SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarter ended November 3, 2003
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission file number 1-11313
CKE RESTAURANTS, INC.
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
33-0602639 (I.R.S. Employer Identification No.) |
|
| 6307 Carpinteria Avenue, Ste. A, Carpinteria, CA (Address of Principal Executive Offices) |
93013 (Zip Code) |
Registrant’s telephone number, including area code: (805) 745-7500
Former Name, Former Address and Former Fiscal Year, if changed since last report.
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o
As of December 1, 2003, 57,613,086 shares of the Registrant’s Common Stock were outstanding.
CKE RESTAURANTS, INC. AND SUBSIDIARIES
INDEX
| Page | ||||||||
| Part I. Financial Information |
||||||||
| Item 1 | Condensed Consolidated Financial Statements (unaudited): | |||||||
| Condensed Consolidated Balance Sheets as of November 3, 2003 and January 31, 2003 | 3 | |||||||
| Condensed Consolidated Statements of Operations for the twelve weeks and forty weeks ended | 4 | |||||||
| November 3, 2003 and November 4, 2002 | ||||||||
| Condensed Consolidated Statement of Stockholders' Equity for the forty weeks ended | 5 | |||||||
| November 3, 2003 | ||||||||
| Condensed Consolidated Statements of Cash Flows for the forty weeks ended November 3, 2003 | 6 | |||||||
| and November 4, 2002 | ||||||||
| Notes to Condensed Consolidated Financial Statements | 7 | |||||||
| Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | ||||||
| Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 46 | ||||||
| Item 4 | Controls and Procedures | 47 | ||||||
| Part II. Other Information |
||||||||
| Item 2 | Changes in Securities and Use of Proceeds | 48 | ||||||
| Item 6 | Exhibits and Reports on Form 8-K | 49 | ||||||
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
| November 3, 2003 | January 31, 2003 | |||||||||
| ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 25,680 | $ | 18,440 | ||||||
Accounts receivable, net |
27,558 | 40,593 | ||||||||
Related party trade receivables |
6,254 | 5,106 | ||||||||
Inventories |
17,877 | 19,224 | ||||||||
Prepaid expenses |
11,622 | 16,325 | ||||||||
Assets held for sale |
16,734 | 21,170 | ||||||||
Other current assets |
1,500 | 1,492 | ||||||||
Total current assets |
107,225 | 122,350 | ||||||||
Notes receivable |
3,622 | 3,891 | ||||||||
Property and equipment, net |
537,943 | 553,325 | ||||||||
Property under capital leases, net |
55,693 | 59,014 | ||||||||
Goodwill |
56,708 | 56,708 | ||||||||
Other assets |
36,889 | 48,185 | ||||||||
Total assets |
$ | 798,080 | $ | 843,473 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Bank indebtedness |
$ | — | $ | 25,000 | ||||||
Convertible subordinated notes |
22,319 | — | ||||||||
Current portion of capital lease obligations |
8,103 | 9,782 | ||||||||
Accounts payable |
44,649 | 56,968 | ||||||||
Other current liabilities |
105,943 | 102,052 | ||||||||
Total current liabilities |
181,014 | 193,802 | ||||||||
Capital lease obligations, less current portion |
59,073 | 62,518 | ||||||||
Senior subordinated notes |
200,000 | 200,000 | ||||||||
Convertible subordinated notes due 2004 |
— | 122,319 | ||||||||
Convertible subordinated notes due 2023 |
105,000 | — | ||||||||
Other long-term liabilities |
55,691 | 71,260 | ||||||||
Total liabilities |
600,778 | 649,899 | ||||||||
Stockholders’ equity: |
||||||||||
Preferred stock, $.01 par value; authorized 5,000,000 shares; none
issued and
outstanding |
— | — | ||||||||
Common stock, $.01 par value; authorized 100,000,000 shares; issued
and outstanding 59,193,000 and 58,868,000 shares at November 3,
2003 and January 31, 2003, respectively |
592 | 589 | ||||||||
Additional paid-in capital |
464,598 | 463,474 | ||||||||
Non-employee director and officer notes receivable |
(2,530 | ) | (2,530 | ) | ||||||
Accumulated deficit |
(254,952 | ) | (257,553 | ) | ||||||
Treasury stock at cost, 1,585,000 shares |
(10,406 | ) | (10,406 | ) | ||||||
Total stockholders’ equity |
197,302 | 193,574 | ||||||||
Total liabilities and stockholders’ equity |
$ | 798,080 | $ | 843,473 | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
3
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||
| November 3, 2003 | November 4, 2002 | November 3, 2003 | November 4, 2002 | ||||||||||||||||
Revenue: |
|||||||||||||||||||
Company-operated restaurants |
$ | 271,026 | $ | 255,865 | $ | 881,237 | $ | 867,144 | |||||||||||
Franchised and licensed restaurants and other |
63,751 | 56,964 | 206,817 | 197,653 | |||||||||||||||
Total revenue |
334,777 | 312,829 | 1,088,054 | 1,064,797 | |||||||||||||||
Operating costs and expenses: |
|||||||||||||||||||
Restaurant operations: |
|||||||||||||||||||
Food and packaging |
81,600 | 73,735 | 262,549 | 249,549 | |||||||||||||||
Payroll and other employee benefit expenses |
86,687 | 81,402 | 284,232 | 277,565 | |||||||||||||||
Occupancy and other operating expenses |
60,465 | 59,491 | 201,356 | 191,141 | |||||||||||||||
| 228,752 | 214,628 | 748,137 | 718,255 | ||||||||||||||||
Franchised and licensed restaurants and other |
49,962 | 43,105 | 163,376 | 150,561 | |||||||||||||||
Advertising expenses |
16,719 | 16,710 | 54,302 | 55,472 | |||||||||||||||
General and administrative expenses |
25,777 | 27,271 | 82,232 | 88,292 | |||||||||||||||
Facility action charges, net |
1,301 | 765 | 3,193 | 5,827 | |||||||||||||||
Total operating costs and expenses |
322,511 | 302,479 | 1,051,240 | 1,018,407 | |||||||||||||||
Operating income |
12,266 | 10,350 | 36,814 | 46,390 | |||||||||||||||
Interest expense |
(9,947 | ) | (9,588 | ) | (31,149 | ) | (32,321 | ) | |||||||||||
Other income (expense), net |
(76 | ) | 3,904 | (487 | ) | 11,806 | |||||||||||||
Income before income taxes, discontinued operations and
cumulative effect of accounting change for goodwill |
2,243 | 4,666 | 5,178 | 25,875 | |||||||||||||||
Income tax expense (benefit) |
192 | (5,393 | ) | 622 | (8,143 | ) | |||||||||||||
Income from continuing operations |
2,051 | 10,059 | 4,556 | 34,018 | |||||||||||||||
Income (loss) from operations of discontinued segment
(net of income tax benefit of $21, $30, $47 and
$26 for the twelve-week periods ended November 3, 2003
and November 4, 2002, and the forty-week periods ended
November 3, 2003 and November 4, 2002, respectively) |
111 | (556 | ) | (1,955 | ) | (568 | ) | ||||||||||||
Income before cumulative effect of accounting change for
goodwill |
2,162 | 9,503 | 2,601 | 33,450 | |||||||||||||||
Cumulative effect of accounting change for goodwill |
— | — | — | (175,780 | ) | ||||||||||||||
Net income (loss) |
$ | 2,162 | $ | 9,503 | $ | 2,601 | $ | (142,330 | ) | ||||||||||
Basic income (loss) per common share: |
|||||||||||||||||||
Continuing operations |
$ | 0.04 | $ | 0.18 | $ | 0.07 | $ | 0.60 | |||||||||||
Discontinued operations (including loss on discontinued
segment) |
— | (0.01 | ) | (0.03 | ) | (0.01 | ) | ||||||||||||
Income before cumulative effect of accounting
change for goodwill |
0.04 | 0.17 | 0.04 | 0.59 | |||||||||||||||
Cumulative effect of accounting change for goodwill |
— | — | — | (3.11 | ) | ||||||||||||||
Net income (loss) |
$ | 0.04 | $ | 0.17 | $ | 0.04 | $ | (2.52 | ) | ||||||||||
Diluted income (loss) per common share: |
|||||||||||||||||||
Continuing operations |
$ | 0.04 | $ | 0.17 | $ | 0.07 | $ | 0.59 | |||||||||||
Discontinued operations (including loss on
discontinued segment) |
— | (0.01 | ) | (0.03 | ) | (0.01 | ) | ||||||||||||
Income before cumulative effect of accounting
change for goodwill |
0.04 | 0.16 | 0.04 | 0.58 | |||||||||||||||
Cumulative effect of accounting change for goodwill |
— | — | — | (3.03 | ) | ||||||||||||||
Net income (loss) |
$ | 0.04 | $ | 0.16 | $ | 0.04 | $ | (2.45 | ) | ||||||||||
Weighted-average common shares outstanding: |
|||||||||||||||||||
Basic |
59,183 | 57,243 | 59,096 | 56,483 | |||||||||||||||
Dilutive effect of stock options |
1,304 | 1,896 | 1,063 | 1,610 | |||||||||||||||
Diluted |
60,487 | 59,139 | 60,159 | 58,093 | |||||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
4
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| Forty Weeks Ended November 3, 2003 | |||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||
| Non- | |||||||||||||||||||||||||||||||||
| Employee | |||||||||||||||||||||||||||||||||
| Additional | Director and | Total | |||||||||||||||||||||||||||||||
| Number of | Paid-In | Officer Notes | Accumulated | Number of | Stockholders' | ||||||||||||||||||||||||||||
| Shares | Amount | Capital | Receivable | Deficit | Shares | Amount | Equity | ||||||||||||||||||||||||||
Balance at January 31, 2003 |
58,868 | $ | 589 | $ | 463,474 | $ | (2,530 | ) | $ | (257,553 | ) | (1,585 | ) | $ | (10,406 | ) | $ | 193,574 | |||||||||||||||
Exercise of stock options |
325 | 3 | 1,124 | — | — | — | — | 1,127 | |||||||||||||||||||||||||
Net income |
— | — | — | — | 2,601 | — | — | 2,601 | |||||||||||||||||||||||||
Balance at November 3, 2003 |
59,193 | $ | 592 | $ | 464,598 | $ | (2,530 | ) | $ | (254,952 | ) | (1,585 | ) | $ | (10,406 | ) | $ | 197,302 | |||||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
5
CKE RESTAURANTS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Forty Weeks Ended | ||||||||||||
| November 3, 2003 | November 4, 2002 | |||||||||||
Cash flow from operating activities: |
||||||||||||
Net income (loss) |
$ | 2,601 | $ | (142,330 | ) | |||||||
Adjustments to reconcile net income (loss) to cash provided by
operating activities (excluding effects of acquisition in 2002): |
||||||||||||
Cumulative effect of accounting change for goodwill |
— | 175,780 | ||||||||||
Depreciation and amortization |
49,347 | 48,013 | ||||||||||
Amortization of loan fees |
3,618 | 3,199 | ||||||||||
Provision (recovery) for losses on accounts and notes receivable |
1,980 | (793 | ) | |||||||||
(Gain) loss on investments, sale of property and equipment, capital
leases and extinguishment of debt |
541 | (10,811 | ) | |||||||||
Facility action charges, net |
3,193 | 5,827 | ||||||||||
Other non-cash items |
(383 | ) | 8 | |||||||||
Income tax refund accrued |
— | (8,852 | ) | |||||||||
Income tax refund received |
723 | 12,724 | ||||||||||
Change in estimated liability for closing restaurants, estimated liability
for self-insurance and other long-term liabilities |
(4,694 | ) | (14,732 | ) | ||||||||
Net change in accounts receivable, inventories, prepaid expenses and
other current assets |
10,592 | (875 | ) | |||||||||
Net change in accounts payable and other current liabilities |
(6,133 | ) | 7,780 | |||||||||
Loss from operations of discontinued segment |
1,955 | 568 | ||||||||||
Cash provided to discontinued segment |
(237 | ) | (2,234 | ) | ||||||||
Cash provided by operating activities |
63,103 | 73,272 | ||||||||||
Cash flow from investing activities: |
||||||||||||
Purchases of property and equipment |
(32,995 | ) | (43,768 | ) | ||||||||
Proceeds from sale of: |
||||||||||||
Marketable securities and long-term investments |
— | 8,959 | ||||||||||
Property and equipment |
12,451 | 16,051 | ||||||||||
Collections on notes receivable and related party receivables |
4,884 | 960 | ||||||||||
Cash received from acquisition, net of payments made to acquire SBRG |
— | 1,368 | ||||||||||
Net change in other assets |
968 | 322 | ||||||||||
Cash used in investing activities |
(14,692 | ) | (16,108 | ) | ||||||||
Cash flow from financing activities: |
||||||||||||
Net change in bank overdraft |
(7,566 | ) | (9,874 | ) | ||||||||
Long-term borrowings |
149,500 | 74,500 | ||||||||||
Repayments of long-term debt |
(274,500 | ) | (101,540 | ) | ||||||||
Repayments of capital lease obligations |
(7,868 | ) | (8,163 | ) | ||||||||
Collections on non-employee director and officer notes receivable |
— | 1,555 | ||||||||||
Payment of deferred financing costs |
(968 | ) | (5,366 | ) | ||||||||
Net change in other long-term liabilities |
(2,484 | ) | (1,667 | ) | ||||||||
Proceeds from issuance of convertible debt |
101,588 | — | ||||||||||
Proceeds from exercise of stock options |
1,127 | 1,250 | ||||||||||
Cash used in financing activities |
(41,171 | ) | (49,305 | ) | ||||||||
Increase in cash and cash equivalents |
7,240 | 7,860 | ||||||||||
Cash and cash equivalents at beginning of period |
18,440 | 24,642 | ||||||||||
Cash and cash equivalents at end of period |
$ | 25,680 | $ | 32,502 | ||||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash (paid) received during the period for: |
||||||||||||
Interest |
$ | (33,397 | ) | $ | (34,265 | ) | ||||||
Income taxes |
$ | (1,521 | ) | $ | 11,854 | |||||||
Non-cash investing and financing activities: |
||||||||||||
Gain recognized on sale and leaseback transactions |
$ | 232 | $ | 237 | ||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
6
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE (1) BASIS OF PRESENTATION
CKE Restaurants, Inc. (“CKE” or the “Company”), through its wholly-owned subsidiaries, owns, operates, franchises and licenses the Carl’s Jr.®, Hardee’s®, The Green Burrito® (“Green Burrito”) and La Salsa Fresh Mexican Grill® (“La Salsa”) concepts. Carl’s Jr. restaurants are primarily located in the Western United States. Hardee’s restaurants are located throughout the Southeastern and Midwestern United States. Green Burrito restaurants are located in California, primarily in dual-brand Carl’s Jr. restaurants. La Salsa restaurants are primarily located in California. As of November 3, 2003, the Company’s system-wide restaurant portfolio consisted of:
| Carl's Jr. | Hardee's | La Salsa | Other | Total | ||||||||||||||||
Company-operated |
440 | 721 | 60 | 4 | 1,225 | |||||||||||||||
Franchised and licensed |
563 | 1,413 | 40 | 17 | 2,033 | |||||||||||||||
Total |
1,003 | 2,134 | 100 | 21 | 3,258 | |||||||||||||||
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of CKE and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements should be read in conjunction with the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for the fiscal year ended January 27, 2003. 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 for the full year or for any future period.
