaurants to the Star Hardee's format. We have identified 105 underperforming Hardee's restaurants which we plan to close within the next 12 months. We have also embarked on our refranchising strategy whereby we intend to increase our proportion of franchised restaurants to company-operated restaurants, which will allow us to generate cash to pay down debt and to increase the number and quality of our Hardee's franchisees to help turn around those restaurants. We cannot assure you that these strategies will be successful. If we are unable to achieve anticipated sales improvements and further improvements in restaurant-level operating margins in our Hardee's restaurants on a timely basis, cash flows generated from Hardee's operations may not be adequate to support our turnaround strategies for Hardee's. Our success will also depend, in part, on our Hardee's franchisees. Hardee's franchisees are not required to participate in implementing all our strategies and we cannot assure you that all Hardee's franchisees will participate. If Hardee's franchisees do not implement our strategies we may not achieve our goals in the desired timeframe or at all. Failure to accomplish our goals could have a material adverse effect on our financial condition and results of operations. GROWTH STRATEGY - OUR ABILITY TO EXPAND OUR RESTAURANT CHAINS DEPENDS ON FACTORS BEYOND OUR CONTROL. Our growth strategy includes, among other things, opening additional company-operated and franchised restaurants, remodeling our restaurants and dual-branding our restaurant concepts. The success of our growth strategy will depend on numerous factors, many of which are beyond our control and the control of our franchisees, including: - the hiring, training and retention of qualified management and other restaurant personnel; - the ability to obtain necessary governmental permits and approvals; - competition for desirable site locations; - the availability of appropriate financing; and - general economic conditions. To manage our planned expansion, we must ensure the continuing adequacy of our existing systems and procedures, including our supply and distribution arrangements, restaurant management, financial controls and information systems. Given the improvements we have realized in recent years in the same-store sales growth in our company-operated Carl's Jr. restaurants, we cannot assure you that we will be able to maintain the historical level of same-store sales growth. Our Carl's Jr. company-operated restaurants experienced a decline in same-store sales in the fourth quarter of fiscal 1999 and the first three quarters of fiscal 2000. During the fourth quarter of fiscal 2000, our company-operated Carl's Jr. restaurants reported a same-store sales increase of 0.6%. COMPETITION - OUR SUCCESS DEPENDS ON OUR ABILITY TO COMPETE WITH OUR MAJOR COMPETITORS. The foodservice industry is intensely competitive with respect to the quality and value of food products offered, concept, service, price, dining experience and location. We compete with major restaurant chains, some of which dominate the quick-service restaurant industry. Our competitors also include a variety of mid-price, full-service casual-dining restaurants, health and nutrition-oriented restaurants, delicatessens and prepared food stores, as well as supermarkets and convenience stores. Many of our competitors have substantially greater financial, marketing and other resources than we have, which may give them competitive advantages. Our competitors could also make changes to pricing or other 12 10 - - marketing strategies. As our competitors expand operations, we expect competition to intensify. Such increased competition could have a material adverse effect on our financial condition and results of operations. THE FOODSERVICE INDUSTRY - CONSUMER PREFERENCES AND PERCEPTIONS, SEASONALITY AND GENERAL ECONOMIC CONDITIONS MAY HAVE SIGNIFICANT EFFECTS ON OUR BUSINESS. Foodservice businesses are often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends. The performance of individual restaurants may be adversely affected by traffic patterns, demographics and the type, number and locations of competing restaurants. Restaurant performance may also be affected by adverse weather conditions, particularly in our Hardee's restaurants, because a significant number of them are located in areas which experience severe winter conditions. Multi-unit foodservice businesses such as ours can also be materially and adversely affected by publicity resulting from poor food quality, illness, injury or other health concerns or operating issues stemming from one or a limited number of restaurants. We can be similarly affected by consumer concerns with respect to the nutritional value of quick-service food. In addition, our dependence on frequent deliveries of food and paper products subjects our restaurants to the risk that shortages or interruptions in supply, caused by adverse weather or other conditions, could adversely affect the availability, quality and cost of ingredients. Unfavorable trends or developments concerning factors such as inflation, increased food, labor and employee benefit costs (including increases in hourly wage and unemployment tax rates), increases in the number and locations of competing quick-service restaurants, regional weather conditions and the availability of experienced management and hourly employees may also adversely affect our financial condition and results of operations. Changes in economic conditions affecting our customers could reduce traffic in some or all of our restaurants or impose practical limits on pricing, either of which could have a material adverse effect on our financial condition and results of operations. Our continued success will depend in part on our management's ability to anticipate, identify and respond to changing conditions. GOVERNMENT REGULATIONS - WE MUST DEVOTE SIGNIFICANT RESOURCES TO COMPLY WITH EXTENSIVE LEGAL REQUIREMENTS APPLICABLE TO OUR FRANCHISE AND OTHER BUSINESS OPERATIONS. We are subject to federal regulation and certain state laws which govern the offer and sale of franchises. Many state franchise laws impose substantive requirements on franchise agreements, including limitations on noncompetition provisions and on provisions concerning the termination or nonrenewal of a franchise. Some states require that certain materials be registered before franchises can be offered or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect us or our franchisees. The restaurant industry is also subject to extensive federal, state and local governmental regulations, including those relating to the preparation and sale of food and those relating to building and zoning requirements. We and our franchisees are also subject to laws governing relationships with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements. Many of our employees are paid hourly rates based upon the federal and state minimum wage laws. Recent legislation increasing the minimum wage has resulted in higher labor costs to us and our franchisees. We anticipate that increases in the minimum wage may be offset through pricing and other cost-control efforts; however, we cannot assure you that we or our franchisees will be able to pass such additional costs on to customers in whole or in part. KEY DISTRIBUTORS - DISRUPTION IN DELIVERIES MAY ADVERSELY AFFECT OUR RESTAURANTS. Our profitability is dependent on, among other things, our continuing ability to offer fresh, high quality food at moderate prices. While we continue to operate our own distribution business for our Carl's Jr. system, we rely upon independent distributors for our Hardee's and Taco Bueno restaurants. In particular, our Hardee's restaurants depend on the distribution services of two distributors, MBM, an independent supplier and distributor of food and other products, and FFM, which was recently acquired by MBM. MBM and FFM are responsible for delivering food, paper and other products from our vendors to our Hardee's restaurants on a regular basis. MBM and FFM also provide distribution services to a large number of our Hardee's franchisees. Any disruption in these distribution services could have a material adverse effect on our business. ENVIRONMENTAL MATTERS - COMPLIANCE WITH ENVIRONMENTAL LAWS MAY ADVERSELY AFFECT OUR FINANCIAL HEALTH. We are subject to various federal, state and local environmental laws. These laws govern discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes. These laws may also impose liability for damages from and the costs of cleaning up sites of spills, disposals or other releases of hazardous materials. We may be responsible for environmental conditions relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurants or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. Although we cannot assure you that all such environmental 13 11 - conditions have been identified, these conditions include the presence of asbestos containing materials, leaks from chemical storage tanks and on-site spills. We are not aware of any environmental conditions that would have a material adverse effect on our businesses, assets or results of operations taken as a whole. Although environmental site assessments prepared for certain properties recommend limited further investigations or minor repairs, based on the information currently available to us, we do not believe any of these environmental issues would have a material adverse effect on these properties. Nevertheless, we cannot assure you that environmental conditions relating to prior, existing or future restaurants or restaurant sites will not have a material adverse effect on us. Moreover, we cannot assure you that: (1) future laws, ordinances or regulations will not impose any material environmental liability; or (2) the current environmental condition of the properties will not be adversely affected by tenants or other third parties or by the condition of land or operations in the vicinity of the properties (such as underground storage tanks). EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers are as follows:
NAME AGE POSITION - ---------------------------------------------------------------------------------------------- C. Thomas Thompson 50 Chief Executive Officer and President Rory J. Murphy 52 President and Chief Operating Officer, Hardee's Food Systems, Inc. Carl A. Strunk 62 Executive Vice President, Chief Financial Officer Andrew F. Puzder 49 Executive Vice President, General Counsel and Secretary Robert W. Wisely 54 Executive Vice President, Marketing John J. Dunion 42 Executive Vice President, Chief Administrative Officer Loren C. Pannier 58 Senior Vice President, Investor Relations
C. Thomas Thompson became Chief Executive Officer and a director in March 2000 and has served as President since October 1994 and Chief Operating Officer from October 1994 to March 2000. Mr. Thompson has been with Carl's Jr. since 1984, and currently operates 17 Carl's Jr. restaurants in the San Francisco and Bay Area. Mr. Thompson also serves as a member of the Board of Directors of Checkers. Mr. Thompson has more than 27 years of experience in the restaurant industry. Rory J. Murphy was appointed President and Chief Operating Officer of Hardee's immediately following our acquisition of Hardee's in July 1997. Mr. Murphy served as Executive Vice President, Restaurant Operations from June 1996 until July 1997, and served as our Senior Vice President, Restaurant Operations from February 1993 until June 1996. Mr. Murphy has been employed by us in various positions for 21 years. Carl A. Strunk was appointed Executive Vice President and Chief Financial Officer in February 1997. Mr. Strunk also serves as Executive Vice President and Chief Financial Officer of American National Financial, Inc. ("ANF") since August 1998. Mr. Strunk previously served as Executive Vice President of Fidelity National Financial, Inc. from 1992 to 1998 and as President of Land Resources Corporation from 1986 to 1991. Mr. Strunk is a Certified Public Accountant and is also a member of the Board of Directors of Micro General Corporation and ANF. Andrew F. Puzder became Executive Vice President, General Counsel and Secretary in February 1997. Mr. Puzder also serves as Chief Executive Officer of SBRG, where he has been since August 1997 and Executive Vice President of Fidelity, where he has been since January 1995. From March 1994 to December 1994, he was a partner with the law firm of Stradling Yocca Carlson & Rauth. Prior to that, he was a partner with the law firm of Lewis, D'Amato, Brisbois & Bisgard, from September 1991 through March 1994, and he was a partner of the Stolar Partnership from February 1984 through September 1991. Mr. Puzder is a member of the Board of Directors of SBRG, Pierre Foods, Javelin Systems, Inc. and Checkers. Robert W. Wisely was appointed Executive Vice President, Marketing in August 1997. Prior to that, he served as Senior Vice President, Marketing from January 1995. Mr. Wisely has been a Carl's Jr. franchisee since 1990. Prior to 1990, Mr. Wisely served as Senior Vice President, Marketing from 1985 to 1990. John J. Dunion was appointed Executive Vice President, Chief Administrative Officer in February 1999. Mr. Dunion served as Senior Vice President, Purchasing since April 1998 and Vice President, Purchasing since September 1996. Prior to that, he served as Vice President, Purchasing at Unigate Restaurants, Inc. from 1993 to September 1996. 14 12 - - Loren C. Pannier was appointed Senior Vice President, Investor Relations in September 1996 and served as Senior Vice President, Purchasing/Distribution from January 1996 to September 1996. Mr. Pannier also served as our Chief Financial Officer from 1980 to May 1995. Mr. Pannier has been a Senior Vice President since 1980, and he has been employed by us for over 27 years. ITEM 2. Properties The following table sets forth information regarding our restaurant properties at January 31, 2000:
Land and Land Leased Land and Building And Building Building Owned Owned Leased Total - ----------------------------------------------------------------------------------------------------------- CARL'S JR.: Company-operated 90 106 367 563 Franchisee-operated(1) 13 11 112 136 Third party-operated/vacant(2) 7 3 42 52 --------------------------------------------- Subtotal 110 120 521 751 --------------------------------------------- HARDEE'S: Company-operated 594 241 519 1,354 Franchisee-operated(1) 57 34 65 156 Third party-operated/vacant(2) 26 11 63 100 --------------------------------------------- Subtotal 677 286 647 1,610 --------------------------------------------- TACO BUENO: Company-operated 84 14 23 121 --------------------------------------------- Total 871 420 1,191 2,482 ---------------------------------------------
(1) "Franchisee-operated" properties are those which we own or lease and lease or sublease to franchisee operators. (2) "Third party-operated/vacant" are properties we own that are either operated by unaffiliated entities or are currently vacant. The terms of our leases or subleases vary in length expiring on various dates through 2062. We do not expect the expiration of these leases to have a material impact on our operations in any particular year, as the expiration dates are staggered over a number of years and many of the leases contain renewal options. Our corporate headquarters and primary distribution center, located in Anaheim, California, are leased and contain approximately 78,000 and 102,000 square feet, respectively. We own Hardee's corporate facility in Rocky Mount, North Carolina. ITEM 3. Legal Proceedings We are from time to time the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect us and our restaurants, regardless of whether such allegations are valid or whether we are liable. We are also the subject of complaints or allegations from employees, former employees and franchisees from time to time. We believe that the lawsuits, claims and other legal matters to which we have become subject in the course of our business are not material to our financial condition or results of operations, but an existing or future lawsuit or claim could result in an adverse decision against us that could have a material adverse effect on our financial condition and results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders None. 15 13 - PART II ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters Our common stock is listed on the New York Stock Exchange under the symbol "CKR". As of March 31, 2000, there were approximately 1,900 record holders of our common stock. The following table sets forth, for the periods indicated, the high and low closing sales prices of our common stock, as reported on the New York Stock Exchange Composite Tape:
High Low - ------------------------------------------------------------------------------ FISCAL 2000 First Quarter $26.56 $13.00 Second Quarter 18.94 12.50 Third Quarter 13.75 6.50 Fourth Quarter 8.19 5.69 FISCAL 1999 First Quarter $41.65 $28.07 Second Quarter 40.00 27.10 Third Quarter 35.85 15.63 Fourth Quarter 30.25 18.64
The foregoing prices have been adjusted to give retroactive effect to a three-for-two stock split effected as a stock dividend in January 1997 and 10% stock dividends in February 1998 and January 1999. We have followed a policy of paying semiannual cash dividends, at the annual rate of $0.07 per share (adjusted to give retroactive effect to the stock split and stock dividends), during fiscal 1998 and 1999. During fiscal 2000, our Board of Directors increased the semi-annual dividend rate to $0.04 per share. On April 7, 2000, we declared a $0.04 dividend, which is payable on May 4, 2000 to holders of record on April 19, 2000. Continued payment of dividends on our common stock will depend upon our operating results, business requirements and financial condition, and such other factors that our Board of Directors considers relevant. Our senior credit facility and certain of our debt instruments impose limitations on the amount of dividends or other distributions that we may make on our common stock. 16 14 - - ITEM 6. Selected Financial and Operating Data The information set forth below should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. Per share data has been retroactively adjusted for stock splits and stock dividends since our inception. SELECTED FINANCIAL AND OPERATING DATA
- -------------------------------------------------------------------------------------Fiscal-year-ended-or-as-of-January 31,(1) (In thousands except per share amounts, restaurant counts, and percentages) 2000 1999(2) 1998(3) - ----------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenues(5) $1,990,073 $1,892,044 $1,149,659 Operating income 47,869 168,220 86,191 Interest expense 63,283 43,453 16,914 Net income (loss)(6) (29,117) 77,712 46,757 Net income (loss) per share - diluted $ (0.56) $ 1.45 $ 0.97 Weighted average shares outstanding - diluted 51,668 56,714 48,121 Cash dividends paid per common share $ 0.08 $ 0.07 $ 0.07 Ratio of earnings to fixed charges(7) 0.5x 2.8x 3.2x CONSOLIDATED BALANCE SHEET DATA: Total assets $1,568,514 $1,496,914 $ 957,144 Total long-term debt and capital lease obligations, including current portion 741,419 625,393 216,905 Stockholders' equity $ 545,757 $ 586,842 $ 498,512 - -----------------------------------------------------------------------------------Fiscal-year-ended-or-as-of-January 31,(1) (In thousands except per share amounts, restaurant counts, and percentages) 1997(4) 1996 - --------------------------------------------------------------------------- ------------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenues(5) $613,380 $464,667 Operating income 44,139 27,000 Interest expense 9,877 10,004 Net income (loss)(6) 22,302 10,952 Net income (loss) per share - diluted $ 0.61 $ 0.33 Weighted average shares outstanding - diluted 36,603 33,611 Cash dividends paid per common share $ 0.04 $ 0.04 Ratio of earnings to fixed charges(7) 2.9x 2.0x CONSOLIDATED BALANCE SHEET DATA: Total assets $410,367 $248,009 Total long-term debt and capital lease obligations, including current portion 86,993 82,423 Stockholders' equity $214,804 $101,189
(1) Our fiscal year is 52 or 53 weeks, ending the last Monday in January. For clarity of presentation, all years are presented as if the fiscal year ended January 31. Fiscal 2000 includes 53 weeks. Fiscal 1999, 1998, 1997 and 1996 include 52 weeks. (2) Fiscal 1999 includes operating results of FEI from and after April 1, 1998. (3) Fiscal 1998 includes operating results of Hardee's from and after July 15, 1997. Share and per share data were also affected during fiscal 1998 by a public offering of 10,088,375 shares of common stock, completed in July 1997. (4) Share and per share data were affected during fiscal 1997 by a public offering of 5,218,125 shares of common stock, completed in November 1996. (5) Fiscal 2000, 1999, 1998 and 1997 include $104.7 million, $135.1 million, $195.2 million and $94.3 million, respectively, of revenues generated from other restaurant concepts we acquired during fiscal 1997. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." (6) Net income (loss) for fiscal 2000 and 1999 includes an extraordinary gain of $0.3 million and $3.3 million, respectively, net of applicable income tax expense, on early retirement of debt. Fiscal 2000 also includes charges of $80.3 million, or $49.3 million net of tax. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." (7) For purposes of calculating the ratio of earnings to fixed charges (a) earnings represent income (loss) before income taxes and extraordinary item and fixed charges, and (b) fixed charges consist of interest on all indebtedness, interest related to capital lease obligations, amortization of debt issuance costs and a portion of rental expense that is representative of the interest factor (deemed by us to be one-third). 17 15 -
Fiscal year ended January 31,(1) - -------------------------------------------------------------------------------------------------------------- 2000(2) 1999(2) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- CARL'S JR. RESTAURANTS Restaurants open (at end of fiscal year): Company-operated 563 539 443 415 394 Franchised and licensed 371 322 265 258 273 ---------------------------------------------------------------------- Total 934 861 708 673 667 ---------------------------------------------------------------------- Systemwide restaurant revenues: Company-operated restaurants $ 613,155 $ 535,038 $ 488,495 $ 443,304 $ 389,214 Franchised and licensed restaurants 306,564 261,341 214,534 204,700 193,984 ---------------------------------------------------------------------- Total systemwide revenues $ 919,719 $ 796,379 $ 703,029 $ 648,004 $ 583,198 ---------------------------------------------------------------------- Average annual sales per company- operated restaurant(3) $ 1,086 $ 1,185 $ 1,157 $ 1,114 $ 1,006 Percentage increase (decrease) in comparable company-operated restaurant sales(4) (3.0)% 3.0% 4.8% 10.7% 4.4% Company-operated restaurant-level operating margins 22.8% 25.9% 24.2% 23.1% 21.3%
Fiscal Fiscal 28 weeks 28 weeks Fiscal year ended year ended ended ended year ended January 31, January 31, January 31, July 15, December 31, 2000(1)(2) 1999(1)(2)(5) 1998(2)(6) 1997(2) 1996(2) - ------------------------------------------------------------------------------------------------------------------- HARDEE'S RESTAURANTS(7) Restaurants open (at end of period): Company-operated 1,354 1,403 863 782 808 Franchised and licensed 1,434 1,401 2,175 2,329 2,417 --------------------------------------------------------------------------- Total 2,788 2,804 3,038 3,111 3,225 --------------------------------------------------------------------------- Systemwide restaurant revenues: Company-operated restaurants $1,096,805 $1,063,075 $ 339,942 $ 346,481 $ 645,409 Franchised and licensed restaurants 1,219,229 1,412,929 1,123,034 1,152,442 2,350,733 --------------------------------------------------------------------------- Total systemwide revenues $2,316,034 $2,476,004 $1,462,976 $1,498,923 $2,996,142 --------------------------------------------------------------------------- Average annual sales per company- operated restaurant(3) $ 769 $ 793 $ 803 $ 831 $ 848 Percentage decrease in comparable company-operated restaurant sales(4) (5.0)% (7.5)% (7.2)% (0.4)% (4.4)% Company-operated restaurant-level operating margins(8) 9.7% 16.7% 12.9% 7.8% 6.2%
