-----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, Qs6OW3EZukH10yex6g0JrLuge67tYViDdjAcOWH6selY1namav4O+pPWQ0inUbQc VqDOrh7KYjzf9X7LyApW4Q== 0001095811-00-005373.txt : 20001220 0001095811-00-005373.hdr.sgml : 20001220 ACCESSION NUMBER: 0001095811-00-005373 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001106 FILED AS OF DATE: 20001219 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CKE RESTAURANTS INC CENTRAL INDEX KEY: 0000919628 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 330602639 STATE OF INCORPORATION: DE FISCAL YEAR END: 0125 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11313 FILM NUMBER: 791739 BUSINESS ADDRESS: STREET 1: 401 WEST CARL KARCHER WAY CITY: ANAHEIM STATE: CA ZIP: 92801 BUSINESS PHONE: 7147745796 MAIL ADDRESS: STREET 1: 401 WEST CARL KARCHER WAY CITY: ANAHEIM STATE: CA ZIP: 92801 10-Q 1 a68075e10-q.txt FORM 10-Q QUARTERLY PERIOD ENDED NOVEMBER 6,2000. 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 November 6, 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 Identification No.) Incorporation or Organization) 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 --- --- As of December 12, 2000, 50,501,421 shares of the Registrant's Common Stock were outstanding. 2 CKE RESTAURANTS, INC. AND SUBSIDIARIES INDEX
Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of November 6, 2000 and January 31, 2000....... 2 Consolidated Statements of Operations for the twelve and forty weeks ended November 6, 2000 and November 1, 1999............................... 3 Consolidated Statements of Cash Flows for the forty weeks ended November 6, 2000 and November 1, 1999..................................... 4 Notes to Consolidated Financial Statements.................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 17 Part II. Other Information Item 6. Exhibits and Current Reports on Form 8-K................................. 18
1 3 PART 1. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
(Unaudited) November 6, January 31, 2000 2000 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 25,774 $ 36,505 Accounts receivable, net 77,538 42,928 Related party receivables 2,146 5,006 Inventories 19,797 26,463 Prepaid expenses 11,383 14,717 Other current assets 2,549 2,454 ----------- ----------- Total current assets 139,187 128,073 Property and equipment, net 894,177 1,051,480 Property under capital leases, net 77,854 84,482 Long-term investments 3,690 3,002 Notes receivable 12,284 7,383 Related party receivables -- 583 Deferred income taxes, net 15,006 15,006 Costs in excess of assets acquired, net 238,441 243,304 Other assets 30,099 35,201 ----------- ----------- $ 1,410,738 $ 1,568,514 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 224,237 $ 5,532 Current portion of capital lease obligations 10,198 9,603 Accounts payable 49,774 99,204 Other current liabilities 95,475 97,582 ----------- ----------- Total current liabilities 379,684 211,921 ----------- ----------- Long-term debt 5,484 274,996 Senior subordinated notes 200,000 200,000 Convertible subordinated notes 159,225 159,225 Capital lease obligations 84,542 92,063 Other long-term liabilities 83,940 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 124,732 172,626 Treasury stock, at cost, 1,585,000 shares (10,406) (10,406) ----------- ----------- Total stockholders' equity 497,863 545,757 ----------- ----------- $ 1,410,738 $ 1,568,514 =========== ===========
See Accompanying Notes to Consolidated Financial Statements. 2 4 CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share amounts) (Unaudited)
Twelve Weeks Ended Forty Weeks Ended ---------------------------- ----------------------------- November 6, November 1, November 6, November 1, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Revenues: Company-operated restaurants $ 356,254 $ 415,519 $ 1,270,478 $ 1,385,687 Franchised and licensed restaurants and other 51,295 38,104 159,895 128,918 --------- ----------- ----------- ----------- Total revenues 407,549 453,623 1,430,373 1,514,605 --------- ----------- ----------- ----------- Operating costs and expenses: Restaurant operations: Food and packaging 110,564 127,641 393,906 417,871 Payroll and other employee benefits 118,728 129,066 407,990 426,940 Occupancy and other operating expenses 88,907 91,691 296,810 286,706 --------- ----------- ----------- ----------- 318,199 348,398 1,098,706 1,131,517 Franchised and licensed restaurants and other 36,082 26,619 115,650 93,344 Advertising expenses 22,305 27,467 79,340 88,760 General and administrative expenses 30,847 31,766 109,476 102,859 --------- ----------- ----------- ----------- Total operating costs and expenses 407,433 434,250 1,403,172 1,416,480 --------- ----------- ----------- ----------- Operating income 116 19,373 27,201 98,125 Interest expense (16,265) (13,798) (53,510) (42,968) Other expense, net (33,437) (833) (49,994) (1,910) --------- ----------- ----------- ----------- Income (loss) before income taxes and extraordinary item (49,586) 4,742 (76,303) 53,247 Income tax expense (benefit) (20,157) 1,735 (30,493) 20,812 --------- ----------- ----------- ----------- Income (loss) before extraordinary item (29,429) 3,007 (45,810) 32,435 Extraordinary