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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13192
CKE RESTAURANTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 33-0602639
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1200 NORTH HARBOR BOULEVARD
ANAHEIM, CALIFORNIA 92801
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 774-5796
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(TITLE OF EACH CLASS) NAME OF EACH EXCHANGE ON WHICH REGISTERED:
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 1997 was $552,153,292.
The number of shares outstanding of the registrant's common stock was
33,356,566 as of March 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the registrant's Proxy
Statement for the 1997 Annual Meeting of Stockholders, which will be filed with
the Securities and Exchange Commission within 120 days after January 27, 1997,
are incorporated by reference into Part III of this Report.
The Exhibit Index is contained in Part IV herein on Page E-1.
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CKE RESTAURANTS, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 27, 1997
PART I Page
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . 13
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . 16
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 22
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . 22
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . 23
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PART I
ITEM 1. BUSINESS
OVERVIEW
CKE Restaurants, Inc., a Delaware corporation ("CKE" and collectively
with its subsidiaries, the "Company"), is engaged primarily in the food service
industry. The Company owns, operates, franchises and licenses the Carl's Jr.(R)
quick-service hamburger restaurant concept, which is the seventh largest
quick-service hamburger restaurant chain in the United States. As of January
27, 1997, the Carl's Jr. system included 673 restaurants, of which 415 were
operated by the Company and 258 were operated by the Company's franchisees and
licensees. The Carl's Jr. restaurants are located in the western United States,
predominantly in California, and in Mexico and the Pacific Rim. Primarily as a
result of recent acquisitions, the Company also operates and franchises a total
of 257 other restaurants, including 107 Taco Bueno(R) quick-service Mexican
food restaurants located in Texas and Oklahoma.
The first Carl's Jr. restaurant was opened in 1956 by Carl N. Karcher,
the Company's founder, in Anaheim, California. After an extended period of
growth, the Company made certain strategic decisions and experienced certain
operational difficulties in the early 1990s which adversely impacted the
Company's sales and profitability. In response to the introduction of value
pricing by its quick-service restaurant competitors, the Company reduced prices
and initiated an extensive value-priced menu advertising campaign. Beginning in
October 1994, the Company hired a new management team that began implementing a
variety of strategic and operational programs designed to revitalize the Carl's
Jr. brand and improve financial results. These programs included, among others,
a renewed focus on offering superior products, the elimination of most
value-priced menu items, a new advertising campaign, a dual-branding program
with The Green Burrito(R) and the commencement of a remodeling program for
Carl's Jr. restaurants. As a result of these strategies, together with the
Company's successful efforts to reduce expenses at both the corporate and
operating levels, the Company experienced significant improvements in sales and
operating results in fiscal 1996 and fiscal 1997. The Company is continuing to
implement its dual-branding and remodeling programs and to focus on reducing
expenses, and believes it will continue to benefit from such activities in the
future.
BUSINESS STRATEGY
The Company's objective is to enhance and reinforce its position as
one of the leading operators of quick-service restaurants within its targeted
markets. The Company's current management team has implemented a business
strategy which has revitalized the Carl's Jr. brand and increased sales and
profitability. The Company believes that certain elements of this business
strategy can be used successfully to improve the financial performance and
revitalize the brands of its recent and future acquisitions. Key elements of
the Company's business strategy are as follows:
Established, Differentiated Brand. The Company is committed to further
developing established restaurant brands that have a strong consumer identity
in regional markets and target a specific market niche. With over 40 years of
operation, Carl's Jr. is a distinct and identifiable brand and its Happy
Star(R) logo is widely recognized in its core markets. Unlike many
quick-service restaurants which emphasize lower prices, Carl's Jr. restaurants
focus on offering customers a higher quality dining experience at a reasonable
price. The Company believes that Carl's Jr.'s superior food quality, generous
portions, broad menu and attentive customer service differentiate it from its
competitors and are critical to its success.
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Maintain Efficient Operations. The Company believes its operating and
distribution systems, experienced restaurant-level management and strong
employee training programs are critical to its ability to achieve strong Carl's
Jr. restaurant-level margins. The Company has designed and implemented
restaurant managerial and operating procedures that enable it to control
expenses while improving food quality and customer service. The Carl's Jr.
distribution system takes advantage of volume purchasing of food and supplies
and provides system-wide consistency and economies of scale. To develop and
motivate its restaurant managers, the Company offers performance-based
incentive compensation and opportunities for advancement.
Continue Dual-Branding Programs. The Company believes dual-branding
programs increase sales and customer counts by offering its customers an
additional distinct concept and a separate menu at a single restaurant
location, without requiring a substantial investment or significantly
increasing operating complexities. The Company believes that its dual-branding
program with The Green Burrito has attracted new customers while increasing the
frequency of customer visits at converted restaurants. The Company plans to
aggressively continue the conversion of Carl's Jr. restaurants to the Carl's
Jr./Green Burrito concept and is considering dual-branding certain of its
recently acquired Taco Bueno restaurants with other quick-service restaurant
concepts.
Innovative Advertising. The Company is committed to aggressively
promoting and enhancing its brand awareness through innovative advertising. In
early 1995, the Company discontinued its value pricing strategy for Carl's Jr.
and focused its advertising programs on building the Carl's Jr. brand by
emphasizing the key differentiating attributes of its concept. Since the start
of this innovative advertising campaign, the Company has experienced seven
consecutive quarterly increases in Company-operated Carl's Jr. same-store sales
as compared with the corresponding quarters of the prior year.
Continue Development of Extensive Franchise System. The Company's
franchise strategy is to increase market penetration without increasing the
total capital required by the Company for development of new restaurants. The
Company has developed a strong Carl's Jr. franchise system by attracting
franchisees with experience in multi-unit restaurant operations and ensuring
that each franchisee adheres to the Company's high operating and quality
standards. The Company believes that the recent strong sales results in the
Carl's Jr. system will attract new franchisees and encourage existing
franchisees to open new restaurants. The Company is also considering
franchising certain of its recently acquired concepts.
GROWTH STRATEGY
The Company is currently pursuing a strategy of growth and expansion
through (i) increasing sales and profitability at its existing restaurants,
(ii) the opening of both Company-operated and franchised restaurants in
existing and new markets, and (iii) acquisitions of, or investments in, similar
concepts to create new avenues for growth.
Increasing Restaurant Sales and Profitability. The Company believes it
can increase consumer awareness, restaurant sales and profitability by
continuing its dual-branding strategy, completing its remodeling and image
enhancement programs and expanding its advertising and marketing program. The
Company's original agreement with GB Foods Corporation ("GB Foods") provided
for an aggregate of 140 dual-brand conversions over the five-year term of the
agreement. The original agreement was modified in February 1997 to provide for
the conversion of a minimum of 60 restaurants per year to dual-brand Green
Burrito locations for each of the next four years, accelerating the original
140-unit commitment to a minimum of 306 stores, including the 66
Company-operated and franchised locations that had been converted as of the
date the agreement was amended. Post-conversion revenues in the 59
Company-operated restaurants converted to Carl's Jr./Green Burrito dual-brand
restaurants (including restaurants converted during the year) as of January 27,
1997 were approximately 25% higher than same-store sales in the comparable
prior year period. The Company is also considering dual-branding certain of its
recently acquired Taco Bueno restaurants with other quick-service restaurant
concepts.
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The Company is currently remodeling Company-operated Carl's Jr.
restaurants with a fresher, more contemporary look. Exterior improvements
include brighter colors, red awnings and a large, tilted Happy Star logo. The
new interiors feature the same fresh colors, food murals, display cases for
salads and desserts and accent lighting throughout the dining area. The Company
believes that its new restaurant design will further increase the consumer's
awareness of the Carl's Jr. brand. As of January 27, 1997, the Company had
remodeled over half of its Company-operated Carl's Jr. restaurants and plans to
complete the remodeling of substantially all of its Company-operated Carl's Jr.
restaurants by the end of fiscal 1998. In accordance with the Company's
franchise agreements, the Company's franchisees will have until August 1999 to
remodel their restaurants. The Company is also in the process of enhancing the
Taco Bueno brand image with new signage and menu boards and is considering a
more extensive remodeling program.
The Company also plans to continue its advertising campaign with
innovative television commercials emphasizing the Carl's Jr. brand and its
quality products. Based upon the success of its advertising campaign, most of
the Company's franchisees have agreed to increase their contributions for
marketing and advertising, and the Company plans to partially match such
contributions.
Opening New Restaurants. The Company intends to accelerate its
expansion program by opening new restaurants in both traditional, freestanding
structures and alternative formats. The Company opened 12 new Carl's Jr.
restaurants during fiscal 1997 and presently anticipates that it will open up
to 30 new Carl's Jr. restaurants and is evaluating opening additional Taco
Bueno restaurants in its existing markets during fiscal 1998. The Company's
franchisees and licensees opened 14 new Carl's Jr. restaurants during fiscal
1997, and the Company presently anticipates that its franchisees and licensees
will open up to 15 new Carl's Jr. restaurants during fiscal 1998.
The Company believes that its existing core and developing markets
offer significant growth opportunity for both Company-operated and franchised
restaurant development. The Company's expansion strategy is designed to
increase market penetration and consumer awareness, thereby enabling the
Company to take advantage of operational and advertising efficiencies through
restaurant clustering within television markets. The Company believes that
increases in average restaurant sales can be achieved in those markets in which
it can open multiple restaurants. The Company will attempt to attract new
qualified franchisees and encourage existing franchisees to open additional
restaurants, and the Company will continue to co-develop markets with its
franchisees. In determining which new markets to develop, the Company considers
many factors, including the size of the market, demographic trends, competition
and real estate availability and pricing.
Pursuing Complementary Acquisitions. The Company also seeks to enhance
its growth and expansion through selective acquisitions of, or investments in,
other restaurant concepts. When evaluating possible acquisitions and
investments, the Company identifies (i) similar concepts for conversion to
Carl's Jr. restaurants, (ii) underperforming brands that the Company believes
can be turned around by improving unit economics and reducing overhead and
(iii) restaurant concepts that the Company believes present the potential for
an additional growth vehicle.
The Company intends to apply certain elements of its business strategy
used to improve the performance of its Carl's Jr. restaurants to its recent and
future acquisitions. In addition, the Company believes that its efficient
operating systems and established corporate infrastructure will enable it to
improve restaurant-level margins and eliminate redundant corporate functions at
companies which it acquires or in which it makes a significant investment.
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CARL'S JR.
Concept. The Company believes that its Carl's Jr. restaurants'
superior food quality, diverse menu and attentive customer service
differentiate the Company from its competitors and are critical to its success.
Unlike many quick-service restaurants that emphasize lower prices, Carl's Jr.
restaurants focus on offering customers a higher quality dining experience at a
reasonable price. Carl's Jr. charbroiled hamburgers, chicken sandwiches and
signature items are generally made-to-order, meet exacting quality standards
and are offered in generous portions. Carl's Jr.'s diverse menu and
all-you-can-eat salad bar appeal to a broad audience but remain sufficiently
limited to maintain both a distinct identity and operational efficiencies. By
providing partial table service, unlimited drink refills and an attractive
restaurant decor, Carl's Jr. restaurants offer a pleasant, customer-friendly
environment. The Company believes that its focus on customers and customer
service, superior food quality and generous portions enables the Carl's Jr.
restaurants to maintain a strong price-value image with its customers.
Menu and Restaurant Design. Carl's Jr. restaurants offer a variety of
products that have a strong reputation for quality and taste. The Carl's Jr.
menu is relatively uniform throughout the chain and features several
charbroiled hamburgers and chicken sandwiches, including the Famous Star,
Western Bacon Cheeseburger(R), Super Star(R), Charbroiler Chicken Sandwiches(R)
and Crispy Chicken Sandwiches. Other entrees include a fish sandwich, stuffed
baked potatoes and prepackaged salads. Side orders, such as french fries, onion
rings and fried zucchini, are also offered. Most restaurants also have a
breakfast menu including eggs, bacon, sausage, French Toast Dips(R), the
Sunrise Sandwich(R) and a breakfast burrito. In addition, the restaurants sell
a variety of promotional products on a limited basis. The Company was also
among the first to offer self-service salad bars and all-you-can-drink beverage
bars.
Most Carl's Jr. restaurants are freestanding, ranging in size from
2,500 to 4,000 square feet, with a seating capacity of 65 to 115 persons and
drive-thru facilities. Some restaurants are located in shopping malls and other
in-line facilities. Currently, several building designs and floor plans are in
use system-wide, depending upon operational needs, local zoning requirements
and real estate availability.
Operations. The Company strives to maintain high standards in all
materials used by its restaurants, as well as the operations related to food
preparation, service and cleanliness. Hamburgers and chicken sandwiches at
Carl's Jr. restaurants are generally prepared or assembled after the customer
has placed an order and are served promptly. Hamburger patties and chicken
breasts are charbroiled in a gas-fired double broiler that sears the meat on
both sides. The meat is conveyed through the broiler automatically to maintain
uniform heating and cooking time.
Each Company-operated Carl's Jr. restaurant is operated by a manager
who has received nine to 13 weeks of management training. This training program
involves a combination of classroom instruction and on-the-job training in
specially designated training restaurants. Other restaurant employees are
trained by the restaurant manager in accordance with Company guidelines.
Restaurant managers are supervised by district managers, each of whom is
responsible for 11 to 14 restaurants. Approximately 35 district managers are
under the supervision of four regional vice presidents, all of whom regularly
inspect the operations in their respective districts and regions.