For clarity of presentation, the Company generally labels all fiscal year ends as fiscal year ended January 31.
Prior year amounts in the consolidated financial statements have been reclassified to conform with current year presentation.
Stock-Based Compensation
The Company has various stock-based compensation plans that provide options for certain employees and outside directors to purchase common shares of the Company. The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS 148”). SFAS 148 amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), to provide alternative methods of transition for a voluntary change to the fair-value method for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
For purposes of the following pro forma disclosures required by SFAS 148 and SFAS 123, the fair value of each option has been estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the value of an estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
7
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
The assumptions used for grants in the twelve week and forty week periods ended November 3, 2003 and November 4, 2002 are as follows:
| November 3, 2003 | November 4, 2002 | ||||||||
Annual dividends |
$ | — | $ | — | |||||
Expected volatility |
140.0 | % | 69.5 | % | |||||
Risk-free interest rate (matched to the expected
term of the outstanding
option) |
2.99 | % | 3.64 | % | |||||
Expected life of all options outstanding (years) |
5.45 | 5.45 | |||||||
Weighted-average fair value of each option granted |
|||||||||
Twelve weeks ended |
$ | 6.08 | $ | — | |||||
Forty weeks ended |
$ | 5.20 | $ | 6.90 | |||||
The assumptions used to determine the fair value of each option granted are highly subjective. Changes in the assumptions used would affect the fair value of the options granted as follows:
| Increase (Decrease) in Fair Value of Options Granted | ||||||||||||
| Twelve Weeks Ended | Forty Weeks Ended | Forty Weeks Ended | ||||||||||
| Change in Assumption | November 3, 2003 | November 3, 2003 | November 4, 2002 | |||||||||
10% increase in expected volatility |
$ | 0.14 | $ | 0.12 | $ | 0.64 | ||||||
1% increase in risk-free interest rate |
$ | 0.02 | $ | 0.01 | $ | 0.12 | ||||||
10% decrease in expected volatility |
$ | (0.17 | ) | $ | (0.14 | ) | $ | (0.69 | ) | |||
1% decrease in risk-free interest rate |
$ | (0.02 | ) | $ | (0.02 | ) | $ | (0.12 | ) | |||
The following tables reconcile reported net income (loss) to pro forma net income (loss) assuming compensation expense for stock-based compensation had been recognized in accordance with SFAS 123:
| Twelve Weeks Ended | |||||||||
| November 3, 2003 | November 4, 2002 | ||||||||
Net income, as reported |
$ | 2,162 | $ | 9,503 | |||||
Add: Stock-based employee compensation expense included in
reported net income |
— | — | |||||||
Deduct: Total stock-based employee compensation expense
determined under
fair value based method, net of related tax effects |
(892 | ) | (729 | ) | |||||
Net income — pro forma |
$ | 1,270 | $ | 8,774 | |||||
Income per common share: |
|||||||||
Basic — as reported |
$ | 0.04 | $ | 0.17 | |||||
Basic — pro forma |
$ | 0.02 | $ | 0.15 | |||||
Diluted — as reported |
$ | 0.04 | $ | 0.16 | |||||
Diluted — pro forma |
$ | 0.02 | $ | 0.15 | |||||
8
CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
| Forty Weeks Ended | |||||||||
| November 3, 2003 | November 4, 2002 | ||||||||
Net income (loss), as reported |
$ | 2,601 | $ | (142,330 | ) | ||||
Add: Stock-based employee compensation expense included in
reported net income (loss) |
— | — | |||||||
Deduct: Total stock-based employee compensation expense determined
under fair value based method, net of related tax effects |
(2,520 | ) | (2,141 | ) | |||||
Net income (loss) — pro forma |
$ | 81 | $ | (144,471 | ) | ||||
Income (loss) per common share: |
|||||||||
Basic — as reported |
$ | 0.04 | $ | (2.52 | ) | ||||
Basic — pro forma |
$ | 0.00 | $ | (2.56 | ) | ||||
Diluted — as reported |
$ | 0.04 | $ | (2.45 | ) | ||||
Diluted — pro forma |
$ | 0.00 | $ | (2.49 | ) | ||||
NOTE (2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
During the first quarter of fiscal 2004, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 addresses the financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS 143 did not have a material effect on the Company’s consolidated financial statements.
During the first quarter of fiscal 2004, the Company adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement 13 and Technical Corrections (“SFAS 145”). As permitted, the Company had previously implemented the provisions of SFAS 145 regarding debt extinguishment in the first quarter of fiscal 2003. SFAS 145 eliminates the presumption of classification of debt extinguishment activity as an extraordinary item, eliminates inconsistencies in lease modification treatment and makes various technical corrections or clarifications of other existing authoritative pronouncements. The adoption of SFAS 145 did not have a material effect on the Company’s consolidated financial statements.
During the first quarter of fiscal 2004, the Company adopted Emerging Issues Task Force No. 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor (“EITF 02-16”). EITF 02-16 provides guidance on the recognition of cash consideration received by a customer from a vendor and is effective for transactions entered into or modified after December 31, 2002. The Company’s initial adoption of EITF 02-16 did not have a material effect on the Company’s consolidated financial statements.
During the third quarter of fiscal 2004, the Company adopted Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS 149”). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material effect on the Company’s financial position or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”).
SFAS 150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. This Statement was originally effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatorily redeemable financial instruments of nonpublic
9
CKE RESTAURANTS, INC. AND SUBSIDIARIES entities. For mandatorily redeemable non-controlling interests, the measurement
provisions of SFAS 150 have been
deferred indefinitely. The adoption of this standard did not have a material
effect on the Company’s financial position or results of operations.
NOTE (3) ACQUISITION
On March 1, 2002, the Company acquired Santa Barbara Restaurant Group, Inc.
(“SBRG”). SBRG owns, operates and franchises the Green Burrito, La Salsa and
Timber Lodge restaurant chains. At the time of acquisition, as a result of the
Company’s dual-branding relationship with GB Franchise Corporation, an indirect
wholly-owned subsidiary of SBRG, Carl’s Jr. had been SBRG’s largest franchisee.
The Company acquired SBRG for strategic purposes, which included gaining
control of the Green Burrito brand, eliminating the payment of royalties on
franchised Green Burrito restaurants, investing in the fast-casual segment,
which is an emerging competitor to the quick-service restaurant segment, and
providing the Company with a growth opportunity in the “Fresh Mex” segment with
La Salsa. The results of operations of SBRG are included in the operating
results for the twelve week and forty week periods ended November 3, 2003, the
twelve week period ended November 4, 2002 and the period from March 1, 2002
(date of acquisition) through November 4, 2002. The purchase price consisted of
6,352,000 shares of the Company’s common stock, warrants to purchase 982,000
shares of the Company’s common stock and options to purchase 1,679,000 shares
of the Company’s common stock, valued in total at $78,815 as of the closing,
plus transaction costs of $1,465.
The final allocation of the purchase price to the assets acquired, including
the goodwill and liabilities assumed in the acquisition of SBRG are as follows:
The Company has made adjustments to the initial purchase price allocation, the
impact of which was immaterial to the Company’s results of operations, as
follows:
10
CKE RESTAURANTS, INC. AND SUBSIDIARIES The Company acquired identifiable intangible assets as a result of the
acquisition of SBRG. The intangible assets acquired, included in other assets
above, excluding goodwill, are classified and valued as follows:
Amortization expense related to identifiable intangible assets acquired as a
result of the acquisition of SBRG was approximately $322, $1,074, $317 and $925
for the twelve week and forty week periods ended November 3, 2003, the twelve
week period ended November 4, 2002 and the period from March 1, 2002 (the date
of acquisition) through November 4, 2002, respectively.
Selected unaudited pro forma combined results of operations for the forty weeks
ended November 4, 2002, assuming the SBRG acquisition occurred on January 30,
2002, using actual restaurant-level margins and general and administrative
expenses prior to the acquisition, are as follows:
NOTE (4) INDEBTEDNESS AND RELATED INTEREST EXPENSE
As of November 3, 2003, the Company’s senior credit facility (“Facility”)
consisted of a $100,000 revolving credit facility, which included a $75,000
letter of credit sub-facility, and was scheduled to mature December 14, 2003.
As of November 3, 2003, the total cash borrowings outstanding under the
Facility were $0, outstanding letters of credit
11
CKE RESTAURANTS, INC. AND SUBSIDIARIES were $62,481 and the availability was $37,519. On November 12, 2003, the
Company amended and restated the Facility. The new Facility consists of a
$150,000 revolving credit facility and a $25,000 term loan. The revolving
portion of the Facility includes an $80,000 letter of credit sub-facility and
matures November 15, 2006. The principal amount of the term loan portion of the
Facility will be repaid in quarterly installments maturing on April 1, 2008,
and will be used to repay the still-outstanding portion of the Company’s 4.25%
Convertible Subordinated Notes due 2004 (“2004 Convertible Notes”) at their
maturity on March 15, 2004. The Facility includes certain restrictive
covenants, including restrictions on the Company’s ability to incur debt, incur
liens on its assets, dispose of assets or make any significant changes to its
corporate structure or the nature of its business. Additionally, the Facility
includes financial covenants requiring minimum earnings before interest, taxes,
depreciation and amortization (“EBITDA”) and limiting the amount available to
the Company for capital expenditures.
On September 29, 2003, the Company completed an offering of $105,000 of its 4%
Convertible Subordinated Notes due 2023 (“2023 Convertible Notes”). Nearly all
of the net proceeds of the offering of $101,588 were used to repurchase
$100,000 of the 2004 Convertible Notes. The 2023 Convertible Notes bear
interest at the annual rate of 4.0%, payable in semiannual installments due
April 1 and October 1 each year. The 2023 Convertible Notes are unsecured
general obligations of the Company and are contractually subordinate in right
of payment to certain other Company obligations, including the Facility and the
Company’s 9.125% Senior Subordinated Notes due 2009 (“Senior Notes”). On
October 1 of 2008, 2013 and 2018, holders of the 2023 Convertible Notes have
the right to require the Company to repurchase all or a portion of the notes at
prices specified in the related indenture. The 2023 Convertible Notes are
convertible into the Company’s common stock at a conversion rate of 112.4859
shares per one thousand dollars principal balance of the 2023 Convertible Notes
upon the conditions set forth in the related indenture, which is being filed
with the Securities and Exchange Commission as an exhibit to this report. The
2023 Convertible Notes were not convertible during the period September 29,
2003 through November 3, 2003.
During the twelve and forty week periods ended November 3, 2003, the Company
repurchased $100,000 (face value) of the 2004 Convertible Notes for $100,708,
which included a call premium of $708. That transaction resulted in the
recognition of a loss on the retirement of debt of $708, which is recorded as
other expense, net in the consolidated financial statements.
During the twelve weeks ended November 4, 2002, the Company repurchased $5,545
(face value) of the 2004 Convertible Notes for $4,817, at various prices
ranging from $85.25 to $91.75. Those transactions resulted in the recognition
of a gain on the retirement of debt of $728. During the forty weeks ended
November 4, 2002, the Company repurchased $22,741 (face value) of the 2004
Convertible Notes for $20,299, at various prices ranging from $85.25 to $91.75.
Those transactions resulted in the recognition of a gain on the retirement of
debt in the amount of $2,442.
Gains and losses on the retirement of debt are recorded as other income
(expense), net in the accompanying Condensed Consolidated Statements of
Operations.
Interest expense consists of the following:
NOTE (5) FACILITY ACTION CHARGES, NET
In late fiscal 2000, the Company embarked on a refranchising initiative to
reduce outstanding borrowings under the Facility, as well as to increase the
number of franchise-operated restaurants. In addition, the Company identified
and
12
CKE RESTAURANTS, INC. AND SUBSIDIARIES closed under-performing restaurants. The results of these strategies have
caused the following transactions to be recorded in the Condensed Consolidated
Financial Statements as facility action charges, net:
On a quarterly basis, the Company evaluates the adequacy of its estimated
liability for closing restaurants and subsidizing restaurant lease payments to
franchisees and modifies the assumptions used based on actual results from
selling surplus properties and terminating leases, and estimated property
values obtained from a related party real estate broker. The Company closed
nine Hardee’s company-operated restaurants and three Carl’s Jr.
company-operated restaurants during the twelve weeks ended November 3, 2003.
The Company closed 13 Hardee’s, two La Salsa and four Carl’s Jr.
company-operated restaurants during the forty weeks ended November 3, 2003. The
Company closed three Hardee’s company-operated restaurants during the twelve
weeks ended November 4, 2002. The Company closed 17 Hardee’s company-operated
restaurants and three Carl’s Jr. company-operated restaurants during the forty
weeks ended November 4, 2002.
The components of facility action charges, net are as follows:
13
CKE RESTAURANTS, INC. AND SUBSIDIARIES The following table is a summary of the activity in the estimated liability for
closing restaurants:
The following table summarizes sales and operating losses related to the
restaurants the Company closed during the twelve weeks ended November 3, 2003:
14
CKE RESTAURANTS, INC. AND SUBSIDIARIES The following table summarizes sales and operating losses related to the
restaurants the Company closed during the forty weeks ended November 3, 2003:
NOTE (6) INCOME (LOSS) PER SHARE
The Company presents “basic” income or loss per share, which represents net
income or loss divided by the weighted average shares outstanding, and
“diluted” income or loss per share, which includes the effect of all
potentially dilutive common shares. Potentially dilutive common shares are
considered in the computation of diluted net loss per share for the forty weeks
ended November 4, 2002, because they are dilutive to income before the
cumulative effect of accounting change for goodwill.
The following table presents the number of potentially dilutive shares, in
thousands, of the Company’s common stock excluded from the computation of
diluted earnings per share:
Potentially dilutive shares related to the 2004 Convertible Notes, stock
options and warrants were excluded as their effect would have been
anti-dilutive. Potentially dilutive shares related to the 2023 Convertible
Notes were excluded because the notes were not convertible during the period
and their effect would have been anit-dilutive.
NOTE (7) SEGMENT INFORMATION
The Company principally is engaged in developing, operating and franchising its
Carl’s Jr., Hardee’s and La Salsa quick-service restaurants, each of which is
considered an operating segment that is managed and evaluated separately.
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 allocated to each segment based on management’s analysis of the
resources applied to each segment. Interest expense related to the Facility,
Senior Notes, 2004 Convertible Notes and 2023 Convertible Notes is allocated to
Hardee’s based on the use of funds. Certain amounts that the Company does not
believe would be proper to allocate to the operating segments are included in
“Other” (i.e., gains or losses on sales of long-term investments). The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1 of Notes to Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year
ended January 31, 2003).
15
CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTE (8) NET ASSETS HELD FOR SALE
In conjunction with the acquisition of SBRG, the Company made the decision to
divest Timber Lodge as the concept does not fit with the Company’s core
concepts of quick-service and fast-casual restaurants. During the first quarter
of fiscal 2004, the Company received an offer to purchase Timber Lodge in a
transaction that would generate net proceeds of approximately $10,000. We
continue to negotiate with the interested party. We are currently evaluating
our plans for Timber Lodge, including an assessment of whether to continue
active efforts to divest. Net assets held for sale consisted of the following
at November 3, 2003:
16
CKE RESTAURANTS, INC. AND SUBSIDIARIES The operating results of Timber Lodge included in the Condensed Consolidated
Statements of Operations as income (loss) from operations of discontinued
segment are as follows:
NOTE (9) RELATED PARTY TRANSACTIONS
In the past we have made relocation loans to officers of the Company, and we
occasionally make relocation loans to other employees (excluding officers and
directors). Relocation loans are forgiven over time if the employee remains an
employee of the Company for a specific term, typically three to five years.
