10-Q 1 e10-q.txt FORM 10-Q QUARTER ENDED MAY 22, 2000 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended May 22, 2000 ---------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ___________ to ___________ Commission file number 1-13192 ------- CKE RESTAURANTS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 33-0602639 ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 401 W. Carl Karcher Way, Anaheim, CA 92801 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (714) 774-5796 ---------------------- Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 50,501,421 shares of Common Stock, par value $.01 per share, were outstanding as of June 23, 2000 ------------------------------------------------------------ 2 CKE RESTAURANTS, INC. AND SUBSIDIARIES INDEX Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of May 22, 2000 and January 31, 2000...................................... 3 Consolidated Statements of Operations for the sixteen weeks ended May 22, 2000 and May 17, 1999..... 4 Consolidated Statements of Cash Flows for the sixteen weeks ended May 22, 2000 and May 17, 1999..... 5 Notes to Consolidated Financial Statements............... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................... 15 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K........................ 16 2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited)
May 22, January 31, 2000 2000 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 17,514 $ 36,505 Accounts receivable, net 47,285 42,928 Related party receivables 5,334 5,006 Inventories 25,525 26,463 Prepaid expenses 13,953 14,717 Other current assets 2,523 2,454 ---------- ---------- Total current assets 112,134 128,073 Property and equipment, net 1,047,878 1,051,480 Property under capital leases, net 82,086 84,482 Long-term investments 5,239 3,002 Notes receivable 8,208 7,383 Related party receivables -- 583 Deferred income taxes, net 15,006 15,006 Costs in excess of assets acquired, net 241,569 243,304 Other assets 34,838 35,201 ---------- ---------- $1,546,958 $1,568,514 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 5,473 $ 5,532 Current portion of capital lease obligations 9,774 9,603 Accounts payable 80,450 99,204 Other current liabilities 94,394 97,582 ----------- ----------- Total current liabilities 190,091 211,921 ----------- ----------- Long-term debt 290,849 274,996 Senior subordinated notes 200,000 200,000 Convertible subordinated notes 159,225 159,225 Capital lease obligations 89,637 92,063 Other long-term liabilities 75,934 84,552 Stockholders' equity: Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued or outstanding -- -- Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 52,086,421 shares 521 521 Additional paid-in capital 383,016 383,016 Retained earnings 168,091 172,626 Treasury stock, at cost, 1,585,000 shares (10,406) (10,406) ----------- ----------- Total stockholders' equity 541,222 545,757 ----------- ----------- $ 1,546,958 $ 1,568,514 =========== ===========
See Accompanying Notes to Consolidated Financial Statements 3 4 CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share amounts) (Unaudited)
Sixteen Weeks Ended -------------------------- May 22, May 17, 2000 1999 --------- --------- Revenues: Company-operated restaurants $ 527,373 $ 546,744 Franchised and licensed restaurants and other 56,955 48,979 --------- --------- Total revenues 584,328 595,723 --------- --------- Operating costs and expenses: Restaurant operations: Food and packaging 162,517 163,732 Payroll and other employee benefits 165,563 165,579 Occupancy and other operating expenses 116,843 110,835 --------- --------- 444,923 440,146 Franchised and licensed restaurants 43,752 35,528 Advertising expenses 33,673 32,679 General and administrative expenses 45,677 39,765 --------- --------- Total operating costs and expenses 568,025 548,118 --------- --------- Operating income 16,303 47,605 Interest expense (20,695) (15,678) Other income (expense), net 431 (266) --------- --------- Income (loss) before income taxes and extraordinary item (3,961) 31,661 Income tax expense (benefit) (1,510) 12,531 --------- --------- Income (loss) before extraordinary item (2,451) 19,130 Extraordinary item - gain on early retirement of debt, net of applicable income taxes of $186 -- 290 --------- --------- Net income (loss) $ (2,451) $ 19,420 ========= ========= Basic income (loss) per share before extraordinary item $ (0.05) $ 0.36 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - basic -- .01 --------- --------- Net income (loss) per share - basic $ (0.05) $ 0.37 ========= ========= Weighted average shares outstanding - basic 50,501 51,860 ========= ========= Diluted income (loss) per share before extraordinary item $ (0.05) $ 0.36 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - diluted -- .01 --------- --------- Net income (loss) per share - diluted $ (0.05) $ 0.37 ========= ========= Weighted average shares outstanding - diluted 50,501 56,341 ========= =========
