10-Q 1 a73927e10-q.txt FORM 10-Q PERIOD END MAY 21, 2001 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 21, 2001 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. for the transition period from to Commission file number 1-13192 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 25, 2001 2 CKE RESTAURANTS, INC. AND SUBSIDIARIES INDEX
Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of May 21, 2001 and January 31, 2001...... 2 Consolidated Statements of Operations for the sixteen weeks ended May 21, 2001 and May 22, 2000.......................................... 3 Consolidated Statements of Cash Flows for the sixteen weeks ended May 21, 2001 and May 22, 2000.......................................... 4 Notes to Consolidated Financial Statements............................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 15 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K......................................... 16
3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited)
May 21, January 31, 2001 2001 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 25,461 $ 16,860 Accounts receivable, net 48,931 73,956 Related party receivables 3,219 2,505 Inventories 18,887 17,694 Prepaid expenses 9,761 10,212 Other current assets 2,451 2,534 Property held for sale 61,224 66,912 ----------- ----------- Total current assets 169,934 190,673 Property and equipment, net 659,605 700,698 Property under capital leases, net 70,951 73,617 Long-term investments 3,457 3,461 Notes receivable 12,248 14,098 Costs in excess of net assets acquired, net 201,361 203,900 Other assets 21,175 27,582 ----------- ----------- $ 1,138,731 $ 1,214,029 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 120,316 $ 67,332 Current portion of capital lease obligations 10,012 9,845 Accounts payable 49,427 53,759 Other current liabilities 90,908 83,045 ----------- ----------- Total current liabilities 270,663 213,981 Long-term debt 5,160 106,760 Senior subordinated notes 200,000 200,000 Convertible subordinated notes 159,225 159,225 Capital lease obligations 78,054 81,173 Other long-term liabilities 113,214 103,333 ----------- ----------- Total liabilities 826,316 864,472 ----------- ----------- 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 (60,716) (23,574) Treasury stock, at cost, 1,585,000 shares (10,406) (10,406) ----------- ----------- Total stockholders' equity 312,415 349,557 ----------- ----------- $ 1,138,731 $ 1,214,029 =========== ===========
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)
Sixteen Weeks Ended ------------------------ May 21, May 22, 2001 2000 --------- --------- Revenues: Company-operated restaurants $ 395,115 $ 527,373 Franchised and licensed restaurants and other 76,375 56,955 --------- --------- Total revenues 471,490 584,328 --------- --------- Operating costs and expenses: Restaurant operations: Food and packaging 118,854 162,517 Payroll and other employee benefits 128,418 165,563 Occupancy and other operating expenses 91,294 116,843 --------- --------- 338,566 444,923 Franchised and licensed restaurants and other 59,482 43,752 Advertising expenses 24,709 33,673 General and administrative expenses 35,279 45,677 Facility action charges (gains), net 28,220 (918) --------- --------- Total operating costs and expenses 486,256 567,107 --------- --------- Operating income (loss) (14,766) 17,221 Interest expense (22,545) (20,695) Other income (expense), net 1,079 (487) --------- --------- Loss before income taxes (36,232) (3,961) Income tax expense (benefit) 910 (1,510) --------- --------- Net loss $ (37,142) $ (2,451) ========= ========= Basic and diluted loss per share $ (0.74) $ (0.05) ========= ========= Weighted average shares outstanding - basic and diluted 50,501 50,501 ========= =========
See Accompanying Notes to Consolidated Financial Statements 3 5 CKE RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Sixteen Weeks Ended ----------------------- May 21, May 22, 2001 2000 --------- --------- Net cash flow from operating activities: Net loss $(37,142) $ (2,451) Adjustments to reconcile net loss to net cash provided by operating activities, excluding the effect of acquisitions and dispositions: Depreciation and amortization 28,002 35,827 Provision for losses on accounts and notes receivable 1,070 -- Gain on sale of property and equipment and capital leases (1,389) 387 Facility action charges (gains), net 28,220 (918) Gain on noncurrent asset and liability transactions (1,867) (374) Net change in receivables, inventories, prepaid expenses and other current assets 23,124 (2,649) Net change in accounts