As of November 3, 2003, there were eight relocation loans outstanding with an
aggregate balance of $205. For the twelve and forty weeks ended November 3,
2003, the amount forgiven, including interest, for all such employees, was
approximately $26 and $174, respectively. Additionally, one outstanding loan in
the amount of $64 was repaid in cash during the forty weeks ended November 3,
2003.
As of November 4, 2002, there were nine relocation loans outstanding with an
aggregate balance of $440. During the twelve and forty weeks ended November 3,
2003, the amount forgiven, including interest, for all such employees was
approximately $0 and $141, respectively.
During the forty weeks ended November 4, 2002, certain loans made under the
Employee Stock Purchase Loan Plan and the Non-Employee Director Stock Purchase
Loan Program (collectively the “Programs”), were fully collected in cash. The
amounts repaid totaled $1,555.
17
CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTE (10) OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following:
NOTE (11) INCOME TAXES
Income taxes for the interim periods were computed using the effective tax rate
estimated for the full fiscal year.
For the twelve weeks and forty weeks ended November 3, 2003, the Company
recorded an income tax expense of $192 and $622, respectively, which consisted
of foreign taxes.
During the twelve weeks and forty weeks ended November 4, 2002, the Company
recorded income tax benefits of $5,393 and $8,143, respectively. The income tax
benefits were a result of changes in existing tax laws whereby the Company was
allowed to carry back certain operating losses to prior years in which the
Company had taxable income.
At November 3, 2003, the Company had a federal net operating loss (“NOL”)
carryforward of approximately $83,400, expiring in varying amounts in the years
2021 through 2023 and state NOL carryforwards in the amount of $71,500 expiring
in the years 2006 through 2023. The Company has a federal NOL carryforward for
alternative minimum tax purposes of approximately $61,235. Additionally, the
Company has an alternative minimum tax credit carryforward of approximately
$7,300. The Company has generated general business credit carryforwards of
approximately $9,700, expiring in varying amounts in the years 2020 through
2023, and foreign tax credits in the amount of $1,400, which expire in the
years 2005 through 2008.
NOTE (12) NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
During January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 (“FIN 46”). FIN 46
addresses the consolidation of entities whose equity holders have either (a)
not provided sufficient equity at risk to allow the entity to finance its own
activities or (b) do not possess certain characteristics of a controlling
financial interest. FIN 46 requires the consolidation of these entities, known
as variable interest entities (“VIE’s”), by the primary beneficiary of the
entity. The primary beneficiary is the entity, if any, that is subject to a
majority of the risk of loss from the VIE’s activities, entitled to receive a
majority of the VIE’s residual returns, or both. FIN 46 applies immediately to
variable interests in VIEs created or obtained after January 31, 2003. The
Company has not entered into any material variable interest arrangements since
January 31, 2003. As amended by FASB Staff Position (“FSP”) No. FIN 46-6, FIN
46 is effective for variable interests in a VIE created before February 1, 2003
at the end of the first interim or annual period ending after December 15, 2003
(the end of fiscal 2004, or January 26, 2004, for the Company). FIN 46 requires
certain disclosures in financial statements issued after January 31, 2003 if it
is reasonably possible that the Company will consolidate or disclose
information about variable interest entities when FIN 46 becomes effective.
The Company utilizes various advertising funds (“Funds”) to administer its
advertising programs. The Carl’s Jr. National Advertising Fund (“CJNAF”) is
Carl’s Jr.’s sole cooperative advertising program. The Company consolidates
CJNAF into its financial statements on a net basis, whereby contributions from
franchisees, when received, are recorded as offsets to the Company’s reported
advertising expenses. The Hardee’s cooperative advertising funds consist of the
Hardee’s National Advertising Fund (“HNAF”) and many local advertising
cooperative funds
18
CKE RESTAURANTS, INC. AND SUBSIDIARIES (“Co-op Funds”). Each of these funds is a separate non-profit
association with all proceeds segregated and managed by a third-party accounting service company. The Company
has determined that consolidation of all of its advertising funds is
appropriate under FIN 46. The Company has historically consolidated the Carl’s
Jr. advertising fund. However, the Hardee’s advertising funds will be newly
consolidated.
The Company has determined the impact of the consolidation of HNAF and the
Co-op Funds will be an increase of approximately $20,000 to current assets and
current liabilities. The Company does not anticipate the consolidation of the
funds will have a material impact to the Company’s results of operations or
stockholders’ equity.
As of the date of this filing, the Company understands the FASB is in the
process of modifying and/or clarifying certain provisions of FIN 46.
Additionally, one FSP relating to FIN 46 is currently being deliberated. These
modifications and the FSP when finalized, could impact the Company’s analysis
of the applicability of FIN 46 to entities that are franchisees of our
concepts. The Company is aware of certain interpretations of FIN 46 by some
parties during its continuing evolution, which could have applicability when
certain conditions exist that are not representative of a typical franchise
relationship. These conditions include the franchisor possessing an equity or
other financial interest in or providing significant levels of financial
support to a franchisee. We do not possess any equity interests in our
franchisees. Also, we do not provide financial support to a franchisee in our
typical franchise relationship. We continue to monitor and analyze developments
regarding FIN 46 that would impact its applicability to franchise
relationships. We cannot predict the impact FIN 46 will have on our financial
statements.
NOTE (13) SUBSEQUENT EVENT
Subsequent to November 3, 2003, a franchisee owning and operating 33 Hardee’s
restaurants filed a voluntary petition for Chapter 11 bankruptcy protection in
the U.S. Bankruptcy Court for the Northern District of Ohio. As of November 3,
2003, the Company had fully reserved all accounts and notes receivable from
this franchisee. The Company remains liable for lease obligations on 15
properties for which it has either guarantied the franchisee’s lease or entered
into subleases to the franchisee. At November 3, 2003, the present value of
the remaining lease obligation on these 15 properties is $5,791. The Company
maintained an accrual of $344 at November 3, 2003 associated with its previous
agreement to subsidize one of these leases.
As of November 3, 2003, the franchisee had closed 5 of the 15 Hardee’s
restaurants that were located on properties that the Company is ultimately
liable for the lease obligations. The Company had not provided for the lease
obligations as the franchisee continued to make timely lease payments. The
franchisee continues to operate Hardee’s restaurants at 10 of
the 15 leased properties
for which the Company remains liable for the lease obligations and, to the best
of the Company’s knowledge, the franchisee will seek to retain the 10 related
leases after emerging from bankruptcy. If the franchisee rejects its sublease
obligations under some or all of the 15 property leases as part of its
bankruptcy reorganization, the Company would be liable for the full obligation
under the rejected leases.
19
CKE RESTAURANTS, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction and Safe Harbor Disclosure
CKE Restaurants, Inc. and its subsidiaries (collectively referred to as the
“Company”) is comprised of the operations of Carl’s Jr., Hardee’s, La Salsa
Fresh Mexican Grill (“La Salsa”), and The Green Burrito (“Green Burrito”),
which is primarily operated as a dual-brand concept with Carl’s Jr.
quick-service restaurants. The following Management’s Discussion and Analysis
should be read in conjunction with the unaudited Condensed Consolidated
Financial Statements contained herein, and our Annual Report on Form 10-K for
the fiscal year ended January 31, 2003. All note references herein refer to the
accompanying Notes to Condensed Consolidated Financial Statements.
Matters discussed in this Form 10-Q contain forward-looking statements relating
to future plans and developments, financial goals, and operating performance
that are based on our current beliefs and assumptions. Such statements are
subject to risks and uncertainties. Factors that could cause our results to
differ materially from those described include, but are not limited to, whether
or not restaurants will be closed and the number of restaurant closures,
consumers’ concerns or adverse publicity regarding our products, effectiveness
of operating initiatives and advertising and promotional efforts (particularly
at the Hardee’s brand), changes in economic conditions, changes in the price or
availability of commodities, availability and cost of energy, workers’
compensation and general liability premiums and claims experience, changes in
our suppliers’ ability to provide quality and timely products to us, delays in
opening new restaurants or completing remodels, severe weather conditions, the
operational and financial success of our franchisees, franchisees’ willingness
to participate in our strategy, availability of financing for us and our
franchisees, unfavorable outcomes on litigation, changes in accounting policies
and practices, new legislation or government regulation (including
environmental laws), the availability of suitable locations and terms for the
sites designed for development, and other factors as discussed in our filings
with the Securities and Exchange Commission.
Forward-looking statements speak only as of the date they are made. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise,
except as required by law or the rules of the New York Stock Exchange.
New Accounting Pronouncements Not Yet Adopted
See Note (12) of Notes to Condensed Consolidated Financial Statements.
Critical Accounting Policies
Our reported results are impacted by the application of certain accounting
policies that require us to make subjective or complex judgments. These
judgments involve making estimates about the effect of matters that are
inherently uncertain and may significantly impact our quarterly or annual
results of operations and financial condition. Specific risks associated with
these critical accounting policies are described in the following paragraphs.
For all of these policies, we caution that future events rarely develop exactly
as expected, and the best estimates routinely require adjustment. Our most
significant accounting policies require:
20
CKE RESTAURANTS, INC. AND SUBSIDIARIES
Descriptions of these critical accounting policies follow.
Impairment of Property and Equipment Held and Used, Held for Sale or To Be Disposed of Other Than By Sale
Each quarter we evaluate the carrying value of individual restaurants when the
operating results have reasonably progressed to a point to adequately evaluate
the probability of continuing operating losses or a current expectation that a
restaurant will be sold or otherwise disposed of before the end of its
previously estimated useful life. In making these judgments, we consider the
period of time since the restaurant was opened or remodeled, and the trend of
operations and expectations for future sales growth. For restaurants selected
for review, we estimate the future estimated cash flows from operating the
restaurant over its estimated useful life. We make judgments about future
same-store sales and the operating expenses and estimated useful life that we
would expect with such level of same-store sales. We employ a
probability-weighted approach wherein we estimate the effectiveness of future
sales and marketing efforts on same-store sales and related estimated useful
life. In general, in expected same-store sales scenarios where sales are not
expected to increase, we generally assume a shorter than previously estimated
useful life.
Quarterly, we update our model for estimating future cash flows based upon
experience gained, current intentions about refranchising restaurants and
closures, expected sales trends, internal plans, and other relevant
information. In prior fiscal years, because we were significantly engaged in
refranchising restaurants to generate cash to repay bank indebtedness, we had
assumed, in some cases, estimated lives that were less than the estimated
useful life for certain restaurants. As our financial position has improved
such that refranchising activities are less likely, we estimated cash flows
over their remaining estimated useful life of the restaurants. Additionally,
commencing with the second quarter of fiscal 2003, we reduced the probability
weighting for the occurrence of future same-store sales from the higher end of
our strategic business plan in light of our actual same-store sales results. As
the operations of restaurants opened or remodeled in recent years progress to
the point that their profitability and future prospects can adequately be
evaluated, additional restaurants will become subject to review and the
possibility that impairments exist. Most likely, this would arise in new
markets the Company expanded into in recent years.
Same-store sales are the key indicator used to estimate future cash flow for
evaluating recoverability. To provide a sensitivity analysis of the impairment
that could arise were the actual same-store sales of all mature restaurants we
owned to grow at only the assumed rate of inflation for our operating costs
(same-store sales sensitivity), for no real growth, the aggregate additional
impairment loss would be approximately $11,819. The inflation rate assumed in
making this calculation is 2.0% for both revenue and expenses.
Additionally, restaurants are operated for three years before we test them for
impairment. Restaurants are also not tested for either two or three years
following a major remodel (contingent upon the extent of the remodel). We
believe this provides the restaurant sufficient time to establish its presence
in the market and build a customer base. If we were to test all restaurants for
impairment without regard to the amount of time the restaurants were operating,
the total asset impairment would increase substantially. Assuming all
restaurants were tested under the same assumptions used in the same-store sales
sensitivity analysis, without regard for the length of time open (time open
sensitivity), we would be required to record additional impairment losses of
approximately $12,454.
The following tables summarize the sensitivity analyses, as classified by
restaurants with positive or negative cash flow during the trailing thirteen
periods, for both same-store sales sensitivity and time open sensitivity:
21
CKE RESTAURANTS, INC. AND SUBSIDIARIES Carl’s Jr.
Hardee’s
La Salsa
22
CKE RESTAURANTS, INC. AND SUBSIDIARIES Core Concepts Combined
Impairment of Goodwill
At the reporting unit level, goodwill is tested for impairment at least
annually during the first quarter of our fiscal year, and on an interim basis
if an event or circumstance indicates that it is more likely than not
impairment may have occurred. We consider the reporting unit level to be the
brand level since the components (e.g., restaurants) within each brand have
similar economic characteristics, including products and services, production
processes, types or classes of customers and distribution methods. The
impairment, if any, is measured based on the estimated fair value of the brand.
Fair value can be determined based on discounted cash flows, comparable sales
or valuations of other restaurant brands. Impairment occurs when the carrying
amount of goodwill exceeds its estimated fair value.
The most significant assumptions we use in this analysis are those made in
estimating future cash flows. In estimating future cash flows, we use the
assumptions in our strategic plan for items such as same-store sales growth
rates and the discount rate we consider to be the market discount rate for
acquisitions of restaurant companies and brands.
If our assumptions used in performing the impairment test prove insufficient,
the fair value of the brands may ultimately prove to be significantly lower,
thereby causing the carrying value to exceed the fair value and indicating an
impairment has occurred. We perform our annual impairment test during the first
quarter of each fiscal year. During the first quarter of fiscal year 2004, we
engaged an outside party to assist us in performing a valuation of the La Salsa
and Carl’s Jr. brands. As a result, we concluded that the current value of the
goodwill associated with La Salsa exceeds the carrying value of that goodwill.
Accordingly, no impairment charge was required. Additionally, we concluded that
the current value of the goodwill of Carl’s Jr. exceeded the carrying value and
no impairment charge was required. During the first quarter of fiscal year
2003, we engaged an outside party to assist us in performing a valuation of the
Hardee’s brand, through which we concluded that the value of the goodwill
associated with the acquisition of Hardee’s was $0. Accordingly, we recorded a
transitional impairment charge to write-off all of the goodwill related to the
Hardee’s brand of $175,780. As of November 3, 2003, we have $56,708 in goodwill
recorded on the balance sheet, $34,059 and $22,649 related to La Salsa and
Carl’s Jr., respectively.
We regularly evaluate under-performing restaurants to determine the likelihood
we can return them to profitability. In the event that we determine we cannot
return an under-performing restaurant to an acceptable level of profitability,
we close the restaurant (absent any contractual restrictions preventing us from
doing so). We believe the potential closing of any restaurants currently
identified as under-performing would not have a material impact on the
valuation of either the Carl’s Jr. or La Salsa goodwill.