Purchasing and Distribution. The Company purchases most of the primary
food products and packaging supplies used in the Carl's Jr. restaurant system
and warehouses and distributes such items to both Company-operated and
franchised Carl's Jr. restaurants. Although not required to do so,
substantially all of the Company's Carl's Jr. franchisees purchase most of
their food and paper supplies from the Company. The Company is one of the few
businesses in the quick-service restaurant industry that has elected not to
outsource all of its distribution activities. The Company believes its mature
procurement process allows it to effectively manage
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food costs, provide adequate quantities of food and supplies at competitive
prices, generate revenues from franchisees by adding a nominal mark-up to cover
the direct costs and provide better over all service to the Carl's Jr.
restaurants. The Company seeks competitive bids from suppliers on many of its
food products, approves suppliers of those products and requires them to adhere
to product specifications established by the Company. Whenever possible, the
Company negotiates sole source contracts for particular products which tend to
produce deeper discounts.
The Company operates a distribution center at its corporate
headquarters in Anaheim, California and a smaller distribution facility in
Manteca, California. The food products and supply items are distributed to
Carl's Jr. restaurants, generally twice a week, by refrigerated trucks leased
and operated by the Company.
Green Burrito Development Agreement. Dual-branding is an emerging
concept in the quick-service restaurant industry that allows a single
restaurant to offer customers two distinct brand menus. In May 1995, the
Company entered into a five-year agreement with GB Foods, the operator and
franchisor of The Green Burrito quick-service Mexican food concept, to offer
the Green Burrito as a second brand menu at selected Carl's Jr. locations. The
Company believes that Green Burrito's position in the popular Mexican food
segment and its dinner menu orientation complement the Carl's Jr. menu.
Customers in the Carl's Jr./Green Burrito dual-brand restaurants are able to
order items from both the Carl's Jr. menu board and the Green Burrito menu
board from the same counter, and both menus are available to customers
utilizing the drive-thru. The Green Burrito menu offered at the dual-brand
restaurants features a broad range of traditional Mexican food items, including
burritos, tostadas, enchiladas, tacos, tacquitos and nachos. A variety of
condiments such as jalapeno peppers, hot sauce and mild and hot salsa are
available at self-serve salsa bars so that customers can spice and garnish
their meals according to individual taste. The Company believes that this
dual-branding program has attracted new customers while increasing the
frequency of customer visits at converted restaurants.
In order to convert an existing Carl's Jr. restaurant to a Carl's
Jr./Green Burrito restaurant, the additional equipment necessary to offer the
Green Burrito menu is added to the Carl's Jr. restaurant, as well as new menu
boards and new signage, both inside and outside, indicating the offering of
both brands. In most cases, changes to the seating area or other parts of the
physical structure of the restaurant are unnecessary.
The Company's agreement with GB Foods initially provided for the
conversion of 140 Carl's Jr. restaurants to Carl's Jr./Green Burrito dual-brand
restaurants by July 2000. The original agreement was modified in February 1997
to provide for the conversion of a minimum of 60 restaurants per year to
dual-brand locations for each of the next four years. The Company is required
to pay an initial franchise fee for each store opened and remit royalties on
Green Burrito food sales to GB Foods. At the end of fiscal 1996, the Company
elected to sub-franchise, and recently began offering the Carl's Jr./Green
Burrito dual-brand to its franchise community. There are currently five
franchised Carl's Jr. restaurants that have been converted to the Carl's
Jr./Green Burrito concept. The Company will receive a portion of the fee for
each franchise conversion and royalties from its franchisees' Green Burrito
food sales.
Franchised and Licensed Operations. The Company's franchise strategy
is designed to further the development of the Carl's Jr. chain and reduce the
total capital required of the Company for development of new Carl's Jr.
restaurants. Franchise arrangements with Carl's Jr. franchisees, who operate
in Arizona, California, Hawaii, Nevada, Oregon and Utah, generally provide for
initial fees and continuing royalty payments to the Company based upon a
percentage of sales. Additionally, most franchisees purchase food, paper and
other supplies from the Company. Franchisees may also be obligated to remit
lease payments for the use of Company-owned or leased restaurant facilities and
to pay related occupancy costs, which include maintenance, insurance and
property taxes. The Company also plans to continue to pursue non-traditional
franchise development opportunities through innovative formats, including
gasoline stations, convenience stores and institutional food service outlets.
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The Company's franchising philosophy is such that only candidates with
appropriate experience are considered for the program. Specific net worth and
liquidity requirements must also be satisfied. Area development agreements
generally require franchisees to open a specified number of Carl's Jr.
restaurants in a designated geographic area within a specified time period.
As of January 27, 1997, 258 Carl's Jr. restaurants were operated by
the Company's franchisees and licensees. The majority of the Company's
franchisees own more than one restaurant, with 13 franchisees owning seven or
more restaurants. The Company presently anticipates that its franchisees and
licensees will open up to 15 new Carl's Jr. restaurants during fiscal 1998.
To expand the Carl's Jr. presence internationally, the Company entered
into nine exclusive licensing agreements that allow the Carl's Jr. licensees to
use the Carl's Jr. name and trademarks and provide for initial fees and
continuing royalties based upon a percent of sales. In May 1995, the Company
entered into a joint venture agreement with its Malaysia-based licensee that
provides for the development of Carl's Jr. restaurants in the Pacific Rim. As
of January 27, 1997, there were 30 licensed restaurants in operation, most of
which are located in Mexico and the Pacific Rim. Royalties from the Company's
licensing agreements were not material in fiscal 1997, 1996 or 1995.
Carl's Jr. Restaurant Locations. The following table sets forth the
locations of Company-operated and franchised and licensed Carl's Jr.
restaurants as of January 27, 1997:
FRANCHISED
OR
COMPANY-OPERATED LICENSED TOTAL
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California . . . . . . . . . . . . . . . . . . . . . . . . . . . 399 157 556
Arizona . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 27 38
Nevada . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 27 27
Oregon . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 15 18
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 -- 2
Hawaii . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1 1
Utah . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1 1
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Total United States . . . . . . . . . . . . . . . . . . 415 228 643
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International . . . . . . . . . . . . . . . . . . . . . . . . . . -- 30 30
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Total . . . . . . . . . . . . . . . . . . . . . . . . . 415 258 673
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TACO BUENO
Casa Bonita Incorporated ("Casa Bonita"), which was acquired by the
Company in October 1996, currently owns and operates 107 Taco Bueno
quick-service Mexican restaurants located in Texas and Oklahoma. Taco Bueno
seeks to differentiate itself from its principal competitors by offering a
broad menu featuring generous portions of freshly prepared food items. In
addition to typical quick-service Mexican offerings, such as burritos, tacos,
tostadas and combination meals, Taco Bueno features a number of signature menu
items such as fresh salads and Mexican platters. Taco Bueno's Mexican platters
include taco and burrito platters, beef and chicken taco salads and nacho
platters, each of which are accompanied by rice, beans, freshly prepared
guacamole and chips. The restaurants also feature a salsa bar that includes
sliced jalapenos, diced onions and freshly prepared pico de gallo and hot
sauce.
Taco Bueno restaurants generally feature a "Santa Fe/Pueblo"
architecture and exterior decor, which is designed to increase visibility and
consumer recognition, and generally range in size from 2,400 square feet to
3,200 square feet. Restaurant interiors include wooden tables and chairs, booth
seating, stucco walls, warm
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colors and a southwestern theme, all of which are intended to create a
distinctive atmosphere. The Company is also in the process of enhancing the
Taco Bueno brand image with new signage and menu boards and is considering a
more extensive remodeling program.
The Company's strategy with respect to its Taco Bueno concept is to
increase its market share and competitive presence in existing markets. The
Company believes that the growing popularity of Mexican food and the relatively
few national or regional Mexican quick-service restaurant chains provide a
significant opportunity to expand the Taco Bueno concept within its core
markets in the areas of Dallas/Ft. Worth, Tulsa and Oklahoma City and to enter
into new markets. The Company is evaluating opening additional Taco Bueno
restaurants in its existing markets during fiscal 1998. The Company may
franchise the Taco Bueno concept and is considering dual-branding certain of
its Taco Bueno restaurants with other quick-service restaurant concepts.
INVESTMENTS IN OTHER RESTAURANT CONCEPTS
The Company seeks to enhance its growth and expansion through the
selective acquisitions of, or investments in, other restaurant concepts. The
following is a brief description of the Company's investments in other
restaurant concepts:
Checkers Drive-In Restaurants, Inc. ("Checkers"). Checkers operates
and franchises the Checkers Drive-In Restaurants double drive-thru
quick-service hamburger restaurant concept. As of December 30, 1996, there were
478 Checkers restaurants operating in 23 states, of which 232 were operated by
Checkers and 246 were operated by franchisees.
During fiscal 1997, the Company, together with a group of investors,
including certain related parties, purchased and subsequently restructured
$35.8 million of aggregate principal amount of Checkers 13.0% senior secured
debt, due on July 31, 1999. The Company paid $12.9 million for $13.2 million,
or 36.75% share of the debt and also contributed $0.5 million as part of a $2.5
million revolving line of credit to Checkers, of which a combined total of
$10.1 million remained due from Checkers as of January 27, 1997. In connection
with the restructuring, the Company received warrants to purchase 7,350,423
shares of Checkers common stock at an exercise price of $0.75 per share (the
"Checkers Warrants").
Subsequent to January 27, 1997, the Company purchased 6,162,299 shares
of Checkers common stock at $1.14 per share and 61,636 shares of Checkers
Series A preferred stock at $114.00 per share for an aggregate purchase price
of $14.1 million in connection with a private placement of Checkers' securities
to the Company and other investors, including certain related parties. The
shares of Checkers common stock acquired by the Company represent approximately
10% of Checkers' outstanding shares. The shares of Series A preferred stock
acquired by the Company are convertible into an aggregate of 6,162,299
additional shares of common stock; provided, however, that such conversion is
subject to the approval of Checkers' stockholders at its next annual meeting.
Assuming full exercise of the Checkers Warrants and the conversion of all of
the Series A preferred stock into Checkers common stock, the Company would
beneficially own approximately 22% of Checkers' outstanding shares. See Note 6
of Notes to Consolidated Financial Statements.
Rally's Hamburgers, Inc. ("Rally's"). Rally's operates and franchises
the Rally's Hamburgers double drive-thru quick-service hamburger restaurant
concept. As of February 24, 1997, there were 471 Rally's restaurants operating
in 19 states, of which 214 were owned and operated by Rally's, 230 were
operated by its franchisees and 27 were owned by Rally's but were operated as
Rally's restaurants by the Company. The Company and Rally's entered into an
operating agreement, effective in July 1996, pursuant to which the Company
began operating 28 Rally's-owned restaurants located in California and Arizona.
Pursuant to the terms of the operating agreement, Rally's retains ownership of
the assets of such restaurants and receives a percentage of the restaurants'
sales. One of the Rally's restaurants operated by the Company has been
converted into a Carl's
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Jr. "Jr." restaurant, which offers a limited Carl's Jr. menu in a double
drive-thru and walk-up service format. The Company is considering the
conversion of more of these Rally's restaurants to Carl's Jr. "Jr."
restaurants. The Company's results of operations include the revenue and
expenses of these 28 restaurants commencing July 2, 1996.
As of January 27, 1997, the Company's investment in Rally's was $7.9
million, representing an approximate 18% ownership interest. In addition, the
Company has the right to acquire an additional 2% ownership interest in Rally's
upon exercise of 775,488 warrants to purchase Rally's common stock at $2.25 per
share that were acquired pursuant to the Company's participation in Rally's
rights offering and 750,000 warrants to purchase Rally's common stock at $4.375
per share that were issued to the Company in December 1996. See Note 6 of Notes
to Consolidated Financial Statements.
On March 25, 1997, Checkers and Rally's agreed in principle to a
merger transaction, pursuant to which Rally's would be acquired by Checkers.
The agreement contemplates that each share of Rally's common stock will be
converted into three shares of Checkers common stock. Consummation of the
Rally's - Checkers merger is subject to negotiation of definitive agreements,
the receipt of fairness opinions and stockholder and other required approvals,
as well as other customary conditions.
Summit Family Restaurants Inc. ("Summit"). Summit, which was acquired
by the Company in July 1996, operates three restaurant concepts: JB's
Restaurant, a family dining chain of 73 Company-operated and 22 franchised
restaurants; 16 HomeTown Buffet restaurants, which are operated by Summit as a
franchisee of HomeTown Buffet, Inc.; and six Galaxy Diners, a "50's style"
casual theme restaurant. Since the Summit acquisition, the Company has
determined that its principal focus is on the quick-service segment of the
restaurant industry as opposed to the family-dining segment in which Summit
operates. As such, the Company is considering selling or otherwise disposing
all of or a portion of Summit. Since completing the acquisition of Summit, the
Company has eliminated a substantial portion of Summit's corporate staff,
resulting in reduced general and administrative expenses. In addition, the
Company has closed five JB's Restaurants. Summit's results of operations have
not been material to the Company's overall operating performance since the date
of acquisition. See Note 2 of Notes to Consolidated Financial Statements.
Boston Market. The Company continues to hold an interest in Boston West,
L.L.C. ("Boston West"), which acquired the Company's Boston Market restaurant
assets and operations in fiscal 1995 and is developing Boston Markets in
designated markets in California under an area development agreement with
Boston Chicken, Inc. ("BCI"), the franchisor of the Boston Market restaurant
concept. As of January 27, 1997, Boston West operated 84 Boston Market stores
located in southern California. The Company's investment in Boston West as of
January 27, 1997 and January 29, 1996 was $22.3 million and $19.8 million,
respectively, which is recorded at cost and approximates the estimated fair
value of the Company's common and preferred equity units in Boston West. See
Note 6 of Notes to Consolidated Financial Statements.