payable and other current liabilities (3,343) (103) -------- --------- Net cash provided by operating activities 36,675 29,719 -------- --------- Cash flow from investing activities: Purchases of: Property and equipment (5,531) (31,022) Long term investments -- (2,250) Proceeds from sale of: Property and equipment 28,008 5,611 Long term investments 1,871 -- Increases in notes receivable and related party receivables (120) (6,614) Collections on and sale of notes receivable, related party receivables and leases receivable 1,627 6,356 Net change in other assets 501 77 -------- --------- Net cash provided by (used in) investing activities 26,356 (27,842) -------- --------- Cash flow from financing activities: Net change in bank overdraft 2,268 (21,839) Long-term borrowings 39,539 104,000 Repayments of long-term debt (88,155) (88,206) Repayments of capital lease obligations (3,151) (3,217) Payment of deferred financing costs (1,113) (904) Net change in other long-term liabilities (3,818) (8,618) Payment of dividends -- (2,084) -------- --------- Net cash used in financing activities (54,430) (20,868) -------- --------- Net increase (decrease) in cash and cash equivalents 8,601 (18,991) Cash and cash equivalents at beginning of period 16,860 36,505 -------- --------- Cash and cash equivalents at end of period $ 25,461 $ 17,514 ======== ========= Supplemental disclosures of cash flow information: Cash paid during period for: Interest $ 21,996 $ 26,417 Income taxes -- $ 139
See Accompanying Notes to Consolidated Financial Statements 4 6 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 21, 2001 NOTE (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of CKE Restaurants, Inc. and its consolidated wholly-owned subsidiaries (the "Company" or "CKE") and have been prepared in accordance with accounting principles generally accepted in the United States of America, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements should be read in conjunction with the audited consolidated financial statements presented in the Company's 2001 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 2001 consolidated financial statements to conform to the fiscal 2002 presentation. NOTE (2) 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 2002. The facility has since been reduced, pursuant to asset sales, to approximately $216.0 million as of May 21, 2001. As of June 30, 2001, the Company can only borrow at a rate of interest equal to the prime rate plus the applicable margin on all outstanding borrowings. As a result of the changing of the maturity date of the facility to February 2002, the total amount outstanding under the senior credit facility of $120.0 million as of May 21, 2001 has been classified as a current liability on the consolidated balance sheet. NOTE (3) FACILITY ACTION CHARGES (GAINS) As described in the summary of significant accounting policies in Note 1 of Notes to Consolidated Financial Statements for the fiscal year ended January 31, 2001, the Company reviews the performance of company-operated restaurants for the likelihood of future profitability. During the first quarter of fiscal 2002, the Company decided to close certain under-performing restaurants that management believes are in locations where the population or demographics have changed so significantly that there is minimal opportunity for improvement. The Company provides store closure reserves for these assets under the criteria described in Note 1 of Notes to Consolidated Financial Statements for the fiscal year ended January 31, 2001. Additionally, during the first quarter of fiscal 2002, the Company identified seven restaurants that it believed it should continue operating, but whose cash flow from operations did not support their related net asset value and, accordingly, an impairment provision was recorded. The Company estimates the impairment provision for these assets under the criteria described in the summary of significant accounting policies in Note 1 of Notes to Consolidated Financial Statements for the fiscal year ending January 31, 2001. In late fiscal 2000, the Company embarked on a refranchising initiative to move to a well-balanced system of nationwide restaurant concepts that are primarily franchisee-operated and to reduce outstanding borrowings on its senior credit facility. As a result, the Company has sold several restaurants to new and existing franchisees. The results of these strategies have caused the following transactions to be recorded in the financial statements as facility action charges (gains): o gains (losses) on the sale of restaurants; o store closure costs; and o impairment of long-lived assets for restaurants the Company intends to continue to operate and restaurants the Company intends to close beyond the quarter in which the closure decision is made. 5 7 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 21, 2001 (Continued) The components of these actions for the first quarter of fiscal 2002 and 2001 were as follows:
Sixteen Weeks Ended -------------------- May 21, May 22, (Dollars in thousands) 2001 2000 -------- ------- Hardee's Store closure reserves $ 16,705 $ -- Impairment on stores to be closed or sold 5,494 -- Impairment on stores that will continue to be operated -- -- Losses (gains) on sales of restaurants, net 2,099 (362) -------- ----- 24,298 (362) -------- ----- Carl's Jr. Store closure reserves 589 -- Impairment on stores to be closed sold 2,236 -- Impairment on stores that will continue to be operated -- -- Gains on sales of restaurants, net (3,403) (556) -------- ----- (578) (556) -------- ----- Other (Taco Bueno) Store closure reserves -- -- Impairment on stores to be closed or sold -- -- Impairment on stores that will continue to be operated -- -- Losses on sales of restaurants, net 4,500 -- -------- ----- 4,500 -- -------- ----- Total Store closure reserves 17,294 -- Impairment on stores to be closed or sold 7,730 -- Impairment on stores that will continue to be operated -- -- Losses (gains) on sales of restaurants, net 3,196 (918) -------- ----- $ 28,220 $(918) ======== =====
Impairment charges were made against the following accounts:
Sixteen Weeks Ended --------------------- May 21, May 22, (Dollars in thousands) 2001 2000 -------- ------- Fixed assets: Hardee's $ 3,730 $ -- Carl's Jr. 2,236 -- Other -- -- -------- ----- 5,966 -- -------- ----- Cost in excess of net assets acquired, net Hardee's 1,764 -- Carl's Jr. -- -- Other -- -- -------- ----- 1,764 -- -------- ----- Total Hardee's 5,494 -- Carl's Jr. 2,236 -- Other -- -- -------- ----- $ 7,730 $ -- ======== =====
6 8 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 21, 2001 (Continued) The following table is a rollforward of the activity in the store closure reserve. The Company believes that the remaining carrying amounts are adequate to complete its disposal actions. Balance at January 31, 2001 $ 58,187 New decisions 17,294 Usage (3,277) Other 1,090 -------- Balance at May 21, 2001 73,294 Less: Current portion 12,623 -------- Long-term portion $ 60,671 ======== NOTE (4) LOSS PER SHARE The Company presents "basic" loss per share which represents net loss divided by the weighted average shares outstanding, excluding all potentially dilutive common shares and "diluted" loss per share reflecting the dilutive effect of all potentially dilutive common shares. The following table illustrates the computation of basic and diluted loss per share: (In thousands except per share amounts) Sixteen Weeks Ended ------------------------- May 21, May 22, 2001 2000 -------- -------- Basic and Diluted Loss Per Share Net loss $(37,142) $ (2,451) ======== ======== Weighted average number of common shares outstanding during the period 50,501 50,501 ======== ======== Loss per share - basic and diluted $ (0.74) $ (0.05) ======== ======== For the 16-week periods ended May 21, 2001 and May 22, 2000, 7.3 million shares and 6.9 million shares, respectively, relating to the possible exercise of outstanding stock options and 3.6 million shares issuable upon conversion of convertible subordinated notes were not included in the computation of diluted loss per share as their effect would have been anti-dilutive. NOTE (5) SEGMENT INFORMATION The Company is engaged principally in developing, operating and franchising its Carl's Jr. and Hardee's quick-service restaurants, each of which are considered strategic businesses that are managed and evaluated separately. Additionally, during the first quarter of fiscal 2002, the Company operated one chain that was held for sale, Taco Bueno (see Note 6). The activity of the Taco Bueno chain is included in the "other" segment. 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. General and administrative expenses are attributed to each segment based on management's analysis of the resources applied to each segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of Notes to Consolidated Financial Statements for the fiscal year ending January 31, 2001. 7 9 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 21, 2001 (Continued) 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 OTHER TOTAL ---------- --------- -------- ----------- MAY 21, 2001: Revenues $215,681 $ 220,684 $ 35,125 $ 471,490 Segment operating income (loss) 19,004 (26,140) (7,630) (14,766) Total assets 324,906 741,225 72,600 1,138,731 Capital expenditures 2,043 2,563 925 5,531 Depreciation and amortization 6,774 14,096 7,132 28,002 MAY 22, 2000: Revenues $224,715 $ 325,681 $ 33,932 $ 584,328 Segment operating income (loss) 17,748 1,052 (1,579) 17,221 Total assets (as of January 31, 2001) 356,266 773,103 84,660 1,214,029 Capital expenditures 14,314 9,637 7,071 31,022 Depreciation and amortization 8,552 22,206 5,069 35,827