(1) Our fiscal year is 52 or 53 weeks, ending the last Monday in January. For clarity of presentation, all years are presented as if the fiscal year ended January 31. Fiscal 2000 includes 53 weeks. Fiscal 1999, 1998, 1997 and 1996 include 52 weeks. (2) The Hardee's-to-Carl's Jr. converted restaurants operating in Oklahoma, Kansas and Texas are included in the number of Carl's Jr. restaurants open at January 31, 2000 and 1999. The operating results of these restaurants, however, are included in the Carl's Jr. financial information beginning in fiscal 2000. In fiscal 1999 and prior, these operating results are included as part of Hardee's financial results. There were 63 company-operated and nine franchised restaurants open during fiscal 1999 and 64 company-operated and eight franchised restaurants open during fiscal 2000 in these markets. Carl's Jr.'s average annual sales per company-operated restaurant, percentage decrease in comparable company-operated restaurant sales and company-operated restaurant-level margins were, $1,150, (2.1%) and 24.1%, respectively, in fiscal 2000 excluding the Hardee's-to-Carl's Jr. converted restaurants. 18 16 - - (3) Calculated on a 52- or 53-week trailing basis for all years presented. (4) Includes only restaurants open throughout the full years being compared. (5) Fiscal 1999 includes operating results of FEI from and after April 1, 1998. (6) Includes results of operations for Hardee's from and after July 15, 1997. (7) Except as otherwise noted, company-operated Hardee's restaurant data for the fiscal year ending December 31, 1996 and for the 28 weeks ended July 15, 1997 excludes the results of Hardee's restaurants sold or closed prior to December 31, 1996 and July 15, 1997, respectively. (8) Restaurant-level margins for Hardee's in fiscal 2000 were 13.6% after excluding a $42.0 million store closure reserve and asset impairment charge recorded in the fourth quarter of fiscal 2000. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and related notes and "Selected Financial and Operating Data" included elsewhere in this Form 10-K. OVERVIEW We are a leading nationwide owner, operator and franchisor of quick-service restaurants, operating principally under the Carl's Jr., Taco Bueno and Hardee's brand names. Based on domestic systemwide sales, our Hardee's and Carl's Jr. chains are the fourth and seventh largest quick-service hamburger restaurant chains in the United States, respectively. As of January 31, 2000, the Carl's Jr. system included 934 restaurants, of which we operated 563 restaurants and our franchisees and licensees operated 371 restaurants. The Carl's Jr. restaurants are located in the Western United States, predominantly in California. As of January 31, 2000, the Hardee's system consisted of 2,788 restaurants, of which we operated 1,354 restaurants and our franchisees and licensees operated 1,434 restaurants. Hardee's are located throughout the Eastern and Midwestern United States, predominantly in the Southeast. As of January 31, 2000, our Taco Bueno chain consisted of 122 quick-service Mexican restaurants in Texas and Oklahoma, of which 121 were operated by us and one was operated by a licensee. We derive our revenues primarily from sales by company-operated restaurants and revenues from franchisees, including franchise and royalty fees, sales to Carl's Jr. franchisees and licensees of food and packaging products, rentals under real property leases and revenues from the sale of equipment to our franchisees. Restaurant operating expenses consist primarily of food and packaging costs, payroll and other employee benefits and occupancy and other operating expenses of company-operated restaurants. Operating costs of our franchised and licensed restaurants include the cost of food and packaging products sold to Carl's Jr.'s franchisees and licensees, lease payments on properties subleased to our franchisees and the costs of equipment purchases. Other operating expenses, including advertising expenses and general and administrative expenses, relate to company-operated restaurants as well as franchisee and licensee operations. Our revenues and expenses are directly affected by the number and sales volume of company-operated restaurants and, to a lesser extent, of franchised and licensed restaurants. FACTORS AFFECTING COMPARABILITY OF FISCAL YEARS 2000, 1999 AND 1998 Our fiscal year results in a fifty-third week every five or six years. Fiscal 2000 includes 53 weeks of operations. Fiscal 1999 and 1998 include 52 weeks of operations. In the fourth quarter of fiscal 2000, we recorded pre-tax charges of $80.3 million ($49.3 million after-tax). These charges consisted of: (a) establishing a $16.3 million store closure reserve and recording a $25.7 million asset impairment charge for 105 Hardee's restaurants which we plan on closing within the next 12 months; (b) recording an impairment charge and equity losses of $37.3 million to write-down our various long-term investments in other restaurant concepts to fair market value; (c) recording $2.1 million of restructuring charges in connection with consolidating certain administrative functions from Rocky Mount, North Carolina, to Anaheim, California; (d) writing-off $3.6 million of deferred financing costs as a result of a commitment decrease in our senior credit facility; (e) writing-off $2.6 million of Year 2000 ("Y2K") costs associated with restaurant computer systems; (f) writing-off $6.6 million of capitalized software development that will not be utilized; (g) recording an additional $1.7 million in vacation expense in connection with a change in vacation policy; (h) recording a gain on the sale of Carl's Jr. and Hardee's restaurants of $19.5 million and (i) other miscellaneous net adjustments of $3.9 million. During fiscal 1999, we recorded a $15.0 million charge to write-down our investment in Boston West and recognized a gain of $10.3 million on the sale of our Star Buffet, Inc. ("Star Buffet") investment. In addition, in fiscal 19 17 - 1999, we reversed approximately $9.7 million of allowances for certain Hardee's franchisee note receivables as the previously established amounts proved to be unnecessary. We currently operate 64 Hardee's-to-Carl's Jr. converted restaurants in Texas, Oklahoma and Kansas and our franchisees operate eight Hardee's-to-Carl's Jr. converted restaurants in Oklahoma. Operating results for these restaurants for fiscal 2000 are included in the Carl's Jr. financial information. In fiscal 1999 and prior, these restaurants' operating results are included in the Hardee's financial information. We believe our acquisitions of Hardee's in July 1997 and FEI in April 1998 allowed us to significantly expand the scope of our operations and to become one of the leading nationwide operators of quick-service hamburger restaurants. Because of the significant effect of the acquisitions of Hardee's and FEI on our results of operations, our historical results of operations and year-to-year comparisons will not be indicative of future results and may not be meaningful. Operating results of Hardee's and FEI are included in our results of operations from July 15, 1997 and April 1, 1998, respectively. We acquired Taco Bueno and certain other restaurant concepts in fiscal 1997, and our results of operations for fiscal 2000, 1999 and 1998 include $104.7 million, $135.1 million and $195.2 million, respectively, of revenues generated by these restaurants. RESULTS OF OPERATIONS The following table sets forth the percentage relationship to total revenues, unless otherwise indicated, of certain items included in our consolidated statements of operations for the years indicated:
Fiscal year ended January 31, - --------------------------------------------------------------------------------------------- 2000 1999 1998 - --------------------------------------------------------------------------------------------- Revenues: Company-operated restaurants 91.2% 91.6% 88.9% Franchised and licensed restaurants and other 8.8 8.4 11.1 ---------------------------- Total revenues 100.0% 100.0% 100.0% ---------------------------- Operating costs and expenses: Restaurant operations(1): Food and packaging 30.5% 30.0% 30.7% Payroll and other employee benefits 31.2 30.9 30.5 Occupancy and other operating expenses 21.1 19.5 20.2 Store closure expense and provision for asset impairment 2.3 -- -- ---------------------------- 85.1 80.4 81.4 Franchised and licensed restaurants and other(2) 73.1 67.0 73.8 Advertising expenses(1) 6.7 6.1 5.7 General and administrative expenses 7.4 6.3 6.9 Operating income 2.4 8.9 7.5 Interest expense (3.2) (2.3) (1.5) Other income (expense), net (1.6) -- 0.7 ---------------------------- Income (loss) before income taxes and extraordinary item (2.4) 6.6 6.7 Income tax expense (benefit) (0.9) 2.7 2.6 ---------------------------- Income (loss) before extraordinary item (1.5) 3.9 4.1 Extraordinary item - gain on early retirement of debt 0.0 0.2 -- ---------------------------- Net income (loss) (1.5)% 4.1% 4.1% ----------------------------
(1) As a percentage of revenues from company-operated restaurants. (2) As a percentage of revenues from franchised and licensed restaurants and other. 20 18 - - FISCAL 2000 COMPARED WITH FISCAL 1999 AND FISCAL 1999 COMPARED WITH FISCAL 1998 REVENUES Company-operated Restaurants. Revenues from company-operated restaurants increased $82.5 million or 4.8% to $1.815 billion in fiscal 2000 as compared with fiscal 1999. A large part of this increase in revenues is the inclusion in fiscal 2000 of an extra week of operating results as compared with fiscal 1999. Carl's Jr., Hardee's and Taco Bueno company-operated restaurant revenues for the year accounted for sales increases of $78.1 million, $33.7 million and $10.8 million, respectively, offset in part by the decrease in revenues from our JB's Restaurants and Galaxy Diner restaurants which were sold to SBRG in September 1998. Same-store sales for our company-operated Carl's Jr. restaurants decreased 3.0% for fiscal 2000, but were positive 0.6% for the fourth quarter of fiscal 2000. Our company-operated Hardee's restaurants experienced a same-store sales decrease of 5.0%, while same-store sales for our company-operated Taco Bueno restaurants increased 7.1%, marking the fifth consecutive annual increase in same-store sales. We believe that the increase in revenue from our company-operated Carl's Jr. restaurants can be primarily attributed to an increase in the number of restaurants open and operating in fiscal 2000, as compared with fiscal 1999, offset in part by the decline in same-store sales, the continuation of our conversion of existing Carl's Jr. locations into Carl's Jr./Green Burrito dual-brand restaurants, the addition of several new sandwiches, including the $0.99 Spicy Chicken Sandwich, the Sourdough Bacon Cheeseburger and the Sourdough Breakfast Sandwich, and the inclusion of $39.2 million of revenue from the Hardee's-to-Carl's Jr. converted restaurants in fiscal 2000 that had been included in the Hardee's results of operations in fiscal 1999. Taco Bueno's increase in revenues is primarily attributable to the addition of 12 new Taco Bueno restaurants open and operating in fiscal 2000 and the image enhancement program for the chain, which began in fiscal 1999. The revenue increase from our Hardee's restaurants was driven by including a full year of operations of the FEI restaurants and other franchised restaurants acquired during fiscal 1999, offset, in part, by the revenues from the Hardee's-to-Carl's Jr. restaurants that were included in Hardee's results for fiscal 1999, but are reflected in Carl's Jr. results of operations beginning in fiscal 2000. We attribute much of the decrease in same-store sales at Hardee's to our previous advertising strategy, which was not successful in promoting the Hardee's brand. The harsh weather experienced in the Southeast during the third quarter of fiscal 2000, including the effects of Hurricane Floyd, and the January storms in the Southeast during fourth quarter were also contributing factors. Average unit volumes at our company-operated Carl's Jr. and Hardee's restaurants ended the fiscal year at $1,086,000 and $769,000, respectively. Average unit volumes at our company-operated Taco Bueno restaurants continue to rise and increased 8% to $807,000 as of fiscal 2000 year-end. Revenues from company-operated restaurants increased $709.8 million or 69.4% to $1.732 billion in fiscal 1999 as compared with fiscal 1998. Carl's Jr. company-operated restaurant revenues for the year accounted for sales increases of $46.5 million. Our Hardee's and Taco Bueno restaurants contributed $723.1 million and $7.2 million, respectively, to the increase. Partially offsetting these increases was the decrease in revenues from our HomeTown Buffet and Casa Bonita concepts, which were disposed of in connection with the initial public offering of Star Buffet in September 1997, and our JB's Restaurants and Galaxy Diner restaurants which were sold to SBRG in September 1998. On a same-store sales basis, our Carl's Jr. sales increased 3.0%, and our Taco Bueno sales increased 7.3%, marking the fourth consecutive annual increase in same-store sales for both chains. Same-store sales for our company-operated Hardee's restaurants decreased 7.5%. The overall increase in revenues from company-operated Carl's Jr. restaurants was primarily the result of our continued focus on promoting great-tasting new and existing food products through increased advertising, the continuation of our conversion of existing Carl's Jr. locations into Carl's Jr./Green Burrito dual-brand restaurants, the image enhancement of our restaurants through a chain-wide remodeling program which was completed in December 1997, and an increase in the number of company-operated restaurants in operation in fiscal 1999 as compared with fiscal 1998. Taco Bueno's increase in revenues is due in part to a new advertising campaign, which also focuses on great-tasting food products, and the system-wide installation of new menu boards and all-you-can-drink beverage bars. In fiscal 1999, we also began an image enhancement program for our Taco Bueno restaurants and are focusing on real estate that is better located and more heavily trafficked than the properties previously targeted for new Taco Bueno restaurants. The revenue increase from our Hardee's restaurants was also driven by including a full year of operations of the restaurants initially acquired in July 1997 and by our acquisitions of FEI and other franchised restaurants during fiscal 1999. We attribute much of the decrease in same-store sales at Hardee's to menu deletions, as well as our discontinuation of promotional discounting and monthly new product introductions. The particularly harsh weather experienced in the Southeast and Midwest during the fourth quarter of fiscal 1999 was also a contributing factor. Franchised and Licensed Restaurants. Our revenues from franchised and licensed restaurants for fiscal 2000 increased $15.6 million, or 9.7%, to $175.4 million over fiscal 1999. This revenue increase was mainly due to increased royalties from, and food purchases by, Carl's Jr. franchisees and licensees as a result of an increase in the number of 21 19 - Carl's Jr. franchised restaurants operating in fiscal 2000 as compared with fiscal 1999 and an increase in equipment sales to Hardee's franchisees in connection with the remodeling of Hardee's restaurants to the Star Hardee's format. Also contributing to the increase was the inclusion of $2.0 million in franchise fees from the sale of company-operated Carl's Jr. and Hardee's restaurants to franchisees in fiscal 2000. Offsetting this increase in part was the loss of royalty revenue from our JB's franchised restaurants, which were sold to SBRG in September 1998. Our revenues from franchised and licensed restaurants for fiscal 1999 increased $32.6 million, or 25.6%, to $159.8 million over fiscal 1998. This increase is principally due to the addition of a full year of royalties earned by Hardee's franchise system and a full year of equipment sales to Hardee's franchisees, offset in part by the conversion of certain Hardee's franchised restaurants into company-operated restaurants, including our purchase of FEI in April 1998. A large part of the increase can also be attributed to increased royalties from, and food purchases by, Carl's Jr. franchisees and licensees as a result of higher sales volume at franchised and licensed Carl's Jr. restaurants and the increase in the number of Carl's Jr. franchised restaurants operating in fiscal 1999 as compared with fiscal 1998. OPERATING COSTS AND EXPENSES Restaurant Operations. Restaurant-level operating margins of our consolidated restaurant operations decreased in fiscal 2000 by 4.7% to 14.9% as compared with fiscal 1999, primarily as a result of establishing a $42.0 million store closure reserve and asset impairment charge for 105 of our Hardee's restaurants which we plan to close within the next 12 months. Depreciation and amortization expense also increased in fiscal 2000 as a result of new unit development of our Carl's Jr. and Taco Bueno chains, restaurant remodels at Hardee's and Taco Bueno and upgrades to our computer systems and applications in connection with our effort to fully integrate our recent restaurant acquisitions. Excluding the expense relating to the Hardee's store closure reserve and asset impairment charge, consolidated restaurant-level margins would have been 17.2% for fiscal 2000. Consolidated restaurant-level margins increased in fiscal 1999 by 1.0% to 19.6% as compared with fiscal 1998, primarily reflecting the improvement in operating margins at each of our three core concepts and the disposal of our remaining higher-cost family-style restaurant concepts in the third quarter of fiscal 1999. Combined pressures in commodity costs, labor costs, the introduction of the lower-priced product offerings and increased depreciation expense as a result of the 49 new Carl's Jr. restaurants opened in fiscal 2000 all contributed to the decrease in the chain's restaurant-level margins in fiscal 2000 to 22.8% as a percentage of revenues from company-operated restaurants from 25.9% in fiscal 1999 and 24.2% in fiscal 1998. Excluding the operating results of the Hardee's-to-Carl's Jr. conversion restaurants which were included in Hardee's operating results prior to fiscal 2000, Carl's Jr. restaurant-level operating margins for fiscal 2000 were 24.1%. The increase in operating margins in fiscal 1999 over fiscal 1998 reflects our increased purchasing synergies for food and paper, improved labor productivity and reduced workers' compensation costs. Our Carl's Jr. food and packaging costs as a percentage of company-operated revenues increased 0.4% to 29.2% in fiscal 2000 following a decrease of 1.1% in fiscal 1999 as compared with fiscal 1998. Increased commodity prices for beef and cheese as well as a shift in the product mix resulting from high sales levels of the $0.99 Spicy Chicken Sandwich, which was introduced in the third quarter of fiscal 2000, contributed to the increase in food and paper costs. During fiscal 1999 food costs decreased due to the purchasing economies our Carl's Jr. chain achieved as a result of the consolidated buying power directly realized from our addition of other restaurant concepts, partially offset by increased pressure from commodity prices and a change in the product mix as a result of the promotion of larger, more expensive sandwiches such as the Charbroiled Sirloin Steak Sandwich, which was introduced in the fourth quarter of fiscal 1998. Payroll and other employee benefits for our Carl's Jr. restaurants increased 1.2% to 27.0% as a percentage of company-operated revenues in fiscal 2000 from a fairly consistent level in prior years of 25.8% and 25.7% for fiscal 1999 and 1998, respectively. The overall tighter labor market has impacted our average hourly wage rate and increased competitive pressures in attracting and retaining qualified employees. The increase in the number of our Carl's Jr./Green Burrito dual-brand restaurants also contributed to the rise in payroll and employee benefit costs due to the more labor intensive nature of the Green Burrito system. Further, we made a conscious decision to add additional employee hours to improve guest service at the restaurants. During fiscal 1999, the September 1997 federal and March 1998 California minimum wage increases contributed to the rise in payroll and employee benefit costs. Offsetting the impact of these partial year increases was the savings resulting from the continuation of labor productivity programs implemented in prior fiscal years to decrease costs further and improve direct labor efficiencies. Carl's Jr. occupancy and other operating expenses, as a percentage of revenues from company-operated Carl's Jr. restaurants, were 21.0%, 19.5%, and 20.2% in fiscal 2000, 1999, and 1998, respectively. The increase in fiscal 22 20 - - 2000 was largely a result of additional depreciation expense on the new units built during fiscal 2000 and increased repair and maintenance expense at the restaurants as the number of years grows since our last remodel program. Also increasing occupancy and other operating expenses as a percentage of revenues is the inclusion in fiscal 2000 of the Hardee's-to-Carl's converted restaurants. These restaurants' revenues are lower than the Carl's Jr. system, therefore fixed costs as a percentage of revenues are higher. The decrease in occupancy and other operating expenses as a percentage of company-operated restaurants in fiscal 1999, as compared with fiscal 1998, is largely due to our efforts to maintain costs at the prior fiscal year levels in conjunction with the fixed nature of the expenses and the increase in revenues in fiscal 1999. Hardee's company-operated restaurant-level margins for fiscal 2000, excluding the $42.0 million store closure reserve and asset impairment charge, were 13.6%, as compared with 16.7% in fiscal 1999 and 12.9% in fiscal 1998. Although Hardee's restaurant-level operating margins are substantially lower than our Carl's Jr. and Taco Bueno quick-service restaurant concepts and despite the decrease in restaurant-level margins from fiscal 1999, we have increased operating margins at Hardee's from 6.2% for those restaurants open and operating as of December 31, 1996, the year prior to our acquisition. We have accomplished this reduction of costs through many of the same cost-saving measures we implemented at our Carl's Jr. restaurants over the past four to five years, including: the introduction of the Carl's Jr. labor matrix to refine labor usage; a focus on safety and accident prevention as a method of lowering workers' compensation costs; the reduction of food waste and theft tolerance levels; and the use of purchasing synergies to lower food and paper costs. Additionally, the simplification of the Hardee's menu and conforming Hardee's depreciation policies also contributed to the increase in restaurant-level operating margins since we acquired it. Hardee's food and packaging costs as a percentage of company-operated revenues increased during fiscal 2000 by 0.8% to 31.4% and decreased 1.5% in fiscal 1999 as compared with fiscal 1998. This fiscal 2000 increase was due mainly to special promotional discounts and an increase in commodity prices. Partially offsetting the fiscal 2000 increase, and contributing to the decrease in fiscal 1999, were the effects of a reduction in food waste and theft tolerance levels and continued purchasing economies achieved as a result of our increased consolidated buying power. Payroll and other employee benefits, as a percentage of revenues from company-operated Hardee's restaurants, increased 0.3% to 33.5% in fiscal 2000 and decreased 2.2% in fiscal 1999 to 33.2% from fiscal 1998. This increase in payroll and other employee benefits in fiscal 2000 is primarily a result of the increased labor required in the remodeled Star Hardee's restaurants and higher average hourly wage rates as a result of a tighter labor market. The decrease in labor from fiscal 1998 to fiscal 1999 is mainly a result of the introduction of the Carl's Jr. labor matrix to refine labor usage and a focus on safety and accident prevention as a method of lowering workers' compensation costs. As a percentage of revenues from Hardee's company-operated restaurants, occupancy and other operating expenses increased 2.0% to 21.5% in fiscal 2000 over the fiscal 1999 and 1998 levels of 19.5% and 19.6%, respectively. The percentage increase in occupancy and other operating expenses in fiscal 2000 is due primarily to the fixed nature of the costs combined with a decrease in the same-store revenue base, as well as increased depreciation costs in connection with remodeling 387 restaurants to the Star Hardee's format during fiscal 2000. In the fourth quarter of fiscal 2000, we provided a store closure reserve at Hardee's of $16.3 million for 105 Hardee's restaurants that we plan on closing over the next 12 months. The store closure reserve represents a liability for the net present value of any remaining lease obligation after the expected closure dates, net of estimated sublease income, if any. Additionally, a related provision for asset impairment of $25.7 million was recorded to reduce the carrying amount of these restaurants' assets ($15.6 million) and goodwill ($10.1 million) to amounts projected to be recovered by the individual restaurants' operating cash flows over the restaurants' estimated remaining period of operation. The provision for restaurant asset impairment is net of amounts expected to be recovered, if any, from the sale of such assets upon the closure of the store. Taco Bueno's restaurant-level operating margins for fiscal 2000 were 24.5%, a decrease of 0.7% from fiscal 1999. In fiscal 1999, Taco Bueno's restaurant-level margins increased 0.6% to 25.2% from fiscal 1998. The decrease in fiscal 2000 was mainly a result of increases in commodity costs for meat and cheese, a change in packaging materials used and an increase in workers compensation costs as a result of a revaluation of our historical worker's compensation experience rating. These decreases in restaurant-level margins for fiscal 2000 were partially offset by a decrease in occupancy and operating expenses, which is due, in large part, to the fixed nature of these costs in combination with the increased revenue base at our Taco Bueno restaurants. The increase in fiscal 1999 over fiscal 1998 was primarily due to the fixed nature of occupancy and other operating expenses combined with an increase in revenues, as well as the savings achieved from implementing some of the same labor productivity programs successfully implemented at our Carl's Jr. restaurants in the past four to five years. Offsetting these benefits in fiscal 1999 was the negative impact of the 23 21 - increased commodity costs for cheese and tomatoes and increased lease expense for the new point of sale equipment installed in all of our Taco Bueno restaurants. Franchised and Licensed Restaurants. Franchised and licensed restaurant and other costs increased 19.7% to $128.1 million in fiscal 2000 over fiscal 1999 and 14.1% to $107.0 million in fiscal 1999 over fiscal 1998. These increases are primarily due to increased food and other products purchased from us by Carl's Jr. franchisees and licensees and increased equipment purchases from us by Hardee's franchisees and licensees. As a percentage of revenues from franchised and licensed restaurants, these costs increased 6.1% in fiscal 2000 and decreased 6.8% in fiscal 1999, as compared with fiscal 1999 and 1998, respectively. While royalties from Hardee's franchised and licensed restaurants decreased during fiscal 2000 as a result of the repurchase of several of Hardee's franchised restaurants including FEI, revenues from equipment sales to Hardee's franchised and licensed restaurants increased. The cost structure associated with equipment