23
CKE RESTAURANTS, INC. AND SUBSIDIARIES Estimated Liability for Closing Restaurants
We make decisions to close restaurants based on prospects for estimated future
profitability and sometimes we are forced to close restaurants due to
circumstances beyond our control (e.g., a landlord’s refusal to negotiate a new
lease). Our restaurant operators evaluate each restaurant’s performance every
quarter. When restaurants continue to perform poorly, we consider the
demographics of the location, as well as the likelihood of being able to
improve an unprofitable restaurant. Based on the operator’s judgment, we
estimate the future cash flows. If we determine that the restaurant will not,
within a reasonable period of time, operate at break-even cash flow or be
profitable, and there are no contractual requirements to continue operating the
restaurant, we close the restaurant. Additionally, franchisees may close
restaurants for which we are the primary lessee. If the franchisee cannot make
payments on the lease, we continue making the lease payments and establish an
estimated liability for the closed restaurant if we decide not to operate it as
a company-operated restaurant. We establish the estimated liability on the
actual closure date. Prior to the adoption of Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal
Activities (“SFAS 146”) on January 1, 2003, we established the estimated
liability when we identified a restaurant for closure, which may or may not
have been the actual closure date.
The estimated liability for closing restaurants on properties vacated is
generally based on the term of the lease and the lease termination fee we
expect to pay, as well as estimated maintenance costs until the lease has been
abated. The amount of the estimated liability established is generally the
present value of these estimated future payments. The interest rate used to
calculate the present value of these liabilities is based on our incremental
borrowing rate at the time the liability is established. The related discount
is amortized and shown in facility action charges, net in our Condensed
Consolidated Statements of Operations.
A significant assumption used in determining the amount of the estimated
liability for closing restaurants is the amount of the estimated liability for
future lease payments on vacant restaurants, which we determine based on our
broker’s (a related party) assessment of its ability to successfully negotiate
an early termination of our lease agreements with the lessors. Additionally, we
estimate the cost to maintain leased and owned vacant properties until the
lease has been abated. If the costs to maintain properties increase, or it
takes longer than anticipated to sell properties or terminate leases, we may
need to record additional estimated liabilities. If the leases on the vacant
restaurants are not terminated on the terms we used to estimate the
liabilities, we may be required to record losses in future periods. Conversely,
if the leases on the vacant restaurants are terminated on more favorable terms
than we used to estimate the liabilities, we reverse previously established
estimated liabilities, resulting in an increase in operating income. The
present value of lease payments on all closed restaurants is approximately
$49,899, which represents the discounted amount we would be required to pay if
we are unable to terminate the leases prior to the terms required in the lease
agreements or enter into sublease agreements. However, it is our experience
that we can terminate those leases for less than that amount and, accordingly,
we have recorded an estimated liability for lease obligations of $18,369 as of
November 3, 2003.
Estimated Liability for Self-Insurance
We are self-insured for a portion of our current and prior years’ losses
related to workers’ compensation, fire and general liability insurance
programs. We have obtained stop loss insurance for individual workers’
compensation claims, property claims and individual general liability claims
over $500. Insurance liabilities and reserves are accounted for based on the
present value of actuarial estimates of the amount of loss incurred. These
estimates rely on actuarial observations of historical claim loss development.
The actuary, in determining the estimated liability, bases the assumptions on
the average historical losses on claims we have incurred. The actual loss
development may be better or worse than the development estimated by the
company in conjunction with the actuary. In that event, we modify the reserve.
As such, if we experience a higher than expected number of claims or the costs
of claims rise more than expected, the we may, in conjunction with the actuary,
adjust the expected losses upward and our future self-insurance expenses will
rise. Consistent with trends the restaurant industry has experienced in recent
years, particularly in California where claim cost trends are among the highest
in the country, workers’ compensation liability costs continue to increase.
24
CKE RESTAURANTS, INC. AND SUBSIDIARIES Loss Contingencies
We maintain accrued liabilities for contingencies related to litigation. We
account for contingent obligations in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies, which
requires that we assess each contingency to determine estimates of the degree
of probability and range of possible settlement. Those contingencies that are
deemed to be probable and where the amount of such settlement is reasonably
estimable are accrued in our consolidated financial statements. If only a range
of loss can be determined, we accrue to the low end of the range. As of
November 3, 2003, we have recorded an accrued liability for contingencies
related to litigation in the amount of $3,351. The assessment of contingencies
is highly subjective and requires judgments about future events. Contingencies
are reviewed at least quarterly to determine the adequacy of the accruals and
related consolidated financial statement disclosure. The ultimate settlement of
contingencies may differ materially from amounts we have accrued in our
consolidated financial statements.
We estimate the liability for those losses related to litigation claims that we
believe are reasonably possible to result in an adverse outcome to be in the
range of $800 to $2,600. In accordance with Statement of Financial Accounting
Standards No. 5, we have not recorded a liability for those losses.
Franchised and Licensed Operations
We monitor the financial condition of certain franchisees and record provisions
for estimated losses on receivables when we believe that our franchisees are
unable to make their required payments to us. Each quarter we perform an
analysis to develop estimated bad debts for each franchisee. We then compare
the aggregate result of that analysis to the amount recorded in our
consolidated financial statements as the allowance for doubtful accounts and
adjust the allowance as appropriate. Additionally, we cease accruing royalty
income from franchisees that are materially delinquent in paying or in default
for other reasons and reverse any royalties accrued during the last 90 days.
Over time our assessment of individual franchisees may change. For instance, we
have had some franchisees, who in the past we had determined required an
estimated loss equal to the total amount of the receivable, who have paid us in
full or established a consistent record of payments (generally one year) such
that we determined an allowance was no longer required.
Depending on the facts and circumstances, there are a number of different
actions we and/or our franchisees may take to resolve franchise collections
issues. These actions may include the purchase of franchise restaurants by us
or by other franchisees, a modification to the franchise agreement which may
include a provision to defer certain royalty payments or reduce royalty rates
in the future (if royalty rates are not sufficient to cover our costs of
service over the life of the franchise agreement, we record an estimated loss
at the time we modify the agreements), a restructuring of the franchisee’s
business and/or finances (including the restructuring of leases for which we
are the primary obligee — see further discussion below) or, if necessary, the
termination of the franchise agreement. The allowance established is based on
our assessment of the most probable course of action that will occur. If we
believe we will operate the restaurants as company-operated restaurants, the
allowance for loss is recorded net of the estimated fair value of the related
restaurant assets that are not pledged as collateral to third parties.
Many of the restaurants that we sold to Hardee’s and Carl’s Jr. franchisees as
part of our refranchising program were on leased sites. Generally, we remain
principally liable for the lease and have entered into a sublease with the
franchisee on the same terms as the primary lease. We account for the sublease
payments received as franchising rental income. Our payments on the leases are
accounted for as rental expense in franchised and licensed restaurants and
other expense in our condensed consolidated statements of operations. As of
November 3, 2003, the present value of our total obligation on such lease
arrangements with Hardee’s and Carl’s Jr. franchisees was $46,449 and $95,758,
respectively. We do not expect Carl’s Jr. franchisees to experience the same
level of financial difficulties as Hardee’s franchisees have encountered in the
past or may encounter in the future. However, we can provide no assurance that
this will not occur.
In addition to the sublease arrangements with franchisees described above, we
also lease land and buildings to franchisees. As of November 3, 2003, the net
book value of property under lease to Hardee’s and Carl’s Jr. franchisees was
$30,256 and $9,629, respectively. Troubled franchisees are those with whom we
have entered into workout agreements and who may have liquidity problems in the
future. In the event that a troubled franchisee
25
CKE RESTAURANTS, INC. AND SUBSIDIARIES closes a restaurant for which we own the property, our options are to operate
the restaurant as a Company-owned restaurant, lease the property to another
tenant or sell the property. These circumstances would cause us to consider
whether the carrying value of the land and building was impaired. If we
determined the property value was impaired, we would record a charge to
operations for the amount the carrying value of the property exceeds its fair
value. As of November 3, 2003, the net book value of land and buildings under
lease to Hardee’s franchisees that are considered to be troubled franchisees
was approximately $21,579 and is included in the amount above. We believe that,
during fiscal 2004, some of these franchisees will probably close restaurants
and, accordingly, we may record an impairment loss in connection with some of
these closures.
Prior to adoption of Statement of Financial Accounting Standards No. 146,
Accounting for the Costs Associated with Exit or Disposal Activities (“SFAS
146”) (see Note 1 of Notes to Consolidated Financial Statements of our Annual
Report on Form 10-K for the fiscal year ended January 27, 2003), the
determination of when to establish an estimated liability for future lease
obligations on restaurants operated by franchisees for which we are the primary
obligee was based on the date that either of the following events occurred:
In accordance with SFAS 146, which we adopted on January 1, 2003, an estimated
liability for future lease obligations on restaurants operated by franchisees
for which we are the primary obligee is established on the date the franchisee
closes the restaurant. We record an estimated liability for subsidized lease
payments when we sign a sublease agreement committing us to the subsidy.
The amount of the estimated liability is established using the methodology
described in “Estimated Liability for Closing Restaurants” above. Consistent
with SFAS 146, we have not established an additional estimated liability for
potential losses not yet incurred. The present value of the lease obligations
for which we remain principally liable and have entered into subleases to
troubled franchisees is approximately $27,223 (six franchisees represent
substantially all of this amount). As disclosed in Note 13 of Notes to
Condensed Consolidated Financial Statements contained herein, subsequent to
November 3, 2003, one of these six franchisees filed voluntary petition for
Chapter 11 bankruptcy protection. If sales trends/economic conditions worsen
for our franchisees, their financial health may worsen, our collection rates
may decline and we may be required to assume the responsibility for additional
lease payments on franchised restaurants. Entering into restructured franchise
agreements may result in reduced franchise royalty rates in the future (see
discussion below). The likelihood of needing to increase the estimated
liability for future lease obligations is related to the success of our
Hardee’s concept (i.e., if our Hardee’s concept results improve from the
execution of our comprehensive plan, we would reasonably expect that the
financial performance of our franchisees would improve).
Stock-Based Compensation
As discussed in Note 1 of Notes to Condensed Consolidated Financial Statements,
we have various stock-based compensation plans that provide options for certain
employees and outside directors to purchase common shares of stock. We have
elected to account for stock-based compensation in accordance with APB Opinion
No. 25, Accounting for Stock Issued to Employees, which utilizes the intrinsic
value method of accounting for stock-based compensation, as opposed to using
the fair-value method prescribed in SFAS 123, Accounting for Stock-Based
Compensation. Because of this election, we are required to make certain pro
forma disclosures of net income assuming we had adopted SFAS 123. We determine
the estimated fair value of stock-based compensation on the date of the grant
using the Black-Scholes option-pricing model. The Black-Scholes option-pricing
model requires the input of highly subjective assumptions, including the
historical stock price volatility, expected life of the option and the
risk-free interest rate. A change in one or more of the assumptions used in the
Black-Scholes option-pricing model may result in a material change to the
estimated fair value of the stock-based compensation (see Note 1 of Notes to
Condensed Consolidated Financial Statements for analysis of the effect of
certain changes in assumptions used to determine the fair value of stock-based
compensation).
26
Valuation Allowance for Net Deferred Tax Asset
As disclosed in Note 20 of Notes to Consolidated Financial Statements of our
Annual Report Form 10-K for the fiscal year ended January 31, 2003, we have
recorded a 100% valuation allowance against our net deferred tax assets. If our
business turnaround is successful, we have been profitable for a number of
years and our prospects for the realization of our deferred tax assets are more
likely than not, we would then reverse our valuation allowance and credit
income tax expense. In assessing the prospects for future profitability, many
of the assessments of same-store sales and cash flows mentioned above become
relevant. When circumstances warrant, we assess the likelihood that our net
deferred tax assets will more likely than not be recovered from future taxable
income. As of January 31, 2003, our net deferred tax assets and related
valuation allowance totaled approximately $164,000.
Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal 2004 Comparisons with Fiscal 2003
The factors discussed below impact comparability of operating performance for
the twelve and forty weeks ended November 3, 2003, to the twelve and forty
weeks ended November 4, 2002, or could impact comparisons for the remainder of
fiscal 2004.
Acquisition of Santa Barbara Restaurant Group, Inc.
As discussed in Note 3 of Notes to Condensed Consolidated Financial Statements,
we acquired SBRG on March 1, 2002 (“Acquisition Date”). The operations of SBRG
subsequent to the Acquisition Date are included in our consolidated financial
statements.
A significant amount of goodwill was recorded in connection with the
acquisition of SBRG. The recoverability of that goodwill is dependent on future
operations and the development of new La Salsa restaurants (see discussion of
financing new restaurants under “Liquidity and Capital Resources” below). The
acquisition of new restaurant sites is highly competitive.
Divestiture of Timber Lodge
As discussed in Note 8 of Notes to Condensed Consolidated Financial Statements,
Timber Lodge is accounted for as a discontinued operation. The operations of
Timber Lodge, which are included in the Condensed Consolidated Statements of
Operations as income (loss) from operations of discontinued segment, are as
follows:
New Accounting Pronouncements
See Note 2 and Note 12 of Notes to Condensed Consolidated Financial Statements.
27
CKE RESTAURANTS, INC. AND SUBSIDIARIES Seasonality
We operate on a retail accounting calendar. Our fiscal year has 13 four-week
accounting periods and ends the last Monday in January. The first quarter of
our fiscal year has four periods, or 16 weeks. All other quarters have three
periods, or 12 weeks.
Our restaurant sales, and therefore our profitability, are subject to seasonal
fluctuations and are traditionally higher during the spring and summer months
because of factors such as increased travel and improved weather conditions,
which affect the public’s dining habits.
Turnaround Strategy
Hardee’s is in the midst of a turnaround program that is targeted at improving
Hardee’s same-store sales and returning the Hardee’s brand to prominence in the
quick-service restaurant (“QSR”) sector. The key elements of the turnaround
program are to:
Pursuant to this program, Hardee’s remodeled 85% of its company-operated
restaurants and recently rolled out its new menu, which we refer to as the
“Revolution,” discussed further under “Hardee’s Revolution” below.
If we are unable to grow sales and operating margins at Hardee’s, it will
significantly affect our future profitability and cash flows. Such
circumstances could affect our ability to access sufficient financing in the
future (See “Liquidity and Capital Resources” below).
Our strategy has emphasized premium products, as well as routine price
increases prompted by increases in food, labor and utility costs. The impact of
this strategy has been an increase in average guest check. That strategy also
has likely resulted in a decrease in transaction counts. Many of our
competitors offer lower prices on discounted fare and have increased their
efforts in this regard over the past two years, which may have impacted our
transaction counts. We generally have experienced negative transaction counts
at Hardee’s since our acquisition of the brand and at Carl’s Jr. for nearly two
years, which we believe is due, in part, to other QSR companies offering
products at discounted prices and the economic slowdown during this time. We
note that others in the QSR industry have experienced negative same-store sales
trends during portions of this time. We cannot quantify how much of our
declines are related to the QSR segment and how much are related to
circumstances involving our own brands.
As shown in the tables on pages 32 — 35, the operating margins for Hardee’s and
La Salsa have decreased from the prior year period. Occupancy costs, which are
primarily fixed or semi-fixed in nature, are a component of operating margins.