NOTE (6) SUBSEQUENT EVENT Subsequent to the end of the first quarter of fiscal 2002, the Company completed the sale of its Taco Bueno concept for net proceeds of approximately $61.2 million. An additional loss of $4.5 million was recorded in facility action charges in the first quarter as a result of this final disposition. The net proceeds from this sale were used to reduce indebtedness under the Company's senior credit facility. The Taco Bueno concept had revenue of $31.2 million and $30.3 million, respectively, and operating income of $2.5 million and $2.1 million, respectively, for the 16-week periods ended May 21, 2001 and May 22, 2000. 8 10 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 21, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following table is presented to facilitate Management's Discussion and Analysis of the first quarter results:
(Dollars in thousands, except average check data) First Quarter FY 2002 ---------------------------------------------------------- Carl's Jr. Hardee's Other Total --------- --------- -------- --------- Number of restaurants (end of period): Company-operated 471 836 146 1,453 Franchised domestic 462 1,593 0 2,055 Licensed international 36 137 0 173 --------- --------- -------- --------- Total 969 2,566 146 3,681 ========= ========= ======== ========= Company-operated sales $ 161,985 $ 198,005 $ 35,125 $ 395,115 ========= ========= ======== ========= Company-operated average unit volumes (trailing 13-periods) $ 1,079 $ 712 ========= ========= Average check $ 4.83 $ 3.60 ========= ========= Company-operated same-store sales increase (decrease) 0.7% (4.2)% Operating costs (as a % of company-operated sales) Food and paper 28.96% 31.23% Payroll and other employee benefits 28.65 35.65 Occupancy and other operating costs 22.36 24.53 Gross margin 20.04% 8.58% Franchising income $ 6,291 $ 10,602 ========= ========= Operating income (loss) excluding facility action charges $ 18,426 $ (1,842) $ (3,130) $ 13,454 Facility action charges (578) 24,298 4,500 28,220 --------- --------- -------- --------- Operating income (loss) $ 19,004 $ (26,140) $ (7,630) $ (14,766) ========= ========= ======== ========= EBITDA excluding facility action charges $ 25,417 $ 12,783 $ 446 $ 38,646 Facility action charges (578) 24,298 4,500 28,220 --------- --------- -------- --------- EBITDA $ 25,995 $ (11,515) $ (4,054) $ 10,426 ========= ========= ======== =========
9 11 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 21, 2001 (Continued)
(Dollars in thousands, except average check data) First Quarter FY 2001 ---------------------------------------------------------- Carl's Jr. Hardee's Other Total --------- --------- -------- --------- Number of restaurants (end of period): Company-operated 570 1,339 145 2,054 Franchised domestic 353 1,314 0 1,667 Licensed international 24 121 0 145 --------- --------- -------- --------- Total 947 2,774 145 3,866 ========= ========= ======== ========= Company-operated sales $ 189,376 $ 304,065 $ 33,932 $ 527,373 ========= ========= ======== ========= Company-operated average unit volumes (trailing 13-periods) $ 1,089 $ 755 ========= ========= Average check $ 4.59 $ 3.50 ========= ========= Company-operated same-store sales increase (decrease) 3.6% (6.2)% Operating costs (as a % of company-operated sales) Food and paper 29.49% 31.82% Payroll and other employee benefits 27.32 33.89 Occupancy and other operating costs 21.31 23.18 Gross margin 21.87% 11.12% Franchising income $ 2,679 $ 10,524 ========= ========= Operating income (loss) excluding facility action charges $ 17,192 $ 690 $ (1,579) $ 16,303 Facility action charges (gains), net (556) (362) 0 (918) --------- --------- -------- --------- Operating income (loss) $ 17,748 $ 1,052 $ (1,579) $ 17,221 ========= ========= ======== ========= EBITDA excluding facility action charges $ 25,544 $ 22,628 $ 3,471 $ 51,643 Facility action charges (gains), net (556) (362) 0 (918) --------- --------- -------- --------- EBITDA $ 26,100 $ 22,990 $ 3,471 $ 52,561 ========= ========= ======== =========