item - gain on early retirement of debt, net of applicable income taxes of $186 -- -- -- 290 --------- ----------- ----------- ----------- Net income (loss) $ (29,429) $ 3,007 $ (45,810) $ 32,725 ========= =========== =========== =========== Basic income (loss) per share before extraordinary item $ (0.58) $ 0.06 $ (0.91) $ 0.62 Extraordinary item - gain on early retirement of debt, net of income taxes - basic -- -- -- 0.01 --------- ----------- ----------- ----------- Net income (loss) per share - basic $ (0.58) $ 0.06 $ (0.91) $ 0.63 --------- ----------- ----------- ----------- Weighted average shares outstanding - basic 50,501 52,054 50,501 51,974 ========= =========== =========== =========== Diluted income (loss) per share before extraordinary item $ (0.58) $ 0.06 $ (0.91) $ 0.62 Extraordinary item - gain on early retirement of debt, net of applicable taxes - diluted -- -- -- -- --------- ----------- ----------- ----------- Net income (loss) per share - diluted $ (0.58) $ 0.06 $ (0.91) $ 0.62 --------- ----------- ----------- ----------- Weighted average shares outstanding - diluted 50,501 52,239 50,501 52,497 ========= =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements. 3 5 CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Forty Weeks Ended --------------------------- November 6, November 1, 2000 1999 ----------- ----------- Net cash flow from operating activities: Net income (loss) $ (45,810) $ 32,725 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) Depreciation and amortization 86,255 75,987 Loss on sale of property and equipment and capital leases 46,820 1,377 Noncash litigation settlement -- 722 Net noncash investment and dividend income -- (140) Loss (gain) on noncurrent asset and liability transactions (71) 1,279 Net change in receivables, inventories and other current assets and prepaid expenses (30,224) (6,377) Net change in accounts payable and other current liabilities (51,314) 1,228 --------- --------- Net cash provided by operating activities 5,656 106,325 --------- --------- Cash flow from investing activities: Purchases of: Property and equipment (62,969) (204,635) Long term investments (2,952) -- Proceeds from sale of: Property and equipment 25,381 14,008 Long term investments 1,948 -- Increase in notes receivable and related party receivables (11,039) (901) Collections on notes receivable and related party receivables 13,725 2,463 Net change in other assets 2,831 (9,610) Acquisitions, net of cash acquired -- (1,958) Dispositions, net of cash surrendered 79,206 -- --------- --------- Net cash provided by (used in) investing activities 46,131 (200,633) --------- --------- Cash flow from financing activities: Net change in bank overdraft (223) (6,876) Long-term borrowings 207,500 177,000 Proceeds from senior subordinated notes -- 200,000 Repayments of short-term borrowings -- (3,600) Repayments of long-term debt (258,307) (253,165) Repayments of capital lease obligations (7,888) (5,726) Deferred financing costs (904) (10,686) Net change in other long-term liabilities (612) (3,209) Payment of dividends (2,084) (4,158) Purchase of treasury stock -- (2,620) Exercise of stock options -- 1,501 --------- --------- Net cash provided by (used in) financing activities (62,518) 88,461 --------- --------- Net decrease in cash and cash equivalents (10,731) (5,847) Cash and cash equivalents at beginning of period 36,505 46,297 --------- --------- Cash and cash equivalents at end of period $ 25,774 $ 40,450 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 59,054 $ 40,268 Income taxes -- 14,928
See Accompanying Notes to Consolidated Financial Statements. 4 6 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 6, 2000 AND NOVEMBER 1, 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. Certain reclassifications have been made to the fiscal 2000 consolidated financial statements to conform to the fiscal 2001 presentation. NOTE (B) LONG TERM DEBT The Company's 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 facility has since been reduced, pursuant to asset sales, to approximately $283.0 million as of November 6, 2000. 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 and subordinated debt), 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 and then further amended the credit facility effective August 14, 2000. The amended senior credit facility provides that the revolving commitments thereunder shall be reduced by the entire net proceeds from the sale of any of the Company's restaurants. The senior credit facility, as amended, also prohibits the Company from purchasing shares of its common stock, purchasing its senior subordinated notes or convertible notes, from prepaying subordinated indebtedness and from paying cash dividends. 