See Accompanying Notes to Consolidated Financial Statements 4 5 CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Sixteen Weeks Ended -------------------------- May 22, May 17, 2000 1999 --------- -------- Net cash flow from operating activities: Net income (loss) $ (2,451) $ 19,420 Adjustments to reconcile net income to net cash provided by operating activities, excluding the effect of acquisitions and dispositions: Extraordinary gain on early retirement of debt -- (476) Depreciation and amortization 35,827 27,923 (Gain) loss on sale of property and equipment and capital leases (531) 435 Net noncash income -- (140) (Gain) loss on noncurrent asset and liability transactions (374) 370 Net change in receivables, inventories, prepaid expenses and other current assets (2,649) 2,123 Net change in accounts payable and other current liabilities (103) (6,459) --------- --------- Net cash provided by operating activities 29,719 43,196 --------- --------- Cash flow from investing activities: Purchases of: Property and equipment (31,022) (67,183) Long term investments (2,250) -- Proceeds from sale of property and equipment 5,611 3,404 Increases in notes receivable and related party receivables (6,614) (569) Collections on notes receivable, related party receivables and leases receivable 6,356 890 Net change in other assets 77 558 --------- --------- Net cash used in investing activities (27,842) (62,900) --------- --------- Cash flow from financing activities: Net change in bank overdraft (21,839) 2,743 Long-term borrowings 104,000 237,000 Repayments of long-term debt (88,206) (204,825) Repayments of capital lease obligations (3,217) (1,858) Deferred financing costs (904) (9,686) Net change in other long-term liabilities (8,618) (2,467) Payment of dividends (2,084) (2,075) Exercise of stock options -- 104 --------- --------- Net cash provided by (used in) financing activities (20,868) 18,936 --------- --------- Net decrease in cash and cash equivalents $ (18,991) $ (768) ========= ========= Supplemental disclosures of cash flow information: Cash paid during period for: Interest (net of amount capitalized) 26,417 15,703 Income taxes 139 5,957
See Accompanying Notes to Consolidated Financial Statements 5 6 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 22, 2000 AND MAY 17, 1999 NOTE (A) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of CKE Restaurants, Inc. and its consolidated wholly-owned subsidiaries (the "Company" or "CKE") and have been prepared in accordance with generally accepted accounting principles, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements should be read in conjunction with the audited consolidated financial statements presented in the Company's 2000 Annual Report to Stockholders. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of financial position and results of operations for the interim periods presented have been reflected herein. The results of operations for such interim periods are not necessarily indicative of results to be expected for the full year or for any other future periods. NOTE (B) LONG-TERM DEBT The senior credit facility, as amended, consists of a $400.0 million revolving credit facility and includes a $75.0 million letter of credit sub-facility and has a maturity date of February 2004. 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 April 2000, the Company amended its senior credit facility effective January 31, 2000, to amend certain of the covenants contained therein. The amended senior credit facility provides that the revolving commitments thereunder shall be reduced by the first $100.0 million in net proceeds from sales of restaurants 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 May 22, 2000 with all of its covenants governing its senior credit facility, as amended. As of May 22, 2000, the Company had $34.9 million of borrowings available under its senior credit facility. NOTE (C) SENIOR SUBORDINATED NOTES On March 4, 1999, the Company completed a private placement of $200.0 million aggregate principal amount of senior subordinated notes, in which the Company received net proceeds of approximately $194.8 million, of which $190.0 million was used to repay indebtedness 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 imposes restrictions on the Company's ability (and the ability of its 6 7 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 22, 2000 AND MAY 17, 1999 (Continued) subsidiaries) to incur additional 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, and 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. 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. NOTE (D) CONVERTIBLE SUBORDINATED NOTES During the first quarter of fiscal 2000, the Company repurchased $3.0 million aggregate principal amount of convertible subordinated notes for $2.5 million in cash, including accrued interest thereon. The Company recognized an extraordinary gain on the early retirement of debt of $0.3 million, net of applicable income taxes of $0.2 million. To date, the Company has repurchased a total of $38.0 million aggregate principal amount of convertible subordinated notes. 