Overview and Safe Harbor Disclosure Consolidated net loss for the 16-week period ended May 21, 2001 increased to $37.1 million or $(0.74) per share on a fully diluted basis, as compared to $2.5 million, or $(0.05) per share on a fully diluted basis, for the prior-year period. The increase in the net loss was due mainly to facility action charges during the current year of $28.2 million, as well as a charge of $3.9 million recorded as interest expense reflecting the write-off of deferred loan costs as a result of the modification of the senior credit facility in the current quarter (see "Repositioning Charges" below). 10 12 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 21, 2001 (Continued) Matters discussed in this Quarterly Report on Form 10-Q contain certain forward-looking statements that are based on management's beliefs and assumptions derived from information currently known to the Company's management. Forward-looking statements may include, but are not limited to, descriptions of plans or objectives of the Company's management for future or past operations, products or services, earnings or other measures of economic performance including statements of profitability of business segments and subsidiaries, estimates of recoverability of long-lived assets, current bank relationships, and current repositioning activities including anticipated store closures. Such statements reflect the view of the Company's management with respect to future events and are subject to risks and uncertainties, such as changes in the fast food industry and changes to the Company's plans, objectives, expectations and intentions. The Company has also experienced an increase in utility costs and rolling blackouts in some areas. There is a possibility that these blackouts may spread to other areas and could materially impact the Company's business. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, the Company's actual results could differ materially from those discussed in this Quarterly Report on Form 10-Q. Factors that could cause or contribute to such differences are effectiveness of operating initiatives and advertising and promotional efforts, changes in economic conditions, the impact of competitive products and pricing, changes in the Company's suppliers' ability to provide quality and timely products to the Company, the operational success of our franchisees, availability of financing for the Company and its franchisees and other factors as discussed in the Company's filings with the Securities and Exchange Commission. Carl's Jr. During the first quarter, we opened two new Carl's Jr. restaurants, acquired one from a franchisee, sold three to franchisees and closed 20, primarily in Oklahoma. Carl's Jr. franchisees and licensees opened 10 new restaurants, sold one to us and acquired three from us. As of May 21, 2001, the Carl's Jr. system consisted of 471 company-operated restaurants, 462 franchised restaurants and 36 international restaurants, for a system total of 969 Carl's Jr. restaurants. Revenues from company-operated Carl's Jr. restaurants decreased $27.4 million, or 14.5%, to $162.0 million for the 16-week period ended May 21, 2001, as compared to the prior year comparable period. The decrease in revenues is due primarily to the sale of company-operated restaurants to franchisees, as well as the closure of company-operated restaurants. See the table above for the number of company-operated restaurants at the end of the first quarter of each year. While revenues from company-operated restaurants are down, franchising income has more than doubled in the current year for Carl's Jr. This is attributable primarily to an increase in the number of franchisee-operated restaurants. Same-store sales for company-operated Carl's Jr. restaurants increased 0.7% in the current quarter and Carl's Jr. company-operated restaurant average unit volumes were $1,079,000 for the trailing thirteen periods ended May 21, 2001, and the average check was $4.83 as compared to $4.59 in the comparable period of the prior year. Restaurant-level margins for our company-operated Carl's Jr. restaurants decreased 1.9% from 21.9% in the prior-year period to 20.0% in the current quarter, as a percentage of company-operated restaurant revenues. Of this decrease, payroll and other employee benefits contributed 1.3% and occupancy and other operating expenses contributed 1.1%. These were partially offset by a favorable variance from the prior year quarter of 0.5% in food and packaging costs. The increase in payroll and other employee benefits from 27.3% as a percentage of company-operated restaurants revenues