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. The amended facility required the Company to complete an asset sale or sales aggregating $150.0 million by the end of October 2000. The Company did not meet this requirement thus resulting in an additional increase to the interest rate of 50 basis points until such sales are completed. The amended credit facility also requires the Company to meet certain benchmarks during the months of November 2000, December 2000 and January 2001 relating to asset sales. If these benchmarks are not met, the lenders may request that the Company pledge specific collateral to further secure the senior credit facility. As of the end of our second quarter of fiscal 2001, the Company was not in compliance with certain covenants governing its senior credit facility. The Company has received a waiver of this non-compliance through January 29, 2001, including its third quarter. It is the Company's intention to repay outstanding borrowings on its senior credit facility with the net proceeds from its asset sales during the next twelve months. Accordingly, the total 5 7 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 (Continued) amount outstanding under the senior credit facility of $219 million as of November 6, 2000 has been classified as a current liability on the consolidated balance sheet. As of November 6, 2000, the Company had $20.8 million of borrowings available under its senior credit facility. In the event the senior credit facility is declared accelerated, the senior subordinated notes and the convertible subordinated notes may also become accelerated under certain circumstances and after all cure periods have expired. 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, payable semi-annually, 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 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 guarantees 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. 6 8 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 (Continued) NOTE (E) INCOME (LOSS) PER SHARE The Company presents "basic" income (loss) per share which represents net income (loss) divided by the weighted average shares outstanding excluding all potentially dilutive common shares and "diluted" income (loss) per share reflecting the dilutive effect of all potentially dilutive common shares. The following table illustrates the computation of basic and diluted income (loss) per share:
(In thousands except per share amounts) Twelve Weeks Ended Forty Weeks Ended ------------------------- ------------------------- November 6, November 1, November 6, November 1, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Basic Income (Loss) Per Share Income (loss) before extraordinary item $(29,429) $ 3,007 $(45,810) $32,435 Extraordinary item - gain on early retirement of debt, net of applicable income taxes of $186 -- -- -- 290 -------- ------- -------- ------- Net income (loss) $(29,429) $ 3,007 $(45,810) $32,725 ======== ======= ======== ======= Weighted average number of common shares outstanding during the period 50,501 52,054 50,501 51,974 ======== ======= ======== ======= Basic income (loss) per share before extraordinary item $ (0.58) $ 0.06 $ (0.91) $ 0.62 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - basic -- -- -- 0.01 -------- ------- -------- ------- Net income (loss) per share - basic $ (0.58) $ 0.06 $ (0.91) $ 0.63 ======== ======= ======== ======= Diluted Income (Loss) Per Share Income (loss) before extraordinary item $(29,429) $ 3,007 $(45,810) $32,435 Interest expense and amortization of debt issuance costs, net of income tax effect applicable to convertible subordinated notes -- -- -- -- -------- ------- -------- ------- Diluted income (loss) before extraordinary item (29,429) 3,007 (45,810) 32,435 Extraordinary item - gain on early retirement of debt, net of applicable income taxes of $186 -- -- -- 290 -------- ------- -------- ------- Diluted net income (loss) $(29,429) $ 3,007 $(45,810) $32,725 ======== ======= ======== ======= Weighted average number of common shares outstanding during the period 50,501 52,054 50,501 51,974 Incremental common shares attributable to: Exercise of outstanding options -- 185 -- 523 Conversion of convertible subordinated notes -- -- -- -- -------- ------- -------- ------- Total shares 50,501 52,239 50,501 52,497 ======== ======= ======== ======= Diluted net income (loss) per share before extraordinary item (0.58) 0.06 (0.91) 0.62 Extraordinary item - gain on early retirement of debt, net of applicable income taxes - diluted -- -- -- -- -------- ------- -------- ------- Net income (loss) per share - diluted $ (0.58) $ 0.06 $ (0.91) $ 0.62 ======== ======= ======== =======
7 9 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 (Continued) For the 12-week periods ended November 6, 2000 and November 1, 1999, 6.9 million shares and 5.7 million shares, respectively, relating to the possible exercise of outstanding stock options and 3.6 million shares issuable upon conversion of convertible subordinated notes were not included in the computation of diluted income (loss) per share as their effect would have been anti-dilutive. For the 40-week periods ended November 6, 2000 and November 1, 1999, 6.9 million shares and 5.4 million shares, respectively, relating to the possible exercise of outstanding stock options and 3.6 million shares issuable upon conversion of convertible subordinated notes were not included in the computation of diluted income (loss) per share as their effect would have been anti-dilutive. 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 ended 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.