sales is much higher than that associated with the royalty stream of income. While Carl's Jr. earns its income from both royalties paid and food purchases by franchisees, Hardee's earns a higher percentage of its franchised restaurant revenue from royalties paid because its franchisees purchase food, supplies and other products from independent vendors and distributors. As a result, the cost structure associated with the Hardee's franchise operations is substantially lower than that associated with the Carl's Jr. franchise operations. Consequently, these costs as a percentage of revenues from franchised and licensed restaurants decreased in fiscal 1999 as compared with fiscal 1998 due to including a full year of Hardee's operating results in fiscal 1999. Advertising Expenses. Advertising expenses increased $16.3 million in fiscal 2000 over fiscal 1999, and $47.0 million in fiscal 1999 over fiscal 1998, principally due to increased advertising support for 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 and as a percentage of revenues in fiscal 2000 and 1999 as compared with the prior fiscal years. General and Administrative Expenses. General and administrative expenses increased $28.7 million to $147.4 million in fiscal 2000 over fiscal 1999 and $39.8 million to $118.7 million in fiscal 1999 over fiscal 1998. General and administrative expenses were 7.4%, 6.3% and 6.9% of total revenues in fiscal 2000, 1999, and 1998, respectively. This increase in general and administrative expenses in fiscal 2000 reflects the planned addition of regional general and administrative expenses in the FEI markets that did not exist in the prior year, including additional quality assurance and regional human resources support; higher training expenses for the accelerated Star Hardee's remodel rollout; a full year of FEI goodwill amortization expense; and an increase in information technology costs associated with the implementation of our new computer system. Also impacting general and administrative expenses in fiscal 2000 are $8.5 million of charges, including: (a) $2.1 million of restructuring charges in connection with consolidating certain administrative functions from Rocky Mount, North Carolina to Anaheim, California; (b) $2.6 million of Y2K expenses associated with restaurant computer systems; (c) $6.6 million in capitalized software development costs which were written-off because they will not be utilized; (d) $1.7 million in additional vacation expense in connection with a change in our vacation policy; (e) $2.8 gain on the sale of an aircraft that we acquired in connection with the original Hardee's acquisition; and (f) $1.7 million in other miscellaneous credits. After adjusting for these items, general and administrative expenses in fiscal 2000 were $138.9 million, or 7.0% of total revenues. On November 11, 1999, we announced that we would consolidate the majority of the corporate functions of our Hardee's subsidiary, located in Rocky Mount, North Carolina, within our corporate headquarters in Anaheim, California, creating a single support and administration center for our Carl's Jr., Hardee's and Taco Bueno restaurants. During the fourth quarter of fiscal 2000, we accrued $2.1 million of termination benefits for approximately 150 employees we will be laying-off between mid-January 2000 and August 2000. We paid $0.3 million to approximately 50 employees who were involuntarily terminated in January 2000. Such amounts were charged against the severance reserve which is included as part of other current liabilities. The increase in general and administrative expenses in fiscal 1999 in terms of dollars spent is primarily the result of the added expense of supporting Hardee's restaurant operations. General and administrative expenses also increased in fiscal 1999 due to recording incentive compensation accruals for regional restaurant management and selected corporate employees for improved operating performance. The decrease in general and administrative expenses as a percentage of total revenues in fiscal 1999 over fiscal 1998 also reflects the economies of scale we realized by absorbing certain costs associated with FEI into our existing infrastructure. 24 22 - - INTEREST EXPENSE Interest expense for fiscal 2000 increased $19.8 million to $63.3 million as compared with fiscal 1999. The increase is due to higher levels of borrowings outstanding and an increase in interest rates under our senior credit facility, a full year of interest expense on our $159.2 million, 4.25% convertible subordinated notes in fiscal 2000 as compared with fiscal 1999, and the issuance of our $200.0 million, 9.125% senior subordinated notes in the first quarter of fiscal 2000, the net proceeds of which we used to pay down our senior credit facility which carried a lower rate of interest. Also increasing interest expense in fiscal 2000 was the write-off of $3.6 million of deferred financing costs associated with a commitment decrease in our senior credit facility. Interest expense for fiscal 1999 increased $26.5 million to $43.5 million as compared with fiscal 1998 due to higher levels of borrowings outstanding, including the issuance of our convertible subordinated notes in the first quarter of fiscal 1999, and the assumption of capital lease obligations as a result of the acquisitions of Hardee's in July 1997 and FEI in April 1998. As a result of the amendment to our senior credit facility subsequent to year-end, the applicable margin used to determine our interest rate payable on outstanding borrowings was increased. As such, we would expect to see our interest expense rise in future quarters even if our borrowings outstanding under our senior credit facility remain unchanged. However, we plan to mitigate the effect of higher interest rates by reducing outstanding borrowings with proceeds from sales of restaurants. OTHER INCOME (EXPENSE), NET Other income (expense), net, mainly consists of interest income, lease income, dividend income, gains and losses on sales of restaurants, income and loss on long-term investments, property management expenses and other non-recurring income and expenses. Other income (expense), net in fiscal 2000 was an expense of $32.0 million. In fiscal 2000, charges of $28.7 million were recorded during the fourth quarter. These charges include: (a) recording an impairment charge and equity losses of $37.3 million to write-down our investments in Checkers (which merged with Rally's in August 1999), SBRG, and Boston West to fair market value based upon our conclusion that these investments have experienced an other than temporary decline in value; (b) recording a gain on the sale of Carl's Jr. and Hardee's restaurants of $19.5 million; and (c) writing-off approximately $10.9 million of Hardee's acquisition-related assets which we believe to have no future benefit. Excluding these charges, other income (expense), net was an expense of $3.3 million, an increase of $2.6 million as compared with the fiscal 1999 expense of $0.7 million. The increase in expense in fiscal 2000, after adjusting for these charges, was largely due to a reduction in interest income as a result of our reduced note receivable from Checkers, the settlement of certain claims against us relating to our investment in Boston West and the recognition of lease income from Boston West in the prior year. Other income (expense), net decreased $8.0 million in fiscal 1999 over 1998. The decrease in fiscal 1999 was primarily due to a $15.0 million charge to our investment in Boston West, offset in part by a non-recurring gain of $10.3 million resulting from the disposition of our investment in Star Buffet. Decreases in lease, dividend and interest income, as well as larger losses recorded from our investment in Rally's have also contributed to the overall decrease in fiscal 1999. EXTRAORDINARY ITEM During the third quarter of fiscal 1999, our Board of Directors approved the buyback of up to $50.0 million aggregate principal amount of convertible subordinated notes. In fiscal 2000 and fiscal 1999, we repurchased $3.0 million and $35.0 million, respectively, of such notes for $2.5 million and $28.8 million in cash, respectively, including accrued interest thereon. In connection with this repurchase, we recognized an extraordinary gain on the early retirement of debt of $0.3 and $3.3 million, net of applicable income taxes of $0.2 million and $2.1 million for fiscal 2000 and 1999, respectively. IMPACT OF INFLATION Inflation has an impact on food, construction, occupancy, labor and benefit costs, all of which can significantly affect our operations. Historically, we have been able to pass any higher costs due to these inflationary factors along to our customers because those factors have affected nearly all restaurant companies. During fiscal 2000, 1999, and 1998, however, we have emphasized cost controls rather than price increases, given the price competitiveness of the quick-service restaurant industry. SEASONALITY Our business is affected by seasonality. Average restaurant sales are normally higher in the summer months than during the winter months for each of our restaurant concepts. In comparison with our other restaurant concepts, the weather has a greater impact on average restaurant sales at our Hardee's restaurants, because a significant number of them are 25 23 - located in rural areas that experience severe winter conditions without the benefit of municipal storm services typical of more urban areas. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased $9.8 million to $36.5 million in fiscal 2000. In fiscal 2000, we generated cash flows from operating activities of $114.6 million, compared with $178.7 million in fiscal 1999. This decrease was mainly due to the continued decrease in same-store sales at our Hardee's restaurants, combined with a decreases in operating margins at all of our restaurant concepts and increased interest expense. Investing activities absorbed $216.2 million of our cash to fund capital additions of $263.6 million. Partially generating some of the funds necessary for these investments were the proceeds of $52.8 million from the sale of property and equipment to our franchisees and $7.7 million from collections on and sale of notes receivable, related party receivables and leases receivable. Financing activities provided us with $91.8 million in cash, primarily from a net increase of $116.6 million in long-term borrowings. Cash flows from operating and financing activities were mainly used to fund the remodeling of our Hardee's restaurants to the Star Hardee's format, to build new Carl's Jr. and Taco Bueno restaurants, to pay $10.8 million of deferred financing costs associated with the issuance of $200.0 million of senior subordinated notes, to repay $7.7 million in capital lease obligations, to purchase $10.4 million of our common stock and to pay dividends of $4.2 million. Exercises of stock options and the related tax benefit provided us with an additional $1.9 million. On March 4, 1999, we completed a private placement of $200.0 million aggregate principal amount of 9.125% senior subordinated notes due 2009. We received net proceeds of $194.8 million, of which $190.0 million was used to repay outstanding term loan balances under our senior credit facility. The indenture relating to the senior subordinated notes imposes certain restrictions on our ability (and the ability of our subsidiaries) to incur indebtedness, pay dividends on, redeem or repurchase our capital stock, make investments, incur liens on our assets, sell assets other than in the ordinary course of business, or enter into certain transactions with our affiliates. The senior subordinated notes represent unsecured general obligations subordinate in right of payment to our senior indebtedness, including our senior credit facility. In connection with our private placement of senior subordinated notes, we also amended and restated our senior credit facility to increase the lenders' commitments under our revolving credit facility to $500.0 million from $250.0 million. We also increased our letter of credit sub-facility to $75.0 million from $65.0 million, and changed the maturity date of the senior credit facility to February 2004. The term loan component of the senior credit facility was eliminated as a result of these transactions. Borrowings under the senior credit facility may be used for working capital and other general corporate purposes, including permitted investments and acquisitions. We will be required to repay borrowings under the senior credit facility with the proceeds from (1) certain asset sales, (2) the issuance of certain equity securities, and (3) the issuance of additional indebtedness. Of the various options we have regarding interest rates, we have selected LIBOR plus a margin, with future margin adjustments dependent on certain financial ratios from time to time. Our senior credit facility contains the following significant covenants: - restrictions on our ability to incur additional indebtedness and incur liens on our assets, subject to specified exceptions; - requirements that we satisfy specified financial tests as a precondition to our acquisition of other businesses; and - limitations on making capital expenditures and certain restricted payments (including dividends and repurchases of stock) subject in certain circumstances to specified financial tests. In addition, we are required to comply with minimum EBITDA requirements, minimum interest coverage and fixed charge coverage ratios, minimum consolidated tangible net worth requirements and maximum leverage ratios. In November 1999, we amended our senior credit facility to modify certain of the covenants therein for the third and fourth quarters of fiscal 2000 and for future measurement periods. In addition, the revolving commitments under the senior credit facility were reduced to $400.0 million from $500.0 million and were to be further reduced by the first $75.0 million in proceeds from sales of restaurants. The final maturity date of February 2004 remained 26 24 - - unchanged; however, the applicable margin used to determine the interest rate payable on outstanding borrowings was increased and up to $200.0 million of revolving borrowings will be converted, subject to lender approvals, to term borrowings with an interest rate not subject to adjustment on the basis of certain financial ratios. The term loan component will provide for principle payments of $4.2 million each quarter, beginning in March 2001, with all remaining principle due on the maturity date. On April 26, 2000 we further amended our senior credit facility effective January 31, 2000, to amend certain of the covenants contained therein. The amended senior credit facility also provides that the revolving commitments thereunder shall be reduced by the first $100.0 million in net proceeds from sales of restaurants (as compared with $75.0 million in the November 1999 amendment) and 75% of the second $100.0 million in net proceeds from sales of restaurants, and by the entire net proceeds from the sale of any of our Carl's Jr. and Taco Bueno restaurants. The senior credit facility, as amended, prohibits us from purchasing shares of our common stock, purchasing our senior subordinated notes or convertible subordinated notes, from prepaying subordinated indebtedness and from increasing cash dividends paid from current levels. In addition, capital expenditures were reduced and construction of new restaurants is limited to construction already begun or committed to begin. The final maturity date still remains unchanged; however, the interest rate payable on outstanding borrowings was increased. Failure to complete an asset sale or sales aggregating $125.0 million in net proceeds by the end of October 2000 will result in a further increase in the interest rate until such sales are completed. We were in compliance as of January 31, 2000 with all of our covenants related to our senior credit facility, as amended. Our primary source of liquidity is our revenues from company-operated restaurants, which are generated in cash. Future capital needs will arise primarily for the construction of new Carl's Jr. and Taco Bueno restaurants, the remodeling of our Hardee's restaurants to the Star Hardee's format, the remodeling of existing Taco Bueno restaurants, the conversion of restaurants to the Carl's Jr./Green Burrito dual-brand concepts and capital expenditures to be incurred in connection with our previously announced restructuring and consolidation of administrative functions from Rocky Mount, North Carolina to Anaheim, California. We intend to increase our proportion of franchised restaurants to company-operated restaurants. We are planning to sell up to 500 Hardee's restaurants to existing and new franchisees in fiscal 2001, which should generate proceeds of approximately $200.0 million. These sales contemplate additional development within the given markets and the related agreements will require that the Hardee's restaurants receive the Star Hardee's remodel. In almost all cases, these agreements require full royalties at four percent of net sales. The net proceeds from these asset sales will be used to repay outstanding borrowings under our senior credit facility. The quick-service restaurant business generally receives simultaneous cash payment for sales. We presently use the net cash flow from operations to repay outstanding indebtedness and to reinvest in long-term assets, primarily for the remodeling and construction of restaurants. Normal operating expenses for inventories and current liabilities generally carry longer payment terms (usually 15 to 30 days). As a result, we typically maintain current liabilities in excess of current assets. We believe that cash generated from our various restaurant concept operations, along with cash and cash equivalents on hand as of January 31, 2000, and amounts available under our senior credit facility, will provide the funds necessary to meet all of our capital spending and working capital requirements for the foreseeable future. As of January 31, 2000, we had $57.5 million of borrowings available to us under our senior credit facility. If those sources of capital, together with net proceeds from sales of restaurants, are insufficient to satisfy our capital spending and working capital requirements, we may be required to sell additional restaurants or obtain additional credit facilities. In addition, substantially all of the real properties we own and use for our restaurant operations are unencumbered and could be used by us as collateral for additional debt financing or could be sold and subsequently leased back to us. In the event that our Hardee's restaurants do not show improvements in same-store sales or our Carl's Jr. restaurants were to experience declines in same-store sales, and if we are unable to generate proceeds from the sale of restaurants at prices and on terms sufficient to service our senior credit facility, we may need to refinance all or a portion of our indebtedness on or before maturity in order to avoid short and long-term liquidity shortage. The availability of capital resources will depend upon prevailing market conditions, interest rates and our then-existing financial position. YEAR 2000 Our operational, information and financial systems successfully handled the transition into Year 2000. All restaurants were fully functional and open for business on January 1, 2000. No communication interruptions were identified with any third 27 25 - party suppliers or vendors. Although no Y2K related problems are anticipated, we are continuing to monitor all systems throughout the first quarter of fiscal 2001. We are currently involved in a comprehensive program to upgrade computer systems and applications in connection with our effort to fully integrate our recent restaurant acquisitions. Total expenditures related to the upgrade of the information systems are expected to range from $30.0 to $40.0 million and will be capitalized or expensed in accordance with generally accepted accounting principles. Through January 31, 2000, we have capitalized approximately $22.9 million of internal staff costs and outside consulting and other expenditures related to this upgrade process. During fiscal 2000, we incurred $2.6 million in costs associated with making our Carl's Jr. and Taco Bueno restaurant computer systems Y2K compliant. These costs were included in general and administrative expenses. In addition, during the fourth quarter of fiscal 2000, we wrote-off $6.6 million of capitalized software development costs that we determined will not be utilized in the future. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Our principal exposure to financial market risks is the impact that interest rate changes could have on our $400.0 million senior credit facility, of which $269.0 million remained outstanding as of January 31, 2000. Borrowings under our senior credit facility bear interest at the prime rate or at LIBOR plus an applicable margin based on certain financial ratios (averaging 7.5% in fiscal 2000). A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction of approximately $2.7 million in annual pre-tax earnings. The estimated reduction is based upon the outstanding balance of our senior credit facility and assumes no change in the volume, index or composition of debt at January 31, 2000. Substantially all of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have never had a significant impact on us and are not expected to in the foreseeable future. Commodity Price Risk We purchase certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. Typically we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases which are significant and appear to be long-term in nature by adjusting our menu pricing or changing our product delivery strategy. However, increases in commodity prices could result in lower restaurant-level operating margins for our restaurant concepts. ITEM 8. Financial Statements and Supplementary Data See the Index included at "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K." ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III ITEM 10. Directors and Executive Officers of the Registrant The information pertaining to directors and executive officers of the registrant is hereby incorporated by reference to our Proxy Statement to be used in connection with our 2000 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 31, 2000. Information concerning the current executive officers is contained in Item 1 of Part I of this Annual Report on Form 10-K. ITEM 11. Executive Compensation The information pertaining to executive compensation is hereby incorporated by reference to our Proxy Statement to be used in connection with our 2000 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 31, 2000. 28 26 - - ITEM 12. Security Ownership of Certain Beneficial Owners and Management The information pertaining to security ownership of certain beneficial owners and management is hereby incorporated by reference to our Proxy Statement to be used in connection with our 2000 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 31, 2000. ITEM 13. Certain Relationships and Related Transactions The information pertaining to certain relationships and related transactions is hereby incorporated by reference to our Proxy Statement to be used in connection with our 2000 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 31, 2000. 29 27 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /s/ C. THOMAS THOMPSON -------------------------------------- C. Thomas Thompson Chief Executive Officer and President Date: April 28, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - ------------------------------------------------------------------------------------------------------------------- /s/ C. THOMAS THOMPSON Chief Executive Officer April 28, 2000 - ----------------------------------------------------- and President C. Thomas Thompson (Principal Executive Officer) /s/ CARL A. STRUNK Executive Vice President, April 28, 2000 - ----------------------------------------------------- Chief Financial Officer Carl A. Strunk (Principal Financial and Accounting Officer) /s/ BYRON ALLUMBAUGH Director April 28, 2000 - ----------------------------------------------------- Byron Allumbaugh /s/ PETER CHURM Director April 28, 2000 - ----------------------------------------------------- Peter Churm /s/ WILLIAM P. FOLEY II Chairman of the Board April 28, 2000 - ----------------------------------------------------- William P. Foley II /s/ CARL L. KARCHER Director April 28, 2000 - ----------------------------------------------------- Carl L. Karcher /s/ CARL N. KARCHER Director April 28, 2000 - ----------------------------------------------------- Carl N. Karcher /s/ DANIEL D. LANE Vice Chairman of the Board April 28, 2000 - ----------------------------------------------------- Daniel D. Lane /s/ FRANK P. WILLEY Director April 28, 2000 - ----------------------------------------------------- Frank P. Willey
30 28 - - PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page - ------------------------------------------------------------------------------ (a)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS: Independent Auditors' Report 29 Consolidated Balance Sheets - as of January 31, 2000 and 30 1999 Consolidated Statements of Operations - for the years ended 31 January 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity - for the 32 years ended January 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows - for the years ended 33 January 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements 34 (a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES: Schedule 54 II - Valuation and Qualifying Accounts All other schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. (a)(3) EXHIBITS: An "Exhibit Index" has been filed as a part of this Form 10-K beginning on page 55 hereof and is incorporated herein by reference. (b) CURRENT REPORTS ON FORM 8-K: A Current Report on Form 8-K dated January 6, 2000, was filed during the fourth quarter of the fiscal year to report that on December 28, 1999, Howard Lester resigned as a member of the Company's Board of Directors.