SOURCES OF RAW MATERIALS
The Company's ability to maintain consistent quality depends in part upon
its ability to acquire and distribute food products, restaurant equipment,
signs, fixtures and supplies from reliable sources in accordance with Company
specifications. The Company, its franchisees and its licensees have not
experienced any material shortages of these items that the Company purchases
from numerous independent suppliers. Alternate sources of these items are
generally available.
8
11
TRADEMARKS AND SERVICE MARKS
The Company owns numerous trademarks and service marks. The Company has
registered many of those marks, including Carl's Jr.(R), the Happy Star(R)
logo, Taco Bueno(R) and proprietary names for a number of the Carl's Jr. and
Taco Bueno menu items, with the United States Patent and Trademark Office. The
Company believes that its trademarks and service marks have significant value
and play an important role in its marketing efforts.
SEASONALITY
The Company's business is moderately seasonal. Average restaurant sales
are normally higher in the summer months than during the winter months.
WORKING CAPITAL PRACTICES
Currently, the Company is utilizing cash flows from operations to fund the
expansion of new Carl's Jr. restaurants, the remodeling of its restaurants
under the Company's image enhancement program and the conversion of its
dual-concept restaurants.
The Company does not carry significant amounts of inventory, experience
material returns of merchandise, or generally provide extended payment terms to
its franchisees or licensees. Cash from operations, along with cash and cash
equivalents, and a combination of proceeds from its revolving credit facility
and borrowings from other banks or financial institutions should enable the
Company to meet its financing requirements.
GOVERNMENT REGULATION
Each Company-operated and franchised restaurant must comply with
regulations adopted by federal agencies and with licensing and other
regulations enforced by state and local health, sanitation, safety, fire and
other departments. In addition, these restaurants also must comply with federal
and state environmental regulations, but those regulations have not had a
material effect on the restaurants' operations. More stringent and varied
requirements of local governmental bodies with respect to zoning, land use, and
environmental factors can delay and sometimes prevent development of new
restaurants and remodeling of existing restaurants in particular locations.
The Company is also subject to federal and a substantial number of
state laws regulating the offer and sale of franchises. Such laws impose
registration and disclosure requirements on franchisors in the offer and sale
of franchises and may also apply substantive standards, including limitations
on the ability of franchisors to terminate franchisees and alter franchise
arrangements, to the relationship between franchisor and franchisee. The
Company believes it is operating in substantial compliance with applicable laws
and regulations governing its operations.
The Company and its franchisees must comply with the Fair Labor
Standards Act and various federal and state laws governing employment matters,
such as minimum wages, overtime and other working conditions and citizenship
requirements. Many of the Company's employees are paid hourly rates related to
the federal and state minimum wage laws and accordingly, increases in the
minimum wage increase the Company's labor cost.
9
12
COMPETITION
The food service industry is intensely competitive with respect to the
quality and value of food products offered, concept, service, price, dining
experience and location. The Company primarily competes with major restaurant
chains, some of which dominate the quick-service restaurant industry, and also
competes with a variety of other take-out food service companies and fast-food
restaurants. Certain of the major quick-service restaurant chains have
increasingly offered selected food items and combination meals at discounted
prices. In recent years, the Company's restaurant sales were adversely affected
by aggressive promotions and price reductions by its competitors. The Company
also faces competition from other quick-service operators, retail chains, other
companies and developers for desirable site locations, which may adversely
affect the cost, implementation and timing of the Company's expansion plans.
RESEARCH AND DEVELOPMENT
The Company maintains a test kitchen for its Carl's Jr. operations at
its headquarters in which new products and production concepts are developed on
an ongoing basis. In addition, the Company is currently testing a number of
dual-concepts which include the sale of other branded products from within the
Company's Carl's Jr. and Taco Bueno restaurants. While these efforts are
critical to the Company, amounts expended for these activities are not
considered material. There are no customer-sponsored research and development
activities.
ENVIRONMENTAL MATTERS
Compliance with federal, state and local environmental provisions
regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment did not have a material effect on
capital expenditures, earnings or the competitive position of the Company in
fiscal 1997. The Company cannot predict the effect on its operations from
possible future legislation or regulation.
EMPLOYEES
As of January 27, 1997, the Company employed approximately 19,400
persons, of whom approximately 18,000 were hourly restaurant, distribution or
clerical employees and the remainder were managerial, salaried employees
engaged in administrative and supervisory capacities. A majority of the hourly
employees are employed on a part-time basis to provide service necessary during
peak periods of restaurant operations. None of the Company's employees are
currently covered by a collective bargaining agreement. The Company has never
experienced a work stoppage attributable to labor disputes and believes its
employee relations are good.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that the forward-looking
statements contained in this Form 10-K under "Item 1. Business," "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Form 10-K involve known and unknown risks and
uncertainties which may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by any forward-looking statements made by
or on behalf of the Company. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, the Company is filing the
following cautionary statements identifying important factors that in some
cases have affected, and in the future could cause, the Company's actual
results to differ materially from those expressed in any such forward-looking
statements.
10
13
In addition to factors discussed in this Form 10-K, among the other
factors that could cause the Company's results to differ materially are:
general economic and business conditions; the impact of competitive products
and pricing; success of operating initiatives; development and operating costs;
advertising and promotional efforts; adverse publicity; acceptance of new
product offerings; consumer trial and frequency; changes in business strategy
or development plans; quality of management; availability, terms, and
deployment of capital; the results of financing efforts; business abilities and
judgment of personnel; availability of qualified personnel; food, labor, and
employee benefit costs; changes in, or the failure to comply with, government
regulations; weather conditions and construction schedules and risks that sales
growth resulting from the Company's current and future remodeling and
dual-branding of restaurants can be sustained at the current levels
experienced.
The Company and its franchisees are pursuing an aggressive growth
strategy. There can be no assurance that the Company or its franchisees will
achieve growth objectives or that new restaurants will be profitable. The
success of the Company's planned expansion will be dependent upon numerous
factors, many of which are beyond the Company's control, including the
identification of suitable markets, the availability and leasing or purchase of
suitable sites on acceptable terms, the hiring, training and retention of
qualified management and other restaurant personnel, the ability to obtain
necessary governmental permits and approvals, the availability of appropriate
financing and general economic conditions.
In addition to the recent acquisitions of Casa Bonita and Summit, the
Company has had preliminary acquisition discussions with, and has evaluated the
potential acquisition of, other companies over the last few years. As part of
its growth strategy, the Company will continue to consider acquiring, or making
investments in, other companies in the food service industry that the Company
believes may complement or expand its existing business. Acquisitions involve a
number of special risks that could adversely affect the Company's operating
results, including the diversion of management's attention, the assimilation of
the operations and personnel of the acquired companies, the amortization of
acquired intangible assets, if any, and the potential loss of key employees. In
addition, the Company's acquisition strategy includes the identification of
companies or properties that are viewed as underperforming by the Company. This
element of the Company's strategy may increase the risks involved with the
Company's acquisitions. There can be no assurance that any such acquisition or
investment will enhance the Company's business.
As of January 27, 1997, the Company's investment in Boston West was
$22.3 million, which is recorded at cost and approximates the estimated fair
value of the Company's common and preferred equity units in Boston West. Boston
West has incurred significant operating losses and there can be no assurance
that the franchisor, BCI, will continue its support. As of January 27, 1997,
the Company's investment in Rally's was $7.9 million. Rally's reported a net
loss of $46.9 million for its fiscal year ended December 31, 1995 and net
income of $2.0 million (including an extraordinary gain, net of tax, of $5.3
million from the early extinguishment of debt) for its fiscal year ended
December 29, 1996. Subsequent to January 27, 1997, the Company purchased an
ownership interest in Checkers, and as of February 20, 1997, the Company's
investment in Checkers was $14.1 million. Checkers reported net losses of $33.2
million and $46.4 million for its fiscal years ended January 1, 1996 and
December 30, 1996, respectively. There can also be no assurance that the fair
values of the Company's investments in Boston West, Rally's or Checkers will
continue to support their recorded carrying values. See Note 6 of Notes to
Consolidated Financial Statements.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
William P. Foley II 52 Chairman of the Board and Chief Executive Officer
C. Thomas Thompson 47 President and Chief Operating Officer
Rory J. Murphy 49 Executive Vice President, Restaurant Operations
Carl A. Strunk 58 Executive Vice President, Chief Financial Officer
Andrew F. Puzder 46 Executive Vice President, General Counsel
Robert E. Wheaton 44 Executive Vice President
Loren C. Pannier 55 Senior Vice President, Investor Relations
William P. Foley II became Chief Executive Officer in October 1994,
Chairman of the Board of Directors in March 1994, and has served as a director
since December 1993. Since 1981, Mr. Foley has been Chairman of the Board,
President (until January 1995) and Chief Executive Officer of Fidelity National
Financial, Inc. ("Fidelity"), a company engaged in title insurance and related
services. Mr. Foley is also a member of the Boards of Directors of Micro
General Corporation, Rally's and Checkers.
C. Thomas Thompson was appointed President and Chief Operating Officer
in October 1994. Mr. Thompson has been a franchisee of the Company since 1984,
and currently operates 15 Carl's Jr. restaurants in the San Francisco Bay Area.
Mr. Thompson has more than 20 years of experience in the restaurant industry.
He previously held positions with Jack-in-the-Box and Pacific Fresh
Restaurants, a full-service restaurant chain in the Bay Area.
Rory J. Murphy was appointed Executive Vice President, Restaurant
Operations in June 1996, and had served as Senior Vice President, Restaurant
Operations from February 1993 until June 1996. Mr. Murphy has been employed by
the Company in various positions for 18 years.
Carl A. Strunk was appointed Executive Vice President, Chief Financial
Officer in February 1997. Mr. Strunk also serves as Executive Vice President,
Chief Financial Officer for Fidelity and has been with Fidelity since 1992. Mr.
Strunk previously served as President of Land Resources Corporation from 1986
to 1991. Mr. Strunk is a certified public accountant and is also a member of
the Board of Directors of Micro General Corporation and Pac Rim Holding
Corporation.
Andrew F. Puzder became Executive Vice President, General Counsel in
February 1997. Mr. Puzder also serves as Executive Vice President, General
Counsel for Fidelity. Mr. Puzder has been with Fidelity since January 1995.
From March 1994 to December 1994, he was a partner with the law firm of
Stradling, Yocca, Carlson & Rauth. Prior to that, he was a partner with the law
firm of Lewis, D'Amato, Brisbois & Bisgard, from September 1991 through March
1994, and he was a partner of the Stolar Partnership from February 1984 through
September 1991.
Robert E. Wheaton became Executive Vice President in January 1996. Mr.
Wheaton served as Vice President and Chief Financial Officer of Denny's, Inc.,
a subsidiary of Flagstar Corporation, from April 1995 to January 1996. From
1991 to 1995, Mr. Wheaton served as President and Chief Executive Officer, and
from 1989 to 1991 as Vice President and Chief Financial Officer, of The Bekins
Company.
Loren C. Pannier was appointed Senior Vice President, Investor
Relations in September 1996 and served as Senior Vice President,
Purchasing/Distribution from January 1996 to September 1996. Mr. Pannier also
served as Chief Financial Officer of the Company from 1980 to May 1995. Mr.
Pannier has been a Senior Vice President since 1980, and he has been employed
by the Company for 25 years.
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ITEM 2. PROPERTIES
Substantially all of the restaurants operated by the Company are located
on properties that are leased from others. In addition, the Company leases and
subleases certain properties to its franchisees. The terms of the Company's
leases or subleases generally range between three and 35 years and expire at
various dates through 2035. The expiration of these leases is not expected to
have a material impact on the Company's operations in any particular year as
the expiration dates are staggered over a number of years and many of the
leases contain renewal options.
The Company's corporate headquarters and primary distribution center,
located in Anaheim, California, are leased and contain approximately 78,000 and
102,000 square feet, respectively. The Manteca, California distribution
facility has 42,000 square feet and is owned by the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time the subject of complaints, threat letters
or litigation from guests alleging illness, injury or other food quality,
health or operational concerns. Adverse publicity resulting from such
allegations may materially adversely affect the Company and its restaurants,
regardless of whether such allegations are valid or whether the Company is
liable. The Company also is the subject of complaints or allegations from
employees and franchisees from time to time. The Company believes that the
lawsuits, claims and other legal matters to which it has become subject in the
course of its business are not material to the Company's financial condition or
results of operations, but an existing or future lawsuit or claim could result
in an adverse decision against the Company that could have a material adverse
effect on the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange
under the symbol "CKR". As of March 31, 1997, there were approximately 1,800
record holders of the Company's Common Stock. The following table sets forth,
for the periods indicated, the high and low closing sales prices of the
Company's Common Stock, as reported on the New York Stock Exchange Composite
Tape:
HIGH LOW
---- ---
FISCAL 1996
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.42 $ 4.25
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 7.50 4.92
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 10.58 7.83
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 11.92 9.58
FISCAL 1997
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $16.08 $ 9.92
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 18.67 13.67
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 22.83 15.42
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 24.00 19.08
13
16
The foregoing prices have been adjusted to give retroactive effect to
a three-for-two stock split of the Company's Common Stock, which was completed
on January 22, 1997 in the form of a stock dividend. No equity securities of
CKE were sold by the Company during the fiscal year ended January 27, 1997 that
were not registered under the Securities Act of 1933, as amended.