TWELVE WEEKS ENDED - ------------------ CARL'S JR. HARDEE'S TACO BUENO OTHER TOTAL ---------- -------- ---------- ------- -------- NOVEMBER 6, 2000: Revenues ........................ $172,748 $ 209,343 $22,657 $ 2,801 $407,549 Segment operating income (loss) . 8,293 (4,863) 964 (4,278) 116 Capital expenditures ............ 1,452 2,069 1,212 189 4,922 Depreciation and amortization ... 7,341 14,972 1,179 1,076 24,568 NOVEMBER 1, 1999: Revenues ........................ $165,076 $ 264,780 $20,962 $ 2,805 $453,623 Segment operating income (loss) . 14,451 6,782 1,605 (3,465) 19,373 Capital expenditures ............ 28,465 38,514 6,535 4,952 78,466 Depreciation and amortization ... 7,113 15,989 1,057 1,153 25,312
8 10 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 (Continued)
FORTY WEEKS ENDED - ----------------- CARL'S JR. HARDEE'S TACO BUENO OTHER TOTAL ---------- -------- ---------- -------- ---------- NOVEMBER 6, 2000: Revenues ............................ $571,959 $ 773,010 $76,045 $ 9,359 $1,430,373 Segment operating income (loss) ..... 38,348 (3,835) 4,721 (12,033) 27,201 Capital expenditures ................ 27,723 23,292 6,581 5,373 62,969 Depreciation and amortization ....... 21,847 52,375 3,595 8,438 86,255 Total assets ........................ 356,878 956,952 81,124 15,784 1,410,738 NOVEMBER 1, 1999: Revenues ............................ $535,668 $ 899,217 $69,823 $ 9,897 $1,514,605 Segment operating income (loss) ..... 55,512 46,397 6,878 (10,662) 98,125 Capital expenditures ................ 51,440 121,649 16,889 14,657 204,635 Depreciation and amortization ....... 20,468 47,237 3,003 5,279 75,987 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 November 6, 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. These shares are reflected as treasury stock on the consolidated balance sheet as of November 6, 2000. The senior credit facility, as amended, prohibits the repurchase of any additional shares. NOTE (H) RECENT DEVELOPMENTS In the fourth quarter of fiscal 2000, the Company recorded a store closure accrual at Hardee's of $16.3 million for 105 Hardee's restaurants to be closed during fiscal 2001. In the third quarter of fiscal 2001, the Company provided an additional $2.4 million reserve for the closure of an additional 17 restaurants. The store closure accrual relates primarily to the net present value of any remaining lease obligations after the expected closure date, net of estimated sublease income. Through the third quarter of fiscal 2001, the Company has closed 45 restaurants and utilized $1.0 million of this accrual. As of November 6, 2000, approximately $15.3 million remained accrued for the store closure accrual. During the 40-week period ended November 6, 2000, the Company has completed the sale of 259 Hardee's restaurants, generating net after-tax cash proceeds (as defined in the Company's senior credit facility) of approximately $72.5 million. In addition, the Company has completed the sale of 21 Carl's Jr. restaurants during the current fiscal year, generating net after-tax cash proceeds (as defined in the Company's senior credit facility) of approximately $12.0 million. These restaurant sales have generated $31.9 million and $48.9 million of losses during the 12- and 40-week periods ended November 6, 2000, respectively. The Company announced during the second quarter of this fiscal year that it had signed a letter of intent to sell the Taco Bueno chain for an amount in excess of $90 million. As this letter of intent has not progressed to a definitive agreement and closing, the Company is pursuing other alternatives as they relate to Taco Bueno. The Company is in discussions with other parties who are interested in purchasing the Taco Bueno brand and is also actively engaged in pursuing a large sale/leaseback transaction on certain Taco Bueno real property that could generate approximately $50 million of proceeds without a sale of the underlying brand. 9 11 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are focused on several goals over the next twelve months, the two most important being the reduction of debt and the improvement of Hardee's operations. During the current fiscal year, we have been addressing our leverage, having reduced our senior credit facility from nearly $300 million at the end of period 2 of fiscal 2001 to $219 million as of the end of the third quarter. We announced during the second quarter of this fiscal year that we signed a letter of intent to sell our Taco Bueno chain for an amount in excess of $90 million. As this letter of intent has not progressed to a definitive agreement and closing, we are pursuing other alternatives as they relate to Taco Bueno. We are in discussions with other parties who are interested in purchasing the Taco Bueno brand and are also actively engaged in pursuing a large sale/leaseback transaction on certain Taco Bueno real property that could generate approximately $50 million of proceeds without a sale of the underlying brand. We are also proceeding with our refranchising strategy whereby we are selling up to 500 Hardee's restaurants and 75 to 100 Carl's Jr. restaurants to new and existing franchisees to rebalance the system to a more predominantly franchised system. These two initiatives reinforce our strategy and intention to recover cash to reduce outstanding borrowings on the senior credit facility. We are also concentrating on improving operations at the Hardee's chain and are refocusing our efforts on quality, service and cleanliness. The debt reduction strategy and the attention on improving operations are, and will continue to be, our main focus over