The fixed nature of those costs allows margins to increase when sales are
rising — an occurrence referred to as sales leverage. If costs increase or
sales decrease, we would have to increase the prices of our products to
preserve the operating margin. Historically, we have been successful at
implementing such price increases, but this likely has had an impact on
transaction counts as described above. During April 2003, we increased prices
at our company-operated Carl’s Jr. restaurants by approximately 1%. The
sensitivity analysis for the recoverability of restaurants (see “Impairment of
Property and Equipment Held and Used, Held for Sale or To Be Disposed of Other
Than By Sale”) assumes that our same-store sales in the future grow at the same
rate as inflation (i.e. our costs for food, labor, utilities, etc.). If we are
unable to pass along such cost increases, and at the same time do not increase
28
CKE RESTAURANTS, INC. AND SUBSIDIARIES our transaction counts, our operating results would decline and the
recoverability of the carrying value of our restaurants would be negatively
impacted.
Hardee’s Revolution
We have implemented a comprehensive plan to reposition Hardee’s as a premium
burger restaurant, and recently rolled out its new menu, which we refer to as
the “Revolution.” As part of the Revolution, we eliminated a significant number
of menu items with the goal of simplifying the Hardee’s menu and improving
restaurant operations. The Hardee’s menu now features a premium Angus beef line
of 1/3 lb., 1/2 lb. and 2/3 lb. burgers called “Thickburgers.” We believe
Thickburgers will help increase Hardee’s sales because burgers still represent
the largest QSR segment, and the 18- to 35-year old male demographic segment we
target shows a strong preference for burgers. We believe the taste and quality
of our Thickburgers are unparalleled in the QSR industry. Hardee’s focus on
burgers marks a return to its roots offering superior tasting charbroiled
burgers, which we believe will increase the average customer check and average
unit volumes.
We began introducing Thickburgers at Hardee’s at the end of last year, and as
of November 3, 2003, all of our company-operated Hardee’s restaurants and
approximately 94% of our franchise-operated Hardee’s restaurants had been
converted to the Revolution menu.
After converting Hardee’s restaurants to the Revolution menu format, we
anticipated an initial decrease in same-store sales because of menu
eliminations and customers’ lack of experience with the new product line. There
was indeed an initial negative impact to earnings due to increased crew
training costs and our discounting the new items to encourage customers to try
the new offerings. As the training, implementation and introduction period has
now been completed, restaurant labor has now returned to pre-Revolution levels
and same-store sales increased 1.0% and 6.8% during the second and third
quarters of fiscal 2004, respectively. While we expect these trends to
continue, we can provide no assurance that this will occur.
Franchise Operations
Like others in the QSR industry, some of our franchise operations experience
financial difficulties from time to time. Our approach to dealing with
financial and operational issues that arise from these situations is described
above (see discussion under Critical Accounting Policies — Franchised and
Licensed Operations). Some franchisees in the Hardee’s system have experienced
significant financial problems. As discussed above, there are a number of
potential resolutions of these financial issues.
We continue to work with franchisees in an attempt to maximize our future
franchising income. Our franchising income is dependent on both the number of
restaurants operated by franchisees and their operational and financial
success, such that they can make their royalty and lease payments to us.
Although we quarterly review the allowance for doubtful accounts and the
estimated liability for closed franchise restaurants (see discussion under
Critical Accounting Policies — Franchised and Licensed Operations), there can
be no assurance that the number of franchisees or franchised restaurants
experiencing financial difficulties will not increase from our current
assessments, nor can there be any assurance that we will be successful in
resolving financial issues relating to any specific franchisee. As of November
3, 2003, our consolidated allowance for doubtful accounts of notes receivable
was 74% of the gross balance of notes receivable and our consolidated allowance
for doubtful accounts on accounts receivable was 8% of the gross balance of
accounts receivable. We still experience specific problems with troubled
franchisees (see Critical Accounting Policies — Franchise and Licensed
Operations) and may be required to increase the amount of our allowances for
doubtful accounts and/or increase the amount of our estimated liability for
future lease obligations. The result of increasing the allowance for doubtful
accounts is an effective royalty rate lower than our standard contractual
royalty rate.
Effective royalty rate reflects royalties deemed collectible as a percent of
franchise generated revenue for all franchisees for which we are recognizing
revenue. For the trailing 13 periods ended November 3, 2003, the effective
royalty rates for domestic Carl’s Jr. and Hardee’s were 3.7% and 3.6%,
respectively.
29
CKE RESTAURANTS, INC. AND SUBSIDIARIES Repositioning Activity
In late fiscal 2000, we embarked on a refranchising initiative to generate cash
to reduce outstanding borrowings on our senior credit facility, as well as
increase the number of franchise-operated restaurants. Additionally, as sales
trends for the Hardee’s restaurants and certain Carl’s Jr. restaurants
(primarily in the Oklahoma area) continued to decline in fiscal 2000 through
fiscal 2001, we determined that it was necessary to close certain restaurants
for which a return to profitability was not likely. We have made reductions to
operating expenses in an effort to bring them to levels commensurate with our
re-balanced restaurant portfolio.
During the twelve week periods ended November 3, 2003 and November 4, 2002, and
the forty week periods ended November 3, 2003 and November 4, 2002, we recorded
repositioning charges of $1,301, $765, $3,193 and $5,827, respectively, which
were primarily non-cash in nature and are classified in the Condensed
Consolidated Statements of Operations as facility action charges, net.
We have completed substantial repositioning activities, including the closure
of under-performing restaurants, and are now able to focus on the operations of
our core brands, Carl’s Jr., Hardee’s and La Salsa. However, we may determine
in the future that additional repositioning activities will be necessary or we
may take advantage of opportunities to generate funds through additional
restaurant asset sales, which could result in material losses.
30
CKE RESTAURANTS, INC. AND SUBSIDIARIES Financial Comparison
Our results reflect the substantial changes we have made in executing our
business turnaround including the sale and closure of under-performing
restaurants and efforts to contain corporate overhead, improve margins and pay
down bank indebtedness. The table below is a condensed presentation of those
activities, and other changes in the components of income, designed to
facilitate the discussion of results in this Form 10-Q.
31
CKE RESTAURANTS, INC. AND SUBSIDIARIES Operating Review
The following tables are presented to facilitate Management’s Discussion and
Analysis and are presented in the same format in which we present segment
information (See Note 7 of Notes to Condensed Consolidated Financial
Statements).
32
CKE RESTAURANTS, INC. AND SUBSIDIARIES 33
CKE RESTAURANTS, INC. AND SUBSIDIARIES 34
CKE RESTAURANTS, INC. AND SUBSIDIARIES 35
CKE RESTAURANTS, INC. AND SUBSIDIARIES Presentation of Non-GAAP Measurements
EBITDA
EBITDA is a typical non-GAAP measurement for companies that issue public debt.
We believe EBITDA is useful to our investors as an indicator of earnings
available to service debt. EBITDA is not a recognized term under GAAP and does
not purport to be an alternative to income from operations, an indicator of
cash flow from operations or a measure of liquidity. We calculate EBITDA as
income (loss) from continuing operations before interest expense, income taxes,
depreciation and amortization. Because not all companies calculate EBITDA
identically, this presentation of EBITDA may not be comparable to similarly
titled measures of other companies. Additionally, EBITDA is not intended to be
a measure of free cash flow for management’s discretionary use, as it does not
consider certain cash requirements such as interest expense, income taxes and
debt service payments.
36
CKE RESTAURANTS, INC. AND SUBSIDIARIES The following table reconciles EBITDA (a non-GAAP measurement) to cash flow
provided by operating activities (a GAAP measurement):
Carl’s Jr.
During the twelve weeks ended November 3, 2003, we closed three Carl’s Jr.
restaurants and opened one Carl’s Jr. restaurant. During the same period,
Carl’s Jr. franchisees and licensees opened nine restaurants and closed four
restaurants. During the forty weeks ended November 3, 2003, we opened four
Carl’s Jr. restaurants and closed four Carl’s Jr. restaurants. During the same
period, Carl’s Jr. franchisees and licensees opened 24 restaurants and closed
eight restaurants. The following table shows the change in the Carl’s Jr.
restaurant portfolio, as well as the change in revenue for both the current
quarter and the year-to-date:
Same-store sales for company-operated Carl’s Jr. restaurants increased 5.4%
during the twelve weeks ended November 3, 2003. Revenue from company-operated
restaurants increased $7,143, or 6.3%, during that period. The increase in
company-operated restaurant revenue is due to the increase in same-store sales
and the opening of five new restaurants during the past year, partially offset
by the closure of two restaurants during that time. The average check during
the twelve weeks ended November 3, 2003 was $5.53, as compared to $5.14 during
the twelve weeks
37
CKE RESTAURANTS, INC. AND SUBSIDIARIES ended November 4, 2002, primarily due to our shift to premium
products and a small price increase implemented earlier in the year.
Same-store sales for company-operated Carl’s Jr. restaurants increased 2.2%
during the forty weeks ended November 3, 2003. Revenue from company-operated
restaurants increased $9,993, or 2.6%, during that period. The increase in
company-operated restaurant revenue is due to the increase in same-store sales
and the increase in restaurant count during the past year.
Net franchising income decreased $144, or 2.7%, to $5,223 during the twelve
weeks ended November 3, 2003, from $5,367 during the twelve weeks ended
November 4, 2002. The decrease is primarily due to a decrease in net rental
income from properties subleased to franchisees and a slight decrease in our
distribution business operating margin due to increased commodity costs,
partially offset by an increase in royalty revenue.
Net franchising income decreased $190, or 1.1%, to $17,411 during the forty
weeks ended November 3, 2003, from $17,601 during the forty weeks ended
November 4, 2002. The decrease is the result of a slight decrease in our
distribution center operating margin due to increased commodity costs and
increased administrative expenses, significantly offset by an increase in
royalty revenue.
Although not required to do so, approximately 98% of Carl’s Jr. franchised and
licensed restaurants purchase food, paper and other supplies from us.
The changes in restaurant-level margins are explained as follows:
Food and packaging costs increased over the prior year comparable periods as
percents of sales primarily due to increases in the cost of beef and other
commodities. We expect that, over time, commodity prices will decrease;
however, we can provide no assurance that this will occur. The current quarter
decrease and year-to-date increase in utility costs reflects the higher
electricity rates incurred during the transition from Enron to our new energy
supplier in the prior year third quarter and the overall increase in
electricity expenses discussed further below.
Rent, property tax and license expenses decreased primarily due to the
designation of certain leases as capital leases during the current year third
quarter. Salaries, wages and incentive compensation decreased in the current
quarter mainly due to leverage from increased sales, partially offset by higher
general manager bonus expense.
General liability insurance expense increased during the forty weeks ended
November 3, 2003 over the prior year comparable period as a percent of sales
primarily due to a $1,700 credit during the prior year, compared to an
approximate $500 credit during the current year. These decreases are based on
actuarial analyses of our reserves and reflect dispositions of general
liability claims more favorable than previously anticipated.
Previously, we had a fixed-rate contract with Enron to supply energy to a
majority of our California Carl’s Jr. restaurants. As part of its bankruptcy
reorganization, Enron rejected that contract during the third quarter of fiscal
2003. In connection with Enron rejecting our fixed-rate contract, we have
filed bankruptcy court claims totaling
38
CKE RESTAURANTS, INC. AND SUBSIDIARIES $14,204 against Enron. At this time, we
cannot make a determination as to the potential recovery, if any, with respect
to these claims, and accordingly, no recognition of this uncertainty has been
recorded in our condensed consolidated financial statements.
To replace the Enron contract, we entered into a fixed-rate contract with
another energy supplier, which took full effect in the fourth quarter of fiscal
2003. During the third quarter of fiscal 2003, while neither of the two
fixed-rated contracts was in effect and we experienced transitional billing
complications, we temporarily incurred energy costs exceeding the rates for
either of the two contracts.
The new fixed-rate contract resulted in an annual energy cost increase of
approximately $1,200. In addition, our energy costs have increased further
over the prior year due to State of California efforts to recoup higher prices
paid to energy suppliers following California’s electricity crisis in 2001. We
believe the incremental charges from the State of California will increase our
fiscal 2004 energy costs by up to $2,000. We are uncertain what effect, if
any, incremental charges from the State of California will have in years after
fiscal 2004.
California Assembly Bill No. 749, signed into law during fiscal 2003 relating
to workers’ compensation claims, includes benefit payment increases that will
phase in through 2006. We estimate the impact of this legislation will be
increased annual costs of approximately $1,000 — $2,000 (see discussion of
price increases under “Turnaround Strategy”).
On October 5, 2003, the Governor of California signed Senate Bill 2, known as
the “Health Insurance Act of 2003” (“SB 2”), which will require certain
California businesses either to pay at least 80% of the premiums for a basic
individual health insurance package for its employees who work over 100 hours
per month and their families, or to pay a fee into a state fund for the
purchase of health insurance for uninsured, low-income workers. California
businesses that employ 200 or more employees must comply with the new law
beginning on January 1, 2006. We currently do not offer health insurance
benefits to our hourly employees. We continue to evaluate the impact of this
legislation, which could be material to our results of operations.
Hardee’s
During the twelve weeks ended November 3, 2003, we closed nine Hardee’s
restaurants and opened one restaurant. During the same period, Hardee’s
franchisees and licensees opened three restaurants and closed 15 restaurants.
During the forty weeks ended November 3, 2003, we opened four Hardee’s
restaurants and closed 13 restaurants. During the same period, Hardee’s
franchisees and licensees opened 12 restaurants and closed 98 restaurants. The
following table shows the change in the Hardee’s restaurant portfolio, as well
as the change in revenue for both the current quarter and the year-to-date:
Same-store sales for company-operated Hardee’s restaurants increased 6.8%
during the twelve weeks ended November 3, 2003. Revenue from company-operated
Hardee’s restaurants increased $7,957, or 6.0%, during the twelve weeks ended
November 3, 2003, as compared to the twelve weeks ended November 4, 2002. This
increase is due to the increase in same-store sales and the opening and
acquisition of nine restaurants during the past year, partially offset by the
closure of 19 restaurants during that time. The average check during the twelve
weeks ended November 3, 2003 was $4.35, as compared to $3.94 during the twelve
weeks ended November 4, 2002, primarily due to our shift to premium products.
Same-store sales for company-operated Hardee’s restaurants increased 0.8%
during the forty weeks ended November 3, 2003. Revenue from company-operated
Hardee’s restaurants increased $15, or 0.0%, during the forty
39
CKE RESTAURANTS, INC. AND SUBSIDIARIES weeks ended
November 3, 2003, as compared to the forty weeks ended November 4, 2002. The
increase in company-operated revenue is due to the same-store sales increase,
partially offset by the net closure of ten restaurants.
Net franchising income increased $249, or 3.0%, to $8,446 during the twelve
weeks ended November 3, 2003, from $8,197 during the twelve weeks ended
November 4, 2002, due to increased equipment sales to franchisees and increased
royalty revenue, partially offset by increased administrative expenses.
Net franchising income decreased $3,314, or 11.6%, to $25,167 during the forty
weeks ended November 3, 2003, from $28,481 during the forty weeks ended
November 3, 2002. Royalty revenue and net rental income decreased due to 111
fewer franchise restaurants operating. Royalty revenue was further impacted by
reduced sales at franchise restaurants. Additionally, at the end of fiscal
2003, a few franchisees who own and operate a large number of restaurants, and
who sublease some of those restaurants from us, became delinquent in their
rental and royalty obligations to us. As a result, we did not recognize rental
revenue related to these franchisees at the beginning of the current fiscal
year. We are currently receiving payments and are therefore recognizing
revenue, both rents and royalties, related to most of these large franchisees.