in the prior year quarter to 28.7% in the current year quarter is due mainly to continued competitive pressures in attracting qualified labor, which is consistent with several other concepts in the quick service restaurant segment, as well as a conscious decision to continue to increase labor in our restaurants in an effort to maintain quality guest service. Occupancy and other operating expenses increased 1.1% as a percentage of company-operated restaurant revenues from 21.3% to 22.4%. This increase is due primarily to an increase in the cost of natural gas at the restaurants (1.0%), as well as a slight increase in our general liability insurance as a result of a slightly higher cost per incident (0.3%). The decrease in food and packaging costs of 0.5%, from 29.5% in the prior year to 29.0% in the current year is largely the result of less emphasis on discounting programs. 11 13 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 21, 2001 (Continued) Hardee's During the first quarter, Hardee's franchisees and licensees opened 12 new restaurants and remodeled 10 to the Star Hardee's format. During the quarter, we also remodeled three Hardee's restaurants to the Star Hardee's format and 84 company-operated restaurants and 19 franchise-operated restaurants were closed during the quarter. As of May 21, 2001, the Hardee's system consisted of 836 company-operated restaurants, 1,593 franchised restaurants and 137 international restaurants, for a system total of 2,566 Hardee's restaurants. Revenues from company-operated Hardee's restaurants decreased $106.1 million, or 34.9%, to $198.0 million for the 16-week period ended May 21, 2001, as compared to the prior year comparable period. The decrease in revenues is due primarily to the sale of company-operated restaurants to franchisees, the closure of company-operated restaurants and continued same-store sales declines. See the table above for the number of company-operated restaurants at the end of the first quarter of each year. While revenues from company-operated restaurants are down, franchising income is up slightly at Hardee's. This is attributable primarily to an increase in the number of franchisee-operated restaurants offset by a decrease in income at Hardee's Equipment Division, as a result of a slowdown in franchisee remodel activity. Same-store sales for company-operated Hardee's restaurants decreased 4.2 % in the current quarter. This is compared to a 6.2% decline in the prior year and a 10.9% decline in the fourth quarter of the last fiscal year. Hardee's company-operated restaurant average unit volumes were $712,000 for the trailing thirteen periods ended May 21, 2001, and the average check was $3.60 as compared to $3.50 for the comparable period last year. Restaurant-level margins for company-operated Hardee's restaurants decreased 2.5% from 11.1% in the prior-year period to 8.6% in the current quarter, as a percentage of company-operated restaurant revenues. Of this decrease, payroll and other employee benefits contributed 1.8% and occupancy and other operating expenses contributed 1.3%. These were partially offset by a favorable variance from the prior year quarter of 0.6% in food and packaging costs. The increase in payroll and other employee benefits from 33.9% as a percentage of company-operated restaurants revenues in the prior year quarter to 35.7% in the current year quarter is due mainly to continued competitive pressures in attracting qualified labor, which is consistent with several other concepts in the hamburger quick service restaurant segment, as well as a conscious decision to continue to increase labor in our restaurants in an effort to maintain quality guest service. Occupancy and other operating expenses increased 1.3% as a percentage of company-operated restaurant revenues from 23.2% to 24.5%. This increase is due primarily to an increase in the cost of natural gas at the restaurants (1.6%). The decrease in food and packaging costs of 0.6%, from 31.8% in the prior year to 31.2% in the current year is largely the result of the less emphasis on discounting programs. Repositioning Charges During the first quarter of fiscal 2002, we recorded charges of $32.1 million. These charges consisted of (a) facility action charges of $28.2 million consisting of an additional write-down of $4.5 million of the net assets of Taco Bueno arising from the final disposition of the concept, a store closure reserve of $17.3 million for approximately 63 Hardee's and five Carl's Jr. restaurants that we have closed or plan to close, an impairment charge of $7.7 million, of which half