the next twelve months. Consolidated net income for the 12-week period ended November 6, 2000 decreased to a net loss of $29.4 million, or $(0.58) per share on a diluted basis, as compared with net income of $3.0 million, or $0.06 per share on a diluted basis, for the prior year quarter. Net income for the 40-week period ended November 6, 2000 decreased to a net loss of $45.8 million, or $(0.91) per share on a diluted basis, as compared with net income of $32.7 million, or $0.62 per share on a diluted basis for the comparable period of the prior year. Excluding the losses on restaurant sales, as well as certain adjustments relating to our self-insurance reserves and store closure reserves, the net loss would have been $7.4 million or $(0.15) per share on a diluted basis and $13.4 million or ($0.26) per share on a diluted basis, for the 12- and 40-week periods ended November 6, 2000, respectively. The decrease in net income for the third quarter was primarily due to declining sales levels at our Hardee's restaurants, combined with the fixed nature of certain of our operating costs as well as losses incurred on restaurant sales. On a year to date basis, interest expense also contributed to the decrease in net income. On a diluted basis, for the 12- and 40-week periods, the number of shares outstanding decreased 3.3% and 3.8%, respectively. The decrease is due primarily to a decrease in the number of dilutive shares outstanding under our stock option plans. During the third quarter of fiscal 2001, we opened five new Carl's Jr. restaurants, sold 18 to franchisees and closed two restaurants. Our franchisees opened 11 new restaurants. As of November 6, 2000, our Carl's Jr. system included 554 company-operated restaurants, 389 franchised restaurants and 30 international restaurants, for a system total of 973 Carl's Jr. restaurants. Our Taco Bueno chain consisted of 125 company-operated restaurants at quarter end. At the end of the quarter, our Hardee's system consisted of 1,027 company-operated restaurants (reflecting the closure of 25 restaurants and the sale of 80 restaurants to franchisees), 1,566 franchised restaurants (reflecting three new restaurants, 80 restaurants acquired from the Company and the closure of 17 restaurants) and 131 international restaurants, for a system total of 2,724 Hardee's restaurants. 10 12 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 (Continued) We remodeled one company-operated Hardee's restaurant to the Star Hardee's format during the third quarter and our franchisees remodeled 24 restaurants, for a total of 794 Hardee's restaurants remodeled to the Star Hardee's format as of November 6, 2000, representing approximately 31% of the Hardee's domestic 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 have changed Hardee's restaurants to a 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 developing a limited remodel which consists primarily of the addition of a charbroiler, signage and certain interior and exterior enhancements. However, due to our debt reduction strategy, we have significantly scaled back the Star Hardee's remodel program for company-operated restaurants. 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 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 acquisition of our Hardee's 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 $59.3 million, or 14.3%, to $356.3 million for the 12-week period ended November 6, 2000 and $115.2 million, or 8.3%, to $1.270 billion for the 40-week period then ended. Carl's Jr. and Taco Bueno company-operated restaurant revenues increased by $0.8 million and $1.7 million, respectively, while Hardee's revenues from company-operated restaurants decreased by $61.8 million in the 12-week period ended November 6, 2000, as compared to the comparable prior year period. For the 40-week period ended November 6, 2000, Carl's Jr. revenues increased $16.3 million, Taco Bueno revenues increased $6.2 million and Hardee's revenues decreased $137.2 million when compared to the prior year-to-date period. The increase in the Taco Bueno revenues was due mainly to an increase in the number of company-operated restaurants in the current year as opposed to the prior year, while the increase in the Carl's Jr. revenues was due mainly to an increase in same store sales and higher average unit volumes. The decrease in Hardee's revenues for both the 12-week period and the 40-week period was due primarily to a decrease in the number of company-operated restaurants in the current year as compared to the prior year and the continuing same-store sales declines at the Hardee's company-operated restaurants, which were down 6.3% for the third quarter. Taco Bueno also experienced negative same-store sales with a decline of 1.2% for the third quarter of fiscal 2001. The company-operated Carl's Jr. restaurants, however, experienced same-store sales increases of 1.1% for the third quarter, the fourth consecutive quarter of same-store sales increases for the Carl's Jr. chain. Average unit volumes for the trailing 52-week period ended November 6, 2000 for our company-operated Carl's Jr., Taco Bueno and Hardee's restaurants were $1,087,000, $791,000 and $732,000, respectively. 