As discussed above (see “Hardee’s Revolution”), we introduced a new menu at
Hardee’s during the fourth quarter of fiscal 2003. We determined that
significant management and staff training would be required to properly execute
the new menu. We also invested in additional labor in the restaurants to ensure
outstanding customer service during the training stage of the Revolution. As
the training, implementation and introduction of the Revolution have been
achieved, we have returned to pre-Revolution staffing levels.
The changes in restaurant-level margins are explained as follows:
Food and packaging costs increased over the prior year comparable periods as
percents of sales primarily due to increased beef and other commodity costs and
the increased emphasis on premium products associated with the Revolution.
General liability and workers compensation insurance expenses increased over
the prior year comparable periods primarily due to increased property insurance
rates based on claims experience and higher overall insurance costs.
Salaries, benefits, direct labor and
bonus expense decreased as a
percent of sales during the twelve weeks ended November 3, 2003 primarily due
to higher general manager bonuses due to achievement of sales-based
bonus goals during the quarter, offset by a slight decrease in benefit
costs and labor costs returning to normal levels upon completion of Revolution
management and staff training.
Labor costs during the forty weeks ended November 3, 2003 include periods
earlier in the year during which significant Revolution training costs were
being incurred.
40
CKE RESTAURANTS, INC. AND SUBSIDIARIES La Salsa
During the twelve weeks ended November 3, 2003, La Salsa franchisees opened one
restaurant and closed one restaurant. During the forty weeks ended November 3,
2003, we opened five La Salsa restaurants and closed two La Salsa restaurants.
During the same period, La Salsa franchisees opened five restaurants and closed
seven restaurants. The following table shows the change in the La Salsa
component of our restaurant portfolio, as well as the change in revenue at La
Salsa for the current quarter:
(1) For the period March 1, 2002 through November 4, 2002.
Same-store sales for company-operated La Salsa restaurants decreased 2.6%
during the twelve weeks ended November 3, 2003. Revenue from company-operated
La Salsa restaurants increased $126, or 1.3%, when compared to the twelve weeks
ended November 4, 2002, primarily due to the opening of five new restaurants,
partially offset by the closing of two restaurants during the past year and the
decrease in same-store sales.
Restaurant-level margins were 6.2% and 14.0% as a percent of company-operated
restaurant revenues for the twelve-week periods ended November 3, 2003 and
November 4, 2002, respectively. Margins were negatively impacted by
approximately 270 basis points as a result of increased labor related to higher
costs associated with new restaurant openings and the fixed nature of labor on
lower sales at more labor-intensive full service locations. Margins also
decreased by approximately 125 basis points as a result of higher repairs and
maintenance costs due to completion of maintenance deferred from the prior year
and increased utilities and grand opening expenses. Occupancy and other
expenses further negatively impacted margins by approximately 360 basis points
due to scheduled rent escalations, increased property insurance costs passed
through by landlords, higher license costs to obtain full service liquor
licenses at several locations, increased depreciation from recent capital
expenditures and increased amortization of favorable lease rights.
Same-store sales from company-operated La Salsa restaurants decreased 2.1%
during the forty weeks ended November 3, 2003. During the forty weeks ended
November 3, 2003, revenue from company-operated La Salsa restaurants increased
$4,149, or 14.4%, when compared to the forty weeks ended November 4, 2002, as a
result of recording 31 additional days of revenue during that period (we
acquired La Salsa on March 1, 2002, resulting in our recording of less than a
full forty weeks of revenue during the first three quarters of fiscal 2003) and
the opening of five new restaurants, partially offset by the closing of two
restaurants during the past year and the decrease in same-store sales.
Restaurant-level margins were 9.4% and 14.9% as a percent of company-operated
restaurant revenues for the forty-week period ended November 3, 2003 and the
period from March 1, 2002 to November 4, 2002, respectively. Margins were
negatively impacted by approximately 260 basis points due to higher repairs and
maintenance, due to completion of maintenance deferred from the prior year, and
increased utilities and grand opening expenses. Occupancy and other expenses
further negatively impacted margins by approximately 320 basis points due to
scheduled rent escalations, increased property insurance costs passed through
by landlords, and increased depreciation from recent capital expenditures and
increased amortization of favorable lease rights. The margin impacts discussed
above were partially offset by lower food costs due to discounting activity
during the prior year.
Decreases in same-store sales and restaurant level margins may impact the
recoverability of the carrying value of a restaurant. We regularly evaluate
under-performing restaurants to determine the likelihood we can return them to
profitability. In the event that we determine we cannot return an
under-performing restaurant to an acceptable level of profitability, we close
the restaurant (absent any contractual restrictions preventing us from doing
so). We believe
41
CKE RESTAURANTS, INC. AND SUBSIDIARIES the potential closing of any restaurants currently identified as
under-performing would not have a material impact on the valuation of the
goodwill associated with the acquisition of La Salsa.
Advertising Expense
Advertising expenses increased $9, or 0.1%, to $16,719 during the twelve weeks
ended November 3, 2003, and decreased $1,170, or 2.1%, to $54,302 during the
forty weeks ended November 3, 2003. Advertising expenses as a percentage of
company-operated restaurant revenue decreased marginally from 6.5% to 6.2%
during the twelve weeks ended November 3, 2003, and decreased marginally from
6.4% to 6.2% during the forty weeks ended November 4, 2003, as compared to the
prior year periods, primarily due to the management decision to slightly reduce
advertising spending as a percentage of sales.
General and Administrative Expense
General and administrative expenses were 7.7% of total revenue during the
twelve weeks ended November 3, 2003, as compared to 8.7% during the twelve
weeks ended November 4, 2002. General and administrative expenses decreased
$1,494, or 5.5%, to $25,777 during the twelve weeks ended November 3, 2003, as
compared to the same period last year. This decrease is primarily due to
reduced incentive compensation expense and relocation expense partially offset
by increased regional general and administrative costs and supply costs.
General and administrative expenses were 7.6% of total revenue during the forty
weeks ended November 3, 2003, as compared to 8.3% during the forty weeks ended
November 4, 2002. General and administrative expenses decreased $6,060, or
6.9%, to $82,232 during the forty weeks ended November 3, 2003, as compared to
the forty weeks ended November 4, 2002. This decrease is primarily due to
reduced salary expense, incentive compensation, relocation and telephone
expense, partially offset by increased regional general and administrative
costs and legal expense.
Interest Expense
During the twelve weeks ended November 3, 2003, interest expense increased
$359, or 3.7%, to $9,947, as compared to the twelve weeks ended November 4,
2002, primarily as a result of increased interest under capital lease
obligations. During the forty weeks ended November 3, 2003, interest expense
decreased $1,172, or 3.6%, to $31,149, as compared to the forty weeks ended
November 4, 2002, primarily due to the prior year repurchase of our 4.25%
convertible subordinated notes due 2004 and a lower average balance on our
senior credit facility.
Other Income (Expense), Net
Other income (expense), net, consists of the following:
During the twelve weeks ended November 3, 2003, we repurchased $100,000 of our
4.25% Convertible Subordinated Notes due 2004 for $100,708, which included a
call premium of $708. As a result, we recorded a loss on repurchase of
convertible subordinated notes as listed in the table above.
During fiscal year 2003, we divested our investment in Checkers resulting in
gains on the sale of those securities as listed in the table above.
42
CKE RESTAURANTS, INC. AND SUBSIDIARIES Additionally, during fiscal year 2003, we repurchased a portion of our 4.25%
Convertible Subordinated Notes due 2004. The repurchases of those notes also
resulted in the recognition of gains as listed in the table above.
Income Taxes
We recorded income tax expense for the twelve and forty weeks ended November 3,
2003, of $192 and $622, respectively. We recorded an income tax benefit for the
twelve and forty weeks ended November 4, 2002, of $5,393 and $8,143,
respectively. The income tax benefits were a result of changes in existing tax
laws whereby the Company was allowed to carry back certain operating losses to
prior years in which the Company had taxable income. We believe that our net
operating loss carryforward is such that we will not be required to pay federal
income taxes on this fiscal year’s taxable earnings, if any, and have only
provided for foreign income taxes. Our deferred tax assets net to $0 due to our
valuation allowance of approximately $164,000 at January 31, 2003.
At November 3, 2003, we had a federal net operating loss (“NOL”) carryforward
of approximately $83,400, expiring in varying amounts in the years 2021 through
2023 and state NOL carryforwards totalling $71,500 expiring in the years
2006 through 2023. We have federal NOL carryforwards for alternative minimum
tax purposes of approximately $61,235. Additionally, we have an alternative
minimum tax credit carryforward of approximately $7,300. We have generated
general business credit carryforwards of approximately $9,700, expiring in
varying amounts in the years 2020 through 2023, and foreign tax credits in the
amount of $1,400, which expire in the years 2005 through 2008.
Liquidity and Capital Resources
We have historically financed our business through cash flow from operations,
borrowings under our credit facility and the sale of restaurants. Our most
significant cash uses during the next 12 months will arise primarily from
funding of our capital expenditures. The revolving credit facility portion of
our senior credit facility (“Facility”), as amended and restated on November
12, 2003, matures on November 15, 2006. We anticipate that existing cash
balances, availability under the Facility and cash generated from operations
will be sufficient to service existing debt and to meet our operating and
capital requirements for the next 12 months. Additionally, we are able to sell
restaurants as a source of liquidity, although we have no intention to do so
significantly at this time. We have no potential mandatory payments of
principal on our $105,000 of 4% Convertible Subordinated Notes due 2023 until
October 1, 2008 (see discussion below). We have no mandatory payments of
principal on the $200,000 of 9.125% Senior Subordinated Notes due 2009
outstanding prior to their final maturity in 2009.
We, and the restaurant industry in general, maintain relatively low levels of
accounts receivable and inventories, and vendors grant trade credit for
purchases such as food and supplies. We also continually invest in our business
through the addition of new sites and the refurbishment of existing sites,
which are reflected as long-term assets and not as part of working capital. As
a result, we typically maintain current liabilities in excess of current
assets, resulting in a working capital deficit. As of November 3, 2003, our
current ratio was .6 to 1.
We use the Facility to fund letters of credit required for our self-insurance
programs. Additionally, the Facility provides working capital during those
periods when seasonality affects our cash flow. The Facility currently permits
borrowings of up to $175,000, including a $25,000 term loan issued on that date
and due April 1, 2008, and an $80,000 letter of credit sub-facility. The
principal amount of the term loan will be repaid in quarterly installments
maturing on April 1, 2008. As of November 3, 2003 (prior to amendment and
restatement of the Facility), we had $0 in cash borrowings outstanding under
our Facility and $62,481 outstanding on standby letters of credit. Upon the
closing of the amended and restated facility, we had $25,000 outstanding under
the term loan, $63,502 of outstanding letters of credit and borrowing
availability of $86,498. Borrowings bear interest at either the LIBOR rate plus
an applicable margin or the Prime Rate plus an applicable margin, with interest
due monthly. The applicable interest rate on the Facility at November 3, 2003 is the Prime Rate
plus 2.25%, or 6.25% per annum. The applicable interest rate on the
term loan portion of the newly amended and restated Facility is LIBOR
plus 3.75%, or 4.86%.
The agreement underlying the Facility includes certain restrictive covenants.
Among other things, these covenants restrict our ability to incur debt, incur
liens on our assets, make any significant change in our corporate structure or
the nature of our business, dispose of assets in the collateral pool securing
the Facility, prepay certain debt, engage
43
CKE RESTAURANTS, INC. AND SUBSIDIARIES in a change of control transaction without the member banks’ consents, pay
dividends and make investments or acquisitions.
Subject to the terms of the agreement, we may make capital expenditures of
$55,000 during the current fiscal year. In future years, we may make capital
expenditures in the amount of $45,000 plus 80% of the amount of actual EBITDA
(as defined in the Facility) in excess of $110,000. Additionally, we may
carryforward any unused capital expenditure amounts to the following year.
The full text of the contractual requirements imposed by this financing is set
forth in the Fifth Amended and Restated Credit Agreement, dated as of November
12, 2003, which we are filing with the Securities and Exchange Commission as an
exhibit to this report. We were in compliance with the requirements of the
then-existing Facility as of November 3, 2003. Subject in certain instances to
cure periods, the lenders under our Facility may demand repayment of borrowings
prior to stated maturity upon certain events, including if we breach the terms
of the agreement, suffer a material adverse change, engage in a change of
control transaction, suffer certain adverse legal judgments, in the event of
specified events of insolvency or if we default other significant obligations.
In the event the Facility is declared accelerated by the lenders (which can
occur only if we are in default under the Facility), our 9.125% Senior
Subordinated Notes due 2009 (“Senior Notes”), our 4.25% Convertible
Subordinated Notes due 2004 (“2004 Convertible Notes”) and our 4% Convertible
Subordinated Notes due 2023 (“2023 Convertible Notes”) may also become
accelerated under certain circumstances and after all cure periods have
expired.
The 2004 Convertible Notes, which are our unsecured general obligations, are
governed by an indenture. The indenture requires that we pay interest at a rate
of 4.25% per annum in semiannual installments due each March 15 and September
15, with all outstanding principal due and payable March 15, 2004. We have the
right to prepay the notes at any time for an amount equal to principal, accrued
interest and a premium, subject to a notice requirement. On November 3, 2003 we
prepaid $100,000 of the notes. We intend to repay the remaining outstanding
principal balance of $22,319 at their maturity on March 15, 2004, using the
proceeds of the term loan portion of the Facility.
On September 29, 2003, we issued $105,000 principal amount of 4% Convertible
Subordinated Notes due 2023 (“2023 Convertible Notes”). The 2023 Convertible
Notes, which are our unsecured general obligations, are governed by an
indenture. The indenture requires that we pay interest at a rate of 4.00% per
annum in semiannual coupons due each April 1 and October 1, with all
outstanding principal due and payable October 1, 2023. We have the right to
prepay the notes after October 1, 2008 for an amount equal to 100% of the
principal amount of the notes redeemed plus accrued interest, subject to a
notice requirement. The full text of the contractual requirements imposed by
this financing is set forth in the related indenture, which we are filing with
the Securities and Exchange Commission as an exhibit to this report. The
indenture contains certain restrictive covenants. We were in compliance with
the covenants of the 2023 Convertible Notes as of November 3, 2003. Subject in
certain instances to cure periods, the holders of the 2023 Convertible Notes
may demand repayment of these borrowings prior to stated maturity upon certain
events, including if we breach the terms of the indenture, in the event of
specified events of insolvency, or if other significant obligations are
accelerated. On October 1 of 2008, 2013 and 2018, holders of the 2023
Convertible Notes have the right to require us to repurchase all or a portion
of the notes at prices specified in the related indenture. The notes are
convertible into our common stock on the conditions set forth in the related
indenture. The notes were not convertible during the period September 29, 2003
through November 3, 2003. The net proceeds from the issuance of these notes
were used to repay a portion of the 2004 Convertible Notes.