The Company has followed a policy of paying semi-annual cash dividends,
at the annual rate of $0.05 per share (adjusted to give retroactive effect to
the stock split), in each of the last three fiscal years. On March 27, 1997, the
Company's Board of Directors increased the semi-annual dividend rate to $0.04
per share and declared a $0.04 cash dividend, which is payable on April 25, 1997
to holders of record on April 4, 1997. Continued payment of dividends on the
Company's common stock will depend upon the Company's operating results,
business requirements and financial condition, and such other factors that the
Company's Board of Directors considers relevant. The Company's credit facility
imposes restrictions on the Company's ability to pay dividends or other
distributions on its common stock.
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ITEM 6. SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with the
consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-K. Per share data has been retroactively
adjusted for stock splits since the Company's inception.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND RESTAURANT DATA)
FISCAL YEAR ENDED OR AS OF JANUARY 31, (1)
-----------------------------------------------------------------
1997(2) 1996 1995 1994(3) 1993
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENTS OF INCOME DATA:
Total revenues . . . . . . . . . . . . . . $ 614,080 $ 465,437 $ 443,747 $ 463,494 $ 505,390
Operating income . . . . . . . . . . . . . 42,000 25,735 8,602 10,508 (7,266)
Interest expense . . . . . . . . . . . . . 9,877 10,004 9,202 10,387 13,630
Net income (loss) . . . . . . . . . . . . . 22,302 10,952 1,264 3,665 (5,507)
Net income (loss) per common and common
equivalent share (4) . . . . . . . . . . $ 0.73 $ 0.39 $ 0.05 $ 0.13 $ (0.20)
Cash dividends paid per common share . . . $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05
Common and common equivalent
shares used in computing per share
amounts (000) . . . . . . . . . . . . . 30,414 28,019 28,076 27,851 27,051
CARL'S JR. RESTAURANT OPERATING DATA (5):
System-wide restaurant revenues:
Company-operated restaurants . . . . . . $ 443,304 $ 389,214 $ 364,278 $ 384,859 $ 417,268
Franchised and licensed restaurants . . 204,700 193,984 201,170 209,214 202,109
--------- --------- --------- --------- ---------
Total system-wide revenues . . . . . . $ 648,004 $ 583,198 $ 565,448 $ 594,073 $ 619,377
========= ========= --------- ========= =========
Restaurants open (at end of fiscal year):
Company-operated . . . . . . . . . . . . 415 394 383 376 379
Franchised and licensed . . . . . . . . 258 273 277 272 263
--------- --------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . 673 667 660 648 642
========= ========= ========= ========= =========
Average annual sales per Company-
operated restaurant (6) . . . . . . . . $ 1,114 $ 1,006 $ 966 $ 992 $ 1,070
Percentage increase (decrease) in
comparable Company-operated
restaurant sales (7) . . . . . . . . . . 10.7% 4.4% (3.8)% (6.5)% (5.6)%
CONSOLIDATED BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . . . $ 401,217 $ 246,759 $ 244,361 $ 242,135 $ 268,924
Total debt, including current portion . . . 87,412 82,874 81,618 79,861 111,879
Stockholders' equity . . . . . . . . . . . $ 214,804 $ 101,189 $ 88,474 $ 92,076 $ 84,732
(1) The Company's fiscal year is 52 or 53 weeks, ending the last Monday in
January. For clarity of presentation, all years are presented as if the
fiscal year ended January 31.
(2) Fiscal 1997 includes results of operations of Rally's from and after July
2, 1996, Summit from and after July 15, 1996 and Casa Bonita from and
after October 1, 1996. See Note (5) below. Share and per share data was
also affected during fiscal 1997 by a public offering of 4,312,500 shares
of common stock, completed in November 1996.
(3) Fiscal 1994 includes 53 weeks.
(4) Net income (loss) per common and common equivalent share in fiscal 1994
and 1993 is net of a cumulative effect of a change in accounting principle
of $(0.03) and $(0.09) per share, respectively.
(5) Includes Carl's Jr. restaurant operating data only. Restaurant revenues
from Company-operated restaurants exclude revenues of $10.1 million, $57.3
million and $26.1 million, of revenues from the Company's Rally's, Summit
and Casa Bonita operations, respectively, in fiscal 1997. Also excludes
revenues of $4.3 million and $5.8 million in fiscal 1996 and 1995,
respectively, from Boston Market stores which are no longer operated by
the Company. See Note 6 of Notes to Consolidated Financial Statements.
(6) Calculated on a 52- or 53-week trailing basis for all years presented.
(7) Includes only Carl's Jr. restaurants open throughout the full years being
compared.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and related notes and "Selected Financial
Data" included elsewhere in this Form 10-K.
OVERVIEW
The Company owns, operates, franchises and licenses the Carl's Jr.
quick-service restaurant concept, which is the seventh largest quick-service
hamburger restaurant chain in the United States. As of January 27, 1997, the
Carl's Jr. system included 673 restaurants, of which 415 were operated by the
Company and 258 were operated by the Company's franchisees and licensees. The
Carl's Jr. restaurants are located in the western United States, predominantly
in California, and in Mexico and the Pacific Rim. Primarily as a result of
recent acquisitions, the Company also operates and franchises a total of 257
other restaurants, including 107 Taco Bueno quick-service Mexican food
restaurants located in Texas and Oklahoma.
Background. The first Carl's Jr. restaurant was opened in 1956 by Carl
N. Karcher, the Company's founder, in Anaheim, California. After an extended
period of growth, the Company made certain strategic decisions and experienced
operational difficulties in the early 1990s which adversely impacted the
Company's sales and profitability. In response to the introduction of value
pricing by its quick-service restaurant competitors, the Company reduced prices
and initiated an extensive value-priced menu advertising campaign. Beginning in
October 1994, the Company hired a new management team that began implementing a
variety of strategic and operational programs designed to revitalize the Carl's
Jr. brand and improve financial results. These programs included, among others,
a renewed focus on offering superior products, the elimination of most
value-priced menu items, a new advertising campaign, a dual-branding program
with The Green Burrito and the commencement of a remodeling program for Carl's
Jr. restaurants. As a result of these strategies, together with the Company's
successful efforts to reduce expenses at both the corporate and operating
levels, the Company experienced significant improvements in sales and operating
results in fiscal 1996 and fiscal 1997. The Company is continuing to implement
its dual-branding and remodeling programs and to focus on reducing expenses,
and believes it will continue to benefit from such activities in the future.
Image Enhancement and Dual-Branding Programs. During fiscal 1996, the
Company commenced its image enhancement program, aimed at remodeling and
revitalizing its Carl's Jr. restaurants. As of January 27, 1997, the Company
had remodeled over half of its Carl's Jr. restaurants and plans to complete
the remodeling of substantially all of its Company-operated Carl's Jr.
restaurants by the end of fiscal 1998. The cost of remodeling ranges from
$100,000 to $140,000 for each location. The Company also initiated its Green
Burrito dual-branding program during fiscal 1996. As of January 27, 1997, the
Company had converted 59 Company-operated Carl's Jr. restaurants to Carl's
Jr./Green Burrito dual-brand locations and the Company plans to convert 60
additional restaurants during fiscal 1998. During fiscal 1997 post-conversion
revenues in the 59 Company-operated restaurants converted to Carl's Jr./Green
Burrito dual-brand restaurants (including restaurants converted during the
year) were approximately 25% higher than same-store sales in the comparable
prior year period. The Company incurs approximately $40,000 to $50,000 in
equipment and signage costs in converting its Carl Jr. restaurants into
dual-brand restaurants. At the time of the conversions of Carl's Jr.
restaurants to Carl's Jr./Green Burrito dual-brand restaurants, the Company
intends to remodel such restaurants as described above. See "Business --
Carl's Jr. -- Green Burrito Development Agreement."
Restaurant Performance. For the trailing 52-week period ended January
27, 1997, the Company's average annual sales per Company-operated Carl's Jr.
restaurant was $1,114,000. For fiscal 1997, Company-operated Carl's Jr.
restaurants generated restaurant-level margins of 21.9%. The Company believes
its Company-operated Carl's Jr. restaurants generate strong restaurant-level
margins and per-store average sales that are among the highest of the major
quick-service hamburger restaurant chains.
General. The Company's revenues are derived primarily from sales by
Company-operated restaurants and revenues from franchisees, including franchise
and royalty fees, rentals under real property leases and sales
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of food and packaging products. Restaurant operating expenses consist primarily
of food and packaging costs, payroll and other employee benefits and occupancy
and other operating expenses of Company-operated restaurants. Operating costs
of the Company's franchised and licensed restaurants include the cost of food
and packaging products sold to the Company's franchisees and licensees and
lease payments on properties subleased to the Company's franchisees. Other
operating expenses, including advertising expenses and general and
administrative expenses, relate to Company-operated restaurants as well as
franchisee and licensee operations. The Company's revenues and expenses are
directly affected by the number and sales volumes of Company-operated
restaurants and, to a lesser extent, franchised and licensed restaurants.
Approximately 78% of the Company's fiscal 1997 revenues from
franchised and licensed restaurants were derived from sales of food and
packaging products through the Company's distribution operations to its Carl's
Jr. franchisees and licensees. The Company's distribution operations support
both Company-operated and franchised Carl's Jr. restaurants by maintaining
system-wide product quality and consistency and by utilizing volume buying
power which the Company believes lowers the costs of food and paper products.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues, unless otherwise indicated, of certain items included in the
Company's consolidated statements of income for the years indicated:
FISCAL YEAR ENDED JANUARY 31,
-----------------------------------
1997(1) 1996 1995
------ ------ ------
Revenues:
Company-operated restaurants . . . . . . . . . . . . . . . . . . . . . 87.4% 84.5% 83.4%
Franchised and licensed restaurants . . . . . . . . . . . . . . . . . . 12.6 15.5 16.6
------ ------ ------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
====== ====== ======
Operating costs and expenses:
Restaurants operations(2):
Food and packaging . . . . . . . . . . . . . . . . . . . . . . . . . 31.2% 30.8% 30.3%
Payroll and other employee benefits . . . . . . . . . . . . . . . . . 27.9 27.9 30.3
Occupancy and other operating expenses . . . . . . . . . . . . . . . 21.0 20.9 22.2
------ ------ ------
80.1 79.6 82.8
Franchised and licensed restaurants(3) . . . . . . . . . . . . . . . . 93.2 95.7 94.8
Advertising expenses(2) . . . . . . . . . . . . . . . . . . . . . . . . 5.3 5.1 5.4
General and administrative expenses . . . . . . . . . . . . . . . . . . 6.8 8.1 8.7
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 5.5 1.9
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.6) (2.1) (2.1)
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 0.5 0.7
------ ------ ------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . 6.0 3.9 0.5
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 1.5 0.2
------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6% 2.4% 0.3%
====== ====== ======
(1) Fiscal 1997 includes results of operations of Rally's from and after July
2, 1996, Summit from and after July 15, 1996 and Casa Bonita from and after
October 1, 1996.
(2) As a percentage of revenues from Company-operated restaurants.
(3) As a percentage of revenues from franchised and licensed restaurants.
REVENUES
Company-operated Restaurants. Revenues from Company-operated
restaurants, comprised mainly of sales from Carl's Jr. restaurants, increased
$143.3 million or 36.4% to $536.8 million in fiscal 1997 as compared
17
20
with $393.5 million in fiscal 1996. Carl's Jr. revenues for fiscal 1997
accounted for sales increases of $54.1 million, while revenues from the
Company's Rally's, Summit and Casa Bonita restaurant concepts accounted for
$10.1 million, $57.3 million and $26.1 million of revenues from
Company-operated restaurants, respectively, in fiscal 1997. Fiscal 1996
revenues included approximately $4.3 million from the Company's Boston Market
operations. On a same-store sales basis, the Company's Carl's Jr. sales, which
are calculated using only restaurants open for the full years being compared,
increased 10.7% as compared with a 4.4% increase a year ago. This marks the
second consecutive yearly increase in same-store sales and the highest
same-store sales reported by the Company's Carl's Jr. chain in nearly a decade.
Per store averages in Company-operated Carl's Jr. restaurants continued to
increase in fiscal 1997 and reached $1,114,000 on a 13-period rolling basis, an
increase of $108,000 over the prior year and the highest per store average
attained since fiscal 1991. The increase in revenues from Company-operated
Carl's Jr. restaurants is primarily the result of the continued momentum in the
Company's various sales enhancement programs that were implemented in fiscal
1996. These programs include the image enhancement of its restaurants through a
chain-wide remodeling program, the continuation of its conversion of existing
Carl's Jr. locations into Carl's Jr./Green Burrito dual-brand restaurants and
the continued focus on promoting great tasting new and existing food products
through increased innovative advertising. An increase in the number of
Company-operated restaurants operating in fiscal 1997 as compared with the
prior year also contributed to the increase in revenues from Company-operated
Carl's Jr. restaurants.
Revenues from Company-operated restaurants totaled $393.5 million in
fiscal 1996, an increase of $23.4 million, or 6.3%, as compared with fiscal
1995. This increase was primarily the result of the sales enhancement programs
that were implemented in fiscal 1996. Also contributing to the rise in revenues
were higher average sales and transaction counts per restaurants and an
increase in the number of Carl's Jr. restaurants in operation in fiscal 1996 as
compared with 1995. The 4.4% increase in same-store sales in fiscal 1996 over
fiscal 1995 was the first yearly increase in same-store sales experienced by
the Company in six years.