7 8 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 22, 2000 AND MAY 17, 1999 (Continued) NOTE (E) EARNINGS (LOSS) PER SHARE The Company presents "basic" earnings (loss) per share which represents net earnings (loss) 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) Sixteen Weeks Ended ------------------------- May 22, May 17, 2000 1999 -------- --------- Basic Earnings (Loss) Per Share Income (loss) before extraordinary item $ (2,451) $19,130 Extraordinary item - gain on early retirement of debt, net of applicable income taxes of $186 -- 290 -------- ------- Net income (loss) $ (2,451) $19,420 ======== ======= Weighted average number of common shares outstanding during the period 50,501 51,860 ======== ======= Basic income (loss) per share before extraordinary item $ (0.05) $ 0.36 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - basic -- 0.01 -------- ------- Basic income (loss) per share $ (0.05) $ 0.37 ======== ======= Diluted Earnings (Loss) Per Share Income (loss) before extraordinary item $ (2,451) $19,130 Interest expense and amortization of debt issuance costs, net of income tax effect applicable to convertible subordinated notes -- 1,415 -------- ------- Diluted income (loss) before extraordinary item (2,451) 20,545 Extraordinary item - gain on early retirement of debt, net of applicable income taxes of $186 -- 290 -------- ------- Diluted net income (loss) $ (2,451) $20,835 ======== ======= Weighted average number of common shares outstanding during the period 50,501 51,860 Incremental common shares attributable to: Exercise of outstanding options -- 839 Issuance of convertible subordinated notes -- 3,642 -------- ------- Total shares 50,501 56,341 ======== ======= Diluted net income (loss) per share before extraordinary item (0.05) $ 0.36 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - diluted -- 0.01 -------- ------- Diluted income (loss) per share $ (0.05) $ 0.37 ======== =======
8 9 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 22, 2000 AND MAY 17, 1999 (Continued) For the periods ended May 22, 2000 and May 17, 1999, 6.1 million shares and 5.5 million shares, respectively, relating to the possible exercise of outstanding stock options, and for the period ended May 22, 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-dulitive. NOTE (F) 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 or loss. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of Notes to Consolidated Financial Statements for the fiscal year ending January 31, 2000. Summarized financial information concerning the Company's reportable segments is shown in the following table. The "other" column includes corporate related items, results of insignificant operations and, as it relates to segment operating income or loss, income and expense not allocated to reportable segments.
Sixteen Weeks Ended CARL'S JR. HARDEE'S TACO BUENO OTHER TOTAL ---------- -------- ---------- ----- ----- MAY 22, 2000: Revenues $224,715 $ 325,681 $30,272 $ 3,660 $ 584,328 Segment operating income (loss) 17,192 1,052 2,053 (3,994) 16,303 Capital expenditures 14,314 9,637 4,059 3,012 31,022 Depreciation and amortization 8,552 22,206 1,363 3,706 35,827 Total assets 387,767 1,053,771 81,124 24,296 1,546,958 MAY 17, 1999: Revenues $207,851 $ 356,230 $27,616 $ 4,026 $ 595,723 Segment operating income (loss) 23,086 25,780 3,272 (4,533) 47,605 Capital expenditures 9,187 47,182 5,418 5,396 67,183 Depreciation and amortization 7,785 17,219 1,022 1,897 27,923 Total assets (as of January 31, 2000) 383,124 1,089,867 77,507 18,016 1,568,514
NOTE (G) STOCK REPURCHASES During the third quarter of fiscal 2000, the Company's Board of Directors authorized the re-purchase of up to five million shares of the Company's common stock on the public market. As of May 22, 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. NOTE (H) RECENT DEVELOPMENTS In November 1999, the Company announced its decision 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 would be laid-off in phases that began in January 2000 and will continue through August 2000. In the first quarter of fiscal 2001, the Company paid $0.9 million of termination benefits to approximately 46 employees who were involuntarily terminated during the quarter. Such amounts were charged against the severance reserve. As of May 22, 2000, approximately $0.9 million remained accrued for employees to be laid off during the remainder of fiscal 2001. 9 10 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 22, 2000 AND MAY 17, 1999 (Continued) In 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 during fiscal 2001. 