31 29 - INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS CKE RESTAURANTS, INC. AND SUBSIDIARIES: We have audited the accompanying consolidated financial statements of CKE Restaurants, Inc. and Subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CKE Restaurants, Inc. and Subsidiaries as of January 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2000 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information shown therein. KPMG LLP Orange County, California April 4, 2000, except as to the eighth paragraph of Note 9 which is as of April 26, 2000 32 30 - - CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) January 31, 2000 1999 - ---------------------------------------------------------------------------------------------- ASSETS: Current assets: Cash and cash equivalents $ 36,505 $ 46,297 Accounts receivable, net 42,928 46,820 Related party receivables 5,006 1,474 Inventories 26,463 22,507 Prepaid expenses 14,717 12,349 Other current assets 2,454 4,845 - ---------------------------------------------------------------------------------------------- Total current assets 128,073 134,292 Property and equipment, net 1,051,480 940,178 Property under capital leases, net 84,482 81,895 Long-term investments 3,002 34,119 Notes receivable 7,383 7,898 Related party receivables 583 7,020 Deferred income taxes, net 15,006 -- Costs in excess of net assets acquired, net 243,304 252,035 Other assets 35,201 39,477 - ---------------------------------------------------------------------------------------------- $ 1,568,514 $1,496,914 - ---------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Current portion of long-term debt $ 5,532 $ 4,273 Current portion of capital lease obligations 9,603 7,838 Accounts payable 99,204 88,462 Other current liabilities 97,582 101,074 - ---------------------------------------------------------------------------------------------- Total current liabilities 211,921 201,647 - ---------------------------------------------------------------------------------------------- Long-term debt 274,996 360,684 Senior subordinated notes 200,000 -- Convertible subordinated notes 159,225 162,225 Capital lease obligations 92,063 90,373 Deferred income taxes, net -- 15,029 Other long-term liabilities 84,552 80,114 Stockholders' equity: Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued or outstanding -- -- Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 52,086,421 shares and 51,850,249 shares 521 519 Additional paid-in capital 383,016 380,423 Retained earnings 172,626 205,900 Treasury stock at cost; 1,585,000 shares and 0 shares (10,406) -- - ---------------------------------------------------------------------------------------------- Total stockholders' equity 545,757 586,842 - ---------------------------------------------------------------------------------------------- $ 1,568,514 $1,496,914 - ----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 33 31 - CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal year ended - ---------------------------------------------------------------------------------------------------------- (In thousands except per share amounts) January 31, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Revenues: Company-operated restaurants $ 1,814,695 $1,732,221 $1,022,453 Franchised and licensed restaurants and other 175,378 159,823 127,206 - ---------------------------------------------------------------------------------------------------------- Total revenues 1,990,073 1,892,044 1,149,659 - ---------------------------------------------------------------------------------------------------------- Operating costs and expenses: Restaurant operations: Food and packaging 553,451 519,443 314,412 Payroll and other employee benefits 566,394 535,638 311,612 Occupancy and other operating expenses 383,144 337,668 206,436 Store closure expense and provision for asset impairment 41,988 -- -- - ---------------------------------------------------------------------------------------------------------- 1,544,977 1,392,749 832,460 Franchised and licensed restaurants and other 128,128 107,019 93,773 Advertising expenses 121,727 105,397 58,383 General and administrative expenses 147,372 118,659 78,852 - ---------------------------------------------------------------------------------------------------------- Total operating costs and expenses 1,942,204 1,723,824 1,063,468 - ---------------------------------------------------------------------------------------------------------- Operating income 47,869 168,220 86,191 Interest expense (63,283) (43,453) (16,914) Other income (expense), net (32,046) (670) 7,363 - ---------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary item (47,460) 124,097 76,640 Income tax expense (benefit) (18,053) 49,645 29,883 - ---------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary item (29,407) 74,452 46,757 Extraordinary item - gain on early retirement of debt, net of applicable income taxes of $186 and $2,084 290 3,260 -- - ---------------------------------------------------------------------------------------------------------- Net income (loss) $ (29,117) $ 77,712 $ 46,757 - ---------------------------------------------------------------------------------------------------------- Basic income (loss) per share before extraordinary item $ (0.57) $ 1.44 $ 1.00 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - basic 0.01 0.07 -- - ---------------------------------------------------------------------------------------------------------- Net income (loss) per share - basic $ (0.56) $ 1.51 $ 1.00 - ---------------------------------------------------------------------------------------------------------- Weighted average shares outstanding - basic 51,668 51,599 46,634 - ---------------------------------------------------------------------------------------------------------- Diluted income (loss) per share before extraordinary item $ (0.57) $ 1.39 $ 0.97 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - diluted 0.01 0.06 -- - ---------------------------------------------------------------------------------------------------------- Net income (loss) per share - diluted $ (0.56) $ 1.45 $ 0.97 - ---------------------------------------------------------------------------------------------------------- Weighted average shares outstanding - diluted 51,668 56,714 48,121 - ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 34 32 - - CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock ----------------------------------------- Additional Total (In thousands except per share Number of Number of Paid-In Retained Stockholders' amounts) Shares Amount Shares Amount Capital Earnings Equity - ----------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 31, 1997 40,195 $ 402 -- $ -- $ 126,209 $ 88,193 $ 214,804 Cash dividends ($.07 per share) -- -- -- -- -- (3,013) (3,013) Exercise of stock options 594 6 -- -- 3,786 -- 3,792 Purchase of Hardee's Green Bay, Inc. 298 3 -- -- 9,402 -- 9,405 Common stock offering, net 10,088 101 -- -- 222,243 -- 222,344 Tax benefit associated with exercise of stock options -- -- -- -- 4,423 -- 4,423 Net income -- -- -- -- -- 46,757 46,757 - ----------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 31, 1998 51,175 512 -- -- 366,063 131,937 498,512 Cash dividends ($.07 per share) -- -- -- -- -- (3,749) (3,749) Exercise of stock options 624 6 -- -- 6,068 -- 6,074 Repurchase of Hardee's franchised restaurants 51 1 -- -- 1,662 -- 1,663 Tax benefit associated with exercise of stock options -- -- -- -- 6,630 -- 6,630 Net income -- -- -- -- -- 77,712 77,712 - ----------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 31, 1999 51,850 519 -- -- 380,423 205,900 586,842 Cash dividends ($.08 per share) -- -- -- -- -- (4,157) (4,157) Exercise of stock options 181 2 -- -- 1,363 -- 1,365 Purchase of treasury shares -- -- (1,585) (10,406) -- -- (10,406) Shares issued to third-party 55 -- -- -- 722 -- 722 Tax benefit associated with exercise of stock options -- -- -- -- 508 -- 508 Net loss -- -- -- -- -- (29,117) (29,117) - ----------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 31, 2000 52,086 $ 521 (1,585) $(10,406) $ 383,016 $172,626 $ 545,757 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 35 33 - CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year ended ------------------------------------------ - -------------------------------------------------------------------------------------------------------- (Dollars in thousands) January 31, 2000 1999 1998 - -------------------------------------------------------------------------------------------------------- Net cash flows from operating activities: Net income (loss) $ (29,117) $ 77,712 $ 46,757 Adjustments to reconcile net income (loss) to net cash provided by operating activities, excluding the effect of acquisitions and dispositions: Extraordinary gain on early retirement of debt (476) (5,344) -- Depreciation and amortization 104,450 77,119 46,402 Provision for losses on accounts and notes receivable 1,485 (5,497) 5,636 (Gain) loss on sale of property and equipment and capital leases (16,922) 1,941 4,657 Shares issued for litigation settlement 722 -- -- Net non-cash charges 105,601 15,000 -- Net non-cash investment and dividend income -- (1,259) (3,029) Deferred income taxes (30,035) 9,038 12,889 (Gain) loss on non-current asset and liability transactions 4,744 (8,818) (5,632) Net change in receivables, inventories, prepaid expenses and other current assets (12,457) (16,009) (16,589) Net change in accounts payable and other current liabilities (13,406) 34,787 (18,955) - -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 114,589 178,670 72,136 - -------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of: Property and equipment (263,589) (124,288) (89,210) Long-term investments and marketable securities -- (27) (14,687) Proceeds from sale of: Marketable securities and long-term investments -- 12,500 393 Property and equipment 52,753 10,723 5,952 Increases in notes receivable and related party receivables (5,544) (2,930) (200) Collections on and sale of notes receivable, related party receivables and leases receivable 7,725 8,457 5,946 Net change in other assets (5,012) 1,295 (1,674) Acquisitions, net of cash acquired (2,491) (406,376) (351,294) Dispositions, net of cash surrendered -- 940 16,286 - -------------------------------------------------------------------------------------------------------- Net cash used in investing activities (216,158) (499,706) (428,488) - -------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net proceeds from common stock offering -- -- 222,344 Net change in bank overdraft 14,210 (13,809) 3,316 Short-term borrowings -- -- 20,000 Repayments of short-term debt (3,600) (433) (12,500) Long-term borrowings 467,500 530,095 131,489 Repayments of long-term debt (350,853) (151,650) (20,570) Repayments of capital lease obligations (7,689) (8,698) (4,956) Deferred financing costs (10,759) (10,384) (4,426) Net change in other long-term liabilities (4,342) (16,901) 281 Payment of dividends (4,157) (3,749) (3,013) Purchase of treasury stock (10,406) -- -- Exercise of stock options 1,365 6,074 3,792 Tax benefit associated with the exercise of stock options 508 6,630 4,423 - -------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 91,777 337,175 340,180 - -------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (9,792) 16,139 (16,172) Cash and cash equivalents at beginning of year 46,297 30,158 46,330 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 36,505 $ 46,297 $ 30,158 - --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 36 34 - - CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES A summary of certain significant accounting policies not disclosed elsewhere in the footnotes to the consolidated financial statements is set forth below. Description of Business CKE Restaurants, Inc. ("CKE" or the "Company") owns, operates, franchises and licenses the Carl's Jr., Hardee's and Taco Bueno quick-service restaurant concepts. As of January 31, 2000, the Carl's Jr. system included 934 restaurants, of which 563 were operated by the Company and 371 were operated by the Company's franchisees and licensees. Carl's Jr. restaurants are located in the Western United States, predominantly in California. As of January 31, 2000, the Company's Hardee's system included 2,788 restaurants, of which 1,354 were operated by the Company and 1,434 were operated by the Company's franchisees and licensees. Hardee's restaurants are located throughout the Eastern and Midwestern United States, predominantly in the Southeast. As of January 31, 2000, the Company also operated a total of 142 other restaurants, including 121 Taco Bueno quick-service Mexican restaurants in Texas and Oklahoma. Basis of Presentation and Fiscal Year The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions are eliminated. The Company's fiscal year is 52 or 53 weeks, ending the last Monday in January each year. Fiscal year 2000 included 53 weeks of operations. Fiscal years 1999 and 1998 each included 52 weeks of operations. For clarity of presentation, the Company has described all years presented as if the fiscal year ended January 31. The equity method of accounting is used for investments in which the Company has the ability to exercise significant influence. Under the equity method, the Company recognizes its share of the net earnings or losses of these entities and adjusts the carrying value of its investment by the amount of net earnings or losses recognized and by the amount of contributions made or distributions received. The Company's share of net earnings or losses is calculated based on the Company's expected share of the investment's estimated profit or loss. Cash Equivalents For purposes of reporting cash flows, highly liquid investments purchased with original maturities of three months or less are considered cash equivalents. The carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair value. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market, and consist primarily of restaurant food items and paper supplies. Deferred Financing Costs Costs related to the issuance of debt are deferred and amortized on a straight-line basis as a component of interest expense over the terms of the respective debt issues. Deferred Lease Costs Deferred lease costs arising from an acquisition represent the excess of actual rent payments on an operating lease over the current market rate on the date of the acquisition. Deferred lease costs are amortized over the remaining lives of the related leases. Deferred Pre-opening Costs The Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") in fiscal 1999. SOP 98-5 requires that costs incurred during a start-up activity (including organization costs) be expensed as incurred. The impact of the adoption of SOP 98-5 on the Company's consolidated financial position and results of operations was not material. 37 35 - Restaurant Operating Agreement The Company and Rally's Hamburgers, Inc. ("Rally's") entered into an operating agreement, effective in July 1996, whereby the Company began operating 28 Rally's-owned restaurants located in California and Arizona. Rally's retains ownership of the restaurants' assets and receives a percentage of the restaurants' sales. The Company's results of operations include the revenue and expenses of these Rally's restaurants. As of January 31, 2000, the Company operated 21 Rally's restaurants under this operating agreement. Property and Equipment Property and equipment are recorded at cost, less depreciation and amortization. Depreciation is computed using the straight-line method based on the assets' estimated useful lives, which range from three to 40 years. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful lives of the assets or the related lease terms. Impairment of Long-Lived Assets The Company assesses certain long-lived assets for possible impairment when events or circumstances indicate carrying amounts may not be recoverable. Losses are recognized when the carrying value exceeds the total estimated undiscounted cash flows expected to be generated over the assets' estimated life. In connection with the Company's decision to close 105 Hardee's restaurants over the next fiscal year, the Company performed an impairment evaluation of these restaurants' underlying assets and goodwill during the fourth quarter of fiscal 2000. A resulting provision for asset impairment of $25.7 million was recorded to reduce the carrying amount of the restaurants' assets ($15.6 million) and goodwill ($10.1 million) to amounts projected to be recovered by the individual restaurants' operating cash flows over the stores estimated remaining period of operation. The provision for restaurant asset impairment is net of amounts expected to be recovered, if any, from the sale of such assets upon the closure of the store. The costs in excess of net assets acquired are amortized on a straight-line basis, principally over 40 years. The Company periodically reviews the costs in excess of net assets acquired for impairment. Accumulated amortization of costs in excess of net assets acquired was $17.0 million and $9.8 million at January 31, 2000 and 1999, respectively. Store Closure Costs During the fourth quarter of fiscal 2000, the Company recorded a store closure reserve at Hardee's of $16.3 million for 105 Hardee's restaurants to be closed over the next fiscal year. The store closure reserve represents a liability for the net present value of any remaining lease obligations after the expected closure dates, net of estimated sublease income, if any. Advertising Production costs of commercials and programming are charged to operations when first aired. The costs of other advertising, promotion and marketing programs are charged to operations when incurred. Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, income tax assets and liabilities are recognized using enacted tax rates for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A change in tax rates is recognized in income in the period that includes the enactment date. Estimations The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Share and Per Share Restatement On December 17, 1998, the Company declared a 10% stock dividend to stockholders of record on December 28, 1998, distributed on January 11, 1999. On January 6, 1998, the Company declared a 10% stock dividend to stockholders of record on January 20, 1998, distributed on February 4, 1998. 38 36 - - All data with respect to earnings (loss) per share, dividends per share and share information, including price per share where applicable, in the consolidated financial statements and notes to consolidated financial statements are retroactively adjusted to reflect the stock dividends. Earnings (Loss) per Share The Company presents "basic" earnings (loss) per share which represents net earnings divided by the weighted average shares outstanding excluding all common stock equivalents and "diluted" earnings (loss) per share reflecting the dilutive effect of all common stock equivalents. The following table illustrates the computation of basic and diluted earnings (loss) per share:
(In thousands, except per share amounts) 2000 1999 1998 - -------------------------------------------------------------------------------------------- BASIC EARNINGS (LOSS) PER SHARE: Income (loss) before extraordinary item $(29,407) $74,452 $46,757 Extraordinary item - gain on early retirement of debt, net of applicable income taxes 290 3,260 -- ------------------------------ Net income (loss) $(29,117) $77,712 $46,757 ------------------------------ Weighted average number of common shares outstanding during the year 52,010 51,599 46,634 Purchase of treasury shares (342) -- -- ------------------------------ 51,668 51,599 46,634 ------------------------------ Basic income (loss) per share before extraordinary item $ (0.57) $ 1.44 $ 1.00 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - basic 0.01 0.07 -- ------------------------------ Basic net income (loss) per share $ (0.56) $ 1.51 $ 1.00 ------------------------------ DILUTED EARNINGS (LOSS) PER SHARE: Income (loss) before extraordinary item $(29,407) $74,452 $46,757 Interest expense and amortization of debt issuance costs, net of income tax effect, applicable to convertible subordinated notes -- 4,635 -- ------------------------------ Income (loss) before extraordinary item (29,407) 79,087 46,757 Extraordinary item - again on early retirement of debt, net of applicable income taxes 290 3,260 -- ------------------------------ Net income (loss) $(29,117) $82,347 $46,757 ------------------------------ Weighted average number of common shares outstanding during the year 52,010 51,599 46,634 Incremental common shares attributable to: Exercise of stock options -- 1,336 1,487 Issuance of convertible subordinated notes -- 3,779 -- Purchase of treasury shares (342) -- -- ------------------------------ 51,668 56,714 48,121 ------------------------------ Diluted income (loss) per common share before extraordinary item $ (0.57) $ 1.39 $ 0.97 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - diluted 0.01 0.06 -- ------------------------------ Diluted net income (loss) per share $ (0.56) $ 1.45 $ 0.97 ------------------------------