Franchised and Licensed Restaurants. Revenues from franchised and
licensed restaurants for fiscal 1997 increased 7.4% to $77.3 million over
fiscal 1996, while fiscal 1996 revenues decreased $1.8 million, or 2.4%, as
compared with fiscal 1995. The fiscal 1997 increase is largely due to increased
royalties from, and food purchases by, franchisees as a result of higher sales
volume at franchised Carl's Jr. restaurants, partially offset by a decrease in
the number of franchised and licensed Carl's Jr. restaurants operating as
compared with the prior year. The decrease in 1996 was largely due to lower
prices of food and other products supplied to franchisees by the Company, which
were passed along to franchisees, along with a slight decrease in the number of
franchised Carl's Jr. restaurants in operation in fiscal 1996 as compared with
fiscal 1995.
OPERATING COSTS AND EXPENSES
Company-operated Restaurants. Restaurant-level margins of the
Company's restaurant operations decreased 0.6% in fiscal 1997 to 19.9% as
compared with fiscal 1996, primarily reflecting the impact of higher operating
costs from Summit's family-style restaurant concepts since the date of
acquisition. The family-style restaurant segment of the restaurant industry
typically has lower margins than the quick-service segment of the industry,
mainly due to increased labor and food costs. Excluding the $1.3 million effect
of the adoption of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," during the first quarter of fiscal 1997, the Company's
restaurant-level margins for the fiscal year would have been 20.1%.
While the Company's consolidated restaurant-level margins decreased in
fiscal 1997, the Company's efforts to reduce the restaurant-level cost structure
of its Carl's Jr. restaurants, which began in fiscal 1994, have resulted in
significant improvement in the Company's Carl's Jr. restaurant-level margins.
These margins, as a percentage of revenues from Company-operated Carl's Jr.
restaurants, were 21.9%, 20.6%, and 17.6% in fiscal 1997, 1996, and 1995,
respectively. These improved results in the Company's Carl's Jr.
restaurant-level operating margins in fiscal 1997 reflect the Company's
continued commitment to improve the cost structure of its Carl's Jr.
restaurants, particularly in the areas of improving labor productivity and
reducing workers' compensation claims and losses. The 3.0% restaurant-level
margin improvement in fiscal 1996 was primarily attributable to material
declines in payroll and other employee benefit costs.
18
21
The Company's Carl's Jr. food and packaging costs have remained
relatively consistent at 31.0%, 30.7% and 30.1% of revenues from
Company-operated Carl's Jr. restaurants for fiscal 1997, 1996 and 1995,
respectively. During fiscal 1997 and 1996, food costs increased marginally due
to increased pressure from commodities prices and a change in the mix of
products sold to higher food cost products, such as the Big Bacon Star which
was introduced in the first quarter of fiscal 1997, the Guacamole Bacon
Cheeseburger which was introduced in the fourth quarter of fiscal 1997, the
Crispy Chicken Sandwiches which were introduced during the third quarter of
fiscal 1996, and the Famous Star, which is offered at participating restaurants
at $0.99 and is currently the Company's only value-priced product.
Carl's Jr. payroll and other employee benefit costs, as a percentage
of revenues from Company-operated Carl's Jr. restaurants, declined 1.4% in
fiscal 1997 to 26.5% and decreased 2.3% in fiscal 1996 to 27.9%. These
significant reductions in payroll and other employee benefit costs were
achieved despite the October 1, 1996 increase in the federal minimum wage. The
cost reductions came primarily as a result of labor productivity programs
implemented during fiscal 1996 to further decrease costs and improve direct
labor efficiencies. Moreover, the Company added new safety and other programs
in fiscal 1994, which, coupled with changes in state regulations, have resulted
in a decrease in work-related injuries and reduced the Company's worker's
compensation claims and losses during fiscal 1997 and 1996.
Many of the Company's employees are paid hourly rates related to the
federal and state minimum wage laws. Recent legislation increasing the federal
minimum wage as of October 1, 1996 has resulted in higher labor costs to the
Company and its franchisees. An additional increase in the federal minimum wage
will become effective in September 1997. Further, as a result of recent
California state legislation, the state minimum wage in California was
increased in March 1997. The Company anticipates that increases in the minimum
wage may be offset through pricing and other cost control efforts; however,
there can be no assurance that the Company or its franchisees will be able to
pass such additional costs on to customers in whole or in part.
Occupancy and other operating expenses for the Company's Carl's Jr.
restaurant chain, as a percentage of revenues from Company-operated Carl's Jr.
restaurants, were 20.6%, 20.8% and 22.2% in fiscal 1997, 1996 and 1995,
respectively. The decreases in fiscal 1997 and 1996 were largely due to the
Company's efforts to maintain costs at the prior fiscal year levels, which
included reducing utility costs through the installation of energy-efficient
lighting during fiscal 1996. Further, since these items are generally fixed in
nature, they decrease as a percentage of Company-operated restaurant revenues
as revenues increase.
Franchised and Licensed Restaurants. Franchised and licensed
restaurant costs have followed a similar trend over the past three fiscal years
to the revenues from franchised and licensed restaurants. These costs increased
4.6% in fiscal 1997 to $72.0 million while fiscal 1996 costs decreased $1.0
million, or 1.5%, to $68.8 million. The overall increase in fiscal 1997 is
primarily due to increased food purchases by Carl's Jr. franchisees, partially
offset by a decrease in the number of franchised and licensed restaurants in
operation in fiscal 1997 as compared with the prior year. The fiscal 1996
decrease was primarily attributable to the decrease in the number of franchised
restaurants in operation.
Advertising Expenses. Advertising expenses have become increasingly
important in the current competitive environment and, accordingly, the Company
increased the dollars spent on advertising by $8.4 million to $28.3 million in
fiscal 1997 as compared with fiscal 1996, while keeping advertising expenses as
a percentage of revenues from Company-operated restaurants relatively
consistent with the prior fiscal years. In fiscal 1997, the Company spent more
on advertising production and increased the number of weeks on electronic media
as compared with the prior fiscal year. During fiscal 1996, a new advertising
agency was appointed to assist the Company in redirecting its Carl's Jr.
marketing programs and restoring its reputation of offering superior quality
products. An innovative new advertising campaign was introduced in May 1995 and
the Company has seen seven consecutive quarterly increases in same-store sales
in Company-operated Carl's Jr. restaurants as compared with the corresponding
quarters of the prior year since the start of the campaign.
19
22
General and Administrative Expenses. General and administrative
expenses in fiscal 1997 increased $3.8 million to $41.6 million, or 6.8% of
total revenues. However, as a percentage of total revenues, these expenses
decreased 1.3% as compared to the prior fiscal year, reflecting the economies
of scale the Company is achieving by collapsing certain costs from acquired
businesses into the Company's existing infrastructure. The increase in general
and administrative expenses in fiscal 1997 is primarily the result of recording
incentive compensation accruals for regional restaurant management and selected
corporate employees as a result of improved restaurant operating performance.
Also contributing to the increase were increased amortization expense and
various corporate legal expenses. In fiscal 1996, general and administrative
expenses amounted to $37.9 million, or 8.1% of sales, a decrease of $0.9
million, or 2.4% from fiscal 1995. During fiscal 1996, the Company benefited,
through reduced payroll and employee benefit costs, from various
reorganizations and headcount reductions that occurred both in fiscal 1996 and
prior years. Also contributing to the decrease in general and administrative
expenses in fiscal 1996 was the formation in April 1995 of Boston West, whereby
this entity assumed the operations of all of the Company's existing Boston
Market stores and agreed to fulfill the Company's remaining obligations under
its area development agreement with BCI. See Note 6 of Notes to Consolidated
Financial Statements.
Interest Expense. Interest expense for fiscal 1997 decreased 1.3% to
$9.9 million as compared with the prior year as a result of lower levels of
borrowings outstanding during fiscal 1997, the prepayment of certain
indebtedness early in the year and lower interest rates. Interest expense for
fiscal 1996 increased 8.7% to $10.0 million, primarily as a result of higher
levels of borrowings and higher interest rates in fiscal 1996 as compared with
fiscal 1995.
Other Income, Net. Other income, net, is primarily comprised of
investment income, interest on notes and leases receivable, gains and losses on
sales of restaurants and income and loss from long-term investments. Other
income, net, increased $2.4 million from fiscal 1996, primarily due to an
increase in investment income as a result of increased cash levels on hand
during fiscal 1997 and gain on the sale of restaurants in fiscal 1997 as
compared with a loss in the prior year. These fiscal 1997 increases in other
income, net, were partially offset by a decrease in interest income on notes
receivable due to the sale of certain of its franchise notes receivable in
fiscal 1996. In addition, included in fiscal 1996 was a $1.6 million decrease
in the Company's Boston Market investment which resulted from the Company
recording its pro-rata share of the losses from Boston West. Other income, net,
decreased 25.9% to $2.2 million in fiscal 1996, largely due to decreases in
investment income resulting from lower investment levels as compared with
fiscal 1995.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $16.4 million to $39.8 million in
fiscal 1997. Total cash provided by the Company's consolidated operations
increased $25.4 million to $63.2 million which was primarily due to increased
revenues and increased gross margins from its Carl's Jr. restaurants.
Consolidated investing activities required the Company to use $114.9
million in cash to fund capital additions of $47.9 million, to complete the
acquisitions of certain franchised restaurants, Summit and Casa Bonita, net of
cash acquired, of $61.5 million, and to fund the Company's purchase of its
long-term investment in Rally's of approximately $7.9 million and note
receivable from Checkers of approximately $13.4 million. Cash outflows from
investment activities were partially offset by cash proceeds of $17.1 million
as a result of the sale of the Company's marketable securities portfolio and
property and equipment and from the collection on and sale of notes receivable,
related party receivables and leases receivable.
Financing activities provided the Company with $68.1 million primarily
as a result of cash proceeds of $77.6 million from the Company's common stock
offering. See Note 11 to Notes of Consolidated Financial Statements. The
increase in new borrowings of $76.8 million were primarily used to fund the
acquisition of Casa
20
23
Bonita and to replace an existing $20.0 million term loan. Cash proceeds from
the common stock offering, along with cash flows from operations and cash
proceeds from the exercise of the Company's common stock options, were used to
reduce the Company's long-term debt by approximately $86.3 million. Repayments
of long-term debt included the repayment of the credit facility which was used
to fund the Casa Bonita acquisition, the repayment of the existing $20.0
million term loan and the early repayment of indebtedness of $6.5 million. The
Company also used cash to reduce capital lease obligations by $3.8 million and
to pay dividends of $1.5 million.
Effective August 12, 1996, the Company entered into a new credit
agreement with a group of financial institutions. Under the terms of the credit
agreement, the Company borrowed the principal amount of $20.0 million under a
five-year, fully amortizing term loan, the proceeds of which were used to repay
existing indebtedness. The credit agreement also provides the Company with (i)
a revolving credit facility for working capital and other general corporate
purposes, under the terms of which the Company may borrow from time to time up
to $30.0 million (including a letter of credit subfacility of up to $20.0
million), and (ii) a revolving credit facility for the purpose of financing
investments in and acquisitions of other companies, under the terms of which
the Company may borrow from time to time up to $25.0 million. The amounts
advanced, if any, to the Company and remaining outstanding under the revolving
acquisition facility will convert after two years into a three-year, fully
amortizing loan. The Company's revolving credit facility matures on July 31,
2001. As of January 27, 1997, no borrowings remained outstanding under this
credit facility.
The credit agreement also includes customary affirmative and negative
covenants which, among other things, restrict the Company's ability to (i)
incur or create indebtedness on or with respect to its properties, (ii) incur
additional indebtedness, (iii) merge or consolidate with other entities, (iv)
sell assets and (v) declare or pay dividends or repurchase shares of capital
stock, subject in each of the foregoing cases to certain exceptions. In
addition, the credit agreement requires the Company to maintain certain
specified financial ratios and operating results. As of fiscal year end, the
Company is in compliance with all of its covenants governing its credit
facility.
During the fourth quarter of fiscal 1997, the Company issued 4.3
million shares of its common stock at a public offering price of $19.08 per
share (adjusted for the stock split). See Note 11 of Notes to Consolidated
Financial Statements. Proceeds from the offering, net of underwriting discounts
and commissions and other related expenses, were $77.6 million and were used
primarily to repay indebtedness.
The Company's primary source of liquidity is its revenues from
Company-operated restaurants, which are generated in cash. Future capital needs
will arise primarily for the construction of new Carl's Jr. and Taco Bueno
restaurants, the remodeling of existing restaurants, and the conversion of
certain restaurants to the Carl's Jr./Green Burrito dual-brand concept. The
Company plans to open up to 30 new Carl's Jr. restaurants and is evaluating
opening additional new Taco Bueno restaurants in its existing markets during
fiscal 1998. During fiscal 1998, the Company also expects to continue to
remodel the remaining Company-operated Carl's Jr. restaurants and to convert up
to 60 Carl's Jr. locations into Carl's Jr./Green Burrito units.
The Company believes cash generated from its various restaurant
concept operations, cash and cash equivalents as of January 27, 1997 and
amounts available under the Company's revolving credit facility, will be
sufficient to satisfy the Company's capital spending requirements for at least
the next 12 months. If those sources of capital are insufficient to satisfy the
Company's capital spending and working capital requirements, or if the Company
determines to make any significant acquisitions of or investments in other
businesses, the Company may be required to sell additional equity or debt
securities or obtain additional credit facilities. The sales, if any, of
additional equity or convertible debt securities could result in additional
dilution to the Company's shareholders.
IMPACT OF INFLATION
Management recognizes that inflation has an impact on food, construction,
labor and benefit costs, all of which can significantly affect the Company's
operations. Historically, the Company has been able to pass any associated
higher costs due to these inflationary factors along to its customers because
those factors have impacted nearly all restaurant companies. During fiscal 1997
and fiscal 1996, however, management emphasized cost controls rather than price
increases, given the competitive pressure within the quick-service industry.