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. During the first quarter, the Company utilized $0.5 million of this reserve. As of May 22, 2000, approximately $15.8 million remained accrued for the store closure reserve. In fiscal 2001 through June 30, 2000, the Company has completed the sale of 21 Hardee's restaurants, generating net proceeds of approximately $12.6 million and a gain of $1.7 million, of which two of these restaurants were sold in the first quarter. In addition, in fiscal 2001 through June 30, 2000, the Company has completed the sale of 9 Carl's Jr. restaurants, generating net proceeds of approximately $5.2 million and a gain of $2.5 million. In accordance with the terms of the senior credit facility, as amended, the results of these asset sales have reduced the revolving commitments to approximately $355 million. The Company also has definitive agreements for the sale of 251 Hardee's units, which are expected to generate proceeds of approximately $73 million and a loss of approximately $36 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW Consolidated net income (loss) for the 16-week period ended May 22, 2000 decreased 112.6% to a net loss of $2.5 million, or ($0.05) per share on a diluted basis as compared with net income of $19.4 million, or $0.37 per share on a diluted basis for the prior year quarter. The decline in consolidated net income (loss) was primarily due to declining sales at our Hardee's restaurants, combined with the fixed nature of certain of our operating costs. In addition, we incurred a significant increase in interest expense in connection with our private placement of $200 million of senior subordinated notes on March 4, 1999 and increased borrowings on our senior credit facility as well as an increase in general and administrative costs. On a diluted basis, the number of shares outstanding decreased 10.4% as compared with the first quarter of fiscal 2000. The decrease is due primarily to reflecting our convertible subordinated notes as if they were converted into shares of our common stock in the calculation of diluted shares outstanding in the prior year. These shares were not included in the diluted shares outstanding calculation in the current year due to their anti-dilutive nature. During the first quarter of fiscal 2001, we opened 8 new Carl's Jr. restaurants while our franchisees opened 10 new restaurants. As of May 22, 2000, our Carl's Jr. system consisted of 570 company-operated restaurants, 353 franchised restaurants and 24 international restaurants for a system total of 947 Carl's Jr. restaurants. At the end of the quarter, our Hardee's system consisted of 1,339 company-operated restaurants, 1,314 franchised restaurants and 121 international restaurants for a system total of 2,774 Hardee's restaurants. Additionally, we opened 3 Taco Bueno restaurants for a total of 124 company-operated restaurants. We remodeled 17 restaurants to the Star Hardee's format during the first quarter of fiscal 2001 and our franchisees remodeled 58 restaurants to the Star Hardee's format, bringing the total number of restaurants remodeled to 724, which represents approximately 26.1% of the system. 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 the Carl's Jr. Star logo. In addition, we, along with some franchisees, are considering a limited remodel which consists primarily of the addition of a charbroiler and certain interior and exterior enhancements. This Quarterly Report on Form 10-Q contains forward-looking statements, which are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the 10 11 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS MAY 22, 2000 AND MAY 17, 1999 (Continued) impact of competitive products and pricing; success of operating initiatives; advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; changes in prevailing interest rates and the availability of financing; food, labor, and employee benefit costs; changes in, or the failure to comply with, government regulations; weather conditions; construction schedules; demands placed on management and capital resources by the substantial increase in our size resulting from the acquisitions of our Hardee's and FEI restaurants; changes in our integration plans for Hardee's and our expansion plans; risks that sales growth resulting from our current and future remodeling and dual-branding of restaurants and other operating strategies can be sustained at the current levels experienced; and other risks detailed in our filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS Revenues from company-operated restaurants decreased $19.4 million or 3.5% to $527.4 million in the first quarter of fiscal 2001 as compared with the prior year first quarter. Revenues from our Carl's Jr. and Taco Bueno concepts were up $10.9 million and $2.7 million, respectively, while revenues from our Hardee's concept decreased $32.6 million from the prior year period. On a same-store sales basis, our company-operated Carl's Jr. sales increased 3.6% for the quarter while our company-operated Hardee's and Taco Bueno concepts sales decreased 6.2% and 1.9%, respectively, compared with the first quarter of fiscal 2000. The increase in revenue from our Carl's Jr. restaurants was primarily