The Senior Notes, which are unsecured obligations but are guaranteed by our
subsidiaries, are governed by an indenture. The indenture requires that we pay
interest at a rate of 9.125% per annum in semi-annual coupons due on each May 1
and November 1, with all outstanding principal due and payable May 1, 2009. We
do not have the right to prepay the notes until May 1, 2004, at which time we
may prepay the notes for an amount equal to principal, accrued interest and a
premium, subject to a notice requirement. The premium from May 1, 2004 to May
1, 2005, is 4.56% of the principal amount redeemed, but reduces annually
through May 2007, at which point no premium is payable. The indenture includes
certain restrictive covenants, including limitations on our ability to incur
debt, incur liens on our assets, make any significant change in our corporate
structure or the nature of our business, pay dividends, make investments,
dispose of assets and make restricted payments. Restricted payments include
certain loans, treasury stock repurchases and voluntary repurchases of
outstanding debt. As of November 3, 2003, the remaining amount of permitted
restricted payments is $28,183. The full text of the contractual requirements
imposed
44
CKE RESTAURANTS, INC. AND SUBSIDIARIES by this financing is set forth in the indenture, which has been filed with the
Securities and Exchange Commission. We were in compliance with such
requirements as of November 3, 2003. Subject in certain instances to cure
periods, the holders of the Senior Notes may demand repayment of these
borrowings prior to stated maturity upon certain events, including if we breach
the terms of the indenture, specified events of insolvency, if we suffer
certain adverse legal judgments or if other significant obligations are
accelerated.
The terms of the Facility, the 2004 Convertible Notes and the Senior Notes are
not dependent on any change in our credit rating. The 2023 Convertible Notes
contain a convertibility trigger based on the credit ratings of the notes (see
discussion above). We believe the key company-specific factors affecting our
ability to maintain our existing debt financing relationships and to access
such capital in the future are our present and expected levels of profitability
and cash flow from operations, asset collateral bases and the level of our
equity capital relative to our debt obligations. In addition, as noted above,
our existing agreements include significant restrictions on future financings
including, among others, limits on the amount of indebtedness we may incur or
which may be secured by any of our assets.
During the forty weeks ended November 3, 2003, cash provided by operating
activities was $63,103. Cash used in investing activities during the forty
weeks ended November 3, 2003, totaled $14,692, which principally consisted of
purchases of property and equipment, partially offset by proceeds from the sale
of property and equipment and collections on notes receivable and related party
receivables. Cash used in financing activities during the forty weeks ended
November 3, 2003, totaled $41,171, which principally consisted of redemption of
$100,000 of our 2004 Convertible Notes and repayments of other short-term debt,
partially offset by proceeds from the issuance of our 2023 Convertible Notes.
Capital expenditures for the forty weeks ended November 3, 2003 were:
As of November 3, 2003, we had remodeled 85% of the Hardee’s company-operated
restaurants to the Star Hardee’s format and had installed charbroilers in 99%
of the company-operated restaurants.
In an effort to improve operations we have relocated several of our corporate
facilities. During 2002, we began relocating our executive headquarters to the
Santa Barbara, California area. We entered into an agreement to lease a
facility in Carpinteria through December 2007. During 2001, we relocated
Hardee’s corporate offices to St. Louis, Missouri and entered into a five-year
agreement to lease a portion of the facility.
Contractual Obligations
We enter into purchasing contracts and pricing arrangements to control costs
for commodities and other items that are subject to price volatility. These
arrangements result in unconditional purchase obligations (see further
discussion regarding these obligations in “Item 3 — Quantitative and
Qualitative Disclosures About Market Risk”) which, as of November 3, 2003,
totaled $39,035.
45
CKE RESTAURANTS, INC. AND SUBSIDIARIES Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our principal exposure to financial market risks relates to the impact that
interest rate changes could have on our Facility. As of November 3, 2003, we
had $0 of borrowings and $62,481 of letters of credit outstanding under the
Facility. Borrowings under the Facility bear interest at the prime rate or
LIBOR plus an applicable margin. A hypothetical increase of 100 basis points in
short-term interest rates would result in a reduction in the Company’s annual
pre-tax earnings of $625. The estimated reduction is based upon the outstanding
balance of the Facility (including outstanding letters of credit) and the
weighted-average interest rate for the quarter and assumes no change in the
volume, index or composition of debt as in effect November 3, 2003.
Substantially all of our business is transacted in U.S. dollars. Accordingly,
foreign exchange rate fluctuations have not 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. The purchasing
contracts and pricing arrangements we use may result in unconditional purchase
obligations, which are not reflected in the consolidated balance sheet.
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 material commodity
cost increases by adjusting our menu pricing or changing our product delivery
strategy. However, increases in commodity prices, without adjustments to our
menu prices (see “Turnaround Strategy”), could result in lower restaurant-level
operating margins for our restaurant concepts.
46
CKE RESTAURANTS, INC. AND SUBSIDIARIES Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company’s “disclosure controls and procedures” as of the end of the period
covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 as amended. Based on that evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer have concluded
that the Company’s disclosure controls and procedures, as of the end of the
period covered by this report, were effective in timely alerting them to
material information relating to the Company required to be included in the
Company’s periodic filings.
There has been no change in the Company’s internal control over financial reporting during the period covered by this report that has materially
affected, or is reasonably likely to affect, the Company’s internal control
over financial reporting.
47
CKE RESTAURANTS, INC. AND SUBSIDIARIES Part II. Other Information.
Item 2. Changes in Securities and Use of Proceeds.
48
CKE RESTAURANTS, INC. AND SUBSIDIARIES Item 6. Exhibits and Reports on Form 8-K
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.
49
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Initial
Final
Purchase Price
Adjustments to the
Purchase Price
Allocation
Initial Allocation
Allocation
$
5,173
$
(2,099
)
$
3,074
33,722
(22,699
)
11,023
32,225
12,504
44,729
—
9,835
9,835
30,566
(6,784
)
23,782
101,686
(9,243
)
92,443
13,141
(7,670
)
5,471
6,500
—
6,500
2,230
(2,038
)
192
21,871
(9,708
)
12,163
$
79,815
$
465
$
80,280
$
9,835
(22,699
)
(2,099
)
(6,784
)
12,504
7,670
2,038
$
465
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Adjustments to
the Initial
Amortization
Initial Balance
Balance Sheet
Final Balance
Intangible Asset
Period
Sheet Allocation
Allocation
Sheet Allocation
Trademarks
20 years
$
17,000
$
171
$
17,171
Franchise agreements
20 years
1,700
80
1,780
6 to 15 years
9,600
(6,468
)
3,132
Other intangible assets
20 years
46
(46
)
—
$
28,346
$
(6,263
)
$
22,083
Forty Weeks Ended
November 4, 2002
$
1,066,138
$
32,963
(722
)
32,241
(175,780
)
$
(143,539
)
$
0.56
(0.01
)
0.55
(3.02
)
$
(2.47
)
$
0.55
(0.01
)
0.54
(2.94
)
$
(2.40
)
58,220
1,610
59,830
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Twelve Weeks Ended
Forty Weeks Ended
November 3, 2003
November 4, 2002
November 3, 2003
November 4, 2002
$
81
$
121
$
988
$
690
4,212
4,212
14,039
14,038
2,443
2,069
6,671
6,955
1,188
1,379
3,572
4,837
415
—
415
—
1,159
1,034
3,618
3,199
449
773
1,846
2,602
$
9,947
$
9,588
$
31,149
$
32,321
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(i)
impairment of long-lived assets for restaurants the Company closes;
(ii)
impairment of long-lived assets for restaurants with net asset values in excess of estimated fair value;
(iii)
restaurant closure costs (primarily reflecting the estimated liability to terminate leases); and
(iv)
gains (losses) on the sale of restaurants and surplus properties.
Twelve Weeks Ended
Forty Weeks Ended
November 3, 2003
November 4, 2002
November 3, 2003
November 4, 2002
$
264
$
137
$
698
$
876
(588
)
(988
)
(3,066
)
(1,112
)
248
296
3,562
2,121
778
820
1,632
3,684
130
(134
)
(526
)
(2,829
)
548
531
1,828
1,743
1,380
662
4,128
4,483
131
5
145
178
(292
)
—
(537
)
—
—
—
—
477
—
—
562
641
(60
)
(56
)
(889
)
(323
)
68
154
263
371
(153
)
103
(456
)
1,344
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
73
—
73
—
(846
)
1
—
1
—
—
—
429
—
—
—
(136
)
—
74
—
(479
)
—
468
142
916
1,054
(880
)
(988
)
(4,449
)
(1,112
)
249
296
3,563
2,598
778
820
2,623
4,325
70
(190
)
(1,551
)
(3,152
)
616
685
2,091
2,114
$
1,301
$
765
$
3,193
$
5,827
$
36,390
916
(11,403
)
(4,449
)
2,091
23,545
13,652
$
9,893
Twelve Weeks Ended
Forty Weeks Ended
November 3, 2003
November 4, 2002
November 3, 2003
November 4, 2002
$
402
$
997
$
2,446
$
3,482
$
269
$
359
$
1,065
$
1,241
$
143
$
60
$
547
$
179
$
93
$
55
$
238
$
168
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Twelve Weeks Ended
Forty Weeks Ended
November 3, 2003
November 4, 2002
November 3, 2003
November 4, 2002
$
402
$
1,517
$
2,192
$
5,264
$
269
$
512
$
1,305
$
1,715
$
143
$
129
$
747
$
379
$
93
$
62
$
286
$
201
Twelve Weeks Ended
Forty Weeks Ended
November 3, 2003
November 4, 2002
November 3, 2003
November 4, 2002
2,764
2,986
2,783
3,344
4,821
—
1,446
—
4,543
5,146
5,297
4,038
982
982
982
898
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Carl's Jr.
Hardee's
La Salsa
Other
Total
$
166,740
$
157,449
$
10,187
$
401
$
334,777
13,019
77
(641
)
(189
)
12,266
2,080
7,886
(18
)
(1
)
9,947
261,221
437,799
68,104
30,956
798,080
3,677
4,188
1,060
912
9,837
22,649
—
34,059
—
56,708
6,281
8,237
720
41
15,279
$
153,992
$
148,361
$
10,002
$
474
$
312,829
10,558
(94
)
14
(128
)
10,350
1,573
8,001
14
—
9,588
288,268
458,334
45,768
38,462
830,832
6,444
10,244
553
879
18,120
22,649
—
34,059
—
56,708
5,910
7,797
652
41
14,400
$
553,764
$
498,784
$
34,158
$
1,348
$
1,088,054
46,895
(9,580
)
(802
)
301
36,814
4,960
26,243
(45
)
(9
)
31,149
261,221
437,799
68,104
30,956
798,080
9,305
15,745
4,636
3,309
32,995
22,649
—
34,059
—
56,708
19,657
26,918
2,632
140
49,347
$
533,964
$
499,539
$
29,850
$
1,444
$
1,064,797
45,402
674
535
(221
)
46,390
5,114
27,189
18
—
32,321
288,268
458,334
45,768
38,462
830,832
12,388
29,322
1,386
672
43,768
22,649
—
34,059
—
56,708
19,968
25,987
1,932
126
48,013
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
$
1,366
8,958
6,410
$
16,734
$
5,203
1,731
$
6,934
$
9,800
Twelve Weeks Ended
Forty
Period from
Weeks Ended
March 1, 2002 to
November 3, 2003
November 4, 2002
November 3, 2003
November 4, 2002
$
9,486
$
9,901
$
32,783
$
29,635
$
72
$
(554
)
$
(706
)
$
(523
)
(1
)
33
23
93
—
—
(1,421
)
—
17
1
148
22
(21
)
(30
)
(47
)
(26
)
$
111
$
(556
)
$
(1,955
)
$
(568
)
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Twelve Weeks Ended
Forty Weeks Ended
November 3, 2003
November 4, 2002
November 3, 2003
November 4, 2002
$
—
$
3,134
$
—
$
8,959
(708
)
728
(708
)
2,442
632
42
221
405
$
(76
)
$
3,904
$
(487
)
$
11,806
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
•
estimation of future cash flows used to assess the recoverability
of long-lived assets, assess the recoverability of goodwill, and
establish the estimated liability for closing restaurants and
subsidizing lease payments of franchisees;
•
estimation, using actuarially determined methods, of our
self-insured claim losses under our workers’ compensation, fire and
general liability insurance programs;
•
determination of appropriate estimated liabilities for litigation;
•
determination of the appropriate allowances associated with
franchise and license receivables and estimated liabilities for
franchise subleases;
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
•
determination of the appropriate assumptions to use to estimate the
fair value of stock-based compensation for purposes of pro forma
disclosures of net income; and
•
estimation of our net deferred income tax asset valuation
allowance.
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Net Book
Number of
Impairment Under
Value
Restaurants
Sensitivity Test
$
86,021
348
$
—
11,259
32
2,672
97,280
380
2,672
13,703
21
—
6,263
39
1,281
19,966
60
1,281
99,724
369
—
17,522
71
3,953
$
117,246
440
$
3,953
Net Book
Number of
Impairment Under
Value
Restaurants
Sensitivity Test
$
133,770
290
$
568
45,916
119
8,328
179,686
409
8,896
86,213
176
492
34,116
136
9,999
120,329
312
10,491
219,983
466
1,060
80,032
255
18,327
$
300,015
721
$
19,387
Net Book
Number of
Impairment Under
Value
Restaurants
Sensitivity Test
$
5,080
41
$
—
512
2
251
5,592
43
251
1,791
7
—
1,700
10
682
3,491
17
682
6,871
48
—
2,212
12
933
$
9,083
60
$
933
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Net Book
Number of
Impairment Under
Value
Restaurants
Sensitivity Test
$
224,871
679
$
568
57,687
153
11,251
282,558
832
11,819
101,707
204
492
42,079
185
11,962
143,786
389
12,454
326,578
883
1,060
99,766
338
23,213
$
426,344
1,221
$
24,273
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
(1)
the franchisee and we mutually decided to close a restaurant and
we assumed the responsibility for the lease, usually after a franchise
agreement was terminated or the franchisee declared bankruptcy; or
(2)
we entered into a workout agreement with a financially troubled
franchisee, wherein we agreed to make part or all of the lease
payments for the franchisee.
Table of Contents
Twelve Weeks Ended
Forty
Period from
Weeks Ended
March 1, 2002 to
November 3, 2003
November 4, 2002
November 3, 2003
November 4, 2002
$
72
$
(554
)
$
(706
)
$
(523
)
(1
)
33
23
93
—
—
(1,421
)
—
17
1
148
22
(21
)
(30
)
(47
)
(26
)
$
111
$
(556
)
$
(1,955
)
$
(568
)
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
•
improve restaurant operations by streamlining the menu
and returning to restaurant fundamentals — quality, service and
cleanliness;
•
remodel Hardee’s restaurants to the “Star Hardee’s”
format and upgrade the condition of the facilities so that our
Hardee’s customers enjoy comfortable surroundings and a pleasant
dining experience;
•
transform Hardee’s from a discount variety brand to a
premium product brand that appeals to what we believe to be the
QSR industry’s most attractive demographic segment, 18- to
35-year old males; and
•
grow the lunch and dinner portion of Hardee’s business
while maintaining Hardee’s already strong breakfast business.
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
(All amounts are approximate and in millions)
Third Fiscal Quarter
Year-To-Date
$
2.2
$
2.6
$
9.5
$
(142.3
)
—
175.8
$
9.5
$
33.5
$
(7.3
)
$
(30.9
)
(All amounts are approximate and in millions)
Third Quarter
Fiscal Year 2004 vs.