is for restaurants that we will close and the remainder is for restaurants we plan to continue to operate, but for which the net book value is not supported by current estimated future cash flows, partially offset by net gains on restaurants sold during the quarter of $1.3 million, and (b) a charge of $3.9 million recorded as interest expense reflecting the write-off of deferred loan costs as a result of our senior credit facility being modified this quarter. In the prior year comparable quarter, we recorded $918,000 relating to net gains on restaurants sold during the quarter. Other Consolidated Expenses Advertising expenses decreased $9.0 million, or 26.6%, to $24.7 million for the 16-week period ended May 21, 2001, as compared to the comparable period in the prior year. However, as a percentage of total revenues, advertising expenses have remained relatively constant in the current year quarter as compared to the prior year quarter. 12 14 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 21, 2001 (Continued) General and administrative expenses decreased $10.4 million, or 22.8%, to $35.3 million for the 16-week period ended May 21, 2001, as compared to the 16-week period ended May 22, 2000. This represents a decrease of 0.3% as a percentage of total revenues. This decrease is attributable not only to a decrease in headcount, but also to other discretionary expenses such as contracted labor and professional services. This decline from the prior year is consistent with the trend that our general and administrative expenses be commensurate with our mix of company-operated and franchisee-operated restaurants. Interest expense for the quarter increased $1.9 million, or 8.9%, when compared to the comparable prior year period. This increase is the result of the $3.9 million charge noted above for the write-off of deferred loan costs as a result of our senior credit facility being modified this quarter, offset by a decrease in interest expense on our senior credit facility as a result of lower outstanding borrowings during the current year quarter. Although the applicable margin used to determine our interest payable on the senior credit facility has increased as a result of amendments to the facility, the outstanding balance has decreased from almost $300 million just one year ago to $120 million at May 21, 2001. Other income (expense) increased during the quarter ended May 21, 2001, primarily due to gains recorded as a result of the sale of our shares of Checkers Drive-In Restaurants, Inc. During the first three quarters of fiscal 2001, we recorded a deferred tax asset for the tax benefit of operating losses which served to reduce the net loss reflected in the statement of operations. Commencing with the fourth quarter of last fiscal year, we ceased to record a deferred tax asset because of our recurring operating losses. As such, the current quarter's statement of operations does not reflect a tax benefit from the operating loss, as was the case in the comparable period of the prior fiscal year. FINANCIAL CONDITION AND LIQUIDITY Cash and cash equivalents increased $8.6 million to $25.5 million in the 16-week period ended May 21, 2001. During the quarter, we generated cash flows from operations of $36.7 million, as compared to $29.7 million in the corresponding period of the prior fiscal year. This increase was due mainly to changes in our working capital during the quarter, primarily the receipt of an income tax refund of approximately $20 million during the current quarter. Earnings were insufficient to cover fixed charges by $36.2 million and $4.0 million for the 16-week periods ended May 21, 2001 and May 22, 2000, respectively. Excluding the effect of the repositioning charges discussed above, earnings would be insufficient to cover fixed charges by $4.1 million and $4.9 million for the 16-week periods ended May 21, 2001 and May 22, 2000, respectively. Investing activities generated $26.4 million, primarily as a result of proceeds from the sale of company-operated restaurants and other surplus properties. Financing activities used $54.4 million, most of which was for net repayments on our senior credit facility during the quarter. Under our senior credit facility, borrowings 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 (8.31% at May 21, 2001), with future margin adjustments dependent on certain financial ratios from time to time. However, as of June 30, 2001, the Company can only borrow at a rate of interest equal to the prime rate plus the applicable margin on all outstanding borrowings. 