attributable to an increase in the number of restaurants open and operating during the first quarter of fiscal 2001 as compared with the comparable period of the prior year. The increase in revenue from our Taco Bueno concept was due to an increase in the number of restaurants open and operating during the first quarter of fiscal 2001 as compared to fiscal 2000. Hardee's revenues decreased in the first quarter of fiscal 2001 due primarily to the concept's continued same-store sales declines and the sale of several restaurants to franchisees in the fourth quarter of fiscal 2000. Average unit volumes for the trailing 52-week period ended May 22, 2000 for our company-operated Carl's Jr., Taco Bueno and Hardee's chains were $1,089,000, $800,000, and $779,000, respectively. Our revenues from franchised and licensed restaurants for the 16-week period ended May 22, 2000 increased $8.0 million, or 16.3%, to $57.0 million from the comparable period in fiscal 2000. This increase is primarily due to an increase in royalties from, and food purchases by, Carl's Jr. franchisees and licensees as a result of an increase in the number of Carl's Jr. franchised restaurants operating in the first quarter of fiscal 2001 as compared with the first quarter of fiscal 2000, an increase in the number of Hardee's franchised restaurants operating in the first quarter of fiscal 2001 as compared to fiscal 2000, 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. Restaurant-level margins for our company-operated Carl's Jr. restaurants decreased 1.9% to 21.9% for the 16-week period ended May 22, 2000 from the corresponding period of the prior year, primarily due to increases in food and packaging and payroll and other employee benefits. As a percentage of revenues from company-operated Carl's Jr. restaurants, food and packaging costs increased 1.1% to 29.5%. The increase over the prior year period was primarily due to an increase in beef commodity prices, combined with the effect of a price-discounting program for selected sandwiches, primarily the $0.99 Spicy Chicken Sandwich. Payroll and other employee benefits for our Carl's Jr. chain, as a percentage of revenues from company-operated restaurants, increased 0.9% to 27.3% for the first quarter of fiscal 2001. This increase was primarily due to the overall tighter labor market and the increased competitive pressures in attracting and retaining qualified employees, which has led to a higher average hourly wage rate during the quarter. In addition, we made a conscious decision to increase labor in our restaurants in an effort to maintain quality guest service. Occupancy and other operating expenses have decreased 0.1% to 21.3% in the current quarter as compared to the corresponding quarter of the prior year. This was primarily due to the fixed nature of certain operating costs. Restaurant-level margins for our company-operated Hardee's restaurants decreased 5.6% to 11.1% for the first quarter of fiscal 2001 as compared to the first quarter of fiscal 2000. This decrease was primarily due to increases in payroll and other employee benefits and occupancy and other operating expenses. Food and packaging costs at the 11 12 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS MAY 22, 2000 AND MAY 17, 1999 (Continued) Hardee's chain increased 0.9% to 31.8% for the quarter. This increase was due to higher food cost items comprising a larger percentage of the Hardee's product mix, primarily chicken products. Payroll and other employee benefits, as a percentage of revenues from company-operated Hardee's restaurants, increased 1.6% to 33.9% for the first quarter of fiscal 2001. This increase was primarily due to the overall tighter labor market and the increased competitive pressures in attracting and retaining qualified employees, which has led to higher average manager and crew wages. Occupancy and other operating expenses increased 3.2% to 23.2% for the current year quarter. This was primarily due to an increase in repair and maintenance expense during the current year quarter as compared to the prior year quarter, as well as an increase in depreciation as a result of new equipment being installed in the Hardee's restaurants over the past year in conjunction with the Star Hardee's remodels. Taco Bueno's restaurant-level margins decreased 4.5% to 22.7% for the 16-week period ended May 22, 2000 from the corresponding period of the prior year. Taco Bueno's food and packaging costs increased 0.9% from the prior year to 29.1%. This increase was due primarily to higher commodity costs and the introduction of the new Popcorn Chicken line, which is a higher cost product. Payroll and other employee benefits increased 1.5% to 31.9% for the quarter. This increase was primarily attributable to the company's decision to keep the restaurants staffed in light of decreased same-store sales in an effort to maintain quality guest service. Occupancy and other operating costs increased 2.1% to 16.3% when compared with the