11 13 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 (Continued) Our revenues from franchised and licensed restaurants for the 12- and 40-week periods ended November 6, 2000 increased $13.2 million, or 34.6% to $51.3 million and $31.0 million, or 24.0%, to $159.9 million from the comparable period in the prior year. These increases are primarily due to franchise fees being recognized in connection with the sale of restaurants during the current fiscal year, as well as an increase in royalties as a result of the significant increase in the number of Hardee's franchised restaurants open and operating during the current year as opposed to the prior year. In addition, an increase in the number of franchised Carl's Jr. restaurants in the current year periods, as well as an increase in certain commodity costs, has led to an increase in food purchases by franchisees from our distribution center. Restaurant-level margins for our company-operated Carl's Jr. restaurants decreased 4.7%, to 17.6%, and 3.4% to 20.2%, respectively, for the 12- and 40-week periods ended November 6, 2000, from the comparable period of fiscal 2000. As a percentage of revenues from company-operated Carl's Jr. restaurants, food and packaging costs increased 0.3% and 0.8% for the 12- and 40-week periods, respectively. This increase was mostly due to an increase in beef commodity prices, as well as an increase in paper costs for a new type of cup being used in the Carl's Jr. restaurants. Payroll and other employee benefits increased 3.2%, to 30.1%, and 1.8%, to 28.4%, respectively, for the 12- and 40-week periods ended November 6, 2000 as compared to the previous year periods. 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 an increasing average wage rate. In addition, we made a conscious decision to increase labor in our restaurants in an effort to maintain quality guest service. Our payroll and other employee benefit costs for both the 12- and 40-week periods were also impacted by a charge of $2.1 million resulting from an increase in the actuarially determined liability for our workers' compensation self-insurance reserve. Occupancy and other operating expenses increased 1.2%, to 22.8%, and 0.9%, to 21.9%, for the 12- and 40-week periods ended November 6, 2000, respectively, as compared to the prior year. This increase was primarily due to an increase in electricity expense in the California units, an increase in certain restaurant equipment leases and increased percentage rents due to higher average unit volumes. Occupancy and other operating expenses were also impacted by a charge of $0.6 million resulting from an increase in the actuarially determined liability for our general self-insurance reserve. Excluding the impact of the adjustments to our self-insurance reserves noted above, Carl's Jr. restaurant-level margins would have been 19.5% and 20.8%, for the 12- and 40-week periods ended November 6, 2000, respectively. Restaurant-level margins for our company-operated Hardee's restaurants decreased 7.8%, to 4.4%, and 6.8%, to 8.2%, respectively, for the 12- and 40-week periods ended November 6, 2000, from the comparable period of fiscal 2000, primarily due to increases in payroll and other employee benefits and occupancy and other operating expenses. Food and packaging costs at the Hardee's chain increased 0.8%, to 32.5%, and 1.2%, to 32.2%, respectively, for the 12- and 40-week periods ended November 6, 2000, as compared to the comparable prior year periods. The increase was attributable to increased commodity costs in the current year periods. Additionally, the 40-week period was impacted by the effect of the discounting program promoting the $0.59 Big Burger. Payroll and other employee benefits increased 2.3%, to 35.7%, and 1.6%, to 34.6%, respectively, for the 12- and 40-week periods ended November 6, 2000, as compared to the same periods a year ago. This increase was due to a conscious effort to increase labor in the restaurants in an effort to improve our guest service, combined with the effect of declining same-store sales. Occupancy and other operating expenses at Hardee's increased 4.7%, to 27.4%, and 4.1%, to 25.0%, respectively, for the 12- and 40-week periods ended November 6, 2000, as compared to the same periods of fiscal 2000. This increase was primarily due to 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. The decline in average unit volumes has also negatively impacted our occupancy and other expenses as a large portion of these costs are fixed in nature. Finally, occupancy and other operating expenses at Hardee's were negatively impacted for both the 12- and 40-week periods by a charge of $2.4 million to increase the store closure reserve. Excluding the impact of this charge, Hardee's restaurant-level margins would have been 5.7% and 8.5%, respectively, for the 12- and 40-week periods ended November 6, 2000. 12 14 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 (Continued) Taco Bueno's restaurant-level margins decreased 4.1%, to 19.7%, and 3.6%, to 21.9%, respectively, for the 12- and 40-week periods ended November 6, 2000, as compared to the same periods one year ago. Food and packaging costs at Taco Bueno remained relatively consistent with the prior year periods. Payroll and other employee benefits increased 2.5%, to 34.1%, and 1.2%, to 32.5%, respectively, for the 12- and 40-week periods ended November 6, 2000 when compared to the same periods last year. This increase is primarily due to the tight labor market in Texas and Oklahoma, as well as an increase in the workers' compensation self-insurance reserve. Occupancy and other operating expenses also increased from the prior year 12- and 40-week periods by 2.2%, to 17.8%, and by 2.1%, to 16.8%, respectively. This increase is due primarily to an increase in depreciation associated with the completion of several signage projects in the current year. Franchised and licensed restaurant costs increased $9.5 million, or 35.5%, and $22.3 million, or 23.9%, respectively, for the 12- and 40-week periods ended