21
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NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
effective for fiscal years beginning after December 15, 1996. SFAS 128
introduces and requires the presentation of "basic" earnings per share which
represents net earnings divided by the weighted average shares outstanding
excluding all common stock equivalents. Dual presentation of "diluted"
earnings per share reflecting the dilutive effects of all common stock
equivalents, will also be required. The diluted presentation is similar to the
current presentation of fully diluted earnings per share. Management believes
the adoption of SFAS 128 will not have a material impact on the Company's
consolidated financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index included at "Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information pertaining to directors and executive officers of the
registrant is hereby incorporated by reference to the Company's Proxy Statement
to be used in connection with the Company's 1997 Annual Meeting of
Stockholders, to be filed with the Commission within 120 days of January 27,
1997. Information concerning the current executive officers of the Company is
contained in Item 1 of Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information pertaining to executive compensation is hereby
incorporated by reference to the Company's Proxy Statement to be used in
connection with the Company's 1997 Annual Meeting of Stockholders, to be filed
with the Commission within 120 days of January 27, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information pertaining to security ownership of certain beneficial
owners and management is hereby incorporated by reference to the Company's
Proxy Statement to be used in connection with the Company's 1997 Annual Meeting
of Stockholders, to be filed with the Commission within 120 days of January 27,
1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information pertaining to certain relationships and related
transactions is hereby incorporated by reference to the Company's Proxy
Statement to be used in connection with the Company's 1997 Annual Meeting of
Stockholders, to be filed with the Commission within 120 days of January 27,
1997.
22
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
(A)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS: NUMBER
------
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets -- as of January 31, 1997 and 1996 . . . . . . . . . . . . . . F-2
Consolidated Statements of Income -- for the years ended January 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity -- for the years ended January 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows -- for the years ended January 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F-6
(A)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted since the required information is not
present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
(A)(3) EXHIBITS:
An "Exhibit Index" has been filed as a part of this Form 10-K
beginning on page E-1 hereof and is incorporated herein by
reference.
(B) CURRENT REPORTS ON FORM 8-K:
None.
23
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CKE RESTAURANTS, INC.
By /s/ WILLIAM P. FOLEY II
--------------------------------------
William P. Foley II
Chairman of the Board and
Chief Executive Officer
Date: April 11, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM P. FOLEY II Chairman of the Board and April 11, 1997
- --------------------------- Chief Executive Officer
William P. Foley II (Principal Executive Officer)
/s/ CARL A. STRUNK Executive Vice President, April 11, 1997
- --------------------------- Chief Financial Officer
Carl A. Strunk (Principal Financial and
Accounting Officer)
/s/ Director April , 1997
- ---------------------------
Byron Allumbaugh
/s/ PETER CHURM Director April 11, 1997
- ---------------------------
Peter Churm
/s/ CARL L. KARCHER Director April 11, 1997
- ---------------------------
Carl L. Karcher
/s/ CARL N. KARCHER Director April 11, 1997
- ---------------------------
Carl N. Karcher
/s/ DANIEL D. (Ron) LANE Vice Chairman of the Board April 11, 1997
- ---------------------------
Daniel D. (Ron) Lane
/s/ W. HOWARD LESTER Director April 11, 1997
- ---------------------------
W. Howard Lester
/s/ FRANK P. WILLEY Director April 11, 1997
- ---------------------------
Frank P. Willey
24
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CKE Restaurants, Inc. and Subsidiaries:
We have audited the accompanying consolidated financial statements of
CKE Restaurants, Inc. and subsidiaries as listed in the accompanying index.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of CKE
Restaurants, Inc. and subsidiaries as of January 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Orange County, California
March 17, 1997
F-1
28
CKE RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
A S S E T S
January 31 1997 1996
---- ----
(Dollars in thousands)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 39,782 $ 23,429
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,510
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,942 7,295
Related party receivables . . . . . . . . . . . . . . . . . . . . . . . . 2,088 977
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,223 6,132
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . 7,214 10,056
Other current assets and prepaid expenses . . . . . . . . . . . . . . . . 6,608 5,656
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 72,857 56,055
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . 205,805 119,128
Property under capital leases, net . . . . . . . . . . . . . . . . . . . . 37,115 28,399
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,218 19,814
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,210 7,801
Related party receivables . . . . . . . . . . . . . . . . . . . . . . . . . 9,325 969
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,687 14,593
--------- ---------
$ 401,217 $ 246,759
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . $ 735 $ 8,575
Current portion of capital lease obligations . . . . . . . . . . . . . . 4,766 3,745
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,930 15,824
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 44,463 31,756
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 83,894 59,900
--------- ---------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,770 30,321
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . 48,141 40,233
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . 20,608 15,116
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares;
none issued or outstanding . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock, $.01 par value; authorized 50,000,000 shares;
issued and outstanding 33,218,751 shares
and 28,800,211 shares . . . . . . . . . . . . . . . . . . . . . . . . 332 288
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 126,279 38,617
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,193 67,393
Treasury stock, at cost; -0- shares and 1,005,450 shares . . . . . . . . -- (5,109)
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . 214,804 101,189
--------- ---------
$ 401,217 $ 246,759
========= =========
See accompanying notes to consolidated financial statements.
F-2
29
CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Fiscal year ended January 31 1997 1996 1995
---- ---- ----
(In thousands except per share amounts)
Revenues:
Company-operated restaurants:
Carl's Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 443,304 $ 389,214 $ 364,278
Taco Bueno . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,146 -- --
JB's Restaurants . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,517 -- --
HomeTown Buffet . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,590 -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,251 4,272 5,767
--------- --------- ---------
536,808 393,486 370,045
--------- --------- ---------
Franchised and licensed restaurants:
Carl's Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,491 71,951 73,702
JB's Restaurants . . . . . . . . . . . . . . . . . . . . . . . . . . . 781 -- --
--------- --------- ---------
77,272 71,951 73,702
--------- --------- ---------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 614,080 465,437 443,747
--------- --------- ---------
Operating costs and expenses:
Restaurant operations:
Food and packaging . . . . . . . . . . . . . . . . . . . . . . . . . . 167,625 121,029 111,985
Payroll and other employee benefits . . . . . . . . . . . . . . . . . 149,846 109,942 112,177
Occupancy and other operating expenses . . . . . . . . . . . . . . . . 112,689 82,095 82,172
--------- --------- ---------
430,160 313,066 306,334
Franchised and licensed restaurants . . . . . . . . . . . . . . . . . . . 71,986 68,839 69,871
Advertising expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 28,291 19,940 20,148
General and administrative expenses . . . . . . . . . . . . . . . . . . . 41,643 37,857 38,792
--------- --------- ---------
Total operating costs and expenses . . . . . . . . . . . . . . . . . 572,080 439,702 435,145
--------- --------- ---------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000 25,735 8,602
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,877) (10,004) (9,202)
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,587 2,222 2,998
--------- --------- ---------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . 36,710 17,953 2,398
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,408 7,001 1,134
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,302 $ 10,952 $ 1,264
========= ========= =========
Net income per common and common equivalent share . . . . . . . . . . . . . $ 0.73 $ 0.39 $ 0.05
========= ========= =========
Common and common equivalent shares
used in computing per share amounts . . . . . . . . . . . . . . . . . . . 30,414 28,019 28,076
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
30
CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock
------------------------ ------------------------ Additional Total
Number of Number of Paid-In Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
-------- -------- -------- -------- -------- -------- --------
(In thousands except per share amounts)
BALANCE AT
JANUARY 31, 1994 . . . . . 28,016 $ 280 -- $ -- $ 33,648 $ 58,148 $ 92,076
Cash dividends
($.05 per share) . . . . -- -- -- -- -- (1,499) (1,499)
Exercise of stock options . 251 3 -- -- 1,096 -- 1,099
Tax benefit associated
with exercise of
stock options . . . . . -- -- -- -- 280 -- 280
Purchase of treasury
stock . . . . . . . . . -- -- 885 (4,558) -- -- (4,558)
Net unrealized loss on
investment securities . . -- -- -- -- -- (188) (188)
Net income . . . . . . . . -- -- -- -- -- 1,264 1,264
-------- -------- -------- -------- -------- -------- --------
BALANCE AT
JANUARY 31, 1995 . . . . . 28,267 283 885 (4,558) 35,024 57,725 88,474
Cash dividends
($.05 per share) . . . . -- -- -- -- -- (1,460) (1,460)
Exercise of stock options . 533 5 -- -- 2,745 -- 2,750
Tax benefit associated
with exercise of
stock options . . . . . -- -- -- -- 848 -- 848
Purchase of treasury
stock . . . . . . . . . -- -- 120 (551) -- -- (551)
Net unrealized gain on
investment securities . -- -- -- -- -- 176 176
Net income . . . . . . . . -- -- -- -- -- 10,952 10,952
-------- -------- -------- -------- -------- -------- --------
BALANCE AT
JANUARY 31, 1996 . . . . . 28,800 288 1,005 (5,109) 38,617 67,393 101,189
Cash dividends
($.05 per share) . . . . -- -- -- -- -- (1,502) (1,502)
Exercise of stock options . 360 4 -- -- 2,226 -- 2,230
Purchase of Summit . . . . 752 7 -- -- 11,404 -- 11,411
Common stock offering, net 4,312 43 -- -- 77,572 -- 77,615
Retirement of treasury
stock . . . . . . . . . (1,005) (10) (1,005) 5,109 (5,099) -- --
Tax benefit associated
with exercise of
stock options . . . . . -- -- -- -- 1,559 -- 1,559
Net income . . . . . . . . -- -- -- -- -- 22,302 22,302
-------- -------- -------- -------- -------- -------- --------
BALANCE AT
JANUARY 31, 1997 . . . . . 33,219 $ 332 -- $ -- $126,279 $ 88,193 $214,804
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
31
CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year ended January 31 1997 1996 1995
---- ---- ----
(Dollars in thousands)
Net cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,302 $ 10,952 $ 1,264
Adjustments to reconcile net income
to net cash provided by operating
activities, excluding the effect
of acquisitions:
Noncash franchise (income) expense . . . . . . . . . . . . . . . (146) 209 170
Depreciation and amortization . . . . . . . . . . . . . . . . . 27,056 21,372 22,755
Loss on sale of property and equipment and capital leases . . . 1,520 1,828 2,118
Reversal of rent subsidy reserves . . . . . . . . . . . . . . . -- -- (2,680)
Income (loss) from long-term investments . . . . . . . . . . . . (140) 1,898 --
Net noncash investment and dividend income . . . . . . . . . . . (1,117) (851) (25)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 6,380 4,211 3,434
Write-down of long-lived assets . . . . . . . . . . . . . . . . 1,250 -- --
Settlement of notes receivable . . . . . . . . . . . . . . . . . -- (1,292) --
Net change in receivables, inventories and other current assets (5,204) (1,757) (4,329)
Net change in other assets . . . . . . . . . . . . . . . . . . . (528) (463) (1,119)
Net change in accounts payable and other current liabilities . . 11,834 1,672 (133)
-------- -------- --------
Net cash provided by operating activities . . . . . . . . . . 63,207 37,779 21,455
-------- -------- --------
Cash flows from investing activities:
Purchases of:
Marketable securities . . . . . . . . . . . . . . . . . . . . . (760) (921) (3,549)
Property and equipment . . . . . . . . . . . . . . . . . . . . . (47,906) (27,148) (40,010)
Long-term investments . . . . . . . . . . . . . . . . . . . . . (7,855) (1,670) --
Proceeds from sale of:
Marketable securities and long-term investments . . . . . . . . 5,418 1,972 15,994
Property and equipment . . . . . . . . . . . . . . . . . . . . . 7,816 905 110
Increases in notes receivable and related party receivables . . . . (14,020) (2,640) (1,985)
Collections on and sale of notes receivable, related party
receivables and leases receivable . . . . . . . . . . . . . . . 3,840 9,900 2,441
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . (61,453) -- --
-------- -------- --------
Net cash used in investing activities . . . . . . . . . . . . (114,920) (19,602) (26,999)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from common stock offering . . . . . . . . . . . . . . 77,614 -- --
Net change in bank overdraft . . . . . . . . . . . . . . . . . . . 8,355 (11,477) 10,203
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . 1,200 57,060 32,806
Repayments of short-term debt . . . . . . . . . . . . . . . . . . . (1,200) (57,060) (13,981)
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . 76,808 14,573 --
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . (86,274) (11,149) (14,771)
Repayments of capital lease obligations . . . . . . . . . . . . . . (3,814) (3,129) (2,878)
Net change in other long-term liabilities . . . . . . . . . . . . . (6,910) (327) (3,076)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . -- (551) (4,558)
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . (1,502) (1,460) (1,499)
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . 2,230 2,750 1,099
Tax benefit associated with the exercise of stock options . . . . . 1,559 848 280
-------- -------- --------
Net cash provided by (used in) financing activities . . . . . 68,066 (9,922) 3,625
-------- -------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . $ 16,353 $ 8,255 $ (1,919)
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
32
CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
A summary of certain significant accounting policies not disclosed elsewhere in
the footnotes to the consolidated financial statements is set forth below.
Description of Business
CKE Restaurants, Inc. ("CKE" and collectively with its subsidiaries, the
"Company") owns, operates, franchises and licenses the Carl's Jr.
quick-service restaurant concept. As of January 31, 1997, the Carl's Jr. system
included 673 restaurants, of which 415 were operated by the Company and 258
were operated by the Company's franchisees and licensees. The Carl's Jr.
restaurants are located in the western United States, predominantly in
California, and in Mexico and the Pacific Rim. Primarily as a result of
acquisitions which occurred in fiscal 1997, the Company also operates and
franchises a total of 257 other restaurants, including 107 Taco Bueno
quick-service Mexican food restaurants located in Texas and Oklahoma.