prior year first quarter. Contributing to this increase were mainly depreciation and repair and maintenance costs. The increase in depreciation as a percentage of company-operated restaurant sales was due to the completion of several signage projects in the current year which are now being depreciated, while the increase in repair and maintenance expense was due to the recent expiration of warranties on the point-of-sale systems at the Taco Bueno chain. Franchised and licensed restaurant and other costs increased 23.1% or $8.2 million to $43.8 million for the first 16 weeks of fiscal 2001. The increase is 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. Advertising expenses increased $1.0 million in the first quarter of fiscal 2001 over the comparable period of fiscal 2000 principally due to increased advertising support for Carl's Jr. Advertising has become increasingly important in the current competitive environment and, as a result, advertising expenses have increased in terms of dollars spent in the current fiscal year as compared with the prior fiscal year, while remaining relatively consistent as a percentage of company-operated revenues. General and administrative expenses increased $5.9 million to $45.7 million for the 16-week period ended May 22, 2000, as compared to the 16-week period ended May 17, 1999. As a percentage of total revenues, general and administrative expenses increased 1.1% to 7.8% of total revenues for the first quarter of fiscal 2001. This increase is primarily attributable to an increase in information technology costs associated with the continued implementation of our new computer system and depreciation of systems installed during the latter part of fiscal 2000. In addition, in connection with the previously announced restructuring and consolidation of administrative functions from Rocky Mount, North Carolina to Anaheim, California, the company is experiencing duplicative costs for certain administrative functions during this transition period. These costs are expected to decline as the consolidation is completed. Interest expense for the 16-week period ended May 22, 2000 increased $5.0 million to $20.7 million as compared with the comparable prior year period due to higher levels of borrowings outstanding under our senior credit facility as well as an overall increase in interest rates. 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, which is required by the senior credit facility, as amended. Also contributing to the rise in interest expense was the $200.0 million aggregate principal amount of 9.125% senior subordinated notes due 2009. These notes were issued during the first quarter of fiscal 2000 and as such, the prior year included only a partial quarter of this interest expense while the current year included a full quarter. 12 13 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS MAY 22, 2000 AND MAY 17, 1999 (Continued) 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, increased $0.7 million in the first quarter of fiscal 2001 as compared with the comparable period in the prior fiscal year. The increase in other income (expense), net, was primarily due to the recognition of a $0.9 million gain on the sale of restaurants in the current quarter. During the third quarter of fiscal 1999, the Board of Directors approved the buyback of up to $50.0 million aggregate principal amount of convertible subordinated notes. In the first quarter of fiscal 2000, we repurchased $3.0 million of these notes for $2.5 million in cash, including accrued interest thereon. In connection with this repurchase, we recognized an extraordinary gain on the early retirement of debt of $0.3 million, net of applicable income taxes of $0.2 million. FINANCIAL CONDITION Cash and cash equivalents decreased $19.0 million to $17.5 million in the 16 week period ended May 22, 2000. Investing activities absorbed $24.0 million of our cash to fund capital additions of $31.0 million. Partially generating some of the funds necessary were $5.6 million from the sale of property and equipment and $4.3 million from collections on and sale of notes receivable, related party receivables and leases receivable. Financing activities absorbed $20.9 million in cash, primarily as a result of timing of payments to suppliers. Cash flows from operating and financing activities were mainly used to fund the development of Carl's Jr. restaurants and the remodeling of our Hardee's restaurants to the new Star Hardee's format, to repay $3.2 million in capital lease obligations and to pay dividends of $2.1 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 (the commitment has since been amended to $400 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 (i) certain asset sales, (ii) the issuance of certain equity securities, and (iii) the issuance of additional indebtedness. Of the various options we have regarding interest rates, we have selected LIBOR plus a margin, with future margin adjustments dependent on certain financial