November 6, 2000, as compared to the corresponding prior year periods. This increase was primarily due to an increase in the number of Carl's Jr. restaurants open and operating during the current year, which has led to higher volume in our distribution center and an increase in the number of Hardee's franchisees and licensees purchasing equipment from us. Advertising expenses decreased $5.2 million, or 18.8%, and $9.4 million, or 10.6%, respectively, for the 12- and 40-week periods ended November 6, 2000, as compared to the comparable periods in the prior year. This decrease was due primarily to certain expenditures incurred in the prior year periods for special advertising campaigns. General and administrative expenses decreased $0.9 million, or 2.9%, and increased $6.6 million, or 6.4%, respectively, for the 12- and 40-week periods ended November 6, 2000, as compared to the prior year. As a percentage of total revenues, this represents a decrease of 0.6% and an increase of 0.9%, respectively, for the 12- and 40-week periods ended November 6, 2000. The increase for the 40-week period is due mainly to maintenance incurred on our new computer systems during the previous two quarters of the current fiscal year as well as depreciation on those systems. In the current year 12-week period, we have significantly decreased this contracted labor and have therefore seen a decrease in G&A when compared to the comparable 12-week period in the prior year. Interest expense for the 12- and 40-week periods ended November 6, 2000 increased $2.5 million, or 17.9%, and $10.5 million, or 24.5%, respectively, when compared to the same periods in the prior year. For the 12-week period, the increase in interest expense was due to an overall increase in interest rates charged to us under the senior credit facility. For the 40-week period, this increase was 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. Given the current rise in interest rates, we would expect our interest expense to continue to 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 for the 40-week period ended November 6, 2000 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 40-week period included only a partial period of interest expense while the current year included a full 40-weeks. 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 decreased $32.6 million and $48.1 million for the 12- and 40-week periods ended November 6, 2000, respectively. This decrease was primarily due to the inclusion of net losses on the sale of certain Hardee's and Carl's Jr. restaurants of $31.9 million and $48.9 million, respectively, for the 12- and 40-week periods ended November 6, 2000. 13 15 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 (Continued) 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 $10.7 million to $25.8 million in the 40-week period ended November 6, 2000. Investing activities generated $46.1 million of cash flows, primarily as a result of the sale of company-operated restaurants, offset by capital additions of $63.0 million. Financing activities absorbed $62.5 million, primarily due to net repayments on the senior credit facility during the period. Cash flows from operating and investing activities were mainly used to fund the development of Carl's Jr. restaurants, to repay $7.9 million in capital lease obligations, to pay down the senior credit facility and to pay the first scheduled semi-annual dividend payment 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, subject to further reduction from asset sales). 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 are required to repay borrowings under the senior credit facility with the proceeds from (i) certain asset sales, (ii) the issuance of certain equity securities, and (iii) the issuance of additional indebtedness. 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, repurchase stock or subordinated debt, pay dividends and incur liens on our assets, subject to specified exceptions; and o requirements that we satisfy specified financial tests as a precondition to our acquisition of other businesses. 14 16 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 (Continued) 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, the Company amended its senior credit facility effective January 31, 2000, to amend certain of the covenants contained therein and then further amended the credit facility effective August 14, 2000. The amended senior credit facility provides that the revolving commitments thereunder shall be reduced by the entire net proceeds from the sale of any of the Company's restaurants. The senior credit facility, as amended, also prohibits the Company from purchasing shares of its common stock, purchasing its senior subordinated notes or convertible notes, from prepaying subordinated indebtedness and from paying cash dividends. 