13 15 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 21, 2001 (Continued) Our senior credit facility contains restrictions on our ability to incur additional indebtedness, repurchase stock or subordinated debt, pay dividends and incur liens on our assets, subject to specified exceptions and requirements that we satisfy specified financial tests as a precondition to acquisition of other businesses. We have since amended our senior credit facility, effective January 31, 2000, August 14, 2000, January 29, 2001 and April 13, 2001, to amend certain of the covenants contained therein. 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 our restaurants. The senior credit facility, as amended, also prohibits us from purchasing shares of our common stock, repurchasing any of our senior subordinated notes or convertible notes, from prepaying subordinated indebtedness and from paying cash dividends. In addition, capital expenditure limits were reduced and construction of new restaurants is limited to construction already begun or committed to begin and we are required to comply with minimum EBITDA requirements. As a result of the amendments, the final maturity date of the senior credit facility was changed to February 1, 2002, and the interest rate payable on outstanding borrowings was increased. As of June 30, 2001, we can only borrow at a rate of interest equal to the prime rate plus the applicable margin on all outstanding borrowings. We believe that the impact of this increase in pricing will be significantly offset by a decrease in outstanding borrowings. Also as a result of not achieving certain asset sale requirements, we have agreed to provide our lenders with specific collateral of our subsidiaries, consisting primarily of mortgages on a portion of our real properties, as well as the stock of our subsidiaries, which was already held as collateral. In the event the senior credit facility is declared accelerated, our 9-1/8% senior subordinated notes due 2009 and our 4.25% convertible subordinated notes due 2004 may also become accelerated under certain circumstances and after all cure periods have expired. As a result of the shortening of the maturity date, the total amount outstanding under the senior credit facility of $120.0 million as of May 21, 2001 has been classified as a current liability on the consolidated balance sheet. Subsequent to the end of the first quarter, we completed the sale of our Taco Bueno concept to an affiliate of Jacobson Partners. The net proceeds from the sale of $61.2 million were used to repay indebtedness under our senior credit facility. The availability of capital sources will depend upon prevailing market conditions, interest rates and our then-existing financial position. We believe that cash generated from our various restaurant concept operations, the sale of company-operated restaurants to new and existing franchisees and the sale of existing surplus properties along with cash and cash equivalents on hand as of May 21, 2001, and amounts available under our senior credit facility, will provide the funds necessary to meet all of our capital spending and working capital requirements for the foreseeable future. As of May 21, 2001, we had $45.7 million of borrowings available to us under our senior credit facility. The Company is currently actively pursuing strategies to refinance its senior credit facility as quickly as possible that may include mortgaging many of its owned and ground leased properties. There can be no assurance that this refinancing or any other will be completed. 14 16 CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 21, 2001 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 (since reduced to $216.3 million pursuant to asset sales), of which $120.0 million remained outstanding as of May 21, 2001. 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 2002). A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction of approximately $1.2 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 May 21, 2001. 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 17 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 12-1 Computation of Ratios (b) Current Reports on Form 8-K: The Company filed a Current Report on Form 8-K on March 20, 2001, announcing that it had reached a definitive agreement to sell its Taco Bueno subsidiary to an affiliate of Jacobson Partners. 16 18 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 3, 2001 /s/ Dennis J. Lacey ------------ ---------------------------------- Date Chief Financial Officer 17 19 EXHIBIT INDEX Exhibit # Description --------- ----------- 12-1 Computation of Ratios