Basis of Presentation and Fiscal Year
In June 1994, a plan of reorganization and merger (the "Merger") was approved
by the stockholders of Carl Karcher Enterprises, Inc. ("Enterprises"), whereby
Enterprises, the predecessor entity of the Company that was a publicly held
corporation, and Boston Pacific, Inc. ("Boston Pacific") became wholly-owned
subsidiaries of the Company, a Delaware corporation organized during fiscal
1995. In fiscal 1997, the Company made two restaurant acquisitions. Summit
Family Restaurants Inc. ("Summit") was acquired in July 1996 and Casa Bonita
Incorporated ("Casa Bonita") was acquired in October 1996 (see Note 2). Both
Summit and Casa Bonita are wholly-owned subsidiaries of the Company.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions are
eliminated. The Company's fiscal year is 52 or 53 weeks, ending the last Monday
in January each year. Fiscal years 1997, 1996 and 1995 each included 52 weeks
of operations. For clarity of presentation, the Company has described all years
presented as if the fiscal year ended January 31.
Cash Equivalents
For purposes of reporting cash flows, highly liquid investments purchased with
original maturities of three months or less are considered cash equivalents.
The carrying amounts reported in the consolidated balance sheets for these
instruments approximate their fair value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market,
and consist primarily of restaurant food items and paper supplies.
Pre-opening Costs
The Company capitalizes certain costs incurred in conjunction with the opening
of new restaurants. These costs are amortized on a straight-line basis over a
one-year period from the date of opening.
F-6
33
Deferred Financing Costs
Costs related to the issuance of debt are deferred and amortized on a
straight-line basis as a component of interest expense over the terms of the
respective debt issues.
Investment in Joint Ventures
In fiscal 1994, the Company entered into a joint venture agreement with a
Mexican company to operate a Carl's Jr. restaurant in Baja California. The
Company owns a 50% interest in this joint venture. In fiscal 1996, the Company
entered into another joint venture agreement, in which the Company owns a 30%
interest, with one of its licensees to operate 130 Carl's Jr. restaurants in 16
Asian countries over the next five years. Both joint venture agreements, which
are accounted for by the equity method, are not considered material to the
Company's consolidated financial statements.
Restaurant Operating Agreement
The Company and Rally's Hamburgers, Inc. ("Rally's") entered into an operating
agreement, effective in July 1996, whereby the Company began operating 28
Rally's-owned restaurants located in California and Arizona. Rally's retains
ownership of the restaurants' assets and receives a percentage of the
restaurants' sales. One of the Rally's restaurants operated by the Company has
been converted into a Carl's Jr. "Jr." restaurant, which offers a limited
Carl's Jr. menu in a double drive-thru and walk-up service format. The Company
is considering the conversion of more of these Rally's restaurants to Carl's
Jr. "Jr." restaurants. The Company's results of operations include the revenue
and expenses of these 28 restaurants from July 2, 1996.
Property and Equipment
Property and equipment are recorded at cost, less depreciation and
amortization. Depreciation is computed using the straight-line method based on
the assets' estimated useful lives, which range from three to forty years.
Leasehold improvements are amortized on a straight-line basis over the lesser
of the estimated useful lives of the assets or the related lease terms.
Impairment of Long-Lived Assets
In fiscal 1997 the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires the assessment of
certain long-lived assets for possible impairment when events or circumstances
indicate their carrying amounts may not be recoverable. Losses are recognized
when the carrying value of these assets exceeds the total estimated
undiscounted cash flows expected to be generated over the assets' estimated
life. The Company adopted SFAS 121 in the first quarter of fiscal 1997 and
recorded a $1.3 million noncash pretax charge, equivalent to $0.03 per share,
to restaurant operations to adjust the carrying value of those assets
identified as impaired.
The cost in excess of net assets acquired is amortized on a straight-line
basis, principally over 40 years. The Company periodically reviews the cost in
excess of net assets acquired in accordance with SFAS 121. Accumulated
amortization of cost in excess of net assets acquired was $2.6 million and $1.7
million at January 31, 1997 and 1996, respectively.
Advertising
Production costs of commercials and programming are charged to operations in
the fiscal year first aired. The costs of other advertising, promotion and
marketing programs are charged to operations in the fiscal year incurred.
F-7
34
Income Taxes
The Company accounts for income taxes using the asset and liability method of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, income tax assets and liabilities are recognized
using enacted tax rates for the expected future tax consequences attributable
to temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. A change in tax
rates is recognized in income in the period that includes the enactment date.
Estimations
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Share and Per Share Restatement
On December 19, 1996, the Company declared a three-for-two stock split, payable
in the form of a stock dividend, to shareholders of record on January 2, 1997,
distributed on January 22, 1997.
All data with respect to earnings per share, dividends per share and share
information, including price per share where applicable, in the consolidated
financial statements and notes to consolidated financial statements have been
retroactively adjusted to reflect the stock split.
Earnings per Share
Earnings per share is computed based on the weighted average number of common
shares outstanding during the year, after consideration of the dilutive effect
of outstanding stock options. For all years presented, primary earnings per
share approximate fully diluted earnings per share.
Reclassifications
Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform with the fiscal 1997 presentation.
NOTE 2 -- ACQUISITIONS
On July 15, 1996, the Company acquired Summit, which was accounted for as a
purchase. Summit has restaurant operations in nine western states, including 73
Company-operated and 22 franchised JB's Restaurants, 16 HomeTown Buffet
restaurants and six Galaxy Diner restaurants. In connection with the
acquisition, each of the 4,809,446 outstanding shares of Summit common stock
was converted into the right to receive 0.15645 shares of the Company's common
stock (and cash in lieu of fractional shares) and cash in the amount of $2.63.
Accordingly, the aggregate number of shares of common stock of the Company
issued in the acquisition was 752,082. The source of funds for the cash portion
of the consideration was cash on hand and borrowings under the Company's then
existing revolving credit facility.
On October 1, 1996, the Company acquired Casa Bonita. Casa Bonita operates 107
Taco Bueno restaurants located in Texas and Oklahoma in addition to two Casa
Bonita Restaurants and three Crystal's Pizza and Spaghetti Restaurants. All
three of the Crystals were closed subsequent to the fiscal year end. The
acquisition was completed by CBI Restaurants, Inc. ("CBI"), a newly-formed
corporation in which the Company originally held an 80% equity interest. CBI
paid $42.0 million in cash, which was financed by short-term loans of $9.0
million from the Company, $8.0
F-8
35
million from Fidelity National Financial, Inc. ("Fidelity"), and $5.0 million
from Giant Group, Ltd. ("Giant"). The balance of the purchase price, $20.0
million, was financed through the Company's investment of $16.0 million in cash
for an 80% equity interest in CBI and Fidelity's investment of $4.0 million in
cash for the remaining 20% equity interest in CBI. The Company's investment in
CBI was funded out of borrowings under the Company's revolving acquisition
facility. The acquisition of CBI was accounted for as a purchase.
On December 3, 1996, the Company purchased Fidelity's 20% equity interest in
CBI for $4.5 million, giving the Company 100.0% ownership of CBI and Casa
Bonita. CBI also repaid the short-term loans of $8.0 million to Fidelity and
$5.0 million to Giant. The purchase of Fidelity's equity interest and the
repayment of short-term loans was provided by the net proceeds of the Company's
common stock offering (see Note 11).
The assets acquired, including the cost in excess of net assets acquired, and
liabilities assumed in the acquisitions of Summit and Casa Bonita are as
follows:
(Dollars in thousands) Summit Casa Bonita
-------- -----------
Tangible assets acquired at fair value . . . . . . . . . . . . . . . . . . . . . $ 59,772 $ 40,672
Costs in excess of net assets acquired . . . . . . . . . . . . . . . . . . . . . -- 9,860
Liabilities assumed at fair value . . . . . . . . . . . . . . . . . . . . . . . . (30,716) (8,532)
-------- --------
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,056 $ 42,000
======== ========
Selected unaudited pro forma combined results of operations for the years ended
January 31, 1997 and 1996, assuming the Summit and Casa Bonita acquisitions
occurred on February 1, 1996 and 1995, using actual restaurant-level margins
and general and administrative expenses prior to the acquisition of each
entity, are presented as follows:
(Dollars in thousands, except per share amounts) 1997 1996
---- ----
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 747,586 $ 666,797
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,319 $ 11,026
Net income per common and common equivalent share . . . . . . . . . . . . . . . $ 0.72 $ 0.38
Since the Summit acquisition, the Company has determined that its principal
focus is on the quick-service segment of the restaurant industry as opposed to
the family-dining segment in which Summit operates. As such, the Company is
considering selling or otherwise disposing of all of or a portion of Summit.
However, the Company has not entered into any agreements providing for any such
transaction and there can be no assurance that the Company will be able to sell
or otherwise dispose of such assets for a financial gain, on favorable terms,
or at all.
NOTE 3 -- ACCOUNTS RECEIVABLE
Details of accounts receivable are as follows:
(Dollars in thousands) 1997 1996
---- ----
Accounts receivable:
Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,982 $3,232
Notes receivable, current . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,022 594
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 714 3,231
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 238
------- -------
$7,942 $7,295
======= =======
F-9
36
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Estimated
(Dollars in thousands) Useful Life 1997 1996
----------- ---- ----
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,487 $ 27,891
Leasehold improvements . . . . . . . . . . . . . . . . . . 4-25 years 109,508 80,883
Buildings and improvements . . . . . . . . . . . . . . . . 7-40 years 99,245 34,476
Equipment, furniture and fixtures . . . . . . . . . . . . . 3-10 years 192,336 128,670
-------- --------
451,576 271,920
Less: Accumulated depreciation and amortization . . . . . . 245,771 152,792
-------- --------
$205,805 $119,128
======== ========
NOTE 5 -- LEASES
The Company occupies land and buildings under terms of numerous lease
agreements expiring on various dates through 2035. Many leases provide for
future rent escalations and renewal options. In addition, contingent rentals,
determined as a percentage of sales in excess of specified levels, are often
stipulated. Most of these leases obligate the Company to pay costs of
maintenance, insurance and property taxes.
Property under capital leases is comprised of the following:
(Dollars in thousands) 1997 1996
---- ----
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,850 $ 64,186
Less: Accumulated amortization . . . . . . . . . . . . . . . . . 48,735 35,787
-------- --------
$ 37,115 $ 28,399
======== ========
Amortization is calculated on the straight-line basis over the shorter of the
respective lease terms or the estimated useful lives of the related assets.
Minimum lease payments for all leases and the present value of net minimum
lease payments for capital leases as of January 31, 1997 are as follows:
(Dollars in thousands) Capital Operating
------- ---------
Fiscal Year
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,448 $ 37,456
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,128 36,268
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,545 34,052
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,017 31,280
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,537 29,211
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . 43,231 216,677
-------- --------
Total minimum lease payments . . . . . . . . . . . . . . . . . . $ 90,906 $384,944
========
Less: Amount representing interest . . . . . . . . . . . . . . . 37,999
--------
Present value of minimum lease payments . . . . . . . . . . . . . 52,907
Less: Current portion . . . . . . . . . . . . . . . . . . . . . . 4,766
--------
Capital lease obligations, excluding current portion . . . . . . $ 48,141
========
F-10
37
Total minimum lease payments have not been reduced by minimum sublease rentals
of $42.5 million due in the future under certain operating subleases.
The Company has leased and subleased land and buildings to others, primarily as
a result of the franchising of certain restaurants. Many of these leases
provide for fixed payments with contingent rent when sales exceed certain
levels, while others provide for monthly rentals based on a percentage of
sales. Lessees generally bear the cost of maintenance, insurance and property
taxes. Components of the net investment in leases receivable, included in other
assets, are as follows:
(Dollars in thousands) 1997 1996
---- ----
Net minimum lease payments receivable . . . . . . . . . . . . . . $ 6,680 $ 9,887
Less: Unearned income . . . . . . . . . . . . . . . . . . . . . . 2,721 5,135
-------- --------
Net investment . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,959 $ 4,752
======== ========
Minimum future rentals to be received as of January 31, 1997 are as follows:
Capital Operating
Leases or Lessor
(Dollars in thousands) Subleases Leases
--------- ------
Fiscal Year:
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 647 $ 258
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 652 260
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651 260
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 644 260
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 649 261
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . 3,437 1,768
-------- --------
Total minimum future rentals . . . . . . . . . . . . . . . . . . $ 6,680 $ 3,067
======== ========
Total minimum future rentals do not include contingent rentals which may be
received under certain leases.
The Company's investment in land under operating leases was $1.6 million and
$1.8 million at January 31, 1997 and 1996, respectively.
Aggregate rents under noncancelable operating leases during fiscal 1997, 1996
and 1995 are as follows:
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Minimum rentals . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,597 $ 29,225 $ 29,173
Contingent rentals . . . . . . . . . . . . . . . . . . . . . . . 1,937 1,384 1,459
Less: Sublease rentals . . . . . . . . . . . . . . . . . . . . . 5,644 5,058 5,029
-------- -------- --------
$ 29,890 $ 25,551 $ 25,603
======== ======== ========
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38
NOTE 6 -- LONG-TERM INVESTMENTS
Checkers Drive-In Restaurants, Inc.
On November 14, 1996, the Company, together with a group of investors purchased
$35.8 million of aggregate principal amount of Checkers Drive-In Restaurants,
Inc. ("Checkers") 13.75% senior secured debt, due on July 31, 1998. The
aggregate purchase price for this senior secured debt was $35.1 million. In
addition to the Company, the investors included KCC Delaware, a wholly-owned
subsidiary of Giant, Fidelity, The Travelers Indemnity Company ("Travelers")
and certain affiliated individual investors. The Company paid $12.9 million in
cash for $13.2 million, or 36.75% share of the debt.