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. The amended facility required the Company to complete an asset sale or sales aggregating $150.0 million by the end of October 2000. The Company did not meet this requirement thus resulting in an additional increase to the interest rate of 50 basis points until such sales are completed. The amended credit facility also requires the Company to meet certain benchmarks during the months of November 2000, December 2000 and January 2001 relating to asset sales. If these benchmarks are not met, the lenders may request that the Company pledge specific collateral to further secure the senior credit facility. As of the end of our second quarter of fiscal 2001, the Company was not in compliance with certain covenants governing its senior credit facility. The Company has received a waiver of this non-compliance through January 29, 2001, including its third quarter. It is the Company's intention to repay outstanding borrowings on its senior credit facility with the net proceeds from its asset sales during the next twelve months. Accordingly, the total amount outstanding under the senior credit facility of $219 million as of November 6, 2000 has been classified as a current liability on the consolidated balance sheet. As of November 6, 2000, the Company had $20.8 million of borrowings available under its senior credit facility. In the event the senior credit facility is declared accelerated, the senior subordinated notes and the convertible subordinated notes may also become accelerated under certain circumstances and after all cure periods have expired. 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 (which has been recently scaled back due to our plan to reduce leverage) and the conversion of restaurants to the Carl's Jr./Green Burrito dual-brand concepts (which has also been recently scaled back due to our plan to reduce leverage). It is our intention to 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 addition, we have significantly reduced our capital expenditures in the current year from $27.0 million in the second quarter of fiscal 2001 to $4.9 million in the third quarter. This step which will help us accomplish our strategic goal of reducing our leverage. In the current fiscal year, the Company has completed the sale of 280 Hardee's restaurants, generating net after-tax cash proceeds of approximately $78.4 million. 15 17 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 (Continued) 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 operations, along with cash and cash equivalents on hand as of November 6, 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 November 6, 2000, we had $20.8 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 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. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities. SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters of fiscal years beginning after December 15, 2000. The Company has not determined whether the application of this accounting standard will have a material impact on its financial position, results of operations or liquidity. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB101"). This Staff Accounting Bulletin summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB101, as amended, is effective for the fourth fiscal quarter of the fiscal year beginning after December 15, 1999. The adoption of SAB101 is not expected to have a material impact on the Company's consolidated financial position or results of operations. 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. 16 18 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 (Continued) 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 $219.0 million remained outstanding as of November 6, 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 9.4% in fiscal 2001). A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction of approximately $2.2 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 November 6, 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. 17 19 CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS NOVEMBER 6, 2000 AND NOVEMBER 1, 1999 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 12.1 Computation of Ratios 27.1 Financial Data Schedule (included only with electronic filing) (b) Current Reports on Form 8-K: A Current Report on Form 8-K dated September 22, 2000 was filed during the third quarter of the fiscal year to report the resignation of C. Thomas Thompson and the appointment of Andrew F. Puzder as President and Chief Executive Officer of the Company. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CKE RESTAURANTS, INC. --------------------- (Registrant) December 19, 2000 /s/ Carl A. Strunk - ----------------- ------------------------- Date Executive Vice President, Chief Financial Officer 18 20 EXHIBIT INDEX Exhibit # Description --------- ----------- 12.1 Computation of Ratios 27.1 Financial Data Schedule (included only with electronic filing) 19 EX-12.1 2 a68075ex12-1.txt EXHIBIT 12.1 1 EXHIBIT 12.1 CKE RESTAURANTS, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands)
Forty Weeks Ended --------------------------- November 6, November 1, 2000 1999 ----------- ----------- Earnings before fixed charges: Income (loss) before income taxes and extraordinary item ................ $ (76,303) $ 53,247 Fixed charges ............................ 80,203 66,824 --------- -------- $ 3,900 $120,071 ========= ======== Fixed charges: Interest expense ..................... $ 53,510 $ 42,968 Interest component of rent expense (1) 26,693 23,856 --------- -------- $ 80,203 $ 66,824 ========= ======== Ratio of earnings to fixed charges ....... 0.0x 1.8x ========= ========
- ---------- (1) Calculated as one-third of total rent expense EX-27.1 3 a68075ex27-1.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from CKE Restaurants, Inc. Consolidated Balance Sheets and Consolidated Statements of Operations as of and for the 40-weeks ended November 6, 2000 and is qualified in its entirety by reference to such Form 10-Q for the quarterly period ended November 6, 2000. 1,000 9-MOS JAN-29-2001 FEB-01-2000 NOV-06-2000 25,774 0 79,684 0 19,797 139,187 1,256,253 362,076 1,410,738 379,684 359,225 0 0 521 497,342 1,410,738 1,270,478 1,430,373 1,098,706 1,403,172 (49,994) 0 53,510 (76,303) (30,493) (45,810) 0 0 0 (45,810) (0.91) (0.91)
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