Year-To-Date Fiscal Year
Third Quarter
2004 vs. Year - To-Date
Fiscal Year 2003
Fiscal Year 2003
$
1.5
$
(14.6
)
(4.6
)
(12.1
)
1.1
6.5
(5.6
)
(8.8
)
0.3
(2.6
)
(0.2
)
(2.8
)
(0.5
)
2.6
0.7
(1.4
)
0.6
(0.2
)
(0.4
)
1.2
(0.1
)
(0.9
)
(0.6
)
(1.3
)
0.9
1.1
—
0.3
(0.4
)
2.1
$
(7.3
)
$
(30.9
)
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Twelve Weeks Ended November 3, 2003
Carl’s Jr.
Hardee’s
La Salsa
Other (A)
Total
$
120,926
$
139,944
$
9,827
$
329
$
271,026
1,172
771
723
1,069
815
689
5.53
4.35
8.80
5.4
%
6.8
%
(2.6
)%
(1.2
)%
(3.5
)%
(1.9
)%
2.6
%
6.3
%
1.3
%
28.7
%
31.5
%
27.5
%
29.0
%
34.5
%
33.5
%
21.6
%
22.1
%
32.8
%
20.7
%
11.9
%
6.2
%
6.4
%
6.1
%
4.9
%
$
5,054
$
9,273
$
360
$
72
$
14,759
35,859
6,459
—
—
42,318
4,606
1,666
—
—
6,272
295
107
—
—
402
45,814
17,505
360
72
63,751
549
1,947
312
—
2,808
35,255
6,027
—
—
41,282
4,787
1,085
—
—
5,872
40,591
9,059
312
—
49,962
$
5,223
$
8,446
$
48
$
72
$
13,789
$
(153
)
$
1,380
$
—
$
74
$
1,301
$
13,019
$
77
$
(641
)
$
(189
)
$
12,266
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Twelve Weeks Ended November 4, 2002
Carl’s Jr.
Hardee’s
La Salsa
Other (A)
Total
$
113,783
$
131,987
$
9,701
$
394
$
255,865
1,146
775
779
1,050
819
819
5.14
3.94
8.80
(5.0
)%
(3.5
)%
0.8
%
(5.8
)%
(8.2
)%
1.3
%
(6.2
)%
(4.7
)%
4.2
%
27.8
%
29.8
%
27.4
%
29.2
%
34.1
%
30.8
%
23.2
%
23.0
%
27.8
%
19.8
%
13.1
%
14.0
%
6.8
%
6.5
%
3.3
%
$
4,679
$
8,728
$
301
$
80
$
13,788
31,956
4,723
—
—
36,679
3,453
2,718
—
—
6,171
121
205
—
—
326
40,209
16,374
301
80
56,964
598
1,350
86
—
2,034
31,066
4,682
—
—
35,748
3,178
2,145
—
—
5,323
34,842
8,177
86
—
43,105
$
5,367
$
8,197
$
215
$
80
$
13,859
$
103
$
662
$
—
$
—
$
765
$
10,558
$
(94
)
$
14
$
(128
)
$
10,350
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Forty Weeks Ended November 3, 2003
Carl’s Jr.
Hardee’s
La Salsa
Other (A)
Total
$
401,002
$
446,168
$
32,962
$
1,105
$
881,237
5.46
4.28
9.10
2.2
%
0.8
%
(2.1
)%
(1.5
)%
(7.2
)%
(3.7
)%
(0.3
)%
(0.5
)%
1.6
%
28.5
%
31.2
%
26.5
%
28.8
%
35.4
%
31.7
%
21.6
%
23.2
%
32.4
%
21.1
%
10.2
%
9.4
%
6.4
%
6.2
%
2.9
%
$
16,701
$
28,937
$
1,196
$
243
$
47,077
118,780
17,526
—
—
136,306
16,629
5,865
—
—
22,494
652
288
—
—
940
152,762
52,616
1,196
243
206,817
2,885
5,010
576
—
8,471
116,026
17,284
—
—
133,310
16,440
5,155
—
—
21,595
135,351
27,449
576
—
163,376
$
17,411
$
25,167
$
620
$
243
$
43,441
$
(456
)
$
4,128
$
194
$
(673
)
$
3,193
$
46,894
$
(9,580
)
$
(802
)
$
302
$
36,814
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Forty Weeks Ended November 4, 2002
Carl’s Jr.
Hardee’s
La Salsa
Other (A)
Total
$
391,009
$
446,153
$
28,813
$
1,169
$
867,144
5.25
3.95
8.90
0.3
%
(1.3
)%
1.2
%
(4.4
)%
(6.9
)%
(0.5
)%
0.5
%
(2.1
)%
1.8
%
27.9
%
29.7
%
27.0
%
28.7
%
35.0
%
31.5
%
21.2
%
22.5
%
26.6
%
22.2
%
12.8
%
14.9
%
6.8
%
6.2
%
3.3
%
$
15,704
$
30,228
$
1,037
$
275
$
47,244
111,796
13,619
—
—
125,415
14,939
9,141
—
—
24,080
516
398
—
—
914
142,955
53,386
1,037
275
197,653
1,914
3,806
302
—
6,022
108,837
13,495
—
—
122,332
14,603
7,604
—
—
22,207
125,354
24,905
302
—
150,561
$
17,601
$
28,481
$
735
$
275
$
47,092
$
1,344
$
4,483
$
—
$
—
$
5,827
$
45,402
$
674
$
535
$
(221
)
$
46,390
(A)
“Other” consists of Green Burrito. Additionally, amounts that we do not
believe would be proper to allocate to the operating segments are included
in “Other” (i.e., gains or losses on sales of long-term investments).
(B)
Average check represents total restaurant sales divided by total
transactions for any given period. The average check is viewed in
conjunction with same-store sales and same-store transactions, as defined
below. This indicator, when viewed with other measures, may illustrate
revenue growth or decline resulting from a change in menu or price
offering. When we introduce menu items or pricing initiatives with higher
or lower price points than the existing menu base, the average check may
reflect the benefit or impact from these new items or pricing on the
average price paid by the consumer.
(C)
Same-store sales is a key performance indicator in our industry. This
indicator is a measure of revenue growth on the existing comparable store
base of a multi-unit chain company such as ours and is measured as a
percentage variance over the same fiscal period in the prior year.
Same-store sales illustrate how competitive forces and external economic
conditions benefit or impact us, as well as any benefit from the diverse
value propositions and marketing initiatives undertaken by us. In
calculating same-store sales, we include restaurants open for 14 full
accounting periods, which allows for a year-over-year comparison.
(D)
Same-store transactions represent the number of consumer visits to our
restaurants. Transactions are viewed on the same basis as same-store sales
above and are another key performance indicator in our industry. This
indicator is a measure of consumer frequency in the existing comparable
store base and is measured as a percentage variance over the same fiscal
period in the prior year. Same-store transactions are another measure of
the effects of competitive forces and economic conditions on consumer
behavior and resulting benefit, or
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
impact, to us. Transactions also reflect any benefit from the diverse value
propositions and marketing initiatives undertaken by us.
Twelve Weeks Ended November 3, 2003
Carl’s Jr.
Hardee’s
La Salsa
Other
Total
$
11,080
$
(8,523
)
$
(652
)
$
146
$
2,051
2,080
7,886
(18
)
(1
)
9,947
39
(34
)
—
187
192
6,281
8,237
720
41
15,279
$
19,480
$
7,566
$
50
$
373
$
27,469
Twelve Weeks Ended November 4, 2002
Carl’s Jr.
Hardee’s
La Salsa
Other
Total
$
10,482
$
(3,393
)
$
—
$
2,970
$
10,059
1,573
8,001
14
—
9,588
(1,029
)
(4,342
)
—
(22
)
(5,393
)
5,910
7,797
652
41
14,400
$
16,936
$
8,063
$
666
$
2,989
$
28,654
Forty Weeks Ended November 3, 2003
Carl’s Jr.
Hardee’s
La Salsa
Other
Total
$
42,570
$
(37,726
)
$
(812
)
$
524
$
4,556
4,960
26,243
(45
)
(9
)
31,149
99
79
—
444
622
19,657
26,918
2,632
140
49,347
$
67,286
$
15,514
$
1,775
$
1,099
$
85,674
Forty Weeks Ended November 4, 2002
Carl’s Jr.
Hardee’s
La Salsa
Other
Total
$
43,630
$
(18,843
)
$
517
$
8,714
$
34,018
5,114
27,189
18
—
32,321
(2,393
)
(5,721
)
—
(29
)
(8,143
)
19,968
25,987
1,932
126
48,013
$
66,319
$
28,612
$
2,467
$
8,811
$
106,209
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Twelve Weeks Ended
Forty Weeks Ended
November 3, 2003
November 4, 2002
November 3, 2003
November 4, 2002
$
17,278
$
9,514
$
63,103
$
73,272
9,947
9,588
31,149
32,321
192
(5,393
)
622
(8,143
)
(1,082
)
(1,034
)
(3,618
)
(3,199
)
114
554
(1,980
)
793
(452
)
4,314
(541
)
10,811
(1,301
)
(765
)
(3,193
)
(5,827
)
225
418
383
(8
)
—
5,131
—
8,852
(1,108
)
4,416
4,694
14,732
(84
)
(5,703
)
(723
)
(12,724
)
(4,772
)
1,548
(10,592
)
875
8,490
5,737
6,133
(7,780
)
90
(586
)
(2,002
)
(594
)
22
329
237
2,234
27,559
28,068
83,672
105,615
(90
)
586
2,002
594
$
27,469
$
28,654
$
85,674
$
106,209
Restaurant Portfolio
Revenue
Third Fiscal Quarter
Third Fiscal Quarter
Year-to-Date
2004
2003
Change
2004
2003
Change
2004
2003
Change
440
439
1
$
120,926
$
113,783
$
7,143
$
401,002
$
391,009
$
9,993
563
542
21
45,814
40,209
5,605
152,762
142,955
9,807
1,003
981
22
$
166,740
$
153,992
$
12,748
$
553,764
$
533,964
$
19,800
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Twelve
Forty
Weeks Ended
Weeks Ended
November 3, 2003
November 3, 2003
19.8
%
22.2
%
(0.9
)%
(0.6
)%
0.7
%
(0.3
)%
0.4
%
(0.2
)%
0.5
%
0.1
%
0.2
%
(0.4
)%
(0.1
)%
(0.2
)%
0.1
%
0.3
%
—
%
0.2
%
20.7
%
21.1
%
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Restaurant Portfolio
Revenue
Third Fiscal Quarter
Third Fiscal Quarter
Year-to-Date
2004
2003
Change
2004
2003
Change
2004
2003
Change
721
731
(10
)
$
139,944
$
131,987
$
7,957
$
446,168
$
446,153
$
15
1,413
1,524
(111
)
17,505
16,374
1,131
52,616
53,386
(770
)
2,134
2,255
(121
)
$
157,449
$
148,361
$
9,088
$
498,784
$
499,539
$
(755
)
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Twelve Weeks
Forty Weeks
Ended
Ended
November 3, 2003
November 3, 2003
13.1
%
12.8
%
(1.7
)%
(1.5
)%
(0.7
)%
(0.3
)%
—
%
(0.3
)%
(0.4
)%
(0.1
)%
0.5
%
0.1
%
0.3
%
(0.2
)%
0.2
%
(0.1
)%
0.6
%
(0.2
)%
11.9
%
10.2
%
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Restaurant Portfolio
Revenue
Third Fiscal Quarter
Third Fiscal Quarter
Year-To-Date
2004
2003
Change
2004
2003
Change
2004
2003(1)
Change
60
57
3
$
9,827
$
9,701
$
126
$
32,962
$
28,813
$
4,149
40
41
(1
)
360
301
59
1,196
1,037
159
100
98
2
$
10,187
$
10,002
$
185
$
34,158
$
29,850
$
4,308
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Twelve Weeks Ended
Forty Weeks Ended
November 3, 2003
November 4, 2002
November 3, 2003
November 4, 2002
$
—
$
3,134
$
—
$
8,959
(708
)
728
(708
)
2,442
632
42
221
405
$
(76
)
$
3,904
$
(487
)
$
11,806
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
$
4,002
3,251
2,834
2,477
8,365
2,826
4,129
1,802
350
2,959
$
32,995
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Table of Contents
CONTROLS AND PROCEDURES
Table of Contents
OTHER INFORMATION
(Dollars in Thousands)
On September 29, 2003, the Company issued $105,000 principal amount of 4%
Convertible Subordinated Notes due 2023 (“2023 Convertible Notes”) in a
private placement in reliance upon the exemptions from registration
provided by Rule 144A (in that the initial purchasers of the notes met
the conditions set forth therein) and Regulation S (in that the notes may
be sold in foreign country transactions) promulgated under the Securities
Act of 1933, as amended. The initial purchasers of the 2023 Convertible
Notes were Citigroup Global Markets, Inc., and BNP Paribas Securities
Corp. The aggregate offering price of the 2023 Convertible Notes was
$105,000, and the initial purchasers purchased the notes from us at a
discount equal to 325 basis points, or $101,588. The 2023 Convertible
Notes are convertible into shares of our common stock at an initial
conversion rate of 112.4859 shares per $1 principal balance of the notes
upon the conditions set forth in the related indenture, which is being
filed with the Securities and Exchange Commission as an exhibit to this
report. The conversion price is subject to adjustment as described in the
indenture.
Table of Contents
EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibits:
Exhibit #
Description
4.6
Indenture, dated as of September 29, 2003, by and between the
Company and J.P. Morgan Trust Company, National Association,
as Trustee.
4.7
Form of Notes (included in Exhibit 4.6)
4.8
Registration Rights Agreement, dated as of September 29, 2003,
by and among the Company and Citigroup Global Markets, Inc.,
for itself and the other initial purchasers.
10.50
Director Fee Agreement, effective as of April 1, 2003, by and
between the Company and William P. Foley, II.*
10.51
Distribution Service Agreement, dated as of November 7, 2003,
by and between La Salsa, Inc. and McCabe’s Quality Foods.
10.52
Fifth Amended and Restated Credit Agreement, dated as of
November 12, 2003, by and among the Company, the Lenders party
thereto, and BNP Paribas, a bank organized under the laws of
France acting through its Chicago Branch (as successor in
interest to Paribas), as Agent.
31.1
Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
*
A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 15(a)(3) of Form 10-K.
(b)
Reports on Form 8-K:
A Current Report on Form 8-K, dated September 17, 2003, was
filed during the third quarter of 2004, furnishing the
Company’s financial results for the second quarter ended
August 11, 2003.
A Current Report on Form 8-K, dated September 22, 2003, was
filed during the third quarter of 2004, announcing the
Company’s proposed offering of convertible subordinated notes.
A Current Report on Form 8-K, dated September 23, 2003, was
filed during the third quarter of 2004, announcing the pricing
of the Company’s convertible subordinated notes.
A Current Report on Form 8-K, dated September 29, 2003, was
filed during the third quarter of 2004, announcing the closing
of $105.0 million of convertible subordinated notes.
CKE RESTAURANTS, INC.
(Registrant)
Date: December 10, 2003
/s/ Theodore Abajian
Theodore Abajian
Executive Vice President
Chief Financial Officer