In fiscal 2000, 1999 and 1998, 6.2 million, 4.0 million and 3.6 million shares, respectively, relating to the possible exercise of outstanding stock options and in fiscal 2000, 3.6 million shares issuable upon conversion of convertible subordinated notes, were not included in the computation of diluted earnings (loss) per share as their effect would have been anti-dilutive. 39 37 - Comprehensive Income The Company did not have any other comprehensive income items requiring reporting under Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". Segment Information The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in fiscal 1999. SFAS 131 establishes standards for the reporting of information about operating segments in annual and interim financial statements and requires restatement of prior year information. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in deciding how to allocate resources and in assessing performance. SFAS 131 also requires disclosures about products and services, geographic areas and major customers. Adoption of SFAS 131 changed the disclosure of segment information presented in Note 18. Reclassifications Prior year amounts in the accompanying consolidated financial statements are reclassified to conform with current year presentation. NOTE 2 - 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. The Company acquired all 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. The Company used the majority of the net proceeds from the issuance of $197.2 million of convertible subordinated notes together with borrowings of $213.2 million under its senior credit facility to finance the acquisition (see Note 9). On July 15, 1997, the Company acquired Hardee's, the operator and franchisor of the Hardee's quick-service hamburger restaurant concept. The Company acquired all of the issued and outstanding shares of Hardee's for cash consideration of $335.0 million, including a $8.0 million purchase price adjustment paid to Imasco Holdings, Inc. in fiscal 2000. The Company used the net proceeds from the sale of 10,088,375 shares of the Company's common stock to the public of $222.3 million (see Note 11) in conjunction with borrowings of $133.9 million under the Company's senior credit facility (see Note 9) to finance the acquisition. After the acquisition of Summit Family Restaurants, Inc. ("Summit") in fiscal 1997, the Company determined that its principal focus was on the quick-service segment of the restaurant industry as opposed to the family-dining segment. Accordingly, in September 1997, the Company transferred Summit's JB's Restaurants and Galaxy Diner assets to a newly formed subsidiary, JB's Family Restaurants, Inc. ("JB's"). The Company then contributed its remaining interest in Summit, whose principal remaining asset was a subsidiary which operated 16 HomeTown Buffet restaurants, and its two Casa Bonita restaurants to Star Buffet, Inc. ("Star Buffet"). The Company subsequently participated in the initial public offering of Star Buffet (see Note 6). In September 1998, the Company completed two additional transactions which resulted in the disposition of JB's (see Note 6). The assets acquired under the purchase method of accounting, including the costs in excess of net assets acquired, and liabilities assumed in the acquisitions of FEI and Hardee's are as follows:
(Dollars in thousands) FEI Hardee's - ----------------------------------------------------------------------------------- Tangible assets acquired at fair value $319,603 $ 417,835 Costs in excess of net assets acquired 150,442 67,284 Liabilities assumed at fair value (89,408) (150,135) --------------------- Total purchase price $380,637 $ 334,984 ---------------------
40 38 - - Selected unaudited pro forma combined results of operations for the year ended January 31, 1999, assuming the FEI and Hardee's acquisitions occurred on February 1, 1998, using actual restaurant-level margins and general and administrative expenses prior to the acquisition of each entity, is presented as follows:
(Dollars in thousands, except per share amounts) 1999 - ------------------------------------------------------------------------ Total revenues $2,013,241 Income before extraordinary item $ 74,897 Net income $ 78,157 Net income per share - basic $ 1.51 Net income per share - diluted $ 1.45
NOTE 3 - ACCOUNTS RECEIVABLE, NET Details of accounts receivables, net are as follows:
(Dollars in thousands) 2000 1999 - --------------------------------------------------------------------------------- Trade receivables $36,531 $ 49,952 Allowance for doubtful accounts (4,917) (10,981) Income tax receivable 8,874 5,024 Notes receivable, current 2,203 2,555 Other 237 270 ------------------- $42,928 $ 46,820 -------------------
NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consists of the following:
Estimated (Dollars in thousands) Useful Life 2000 1999 - ---------------------------------------------------------------------------------------------------- Land $ 269,211 $ 267,287 Leasehold improvements 4-25 years 274,820 186,369 Buildings and improvements 7-40 years 421,674 400,366 Equipment, furniture and fixtures 3-10 years 412,818 343,827 -------------------------------------- 1,378,523 1,197,849 Less: Accumulated depreciation and amortization 327,043 257,671 ------------------------ $1,051,480 $ 940,178 ------------------------
NOTE 5 - LEASES The Company occupies land and buildings under lease agreements expiring on dates through 2062. Many leases provide for future rent escalations and renewal options. In addition, contingent rentals, determined as a percentage of sales in excess of specified levels, are often stipulated. Most leases obligate the Company to pay costs of maintenance, insurance and property taxes. Property under capital leases consists of the following:
(Dollars in thousands) 2000 1999 - ---------------------------------------------------------------------------------- Buildings $131,033 $124,215 Less: Accumulated amortization 46,551 42,320 -------------------- $ 84,482 $ 81,895 --------------------
41 39 - Amortization is calculated on a straight-line basis over the shorter of the respective lease terms or the estimated useful lives of the related assets. Minimum lease payments for all leases and the present value of net minimum lease payments for capital leases as of January 31, 2000 are as follows:
(Dollars in thousands) Capital Operating - ----------------------------------------------------------------------------------- Fiscal Year: 2001 $ 20,453 $ 91,286 2002 20,154 84,865 2003 19,590 77,763 2004 17,716 69,950 2005 13,799 56,623 Thereafter 85,651 324,035 --------------------- Total minimum lease payments 177,363 $704,522 --------- Less: Amount representing interest 75,697 -------- Present value of minimum lease payments 101,666 Less: Current portion 9,603 -------- Capital lease obligations, excluding current portion $ 92,063 --------
Total minimum lease payments have not been reduced for future minimum sublease rentals of $88.9 million under certain operating subleases. The Company has leased and subleased land and buildings to others, primarily as a result of the franchising of certain restaurants. Many of these leases provide for fixed payments with contingent rent when sales exceed certain levels, while others provide for monthly rentals based on a percentage of sales. Lessees generally bear the cost of maintenance, insurance and property taxes. Components of the net investment in leases receivable, included in other current assets and other assets, are as follows:
(Dollars in thousands) 2000 1999 - ------------------------------------------------------------------------------ Net minimum lease payments receivable $2,095 $4,323 Less: Unearned income 583 1,690 ---------------- Net investment $1,512 $2,633 ----------------
Minimum future rentals to be received as of January 31, 2000 are as follows:
Capital Operating Leases or Lessor (Dollars in thousands) Subleases Leases - ------------------------------------------------------------------------------------ Fiscal Year: 2000 $ 414 $ 2,658 2001 420 2,609 2002 363 2,243 2003 302 1,486 2004 277 1,207 Thereafter 319 5,796 --------------------- Total minimum future rentals $2,095 $15,999 ---------------------
42 40 - - Total minimum future rentals do not include contingent rentals which may be received under certain leases. Aggregate rents under noncancelable operating leases during fiscal 2000, 1999 and 1998 are as follows:
(Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------- Minimum rentals $92,107 $81,809 $60,469 Contingent rentals 5,275 6,393 4,002 Less: Sublease rentals 10,064 12,033 9,238 ----------------------------- $87,318 $76,169 $55,233 -----------------------------
NOTE 6 - LONG-TERM INVESTMENTS The Company has selectively invested in other restaurant concepts, as follows: Santa Barbara Restaurant Group, Inc. Santa Barbara Restaurant Group, Inc. ("SBRG") (formerly GB Foods Corporation) owns, operates and franchises The Green Burrito and La Salsa quick-service Mexican food restaurants, JB's Restaurants and Galaxy Diner Restaurants, which SBRG acquired from the Company, and Timber Lodge Steakhouse. Through the Company's dual-branding relationship with The Green Burrito, the Company is SBRG's largest franchisee. On September 1, 1998, the Company sold 14 company-operated JB's Restaurants and two Galaxy Diner restaurants to Timber Lodge Steakhouse, Inc. ("Timber Lodge") for 687,890 shares of Timber Lodge common stock, which was converted into SBRG common stock in connection with the merger of Timber Lodge and SBRG. The Company also sold its wholly owned subsidiary, JB's, 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. As of January 31, 2000, the Company owned approximately 8.9% of SBRG's outstanding common stock and accounts for its investment in SBRG under the equity method of accounting. During the fourth quarter of fiscal 2000, the Company wrote-down its investment in SBRG by $9.0 million to its fair value of approximately $2.0 million, upon its conclusion that the investment has experienced an other than temporary decline in value. Although the Company's investment represents less than a 20% ownership interest in SBRG, management believes that the Company has the ability to exercise significant influence because of certain shared executive management and common board members. Rally's Hamburgers, Inc. and Checkers Drive-In Restaurants, Inc. In August 1999, Rally's merged with Checkers Drive-In Restaurants, Inc. ("Checkers") in a reverse acquisition. Checkers operates and franchises approximately 443 Checkers and 464 Rally's double drive-thru quick-service hamburger restaurants, primarily in the Southeastern and Midwestern United States. As a result of the August 1999 merger, each share of Rally's common stock was converted into 1.99 shares of Checkers' common stock. Simultaneous with the merger, Checkers declared a reverse one-for-twelve stock split. Prior to the merger, the Company, through a series of transactions, owned approximately 9.4 million shares, or 32.1% of Rally's common stock and held warrants to purchase an additional 1.5 million shares of Rally's common stock. The Company, also prior to the merger, held warrants to purchase 7.4 million shares of Checkers' common stock. As a result of the merger and as of January 31, 2000, the Company holds approximately 1.6 million shares, or 16.6% of Checkers outstanding common stock and accounts for its investment in Checkers under the equity method of accounting. Assuming full exercise of the warrants, the Company would beneficially own approximately 23.7% of Checkers' outstanding common stock. During the fourth quarter of fiscal 2000, the Company wrote-down its investment in Checkers by $16.6 million to its fair market value upon its conclusion that the investment has experienced an other than temporary decline in value. Further, as a result of the Company recognizing its share of the net losses of Checkers, as of January 31, 2000, the Company's investment in Checkers was zero. As of January 31, 2000, the Company also held a $3.2 million note receivable from Checkers. The note receivable, which was entered into during fiscal 1997, bears interest at 13% and is due April 30, 2000. The note receivable from Checkers was paid in full on March 31, 2000. 43 41 - Boston Market The Company, through its wholly owned subsidiary, Boston Pacific, Inc. ("BPI"), owns an 11% interest in Boston West, LLC ("Boston West"), which operates Boston Market restaurants in designated markets in Southern California as a franchised area developer of Boston Chicken, Inc. ("BCI"), the franchisor of the Boston Market restaurant concept. 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 to restructure its overall operations. Pursuant to Boston West's plan of organization, as filed with the bankruptcy court, it was anticipated that the Company would own approximately 25% of Boston West after emergence from bankruptcy. As a result, in fiscal 1999, the Company recorded a $15.0 million charge to its Boston West investment to reflect its remaining value. In addition, during fiscal 1999, the Company signed an agreement with Boston West to provide administrative and management services to the Boston Market franchises operated by Boston West and Boston West closed or sold 42 Boston Market restaurants. On December 1, 1999, McDonald's Corporation and BCI jointly announced that a definitive purchase agreement had been signed by McDonald's subsidiary, Golden Restaurants Operations, Inc. ("GRO") and BCI for the sale to GRO of the majority of the assets of Boston Market. GRO has since approached the Company with a different reorganization plan for Boston West and the Company and GRO are currently negotiating the details of that plan. Under the proposed reorganization plan, it is anticipated that the Company will no longer provide administrative or management services to Boston Market franchises operated by Boston West and will have no ownership interest in Boston West. As such, in the fourth quarter of fiscal 2000, the Company wrote-down its investment in Boston West to zero by recording a $8.4 million charge. As of January 31, 2000, Boston West operated 56 Boston Market restaurants. Star Buffet, Inc. Star Buffet is an operator of approximately 45 buffet-style restaurants and 11 franchised, family-style JB's Restaurants. On September 30, 1997, the Company participated in an initial public offering of its buffet-style restaurant operations. Prior to the offering, the Company formed Star Buffet to continue to operate its 16 HomeTown Buffet franchised restaurants and two Casa Bonita theme restaurants. Star Buffet then completed an initial public offering of 3,450,000 shares of its common stock, of which 600,000 shares were sold by the Company as a selling shareholder. The Company received net proceeds of $6.7 million in connection with such sale, and retained an approximate 37% interest in Star Buffet. The Company also received a cash dividend of $9.3 million in the transaction and sold the net assets of two Casa Bonita restaurants to Star Buffet for their net book value of $1.1 million. On November 2, 1998, the Company sold its remaining two million shares of Star Buffet common stock to Star Buffet, for a cash sales price of $12.5 million. In connection with the sale, the Company recognized a non-recurring gain of $10.3 million in the third quarter of fiscal 1999, which is included in other income (expense), net (see Note 16). NOTE 7 - OTHER ASSETS Other assets consist of the following:
(Dollars in thousands) 2000 1999 - -------------------------------------------------------------------------------- Deferred financing costs $15,521 $11,632 Deferred lease costs 12,850 14,275 Leases receivable 1,274 2,365 Other intangibles 256 3,366 Other assets 5,300 7,839 ------------------ $35,201 $39,477 ------------------
44 42 - - NOTE 8 - OTHER CURRENT LIABILITIES Other current liabilities consist of the following:
(Dollars in thousands) 2000 1999 - --------------------------------------------------------------------------------- Salaries, wages and other benefits $28,964 $ 38,503 State sales taxes 12,136 14,236 Accrued interest 10,645 4,217 Property taxes 6,353 5,288 Closure reserves 6,147 1,333 Other self-insurance reserves 5,802 5,044 Self-insured workers' compensation reserve 2,454 5,230 Other accrued liabilities 25,081 27,223 ------------------- $97,582 $101,074 -------------------
Included in other accrued liabilities is a severance reserve of $1.8 million for approximately 100 employees who will be laid off between February 1, 2000 and June 2000. The Company announced its decision in November 1999 to create a single support and administration center for all of its restaurant concepts by consolidating the majority of the corporate functions of its Hardee's subsidiary, located in Rocky Mount, North Carolina, within its corporate headquarters in Anaheim, California. As a result of this decision, the Company accrued $2.1 million of termination benefits for a total of approximately 150 employees that will be laid-off in phases through August 2000. The severance expense is included in general and administration expenses. During the fourth quarter of fiscal 2000, the Company paid $0.3 million of termination benefits to approximately 50 employees who were involuntarily terminated in January 2000. Such amounts were charged against the severance reserve. NOTE 9 - LONG-TERM DEBT Long-term debt consists of the following:
(Dollars in thousands) 2000 1999 - ---------------------------------------------------------------------------------- Senior Credit Facility, interest based on LIBOR plus applicable margin, averaging 7.46% in fiscal 2000 $269,000 $349,113 Senior subordinated notes due 2009, interest at 9.125% 200,000 -- Convertible subordinated notes due 2004, interest at 4.25% 159,225 162,225 Secured note payable, principal payments in specified amounts monthly through 2001, interest at 8.17% 4,261 4,568 Industrial Revenue Bonds, payable in 1999 -- 3,600 Other 7,267 7,676 -------------------- 639,753 527,182 Less: Current portion 5,532 4,273 -------------------- $634,221 $522,909 --------------------
On July 15, 1997, the Company entered into a new $300.0 million credit facility (the "Senior Credit Facility") with a group of financial institutions. The Senior Credit Facility initially consisted of a $75.0 million term loan facility ("Term Loan Facility") and a $225.0 million revolving credit facility ("Revolving Credit Facility"), which included a $55.0 million letter of credit sub-facility. On July 15, 1997, the Company incurred $75.0 million of borrowings under the Term Loan Facility and $58.9 million of borrowings under the Revolving Credit Facility to fund a portion of the consideration needed to acquire Hardee's (see Note 2). The Senior Credit Facility was amended on April 1, 1998 to increase the aggregate principal amounts of the lenders' commitments under the Term Loan Facility to $250.0 million and under the Revolving Credit Facility to $250.0 million, which included a $65.0 million letter of credit sub-facility, and to extend the 45 43 - final maturity date until April 2003. The Company incurred borrowings of $213.2 million thereunder to finance a portion of the purchase price of FEI (see Note 2). On March 13, 1998, the Company completed a private placement of $197.2 million aggregate principal amount of convertible subordinated notes (the "Convertible 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 Senior Credit Facility. The Convertible Notes, which represent unsecured general obligations subordinate in right of payment to certain other obligations, including the Senior Credit Facility and the senior subordinated notes, described below, are due in 2004, are convertible into the Company's common stock at a conversion price of $43.82 (adjusted for the 10% stock dividend paid on January 11, 1999) and carry a 4.25% coupon. The remaining net proceeds from the Convertible Notes, together with borrowings under the Senior Credit Facility, were used to fund the acquisition of FEI on April 1, 1998 (see Note 2). In fiscal 2000 and fiscal 1999, the Company repurchased $3.0 million and $35.0 million, respectively, aggregate principal amount of Convertible Notes for $2.5 million and $28.8 million in cash, respectively, including accrued interest thereon. The Company recognized an extraordinary gain on the early retirement of debt of $0.3 million and $3.3 million, net of applicable taxes of $0.2 million and $2.1 million for fiscal 2000 and fiscal 1999, respectively. On March 4, 1999, the Company completed a private placement of $200.0 million aggregate principal amount of 9.125% senior subordinated notes ("Senior Subordinated Notes") due 2009. The Company received net proceeds of $194.8 million, of which $190.0 million was used to repay outstanding term loan balances under the Senior Credit Facility. The Senior Subordinated Notes are due in May 2009, carry a 9.125% coupon rate and are redeemable by the Company beginning on May 1, 2004. The indenture relating to the Senior Subordinated Notes impose restrictions on the Company's ability (and the ability of its subsidiaries) to incur indebtedness, pay dividends on, redeem or repurchase its capital stock, make investments, incur liens on its assets, sell assets other than in the ordinary course of business, or enter into certain transactions with its affiliates. The Senior Subordinated Notes represent unsecured general obligations subordinate in right of payment to the Company's senior indebtedness, including its Senior Credit Facility. In connection with the private placement of Senior Subordinated Notes, the Company also amended and restated its Senior Credit Facility to increase the lenders' commitments under its Revolving Credit Facility to $500.0 million from $250.0 million. The Company also increased its letter of credit sub-facility to $75.0 million from $65.0 million, and changed the maturity date of the Senior Credit Facility to February 2004. The term loan component of the Senior Credit Facility was eliminated as a result of these transactions. Borrowings and other obligations of the Company under the Senior Credit Facility are general unsubordinated obligations of the Company and 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, contract rights, general intangibles (including trademarks) and other assets of the Company and such subsidiaries. The Company is required to repay borrowings under the Senior Credit Facility with the proceeds from certain asset sales from the issuance of certain equity securities or from 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. 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. In November 1999, the Company amended its Senior Credit Facility to modify certain of the covenants therein for the third and fourth quarters of fiscal 2000 and for future measurement periods. In addition, the revolving commitments under the Senior Credit Facility were reduced to $400.0 million from $500.0 million and were to be further reduced by the first $75.0 million in proceeds from sales of restaurants. The final maturity date of February 2004 remained unchanged; however, the applicable margin used to determine the interest rate payable on outstanding borrowings was increased and up to $200.0 million of revolving borrowings will be converted, subject to lender approvals, to term borrowings with an interest rate not subject to adjustment on the basis of certain financial ratios. The term loan component will provide for principle payments of $4.2 million each quarter, beginning in March 2001, with all remaining principle due on the maturity date. 46 44 - - On April 26, 2000, the Company further amended its Senior Credit Facility effective January 31, 2000, to amend certain of the covenants contained therein. The amended Senior Credit Facility also provides that the revolving commitments thereunder shall be reduced by the first $100.0 million in net proceeds from sales of restaurants (as compared with $75.0 million in the November 1999 amendment) and 75% of the second $100.0 million in net proceeds from sales of restaurants, and by the entire net proceeds from the sale of any of the Company's Carl's Jr. or Taco Bueno restaurants. The Senior Credit Facility, as amended, prohibits the Company from purchasing shares of its common stock, purchasing its Senior Subordinated Notes or Convertible Notes, from prepaying subordinated indebtedness and from increasing cash dividends paid from current levels. In addition, capital expenditures were reduced and construction of new restaurants is limited to construction already begun or committed to begin. The final maturity date remains unchanged; however, the interest rate payable on outstanding borrowings was increased. Failure to complete an asset sale or sales aggregating $125.0 million in net proceeds by the end of October 2000 will result in a further increase in the interest rate until such sales are completed. The Company was in compliance as of January 31, 2000 with all of its covenants governing its Senior Credit Facility, as amended. As of fiscal 2000, the Company had $57.5 million of borrowings available under its Senior Credit Facility. Secured notes payable are collateralized by certain restaurant property deeds of trust, with a carrying value of $9.4 million as of January 31, 2000. Long-term debt matures in fiscal years ending after January 31, 2000 as follows:
(Dollars in thousands) - ------------------------------------------------------------------------ Fiscal Year: 2001 $ 5,532 2002 339 2003 369 2004 428,735 2005 417 Thereafter 204,361 -------- $639,753 --------
NOTE 10 - OTHER LONG-TERM LIABILITIES Other long-term liabilities consist of the following:
(Dollars in thousands) 2000 1999 - -------------------------------------------------------------------------------- Closure reserves $37,158 $29,294 Self-insured workers' compensation reserve 21,381 21,068 Other self-insurance reserves 7,989 10,302 Deferred revenues 6,891 4,674 Deferred lease costs 5,241 5,277 Other 5,892 9,499 ------------------ $84,552 $80,114 ------------------
The closure reserves primarily consist of amounts provided for in the acquisition of Hardee's for the closure of certain restaurants and corporate facilities. In addition, during the fourth quarter of fiscal 2000, the Company recorded a store closure reserve at Hardee's of $16.3 million for 105 Hardee's restaurants to be closed over the next fiscal year. The store closure reserve relates primarily to the net present value of any remaining lease obligations after the expected closure date, net of estimated sublease income, of which $11.2 million is included in other long-term liabilities and $5.1 million is included in other current liabilities. In prior years, the Company initiated programs to dispose of or franchise its Arizona and Texas Carl's Jr. restaurant operations. As of January 31, 2000 and 1999, $4.0 million and $5.1 million, respectively, were accrued for these costs, including the current portion. These balances consist mainly of estimated lease subsidies which represent the net present value of the excess of future lease payments over estimated sublease income. 47 45 - The remaining unamortized discount to present value these lease subsidies at January 31, 2000 was $2.8 million and will be amortized to operations over the remaining sublease terms, which range up to 15 years. The Company presently self-insures for group insurance, workers' compensation and fire and comprehensive protection on most equipment and certain other assets. A total of $23.8 million and $26.3 million was accrued as of January 31, 2000 and 1999, respectively, representing the current and long-term portions of the net present value of an independent actuarial valuation of the Company's workers' compensation claims. These amounts are net of a present value discount of $5.2 million and $4.9 million in fiscal 2000 and 1999, respectively. NOTE 11 - STOCKHOLDERS' EQUITY During the third quarter of fiscal 2000, the Company's Board of Directors authorized the purchase of up to five million shares of the Company's common stock. As of January 31, 2000, the Company had repurchased 1,585,000 shares of common stock for $10.4 million, at an average price of $6.53 per share. During the second quarter of fiscal 1998, the Company issued 10,088,375 shares of its common stock at a public offering price of $23.14 per share. Proceeds from the offering, net of underwriting discounts and commissions and other related expenses, were $222.3 million. The net proceeds were primarily used to finance the acquisition of Hardee's (see Note 2). NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents information on the Company's financial instruments:
2000 1999 - -------------------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated (Dollars in thousands) Amount Fair Value Amount Fair Value - -------------------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 36,505 $ 36,505 $ 46,297 $ 46,297 Notes receivable 13,498 14,501 17,473 20,618 Financial liabilities: Long-term debt, including current portion $639,753 $526,906 $527,182 $518,048
The fair value of cash and cash equivalents approximates their carrying amount due to their short maturity. The estimated fair values of notes receivable were determined by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. The estimated fair value of long-term debt was determined by discounting future cash flows using rates currently available to the Company for debt with similar terms and remaining maturities and using market quotes as of January 31, 2000 for the Company's Senior Subordinated Notes and Convertible Notes. NOTE 13 - RELATED PARTY TRANSACTIONS Certain members of management and the Karcher family are franchisees of the Company. A total of 43 restaurants have been sold to these individuals. Additionally, these franchisees regularly purchase food and other products from the Company on the same terms and conditions as other franchisees. In fiscal 1994, the Chairman Emeritus was granted future retirement benefits for past services consisting principally of payments of $200,000 per year for life and supplemental health benefits, which had a net present value of $1.7 million as of that date. This amount was computed using certain actuarial assumptions, including a discount rate of 7%. A total of $1.0 million remained accrued in other long-term liabilities as of January 31, 2000. The Company anticipates funding these obligations as they become due. The Company leases various properties, including its corporate headquarters, a distribution facility and three restaurants from the Chairman Emeritus. Included in capital lease obligations were $2.4 million and $3.0 million, representing the present value of lease obligations related to these various properties at January 31, 2000 and 1999, respectively. Lease payments under these leases for fiscal 2000, 1999 and 1998 amounted to $1.5 million, $1.2 million, and $1.3 million, respectively. This was net of sublease rentals of $161,000 in fiscal 2000 and $157,000 in fiscal 1999. 48 46 - - In fiscal 2000, the Company sold 14 Carl's Jr. restaurants to a relative of a board of director member for $14.1 million and recorded a gain on the sale of these restaurants of $12.2 million. NOTE 14 - FRANCHISE AND LICENSE OPERATIONS Franchise arrangements generally provide for initial fees and continuing royalty payments to the Company based upon a percentage of sales. The Company generally charges an initial franchise fee for each new franchised restaurant that is added to its system, and in some cases, an area development fee, which grants exclusive rights to develop a specified number of restaurants in a designated geographic area within a specified time period. Similar fees are charged in connection with the Company's international licensing operations. These fees are recognized ratably when substantially all the services required of the Company are complete and the restaurants covered by these agreements commence operations. Certain franchisees may also purchase food, paper, supplies and equipment from the Company. Additionally, franchisees may be obligated to remit lease payments for the use of restaurant facilities owned or leased by the Company, generally for a period of 20 years. Under the terms of these leases, they are required to pay related occupancy costs which include maintenance, insurance and property taxes. Revenues from franchised and licensed restaurants consist of the following:
(Dollars in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------- Foodservice $ 80,094 $ 75,895 $ 63,890 Royalties 52,692 56,316 42,929 Equipment sales 27,876 14,038 9,989 Rental income 10,916 11,644 9,854 Initial fees 3,800 1,930 544 -------------------------------- $175,378 $159,823 $127,206 --------------------------------
Operating costs and expenses for franchised and licensed restaurants consist of the following:
(Dollars in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------- Foodservice $ 78,881 $ 74,230 $ 62,801 Occupancy and other operating expenses 28,241 22,113 23,588 Equipment purchases 21,006 10,676 7,384 -------------------------------- $128,128 $107,019 $ 93,773 --------------------------------
NOTE 15 - INTEREST EXPENSE Interest expense consists of the following:
(Dollars in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------- Notes payable and Senior Credit Facility $(26,674) $(23,013) $ (9,689) Senior Subordinated Notes (16,880) -- -- Capital lease obligations (11,570) (12,030) (6,578) Convertible Notes (7,509) (7,725) -- Other (650) (685) (647) -------------------------------- $(63,283) $(43,453) $(16,914) --------------------------------
49 47 - NOTE 16 - OTHER INCOME (EXPENSE), NET Other income (expense), net consists of the following:
(Dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------- Net gain (loss) on sale of restaurants $ 15,186 $ (71) $ (141) Interest income 2,615 4,916 4,955 Lease income (expense) (235) 1,101 1,819 Property management (971) (792) (1,167) Bad debt expense (1,218) 50 (279) Loss from long-term investments (39,302) (6,246) (366) Dividend income -- -- 1,800 Other (8,121) 372 742 ------------------------------ $(32,046) $ (670) $ 7,363 ------------------------------
NOTE 17 - INCOME TAXES Income tax expense (benefit) consists of the following:
(Dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------- Current: Federal $ 10,883 $34,433 $19,031 State 1,285 6,289 5,160 ------------------------------ 12,168 40,722 24,191 ------------------------------ Deferred: Federal (26,353) 8,607 3,468 State (3,682) 2,400 2,224 ------------------------------ (30,035) 11,007 5,692 ------------------------------ $(17,867) $51,729 $29,883 ------------------------------
Total income tax expense (benefit) for the years ended January 31, 2000, 1999 and 1998 was allocated as follows:
(Dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------- Income (loss) from continuing operations $(18,053) $49,645 $29,883 Extraordinary gain 186 2,084 -- ------------------------------ $(17,867) $51,729 $29,883 ------------------------------
A reconciliation of income tax expense (benefit) at the federal statutory rate to the Company's provision for taxes on income is as follows:
(Dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------- Income taxes at statutory rate $(16,444) $45,305 $26,824 State income taxes, net of federal income tax benefit (3,637) 5,637 4,153 Work opportunity tax credits (1,119) (1,048) (1,508) Increase (decrease) in valuation allowance 3,378 664 (515) Other, net (45) 1,171 929 ------------------------------ $(17,867) $51,729 $29,883 ------------------------------
50 48 - - Temporary differences and carryforwards gave rise to a significant amount of deferred tax assets and liabilities as follows:
(Dollars in thousands) 2000 1999 - --------------------------------------------------------------------------------- Deferred tax assets: Workers' compensation reserve $10,182 $ 10,353 Capitalized leases 9,024 8,424 Closure reserves 9,011 1,982 Long-term investments 7,224 -- Insurance reserves 5,352 5,126 State net operating losses 2,971 -- Other reserves 2,112 636 Accrued payroll 1,813 1,478 State taxes 544 3,888 Other 3,348 1,907 ------------------- 51,581 33,794 Alternative minimum tax credits 7,612 -- General business tax credits 1,620 -- Less: Valuation allowance 5,398 2,020 ------------------- Total deferred tax assets 55,415 31,774 ------------------- Deferred tax liabilities: Depreciation 40,362 35,293 Long-term investments -- 5,392 Intangibles -- 4,802 Other 47 1,316 ------------------- Total deferred tax liabilities 40,409 46,803 ------------------- Net deferred tax asset (liability) $15,006 $(15,029) -------------------
While there can be no assurance that the Company will generate any earnings or any specific level of earnings in future years, management believes it is more likely than not that the Company will realize the majority of the benefit of the existing deferred tax assets at January 31, 2000, based on the Company's historical and future pre-tax earnings. The Company has fully reserved against state net operating loss carryforwards available at January 31, 2000, which represent a potential future state income tax benefit of $3.0 million and expire in fiscal 2003 through 2020. As of January 31, 2000, the Company also had work opportunity tax credit carryforwards of $1.6 million which expire in fiscal 2020. Further, as of January 31, 2000, the Company had available federal and state alternative minimum tax credit carryforwards of $7.1 million and $0.5 million, respectively, with no expiration date. NOTE 18 - SEGMENT INFORMATION The Company is engaged principally in developing, operating and franchising its Carl's Jr., Hardee's and Taco Bueno quick-service restaurants, each of which are considered strategic businesses that are managed and evaluated separately. As such, the Company considers its Carl's Jr., Hardee's and Taco Bueno chains to each be a reportable segment. Management evaluates the performance of its segments and allocates resources to them based on several factors, of which the primary financial measure is segment operating income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1. Summarized financial information concerning the Company's reportable segments is shown in the following table. The "other" column includes corporate related items and results of insignificant operations. The amounts reported 51 49 - for Hardee's reflect only the periods subsequent to the acquisition date of April 1, 1998 for FEI and July 15, 1997 for Hardee's.
(Dollars in thousands) Carl's Jr. Hardee's Taco Bueno Other Total - -------------------------------------------------------------------------------------------------------------- 2000 Revenues $714,495 $1,170,834 $ 91,950 $ 12,794 $1,990,073 Segment operating income (loss) 61,157 (4,920) 8,136 (16,504) 47,869 Total assets 383,124 1,089,867 77,507 18,016 1,568,514 Capital expenditures 72,804 146,677 24,308 19,800 263,589 Depreciation and amortization 26,873 63,398 4,119 10,060 104,450 1999 Revenues $629,837 $1,127,130 $ 81,200 $ 53,877 $1,892,044 Segment operating income (loss) 76,960 95,110 8,717 (12,567) 168,220 Total assets 280,201 1,072,594 62,539 81,580 1,496,914 Capital expenditures 46,527 56,424 7,077 14,260 124,288 Depreciation and amortization 22,869 43,835 3,031 7,384 77,119 1998 Revenues $569,225 $ 385,237 $ 73,993 $121,204 $1,149,659 Segment operating income (loss) 61,458 23,463 6,793 (5,523) 86,191 Total assets 241,644 527,312 52,034 136,154 957,144 Capital expenditures 55,902 17,035 4,822 11,451 89,210 Depreciation and amortization 21,749 12,566 3,028 9,059 46,402
NOTE 19 - EMPLOYEE BENEFIT AND RETIREMENT PLANS Profit Sharing and Savings Plan The Company maintains a voluntary contributory profit sharing and savings investment plan for all eligible employees other than operations hourly employees. Annual contributions under the profit sharing portion of the plan are determined at the discretion of the Company's Board of Directors. Under the savings investment portion of the plan, participants may elect to contribute up to 15% of their annual salaries to the plan. Post Retirement Benefits Other Than Pensions The Company provides an unfunded retiree medical benefit plan for substantially all Hardee's employees (except restaurant hourly employees) who retire on or after age 55 with at least five years of service. The retiree pays the actual costs of the plan with a Company subsidy provided for retirees with 10 or more years of credited service. The dollar amount of this subsidy will be capped in 2003. Such benefits provided by the Company are immaterial. Stock Purchase Plan In fiscal 1995, the Board of Directors adopted, and stockholders subsequently approved in fiscal 1996, an Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP and subsequent amendments, eligible employees may voluntarily purchase, at current market prices, up to 907,500 shares of the Company's common stock through payroll deductions. Pursuant to the ESPP, employees may contribute an amount between 3% and 15% of their base salaries. The Company contributes varying amounts as specified in the ESPP. During fiscal 2000, 1999 and 1998, 338,417, 128,477 and 59,458 shares, respectively, were purchased and allocated to employees, based upon their contributions, at an average price of $10.15, $28.43 and $28.20 per share, respectively. The Company contributed $1.2 million or an equivalent of 137,568 shares for the year ended January 31, 2000, $0.6 million or an equivalent of 22,496 shares for the year ended January 31, 1999 and $0.3 million or an equivalent of 11,095 shares for the year ended January 31, 1998. Stock Incentive Plans The Company's 1999 stock incentive plan was approved by stockholders in June 1999. Awards granted to eligible employees under the 1999 plan are not restricted as to any specified form or structure, with such form, vesting and 52 50 - - pricing provision determined by the compensation committee of Board of Directors. Options generally have a term of 10 years from the date of grant, except for five years from the date of grant in the case of incentive stock options granted to 10% or greater shareholders of the Company. Options are generally granted at a price equal to or greater than the fair market value of the underlying common stock on the date of grant, except that incentive stock options granted to 10% or greater shareholders of the Company may not be granted at less that 110% of the fair market value of the common stock on the date of grant. A total of 1,500,000 shares are available for grants of options or other awards under the 1999 plan, with such amount of available shares increased by 350,000 shares on the date of each annual meeting of shareholders. As of January 31, 2000, 1,147,000 options were outstanding under this plan with exercise prices ranging from $8.13 per share to $18.13 per share. The Company's 1994 stock incentive plan expired in April 1999. Options generally had a term of five years from the date of grant for the nonemployee directors and 10 years from the date of grant for employees, became exercisable at a rate of 33 1/3% per year following the grant date and were priced at the fair market value of the shares on the date of grant. A total of 6,352,500 shares were available for grants of options or other awards under this plan, of which 4,805,164 stock options were outstanding as of January 31, 2000, with exercise prices ranging from $3.72 per share to $36.65 per share. The Company's 1993 stock incentive plan was superseded by the 1994 plan, as discussed above. As of January 31, 2000, 195,964 stock options, with exercise prices ranging from $3.99 per share to $6.27 per share, were outstanding under the plan. No further awards may be granted under this plan. The Company's 1982 stock option plan expired in September 1992. Under this plan, stock options were granted to key employees to purchase up to 5,445,000 shares of its common stock at a price equal to or greater than the fair market value at the date of grant. The options generally had a term of 10 years from the grant date and became exercisable at a rate of 25%, 35% and 40% per year following the grant date. The exercise prices of the 60,801 stock options outstanding as of January 31, 2000 under this plan range from $3.31 per share to $4.27 per share. In connection with the acquisition of Summit, the Company assumed the options outstanding under Summit's existing option plans: the 1984 Incentive Stock Option Plan, the 1987 Nonqualified Stock Option Plan, the 1987 Employee Incentive Stock Option Plan and the 1992 Stock Option Plan. Pursuant to the terms of the acquisition, options under these plans became fully vested on July 15, 1996. The options granted in accordance with these four plans generally had a term of five to 10 years. Under these plans, there were 14,912 stock options outstanding at January 31, 2000, with exercise prices ranging from $12.03 to $21.32 per share. No further shares may be granted under these plans. Transactions under all plans are as follows:
Weighted Average Shares Exercise Price Exercisable - -------------------------------------------------------------------------------------------------------------- Balance, January 31, 1997 3,925,585 $ 9.29 1,495,005 Granted 1,947,495 24.13 Canceled (233,803) 20.28 Exercised (594,410) 6.32 --------- Balance, January 31, 1998 5,044,867 $14.86 2,059,307 Granted 1,144,230 35.41 Canceled (197,409) 25.83 Exercised (624,502) 9.41 --------- Balance, January 31, 1999 5,367,186 $19.47 3,064,429 Granted 1,830,300 16.66 Canceled (791,974) 33.38 Exercised (181,671) 8.28 --------- Balance, January 31, 2000 6,223,841 $17.20 3,997,831 ---------
53 51 - The following table summarizes information related to stock options outstanding and exercisable at January 31, 2000:
Options Outstanding Options Exercisable - ---------------------------------------------------------------------- ---------------------------- Weighted Weighted Average Weighted Range of Shares Average Remaining Shares Average Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price - ----------------------------------------------------------------------------------------------------- $ 3.31 to $ 4.48 556,310 $ 3.95 4.35 556,310 $ 3.95 5.10 6.27 72,518 6.07 3.76 72,518 6.07 8.13 12.03 942,825 8.56 5.49 940,825 8.56 12.88 19.28 2,744,230 16.54 8.24 1,169,391 15.99 21.32 28.50 1,506,623 24.35 7.13 1,114,853 24.42 33.64 36.65 401,335 35.51 8.06 143,934 35.43 --------- --------- $ 3.31 $36.65 6,223,841 $17.20 7.14 3,997,831 $15.44 ----------- -----------
For purposes of the following pro forma disclosures required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") the fair value of each option granted after fiscal 1995 has been estimated on the date of grant using the Black-Scholes option-pricing model, with the following assumptions used for grants in fiscal 2000, 1999 and 1998: annual dividends consistent with the Company's current dividend policy, which resulted in payments of $0.08 per share in fiscal 2000 and $0.07 per share in fiscal 1999 and 1998; expected volatility of 50% in fiscal 2000, 30% in fiscal 1999 and 25% in fiscal 1998; risk-free interest rates of 6.69% in fiscal 2000, 4.55% in fiscal 1999, and 5.51% in fiscal 1998; and an expected life of 5.40 years in fiscal 2000, 5.45 years in fiscal 1999 and 5.50 years for fiscal 1998. The weighted average fair value of each option granted during fiscal 2000, 1999 and 1998 was $8.07, $12.50 and $8.30, respectively. Had compensation expense been recognized for fiscal 2000, 1999 and 1998 grants for stock-based compensation plans in accordance with provisions of SFAS 123, the Company would have recorded net income (loss) and earnings (loss) per share of $(35.2) million, or $(0.68) per basic and diluted share in fiscal 2000; $61.6 million, or $1.19 per basic share and $1.17 per diluted share in fiscal 1999; and $39.9 million, or $0.85 per basic share and $0.83 per diluted share in fiscal 1998. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the value of an estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 54 52 - - NOTE 20 - SUPPLEMENTAL CASH FLOW INFORMATION
(Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------- Cash paid for interest and income taxes are as follows: Interest (net of amount capitalized) $50,009 $37,501 $14,448 Income taxes 15,193 39,400 18,938 Non-cash charges are as follows: Store closure expense and provision for asset impairment $41,998 $ -- $ -- Provision for impairment of long-term investments 34,431 15,000 -- Write-off of Hardee's acquisition-related assets 10,989 -- -- Write-off of capitalized software development cost 6,553 -- -- Write-off of deferred financing costs 3,565 -- Restructuring charges 2,058 -- -- Other, net 6,007 -- -- Non-cash investing and financing activities are as follows: Common stock issued in connection with Hardee's franchisee acquisitions $ -- $ 1,663 $ 9,405
NOTE 21 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following table presents summarized quarterly results:
Quarter - ---------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1st 2nd 3rd 4th - ---------------------------------------------------------------------------------------------------------- FISCAL 2000 Total revenues $595,723 $465,259 $453,623 $475,468 Operating income (loss) 47,605 31,147 19,373 (50,256) Income (loss) before extraordinary item 19,130 10,298 3,007 (61,842) Extraordinary item 290 -- -- -- Net income (loss) 19,420 10,298 3,007 (61,842) Net income (loss) per share - basic $ 0.37 $ 0.20 $ 0.06 $ (1.22) -------------------------------------------- Net income (loss) per share - diluted $ 0.37 $ 0.20 $ 0.06 $ (1.22) -------------------------------------------- FISCAL 1999 Total revenues $528,211 $474,841 $457,605 $431,387 Operating income 45,634 49,138 40,894 32,554 Income before extraordinary item 22,732 22,604 16,146 12,970 Extraordinary item -- -- 2,738 522 Net income 22,732 22,604 18,884 13,492 Net income per share - basic $ 0.44 $ 0.44 $ 0.36 $ 0.26 -------------------------------------------- Net income per share - diluted $ 0.43 $ 0.42 $ 0.35 $ 0.26 --------------------------------------------
Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including the seasonal nature of the quick-service restaurant industry and unpredictable adverse weather conditions which may affect sales volume and food costs. In addition, all quarters have 12-week accounting periods, except the first quarters of fiscal 2000 and 1999, which have 16-week accounting periods. Further, the fourth quarter of fiscal 2000 includes 13 weeks, whereas the fourth quarter of fiscal 1999 includes 12 weeks. 55 53 - In the fourth quarter of fiscal 2000, the Company recorded pre-tax charges of $80.3 million ($49.3 million after-tax). These charges consisted of: (a) establishing a $16.3 million store closure reserve and recording a $25.7 million asset impairment charge for 105 Hardee's restaurants which the Company plans on closing within the next 12 months; (b) recording an impairment charge and equity losses of $37.3 million to write-down the Company's various long-term investments in other restaurant concepts to fair market value; (c) recording $2.1 million of restructuring charges in connection with consolidating certain administrative functions from Rocky Mount, North Carolina, to Anaheim, California; (d) writing-off $3.6 million of deferred financing costs as a result of a commitment decrease in the Company's senior credit facility; (e) writing-off $2.6 million of Y2K costs associated with restaurant computer systems; (f) writing-off $6.6 million of capitalized software development that will not be utilized; (g) recording an additional $1.7 million in vacation expense in connection with a change in vacation policy; (h) recording a gain on the sale of Carl's Jr. and Hardee's restaurants of $19.5 million and (i) other miscellaneous net adjustments of $3.9 million. In the third quarter of fiscal 1999, the Company recorded a $15.0 million charge to write-down its investment in Boston West and recognized a gain of $10.3 million on the sale of its Star Buffet investment. NOTE 22 - COMMITMENTS AND CONTINGENT LIABILITIES In conjunction with the Senior Credit Facility, a letter of credit sub-facility in the amount of $75.0 million was established (see Note 9). Several letters of credit are outstanding under this facility which secure the Company's potential workers' compensation claims and general and health liability claims. The Company is required to provide a letter of credit each year based on its existing claims experience, or set aside a comparable amount of cash or investment securities in a trust account. The Company's standby letter of credit agreements with various banks expire as follows:
(Dollars in thousands) - ------------------------------------------------------------------------------------ July 2000 $ 28,923 November 2000 345 February 2001 1,316 March 2001 6,651 April 2001 7,300 ---------------------- $ 44,535 -------------------
In fiscal 1996, the Company sold certain of its Carl's Jr. franchise notes receivable, with recourse, to an independent third party. In addition, the Company entered into a limited term guarantee with an independent third party during fiscal 1997 on behalf of a Carl's Jr. franchisee and an additional limited term guarantee in fiscal 1998 with an independent third party on behalf of its Hardee's franchisees. The Company is contingently liable for an aggregate of approximately $4.4 million under these guarantees as of January 31, 2000. The Company's Senior Credit Facility is guaranteed on a secured basis by the Company's direct and indirect subsidiaries (the "Subsidiary Guarantors"), other than non-guarantor subsidiaries which conduct no material operations, have no significant assets on a consolidated basis and account for only an insignificant share of the Company's consolidated revenues. Each of the Subsidiary Guarantors also fully and unconditionally guarantee the Company's 9.125% Senior Subordinated Notes due 2009 on a joint and several basis. The Company is from time to time the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect the Company and its restaurants, regardless of whether such allegations are valid or whether the Company is liable. The Company is also the subject of complaints or allegations from employees, former employees and franchisees from time to time. The Company believes that the lawsuits, claims and other legal matters to which it has become subject in the course of its business are not material to the Company's financial condition or results of operations, but an existing or future lawsuit or claim could result in an adverse decision against the Company that could have a material adverse effect on its financial condition and results of operations. 56 54 - - CKE RESTAURANTS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for (Dollars in thousands) Doubtful Accounts - --------------------------------------------------------------------------------- Balance at January 31, 1997 $ 1,380 Charges to operations 5,636 Deductions (3,989) Acquired through acquisitions 29,884 ----------------- Balance at January 31, 1998 32,911 Charges to operations 4,192 Deductions (11,389) Adjustments (9,689) Write-off from dispositions (471) ----------------- Balance at January 31, 1999 15,554 Charges to operations 1,485 Deductions (6,643) ----------------- Balance at January 31, 2000 $ 10,396 --------
57 55 - EXHIBIT INDEX
Exhibits Description - ------------------------------------------------------------------------ 3-1 Certificate of Incorporation of the Registrant, incorporated herein by reference to exhibit 3-1 to the Registrant's Form S-4 Registration Statement Number 333-05305. 3-2 Certificate of Amendment of Certificate of Incorporation, as filed with the Delaware Secretary of State on December 9, 1997, filed as exhibit 3-2 to the Company's Form 10-K Annual Report for the fiscal year ending January 26, 1998, and is hereby incorporated by reference. 3-3 Bylaws of the Registrant, incorporated herein by reference to exhibit 3-2 to the Registrant's Form S-4 Registration Statement Number 333-05305. 4-1 Indenture, dated as of March 14, 1998 for 4.25% Convertible Subordinated Notes due 2004 by and between CKE Restaurants, Inc. and Chase Manhattan Bank and Trust Company, National Association, as Trustee, filed as exhibit 4.1 to the Company's Form 10-K Annual Report for fiscal year ended January 26, 1998, and is hereby incorporated by reference. 4-2 Form of Note (included in exhibit 4.1). 4-3 Registration Rights Agreement dated as of March 13, 1998 between the Company and Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Schroder & Co. Inc., filed as an exhibit 4.3 to the Company's Form 10-K Annual Report for fiscal year ended January 26, 1998, and is hereby incorporated by reference. 4-4 Indenture, dated as of March 4, 1999, by and among the Company, its subsidiary guarantors and Chase Manhattan Bank and Trust Company, N.A., as Trustee, filed as exhibit 4.1 to the Company's Current Report on Form 8-K dated February 25, 1999, and is hereby incorporated by reference. 4-5 Form of Note (included in exhibit 4.4). 4-6 Registration Rights Agreement, dated as of March 4, 1999, by and among the Company, the Subsidiary Guarantors and the Initial Purchasers, filed as exhibit 4.3 to the Company's Registration Statement on Form S-4, file No. 333-76377, and is hereby incorporated by reference. 10-1 Carl Karcher Enterprises, Inc. Profit Sharing Plan, as amended, filed as exhibit 10-21 to the Company's Registration Statement on Form S-1, file No. 2-73695, and is hereby incorporated by reference.(2) 10-2 Carl Karcher Enterprises, Inc. Key Employee Stock Option Plan, filed as exhibit 10-24 to the Company's Registration Statement on Form S-1, file No. 2-80283, and is hereby incorporated by reference.(2) 10-3 Carl Karcher Enterprises, Inc. 1993 Employee Stock Incentive Plan, filed as exhibit 10-123 to the Company's Form 10-K Annual Report for fiscal year ended January 25, 1993, and is hereby incorporated by reference.(2) 10-4 CKE Restaurants, Inc. 1994 Stock Incentive Plan, as amended, incorporated herein by reference to exhibit 4-1 to the Registrant's Form S-8 Registration Statement Number 333-12399.(2) 10-5 CKE Restaurants, Inc. 1999 Stock Incentive Plan, incorporated herein by reference to exhibit 4-1 to the Registrant's Form S-8 Registration Statement Number 333-83601.(2) 10-6 CKE Restaurants, Inc. 1994 Employee Stock Purchase Plan, as amended, filed as exhibit 10-22 to the Company's Form 10-K Annual Report for fiscal year ended January 27, 1997, and is hereby incorporated by reference.(2) 10-7 Employment Agreement dated January 1, 1994, by and between Carl Karcher Enterprises, Inc. and Carl N. Karcher, filed as exhibit 10-89 to the Company's Form 10-K Annual Report for fiscal year ended January 31, 1994, and is hereby incorporated by reference.(2) 10-8 First Amendment to Employment Agreement dated November 1, 1997, by and between Carl N. Karcher and Carl Karcher Enterprises, Inc., filed as exhibit 10-8 to the Company's Form 10-K Annual Report for fiscal year ended January 26, 1998, and is hereby incorporated by reference.(2) 10-9 Employment Agreement dated as of April 9, 1999, by and between the Company and William P. Foley, II, filed as exhibit 10-1 to the Company's Form 10-Q Quarterly Report for the quarterly period ended May 17, 1999, and is hereby incorporated by reference.(2) 10-10 Employment Agreement dated as of April 9, 1999, by and between the Company and C. Thomas Thompson, filed as exhibit 10-2 to the Company's Form 10-Q Quarterly Report for the quarterly period ended May 17, 1999, and is hereby incorporated by reference.(2)
58 56 - -
Exhibits Description - ------------------------------------------------------------------------ 10-11 Employment Agreement dated as of April 9, 1999, by and between the Company and Rory J. Murphy, filed as exhibit 10-3 to the Company's Form 10-Q Quarterly Report for the quarterly period ended May 17, 1999, and is hereby incorporated by reference.(2) 10-12 Employment Agreement dated as of April 9, 1999, by and between the Company and Robert W. Wisely, filed as exhibit 10-4 to the Company's Form 10-Q Quarterly Report for the quarterly period ended May 17, 1999, and is hereby incorporated by reference.(2) 10-13 Employment Agreement dated as of April 9, 1999, by and between the Company and Carl A. Strunk, filed as exhibit 10-5 to the Company's Form 10-Q Quarterly Report for the quarterly period ended May 17, 1999, and is hereby incorporated by reference.(2) 10-14 Employment Agreement dated as of April 9, 1999, by and between the Company and Andrew F. Puzder, filed as exhibit 10-6 to the Company's Form 10-Q Quarterly Report for the quarterly period ended May 17, 1999, and is hereby incorporated by reference.(2) 10-15 Employment Agreement dated as of April 9, 1999, by and between the Company and John J. Dunion, filed as exhibit 10-7 to the Company's Form 10-Q Quarterly Report for the quarterly period ended May 17, 1999, and is hereby incorporated by reference.(2) 10-16 Settlement Agreement and Release dated as of April 26, 1996, by and between Giant Group, Ltd; William P. Foley II; CKE Restaurants, Inc.; Fidelity National Financial, Inc.; and other parties, filed as exhibit 10-42 to the Company's Form 10-Q Quarterly Report for the quarterly period ended May 20, 1996, and is hereby incorporated by reference. 10-17 Operating Agreement by and between Rally's Hamburgers, Inc. and Carl Karcher Enterprises, Inc. dated May 26, 1996, filed as exhibit 10-43 to the Company's Form 10-Q Quarterly Report for the quarterly period ended May 20, 1996, and is hereby incorporated by reference.* 10-18 Settlement and Development Agreement by and between Carl Karcher Enterprises, Inc., CKE Restaurants, Inc. and GB Foods Corporation dated as of May 1995, filed as exhibit 10-31 to the Company's Form 10-K Annual Report for the fiscal year ended January 29, 1996, and is hereby incorporated by reference. 10-19 First Amendment to Settlement and Development Agreement by and between Carl Karcher Enterprises, Inc., CKE Restaurants, Inc. and GB Foods Corporation dated as of February 20, 1997, filed as exhibit 10-31 to the Company's Form 10-K Annual Report for the fiscal year ended January 27, 1997, and is hereby incorporated by reference. 10-20 Term Loan and Security Agreement between Carl Karcher Enterprises, Inc. and Heller Financial, Inc., dated December 19, 1995, filed as exhibit 10-40 to the Company's Form 10-K Annual Report for the fiscal year ended January 29, 1996, and is hereby incorporated by reference. 10-21 Amendment No. One to Term Loan and Security Agreement dated as of January 22, 1996, by and between Carl Karcher Enterprises, Inc. and Heller Financial, Inc. filed as exhibit 10-41 to the Company's Form 10-K Annual Report for the fiscal year ended January 29, 1996, and is hereby incorporated by reference. 10-22 Amendment No. Two to Term Loan and Security Agreement dated as of January 14, 1997, by and between Carl Karcher Enterprises, Inc. and Heller Financial, Inc., filed as exhibit 10-42 to the Company's Form 10-K Annual Report for the fiscal year ended January 27, 1997, and is hereby incorporated by reference. 10-23 Stock Purchase Agreement, dated as of August 27, 1996, by and between CKE Restaurants, Inc. and Casa Bonita Holdings, Inc., filed as exhibit 10-1 to the Company's Current Report on Form 8-K dated August 27, 1996, and is hereby incorporated by reference.* 10-24 Stock Purchase Agreement, dated as of April 27, 1997, by and among CKE Restaurants Inc., Imasco Holdings, Inc. and Hardee's Food Systems, Inc., filed as exhibit 10.1 to the Company's Current Report on Form 8-K dated April 27, 1997, and is hereby incorporated by reference.* 10-25 Supply Agreement, dated as of July 14, 1997, by and between Hardee's Food Systems, Inc. and Fast Food Merchandisers, Inc. (Forest City Division), filed as exhibit 99.3 to the Company's Current Report on Form 8-K dated April 27, 1997, and is hereby incorporated by reference.* 10-26 Supply Agreement, dated as of July 14, 1997, by and between Hardee's Food Systems, Inc. and Fast Food Merchandisers, Inc. (Monterey Division), filed as exhibit 99.4 to the Company's Current Report on Form 8-K dated April 27, 1997, and is hereby incorporated by reference.*
59 57 -
Exhibits Description - ------------------------------------------------------------------------ 10-27 Supply Agreement, dated as of July 14, 1997, by and between Hardee's Food Systems, Inc. and QVS, Inc., filed as exhibit 99.5 to the Company's Current Report on Form 8-K dated April 27, 1997, and is hereby incorporated by reference.* 10-28 Distribution Agreement, dated as of July 14, 1997, by and among the Company, Hardee's Food Systems, Inc. and Fast Food Merchandisers, Inc., filed as exhibit 99.6 to the Company's Current Report on Form 8-K dated April 27, 1997, as is hereby incorporated by reference.* 10-29 Exchange Agreement, dated as of December 8, 1997, by and between Rally's Hamburgers, Inc., CKE Restaurants, Inc., Fidelity National Financial, Inc., Giant Group, LTD and others, filed as exhibit 10-35 to the Company's Form 10-K Annual Report for the fiscal year ended January 26, 1998, and is hereby incorporated by reference.* 10-30 Stock Purchase Agreement dated February 18, 1998, among CKE Restaurants, Inc., Advantica Restaurant Group, Inc., Spartan Holdings, Inc. and Flagstar Enterprises, Inc., filed as exhibit 99.2 to the Company's Current Report on Form 8-K dated February 19, 1998, and is hereby incorporated by reference.* 10-31 Third Amended and Restated Credit Agreement, dated as of November 24,1999, by and between the Company and Paribas, as agent, and the Lenders party thereto, filed as exhibit 10.8 to the Company's form 10-Q Quarterly Report for the quarterly period ended November 1, 1999, and is hereby incorporated by reference.* 10-32 Amendment No. 1 to Third Amended and Restated Credit Agreement, dated as of April 26, 2000, by and between the Company and Paribas, as agent, and the Lenders party thereto.(1) 12-1 Computation of Ratios.(1) 21-1 Subsidiaries of Registrant.(1) 23-1 Consent of KPMG LLP.(1) 27-1 Financial Data Schedule (included only with electronic filing).