ratios from time to time. Our senior credit facility contains the following significant covenants: o restrictions on our ability to incur additional indebtedness and incur liens on our assets, subject to specified exceptions; o requirements that we satisfy specified financial tests as a precondition to our acquisition of other businesses; and 13 14 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS MAY 22, 2000 AND MAY 17, 1999 (Continued) o 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 April 2000, we amended our senior credit facility effective January 31, 2000, to amend certain of the covenants contained therein. The amended senior credit facility provides that the revolving commitments thereunder shall be reduced by the first $100.0 million in net proceeds from sales of restaurants 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. or 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 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. We were in compliance as of May 22, 2000 with all of our covenants governing our senior credit facility, as amended. As of May 22, 2000, we had $34.9 million of borrowings available under our senior credit facility. 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 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. It is our intention to reposition and rebalance our company so that we will have a larger proportion of franchised restaurants rather than company-operated restaurants. We are planning to sell up to 500 Hardee's restaurants to existing and new franchisees during fiscal 2001, which should generate net proceeds to the company of approximately $200.0 million. We intend to condition such sales upon the purchasers' agreement to perform additional development with respect to the purchased restaurants, including the Star Hardee's remodeling, and upon the execution of royalty agreements providing for 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. In the current fiscal year, the company has completed the sale of 21 Hardee's restaurants, generating net proceeds of approximately $12.6 million. 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 May 22, 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 May 22, 2000, we had $34.9 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. 14 15 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS MAY 22, 2000 AND MAY 17, 1999 (Continued) In the event that our Hardee's restaurants continue to show declines in same-store sales or our Carl's Jr. restaurants begin 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 a short and long term liquidity shortage. The availability of capital sources will depend upon prevailing market conditions, interest rates and our then-existing financial position. YEAR 2000 We have addressed the potential business risks associated with the Year 2000. The Year 2000 issue involved the use of a two-digit year field instead of a four-digit year field in computer systems. If computer systems cannot distinguish between the year 1900 and the year 2000, system failures or other computer errors could result. To date, we are not aware of the occurrence of any significant Year 2000 problems being reported. Some business risks associated with the Year 2000 issue may remain throughout 2000. However, it is not anticipated that future Year 2000 issues, if any, will have a material adverse effect on us. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Our principal exposure to financial market risks is the impact that interest rate changes could have on our $400.0 million senior credit facility, of which $285.0 million remained outstanding as of May 22, 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 8.6% in fiscal 2001). A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction of approximately $2.9 million in annual pre-tax earnings. The estimated reduction is based upon the outstanding balance of our senior credit facility and assumes no change in the volume, index or composition of debt at May 22, 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. 15 16 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.33 Green Burrito Master Franchise Agreement dated June 5, 2000 by and among the Company and Green Burrito Grill Franchise Corporation and Santa Barbara Restaurant Group, Inc. 12.1 Computation of Ratios 27.1 Financial Data Schedule (included only with electronic filing). (b) Current Reports on Form 8-K: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CKE RESTAURANTS, INC. --------------------- (Registrant) July 6, 2000 /s/ Carl A. Strunk ------------ ------------------------------ Date Executive Vice President, Chief Financial Officer 16 17 EXHIBIT INDEX Exhibit # Description --------- ----------- 10.33 Green Burrito Master Franchise Agreement dated June 5, 2000 by and among the Company and Green Burrito Grill Franchise Corporation and Santa Barbara Restaurant Group, Inc. 12.1 Computation of Ratios 27.1 Financial Data Schedule (included only with electronic filing).