* Schedules omitted. The Registrant shall furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule upon request. (1) Filed herewith. (2) A management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K. EX-10.32 2 EXHIBIT 10.32 1 EXHIBIT 10.32 AMENDMENT NO. 1 TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT This Amendment No. 1 (this "Amendment"), dated as of April 26, 2000, is by and among CKE Restaurants, Inc. (the "Borrower"), the Lenders party hereto (the "Lenders") and Paribas, acting in its capacity as agent for the Lenders (the "Agent"), and amends that certain Third Amended and Restated Credit Agreement, dated as of November 24, 1999, among the Borrower, the Lenders party thereto and the Agent (the "Credit Agreement"). Capitalized terms used but not defined in this Amendment shall have the respective meanings specified in the Credit Agreement. The Borrower, the Lenders and the Agent, pursuant to Section 10.5 of the Credit Agreement, hereby agree to amend the Credit Agreement as follows upon the terms and conditions set forth herein: 1. Section 1.1 of the Credit Agreement is hereby amended by amending and restating, in its entirety, the table contained in the definition of "Applicable Margin" to read as follows:
Leverage Ratio Eurodollar Loans Base Rate Loans Commitment Fee -------------- ---------------- --------------- -------------- less than 1.5 to 1.0 1.250% 0.00% 0.375% 1.5 to 1.0 or greater, but less than 2.0 to 1.0 1.500% 0.250% 0.375% 2.0 to 1.0 or greater, but less than 2.5 to 1.0 1.875% 0.625% 0.375% 2.5 to 1.0 or greater, but less than 3.0 to 1.0 2.125% 0.875% 0.500% 3.0 to 1.0 or greater, but less than 3.5 to 1.0 2.250% 1.000% 0.500% 3.5 to 1.0 or greater 3.250% 1.750% 0.500%
2. Section 1.1 of the Credit Agreement is hereby amended by deleting "3.0" appearing in the fourth sentence of subsection (a) of the definition of "Applicable Margin" and inserting "3.5" in place thereof. 2 3. Section 1.1 of the Credit Agreement is hereby amended by inserting at the end of the definition of "Applicable Margin" the following subsection (c): (c) Notwithstanding the foregoing, if the Borrower and its Subsidiaries have not received an aggregate amount of Net Sale Proceeds of at least $125 million during the period from April 15, 2000 to October 27, 2000, then the Applicable Margin with respect to each Eurodollar Loan or Base Rate Loan shall be increased by 0.500% until such time as the aggregate amount of Net Sale Proceeds received after April 15, 2000 shall be at least $125 million. 4. Section 1.1 of the Credit Agreement is hereby amended by amending and restating, in its entirety, the definition of "Consolidated EBITDA" to read as follows: "Consolidated EBITDA" shall mean, for any Person during any period, the sum of (i) Consolidated Net Income for such period, plus (ii) to the extent deducted in the calculation of Consolidated Net Income for such period, Consolidated Interest Expense for such period, plus (iii) to the extent deducted in the calculation of Consolidated Net Income for such period, federal and state income taxes for such period, plus (iv) to the extent deducted in the calculation of Consolidated Net Income for such period, depreciation and amortization expense for such period, 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, all determined on a consolidated basis for such Person and its Subsidiaries in accordance with GAAP, plus (vii) without duplication, to the extent deducted (or minus to the extent added) in the calculation of Consolidated Net Income for the period from November 2, 1999 through January 31, 2000, the non-recurring items from such period as presented in the EBITDA Reconciliation Summary set forth on Exhibit K hereto. 5. Section 1.1 of the Credit Agreement is hereby amended by amending and restating, in its entirety, the definition of "Consolidated Tangible Net Worth" to read as follows: "Consolidated Tangible Net Worth" shall mean, at any time, the excess of (i) the total assets of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP, minus goodwill and any other items that are classified as intangibles in accordance with GAAP, plus the net loss (expressed as a positive number), in the aggregate (not to exceed $100 million), from all Asset Dispositions of any Restaurant or Restaurants made after April 15, 2000, minus (ii) all liabilities of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP. 2 3 6. Section 1.1 of the Credit Agreement is hereby amended by amending and restating, in its entirety, the definition of "Paydown Condition" to read as follows: "Paydown Condition" shall mean the point in time at which the Borrower shall have prepaid the outstanding Loans (and such Loans and all Commitments in connection therewith shall have been permanently reduced) in the aggregate amount of $175,000,000 with the Net Sale Proceeds of Asset Dispositions of Restaurants occurring on or after November 2, 1999 in accordance with the provisions of Section 2.12(a)(ii)(B). 7. Section 2.6 of the Credit Agreement is hereby amended by replacing the last sentence of subsection (a) thereof with the following: The Borrower agrees to pay interest in respect of the unpaid principal amount of each Term Loan that is a Base Rate Loan from the date of the making of such Loan until such Loan shall be paid in full at a rate per annum which shall be equal to (i) so long as the Leverage Ratio is less than 3.5 to 1.0, the sum of (A) 1.25% plus (B) the Base Rate in effect from time to time, such rate to change as and when the Base Rate changes, such interest to be computed on the basis of a 365 or 366-day year, as the case may be, and paid for the actual number of days elapsed, or (ii) so long as the Leverage Ratio is 3.5 to 1.0 or greater, the sum of (A) 1.75% plus (B) the relevant Base Rate, such interest to be computed on the basis of a 365 or 366-day year and paid for the actual number of days elapsed, in each case subject to the provisions of clause (c) of this Section 2.6. For purposes of this subsection 2.6(a), the Leverage Ratio shall be calculated in the same manner (and adjustments to the interest rate of Term Loans that are Base Rate Loans shall be made in the same manner as are adjustments to Applicable Margin) as specified in subsection (a) of the definition of "Applicable Margin." 8. Section 2.6 of the Credit Agreement is hereby amended by replacing the last sentence of subsection (b) thereof with the following: The Borrower agrees to pay interest in respect of the unpaid principal amount of each Term Loan that is a Eurodollar Loan from the date of the making of such Loan until such Loan shall be paid in full at a rate per annum which shall be equal to (i) so long as the Leverage Ratio is less than 3.5 to 1.0, the sum of (A) 2.50% plus (B) the relevant Eurodollar Rate, or (ii) so long as the Leverage Ratio is 3.5 to 1.0 or greater, the sum of (A) 3.25% plus (B) the relevant Eurodollar Rate, such interest in each case to be computed on the basis of a 360-day year and paid for the actual number of days elapsed, in each case subject to the provisions of clause (c) of this Section 2.6. For purposes of this subsection 2.6(b), the Leverage Ratio shall be calculated in the same manner (and adjustments to the interest rate of Term Loans that are Eurodollar Loans shall be made in the same manner as are adjustments to Applicable Margin) as specified in subsection (a) of the definition of "Applicable Margin." 3 4 9. Section 2.12 of the Credit Agreement is hereby amended by amending and restating, in its entirety, paragraph (B) of clause (ii) of subsection (a) thereof to read as follows: (B) Upon the consummation of any Asset Disposition of any Restaurant or Restaurants occurring on or after November 2, 1999 and, with respect to subparagraphs (I) and (II) hereof, prior to the occurrence of the Paydown Condition, within ten (10) days after the Borrower or any of its Subsidiaries receives any Net Sale Proceeds with respect to any such Asset Disposition, the Borrower shall prepay the outstanding Loans (I) in an amount equal to 100% of the first $100,000,000 of such Net Sale Proceeds of Restaurants, (II) in an amount equal to 75% of the next $100,000,000 of such Net Sale Proceeds of Restaurants, and (III) notwithstanding any other provision of this paragraph 2.12(a)(ii)(B), in an amount equal to 100% of the net proceeds, without duplication, from sales of Carl's Jr. and Taco Bueno Restaurants, each in accordance with the provisions of Section 2.12. 10. Section 7.1 of the Credit Agreement is hereby amended by amending and restating, in its entirety, the table contained in subsection (a) thereof to read as follows: Period Ratio ------ ------------ Second A&R Closing Date through November 1, 1999 3.60 to 1.00 November 2, 1999 through January 31, 2000 4.00 to 1.00 February 1, 2000 through May 22, 2000 5.00 to 1.00 May 23, 2000 through August 14, 2000 4.80 to 1.00 August 15, 2000 through November 6, 2000 4.60 to 1.00 November 7, 2000 through January 29, 2001 4.00 to 1.00 Each fiscal quarter of the Borrower thereafter 2.50 to 1.00 11. Section 7.1 of the Credit Agreement is hereby amended by amending and restating, in its entirety, the table contained in subsection (b) thereof to read as follows: Period Ratio ------ ------------ Second A&R Closing Date through November 1, 1999 3.00 to 1.00 November 2, 1999 through January 31, 2000 3.00 to 1.00 February 1, 2000 through May 22, 2000 2.50 to 1.00 May 23, 2000 through August 14, 2000 2.50 to 1.00 August 15, 2000 through November 6, 2000 2.50 to 1.00 November 7, 2000 through January 29, 2001 2.50 to 1.00 Each fiscal quarter of the Borrower thereafter 5.00 to 1.00 4 5 12. Section 7.1 of the Credit Agreement is hereby amended by amending and restating, in its entirety, the table contained in subsection (d) thereof and the proviso immediately following to read as follows: Period Amount ------ ------------ Second A&R Closing Date through November 1, 1999 $200,000,000 November 2, 1999 through January 31, 2000 $175,000,000 February 1, 2000 through May 22, 2000 $155,000,000 May 23, 2000 through August 14, 2000 $160,000,000 August 15, 2000 through November 6, 2000 $165,000,000 November 7, 2000 through January 29, 2001 $180,000,000 Each fiscal quarter of the Borrower thereafter $260,000,000 provided, however, that the amount set forth opposite such period shall be reduced by the EBITDA Adjustments as of the date of determination attributable to those Restaurants sold (excluding those sold during the period from November 2, 1999 through January 31, 2000) pursuant to which the Net Sale Proceeds from such sales have been applied to permanently reduce the Commitments of the Lenders on or before the 45th calendar day following the end of the fiscal quarter in which such Restaurants were sold. 13. Section 7.1 of the Credit Agreement is hereby amended by amending and restating, in its entirety, the table contained in subsection (e) thereof to read as follows: Period Ratio ------ ------------ Second A&R Closing Date through November 1, 1999 5.00 to 1.00 November 2, 1999 through January 31, 2000 5.80 to 1.00 Feb. 1, 2000 through May 22, 2000 5.80 to 1.00 May 23, 2000 through August 14, 2000 5.80 to 1.00 August 15, 2000 through November 6, 2000 5.70 to 1.00 November 7, 2000 through January 29, 2001 5.20 to 1.00 Each fiscal year of the Borrower thereafter 3.75 to 1.00 5 6 14. Section 7.1 of the Credit Agreement is hereby amended by amending and restating, in its entirety, subsection (f) thereof to read as follows: (f) Capital Expenditures. The Borrower shall not make or incur, and shall not permit any of its Subsidiaries to make or incur, any Capital Expenditures, except Capital Expenditures of the Borrower and its Subsidiaries in an aggregate amount not in excess of $120,000,000 in each fiscal year of the Borrower; and provided that if the aggregate amount of Capital Expenditures made or incurred during such fiscal year of the Borrower is less than the amount (as reduced, if applicable) permitted to be made or incurred pursuant to this clause (f), then the maximum amount for the following fiscal year of the Borrower (but not any subsequent fiscal year of the Borrower) shall be increased by the amount of such difference. The Borrower shall not enter into and shall not permit any of its Subsidiaries to enter into any commitments to build or develop new Restaurants; provided, that the Borrower may, and may permit its Subsidiaries to, complete any new Restaurant that was under development on or before April 26, 2000, and for which the Borrower or any of its Subsidiaries had either commenced construction or had entered into commitments to build such Restaurant, so long as the aggregate Capital Expenditures incurred for new Restaurants during the periods in each case commencing on January 31, 2000 shall not exceed in the aggregate (i) $13 million cumulatively through May 22, 2000, (ii) $23 million cumulatively through August 14, 2000, (iii) $30 million cumulatively through November 6, 2000, and (iv) $33 million cumulatively through January 29, 2001. Notwithstanding any other provision of this subsection 7.1(f), if at any time the Unused Portion of the Revolving Loans shall be less than $20 million, and until such time as such Unused Portion has been restored to at least $20 million, the Borrower shall not make or incur and shall not permit any of its Subsidiaries to make or incur any Capital Expenditures (other than Capital Expenditures otherwise permitted by this subsection 7.1(f) and made or incurred pursuant to contractual commitments to make or incur such Capital Expenditures entered into by the Borrower or any of its Subsidiaries at a time when such Unused Portion was at least $20 million). 15. 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 during any fiscal year of the Borrower if after giving effect thereto the aggregate amount of such dividends 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, 6 7 1998) up to and including the fiscal year immediately preceding the year in which such dividend is paid or made, less (B) the aggregate amount of any regularly scheduled payment paid pursuant to Section 7.10(d) during such fiscal year (excluding, however, the aggregate amount of payments made in connection with Permitted Redemptions), less (C) the aggregate amount of all such dividends paid and made by the Borrower after January 26, 1998 through and including the end of such immediately preceding fiscal year, less (D) the aggregate outstanding principal balance of all Employee Stock Loans then outstanding; provided, however, for purposes of this clause (ii), the Borrower shall not increase the rate of cash dividends paid in respect of its shares above the rate authorized to be paid as of the last dividend distribution date prior to April 26, 2000, or in any event pay cash dividends in a total aggregate amount greater than $4.5 million in any fiscal year; and 16. Section 7.10 of the Credit Agreement is hereby amended by replacing the "; or" as it appears at the end of subsection (a) thereof with the following: ; provided, however, that notwithstanding the foregoing, the Borrower shall not, and shall not permit any of its Subsidiaries to, make any Prepayment of any Indebtedness referred to in Section 7.2(h); or 17. 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 acquisition 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) regularly scheduled semi-annual interest payments required to be made in cash and (ii) conversions of the Convertible Subordinated Notes into common stock of the Borrower). 18. The Borrower represents and warrants to the Agent and the Lenders, as of the date hereof, 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 of the Borrower and each other Loan Party contained in the Transaction Documents are true and correct. 7 8 19. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent: (a) This Amendment shall have been duly executed and delivered by the Borrower and the Required Lenders. (b) The Agent shall have received a certificate of a duly authorized officer of the Borrower certifying as to matters set forth in Section 18 of this Amendment. This Amendment shall immediately become effective as of January 31, 2000 upon the receipt by the Agent of duly executed counterparts of each of the foregoing. 20. 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 (a) be a consent to any amendment, waiver or modification of any other term or condition of any Transaction Document or of any other instrument or agreement referred to therein, except as set forth herein, or (b) prejudice any right or remedy that the Agent or any Lender 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 Transaction Documents to 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. 21. The Borrower agrees to pay all costs, fees and expenses in connection with the preparation, execution and delivery of this Amendment (including the reasonable fees and expenses of counsel to the Agent and the Lenders), including an amendment fee of 0.25% on its existing Commitment to each Lender who approves this Amendment. 22. Each Lender by its signature hereto hereby authorizes the Facility Conversion. If all of the Lenders acknowledge the Facility Conversion by their signatures hereto, the Facility Conversion Date will occur on and as of the date hereof. 23. 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. 24. 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 operation, enforceability or validity of the remaining provisions of this Amendment in that jurisdiction or the operation, enforceability or validity of such provision in any other jurisdiction. 25. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS. 8 9 IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date first above written. CKE RESTAURANTS, INC. By: /s/ Carl Strunk -------------------------------------- Print Name: Carl Strunk Title: Executive Vice President, Chief Financial Officer PARIBAS, as Agent and as a Lender By: /s/ Clark King -------------------------------------- Print Name: Clark C. King III Title: Managing Director By: /s/ Michael Colias -------------------------------------- Print Name: Michael C. Colias Title: Assistant Vice President ARAB BANKING CORPORATION By: /s/ Sheldon Tilney -------------------------------------- Print Name: Sheldon Tilney Title: Deputy General Manager By: -------------------------------------- Print Name: ------------------------------ Title: ----------------------------------- 9 10 BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By: /s/ Jack Bertges -------------------------------------- Print Name: Jack R. Bertges Title: Executive Vice President By: /s/ James McCann -------------------------------------- Print Name: James F. McCann Title: Vice President BANK LEUMI USA By: /s/ Joung Hee Hong -------------------------------------- Print Name: Joung Hee Hong Title: Vice President BANK UNITED By: /s/ Phil Green -------------------------------------- Print Name: Phil Green Title: Director FLEET NATIONAL BANK (f/k/a BANKBOSTON, N.A.) By: /s/ J. Nicholas Cole -------------------------------------- Print Name: J. Nicholas Cole Title: Director 10 11 BANQUE NATIONALE DE PARIS By: /s/ David W. Low -------------------------------------- Print Name: David W. Low Title: Vice President By: /s/ Jeffrey Kajisa -------------------------------------- Print Name: Jeffrey S. Kajisa Title: Vice President CALIFORNIA BANK & TRUST (f/k/a Sumitomo Bank of California) By: /s/ Robert S. Kahn -------------------------------------- Print Name: Robert S. Kahn Title: Vice President & Relationship Manager CENTURA BANK By: Print Name: Title: CHANG HWA COMMERCIAL BANK, LTD., NEW YORK BRANCH By: /s/ Wan-Tu Yeh -------------------------------------- Print Name: Wan-Tu Yeh Title: Vice President & General Manager 11 12 CREDIT INDUSTRIEL ET COMMERCIAL (f/k/a COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE) By: /s/ Brian O'Leary -------------------------------------- Print Name: Brian O'Leary Title: Vice President By: /s/ Sean Mounier ------------------------------------- Print Name: Sean Mounier Title: First Vice President AMSOUTH BANK successor in interest by merger to FIRST AMERICAN NATIONAL BANK By: /s/ Seth Butler ------------------------------------- Print Name: Seth Butler Title: Corporate Bank Officer FIRST BANK & TRUST By: /s/ K.P. Balkrishna ------------------------------------- Print Name: K.P. "Bala" Balkrishna Title: Executive Vice President FIRST UNION NATIONAL BANK By: /s/ Jeffrey R. Stottler ------------------------------------- Print Name: Jeffrey R. Stottler Title: Vice President 12 13 MANUFACTURERS BANK By: /s/ Eric Shapiro ------------------------------------- Print Name: Eric Shapiro Title: Vice President NATIONAL BANK OF KUWAIT By: /s/ Robert McNeill ------------------------------------- Print Name: Robert J. McNeill Title: Executive Manager By: /s/ Jeffrey J. Ganter ------------------------------------- Print Name: Jeffrey J. Ganter Title: Senior Credit Officer THE SANWA BANK, LIMITED By: /s/ Toshiko Boyd ------------------------------------- Print Name: Toshiko Boyd Title: Vice President SUNTRUST BANK (f/k/a/ SUNTRUST BANK, NASHVILLE, N.A.) By: /s/ William D. Priester ------------------------------------- Print Name: William D. Priester Title: Assistant Vice President 13 14 UMB BANK, N.A. By: /s/ David Proffitt ------------------------------------- Print Name: David A. Proffitt Title: Senior Vice President U.S. BANK NATIONAL ASSOCIATION By: /s/ Janet Jordan ------------------------------------- Print Name: Janet E. Jordan Title: Vice President WELLS FARGO BANK By: /s/ Jessica O. Euzebio Print Name: Jessica Euzebio Title: Vice President 14 EX-12.1 3 EXHIBIT 12.1 1 EXHIBIT 12-1 CKE RESTAURANTS, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Fiscal year ended January 31, - ---------------------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Earnings before fixed charges: Income (loss) before income taxes and extraordinary item $(47,460) $124,097 $ 76,640 $36,710 $17,953 Fixed charges 92,389 68,843 35,325 19,840 18,521 ------------------------------------------------------ $ 44,929 $192,940 $111,965 $56,550 $36,474 ------------------------------------------------------ Fixed charges: Interest expense $ 63,283 $ 43,453 $ 16,914 $ 9,877 $10,004 Interest component of rent expense(1) 29,106 25,390 18,411 9,963 8,517 ------------------------------------------------------ $ 92,389 $ 68,843 $ 35,325 $19,840 $18,521 ------------------------------------------------------ Ratio of earnings to fixed charges 0.5x 2.8x 3.2x 2.9x 2.0x ------------------------------------------------------
(1) Calculated as one-third of total rent expense. EX-21.1 4 EXHIBIT 21.1 1 EXHIBIT 21-1 CKE RESTAURANTS, INC. LIST OF SUBSIDIARIES Set forth below is a list of the Registrant's subsidiaries as of January 31, 2000:
Control by Jurisdiction of -------------------------- Name of Subsidiary Organization Registrant Subsidiary - ------------------------------------------------------------------------------------------------------------- Carl Karcher Enterprises, Inc. California 100% Boston Pacific, Inc. California 100% CBI Restaurants, Inc. Delaware 100% Taco Bueno Restaurants, Inc. Texas 100 % Taco Bueno Equipment Company Texas 100 % Taco Bueno West, Inc. Delaware 100 % Taco Bueno Texas, L.P. Texas 100 % Hardee's Food Systems, Inc. North Carolina 100% Flagstar Enterprises, Inc. Alabama 100% Spardee's Realty, Inc. Alabama 100 % Fast Food Restaurants, Inc. Pennsylvania 100 % HFS Ventures, Inc. North Carolina 100 % HED, Inc. North Carolina 100 % HFS Georgia, Inc. Georgia 100 % Central Iowa Food Systems, Inc. Iowa 100 % Hardee's at Onslow Mall, Inc. North Carolina 100 % Burger Chef Systems, Inc. North Carolina 100 % 1233 Corporation Ohio 100 % Hardee's Food Systems LTD, Fribourg Switzerland 98 % Hardee's REIT I Delaware 100 % Hardee's REIT II Delaware 100 % CKE REIT I, Inc. Delaware 100% CKE REIT II, Inc. Delaware 100% Carl's Jr. Region VIII, Inc. Delaware 100 %
EX-23.1 5 EXHIBIT 23.1 1 EXHIBIT 23-1 CONSENT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS CKE RESTAURANTS, INC. AND SUBSIDIARIES: We consent to incorporation by reference in the Registration Statements (Nos. 333-83621, 333-83601, 333-76377, 333-51103, 333-52633, 333-62421, 33-56313, 33-55337, 333-12399, 33-53089-01, 2-86142-01, 33-31190-01 and 333-12401) of CKE Restaurants, Inc. and Subsidiaries of our report dated April 4, 2000, except as to the eighth paragraph of Note 9 which is as of April 26, 2000, relating to the consolidated balance sheets of CKE Restaurants, Inc. and Subsidiaries as of January 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended January 31, 2000, which report appears in the January 31, 2000 Annual Report on Form 10-K of CKE Restaurants, Inc. and Subsidiaries. KPMG LLP Orange County, California April 28, 2000 EX-27.1 6 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 YEAR ENDED JANUARY 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCING TO SUCH FORM 10-K FOR THE YEAR ENDED JANUARY 31, 2000. 1,000 12-MOS JAN-31-2000 JAN-26-1999 JAN-31-2000 36,505 0 55,900 0 26,463 128,073 1,378,523 327,043 1,568,514 211,921 359,225 0 0 521 545,236 1,568,514 1,814,695 1,990,073 1,544,977 1,942,204 32,046 0 63,283 (47,460) (18,053) (29,407) 0 290 0 (29,117) (.56) (.56)
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