On November 22, 1996, the investors restructured Checkers' indebtedness under
its existing credit agreement. Pursuant to the restructuring, the term of the
credit agreement was extended by one year until July 31, 1999 and the fixed
interest rate on such indebtedness was reduced to 13.0%. The investors modified
certain financial covenants and the timing and amount of principal payments due
under the credit agreement. In connection with the restructuring, the Company
received warrants to purchase 7,350,423 shares of Checkers common stock at an
exercise price of $0.75 per share ("the Checkers Warrants"). The Company
recorded the difference between the fair market value of Checkers' common stock
and the exercise price of the Checkers Warrants on the date of grant as a
reduction, or discount, to the note receivable from Checkers. This discount is
amortized on a straight-line basis into interest income over the life of the
note. The Company, KCC Delaware and Travelers also provided a $2.5 million
short-term revolving line of credit to Checkers, of which the Company
contributed $0.5 million. As of January 31, 1997, the Company's note receivable
from Checkers, including the revolving line of credit advance and related
discount, was $10.1 million and is included in related party receivables.
Subsequent to the fiscal year end, on February 19, 1997, the Company purchased
6,162,299 shares of Checkers common stock at $1.14 per share and 61,636 shares
of Checkers Series A preferred stock at $114.00 per share for an aggregate
purchase price of $14.1 million in connection with a private placement of
Checkers' securities to the Company and other investors, including certain
related parties. Registration rights with respect to the common stock will
commence one year from the date of purchase. The shares of Checkers common
stock acquired by the Company represent approximately 10% of Checkers'
outstanding shares. The shares of Series A preferred stock acquired by the
Company are convertible into an aggregate of 6,162,299 additional shares of
common stock; provided, however, that such conversion is subject to the
approval of Checkers' stockholders at its next annual meeting. If Checkers
stockholders fail to approve the common stock provisions of the Series A
preferred stock, cash dividends will accrue at a rate of 14.5% six months from
the date of issuance and quarterly thereafter. Assuming full exercise of the
Checkers Warrants and the conversion of all of the Series A preferred stock
into Checkers common stock, the Company would beneficially own approximately
22% of Checkers' outstanding shares.
In connection with the private placement of securities, Checkers repaid $8.0
million of the senior secured debt and paid in full the $2.5 million revolving
line of credit. As a result, as of February 20, 1997, the Company's note
receivable from Checkers, net of the related discount, was $6.7 million.
Rally's Hamburgers, Inc.
On April 20, 1996, the Company purchased from Giant, in settlement of certain
litigation, 2,350,432 shares of Rally's common stock for $4.1 million,
representing approximately 15% of Rally's outstanding shares. In connection
with this settlement, the Company also received options to purchase Rally's
common stock from Giant over the next two years.
Effective August 31, 1996, the Company participated in Rally's rights offering,
pursuant to which the Company received one right for each of the 2,350,432
shares of Rally's common stock the Company already owned. In accordance with
the terms of the rights offering, holders of rights were entitled to purchase
one unit for each 3.25 rights surrendered for a cash payment of $2.25 per unit.
Each unit consists of one share of Rally's common stock and one
F-12
39
warrant to purchase an additional share of Rally's common stock upon payment of
a $2.25 exercise price. The Company contributed approximately $1.7 million in
cash and acquired 775,488 shares of Rally's common stock in connection with the
rights offering, with warrants to acquire another 775,488 shares.
Additionally, on November 29, 1996, the Company elected to exercise 626,607
options to purchase common stock of Rally's from Giant for a total of
approximately $1.9 million.
On December 20, 1996, Rally's issued the Company warrants to purchase 750,000
restricted shares of Rally's common stock at an exercise price of $4.375 per
share. The warrants have a three year term and are not exercisable until
December 20, 1997.
As of January 31, 1997, the Company's investment in Rally's was $7.9 million,
representing an approximate 18% ownership interest of Rally's. In addition, the
Company has the right to acquire an additional 2% ownership interest upon
exercise of all the warrants.
On March 25, 1997, Checkers and Rally's agreed in principle to a merger
transaction, pursuant to which Rally's would be acquired by Checkers. The
agreement contemplates that each share of Rally's common stock will be
converted into three shares of Checkers common stock. Consummation of the
Rally's - Checkers merger is subject to negotiation of definitive agreements,
the receipt of fairness opinions and stockholder and other required approvals,
as well as other customary conditions.
Boston Market
In January 1994, the Company acquired from Boston Chicken, Inc. ("BCI") the
rights to develop, own and operate up to 300 Boston Market stores throughout
designated markets in California. Boston Pacific was formed during fiscal 1995
to conduct the Company's Boston Market franchise operations.
In April 1995, the Company's overall strategic plans were revised and the
Company determined that its available cash should be used to fund the expansion
and image enhancement of its Carl's Jr. restaurants. As such, management
determined it would opt for a more passive investment role and eliminate its
control and significant influence in the Boston Market concept. The Company
formed a new privately owned company, Boston West, LLC ("Boston West") which
assumed the operations of all of the Company's 25 existing Boston Market stores
and agreed to fulfill the Company's remaining obligation to develop an
additional 175 Boston Market stores under its January 1994 area development
agreement with BCI. In connection with this transaction, the Company received
preferred units and all the outstanding common equity units in Boston West, for
a cost of approximately $19.7 million and $620,000, respectively, in exchange
for a majority of its existing Boston Market restaurant assets.
On May 30, 1995, Boston West issued an additional $2.5 million of common equity
units to an independent investor group in return for cash and certain notes
receivable, which are secured by $1.2 million of Boston West common equity
units. As of this date, the Company ceased consolidating the operations of
Boston West into its financial statements and commenced realizing a pro-rata
share of the losses of Boston West.
On September 12, 1995, Boston West formally agreed to repurchase one half of
the Company's outstanding common equity units in Boston West, at a purchase
price of $10.00 per unit, or $310,000. As of this date, the Company began
accounting for its interest in Boston West under the cost method of accounting
for investments.
The Company is entitled to receive dividends on its preferred units at rates
ranging from 8.6% to 9.0%. The dividends earned through June 1997 will be paid
in cash upon conversion of the Company's preferred units into common equity
units. In addition, this transaction provided for the leasing of approximately
$12.0 million of equipment and real property retained by the Company to Boston
West at current market rates. An affiliate of BCI has an option to purchase all
the equipment and real property leased by the Company to Boston West. In fiscal
1997, the Company received $2.5 million in cash and $2.5 million in additional
preferred units in exchange for real property that the Company was
F-13
40
leasing to Boston West. In addition, pursuant to this agreement, the Company
has an option to co-fund, along with BCI loan proceeds, the capital
requirements of Boston West up to a maximum of $15.0 million, of which the
Company funded approximately $1.7 million in fiscal 1996 through the purchase
of additional preferred units. In March 1996, the Company's Board of Directors
elected to cease participation in the option to co-fund the capital
requirements of Boston West. With the amounts co-funded to date, the Company's
interest in Boston West may be increased to up to approximately 32% upon
conversion of the preferred units.
As of January 31, 1997 and 1996, the Company's total long-term investment in
Boston West was $22.3 million and $19.8 million, respectively, which
approximates fair value. The Company's estimate of fair value of its long-term
investment was based on a number of factors including the discounted future
cash flows of Boston West and the present value of expected future preferred
dividend distributions. A total of 84 Boston Market stores were opened under
the area development agreement with BCI as of fiscal 1997.
NOTE 7 -- OTHER ASSETS
Other assets are comprised of the following:
(Dollars in thousands) 1997 1996
---- ----
Costs in excess of net assets acquired, net . . . . . . . . . . . . . . . . . . . . . $ 24,363 $ 8,215
Leases receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,735 4,515
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,589 1,863
-------- --------
$ 36,687 $ 14,593
======== ========
NOTE 8 -- OTHER CURRENT LIABILITIES
Other current liabilities are comprised of the following:
(Dollars in thousands) 1997 1996
---- ----
Salaries, wages and other benefits . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,849 $ 8,564
State sales taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,685 5,881
Self-insured workers' compensation reserve . . . . . . . . . . . . . . . . . . . . . . 6,781 6,854
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,403 4,351
Other self-insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,103 1,328
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,642 4,778
-------- --------
$ 44,463 $ 31,756
======== ========
F-14
41
NOTE 9 -- LONG-TERM DEBT
Long-term debt is comprised of the following:
(Dollars in thousands) 1997 1996
---- ----
Secured notes payable, principal payments in varying amounts
monthly beginning September 1997 through July 2017, interest
based on LIBOR plus 2.0% through July 31, 1997 and 2.75% thereafter . . . . . . . $20,000 $ --
Secured note payable, principal payments in specified amounts
monthly through 2001, interest at 8.17% . . . . . . . . . . . . . . . . . . . . . 5,111 5,398
Industrial Revenue Bonds, payable in 1999, variable interest
rate averaging 3.4% in fiscal 1997 . . . . . . . . . . . . . . . . . . . . . . . . 3,600 3,600
Unsecured note payable to bank, principal payments in specified amounts
quarterly through 1998, interest based on the bank prime rate plus 0.25% . . . . . -- 22,750
Secured note payable, principal payments in specified amounts annually
through 2000, interest at 13.5% . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,993
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,794 3,155
-------- --------
34,505 38,896
Less: Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735 8,575
-------- --------
$ 33,770 $ 30,321
======== ========
Effective August 12, 1996, the Company entered into a new credit agreement with
a group of financial institutions. Under the terms of the credit agreement, the
Company borrowed the principal amount of $20.0 million under a five-year, fully
amortizing term loan, the proceeds of which were used to repay existing
indebtedness. The credit agreement also provides the Company with (i) a
revolving credit facility for working capital and other general corporate
purposes, under the terms of which the Company may borrow from time to time up
to $30.0 million (including a letter of credit subfacility of up to $20.0
million), and (ii) a revolving credit facility for the purpose of financing
investments in and acquisitions of other companies, under the terms of which
the Company may borrow from time to time up to $25.0 million. The Company
borrowed $25.0 million under this revolving credit facility in connection with
the acquisition of Casa Bonita on October 1, 1996 (see Note 2), the total of
which, together with the outstanding principal amount of the term loan was paid
in full with the net proceeds of the Company's common stock offering (see Note
11). The amounts advanced, if any, to the Company and remaining outstanding
under the revolving acquisition facility will convert after two years into a
three-year, fully amortizing loan. Both of the foregoing revolving credit
facilities mature on July 31, 2001. As of January 31, 1997, no borrowings were
outstanding under its credit facility.
The credit agreement also includes customary affirmative and negative covenants
which, among other things, restrict the Company's ability to (i) incur or
create indebtedness on or with respect to its properties, (ii) incur additional
indebtedness, (iii) merge or consolidate with other entities, (iv) sell assets
and (v) declare or pay dividends or repurchase shares of capital stock, subject
in each of the foregoing cases to certain exceptions. In addition, the credit
agreement requires the Company to maintain certain specified financial ratios
and operating results. As of fiscal year end, the Company was in compliance
with all of its covenants governing its credit facility.
Secured notes payable are collateralized by certain restaurant property deeds
of trust, with a carrying value of $36.1 million as of January 31, 1997.
F-15
42
Long-term debt matures in fiscal years ending after January 31, 1997 as
follows:
(Dollars in thousands)
Fiscal Year:
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 735
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,073
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,769
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,130
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 848
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,950
--------
$34,505
========
NOTE 10 -- OTHER LONG-TERM LIABILITIES
Other long-term liabilities consists of the following:
(Dollars in thousands) 1997 1996
---- ----
Self-insured workers' compensation reserve . . . . . . . . . . . . . . . . . . . . . $ 7,283 $ 6,784
Exit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,263 5,274
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,062 3,058
-------- --------
$ 20,608 $ 15,116
======== ========
The Company presently self-insures for group insurance, workers' compensation
and fire and comprehensive protection on most equipment and certain other
assets. A total of $14.1 million and $13.6 million was accrued as of January
31, 1997 and 1996, respectively, representing the current and long-term
portions of the net present value of an independent actuarial valuation of the
Company's workers' compensation claims. These amounts are net of a discount of
$2.0 million in both fiscal 1997 and 1996.
In prior years, the Company initiated programs to dispose of or franchise its
Arizona and Texas operations. As of January 31, 1997 and 1996, $6.0 million and
$6.7 million, respectively, were accrued for these reserves, including the
current portion. These balances were mainly comprised of estimated lease
subsidies, $2.7 million of which were reduced in connection with the
reacquisition of several Carl's Jr. franchised restaurants from a related
party during fiscal 1995 (see Note 13). These lease subsidies represent the net
present value of the excess of future lease payments over estimated sublease
income. The remaining unamortized discount to present value these lease
subsidies at January 31, 1997 was $4.5 million and will be amortized to
operations over the remaining sublease terms, which range up to 18 years.
NOTE 11 -- STOCKHOLDERS' EQUITY
Upon consummation of the Merger, stockholders of Enterprises received one share
of the Company's common stock for each share of Enterprises' common stock owned
by them just prior to the Merger. In connection with this transaction, the
Certificate of Incorporation was adopted for CKE which authorizes 50,000,000
shares of common stock and 5,000,000 shares of preferred stock, both of which
have a par value of $.01 per share.
In July 1994, the Board of Directors authorized the repurchase of up to three
million shares of the Company's common stock. A total of 1,005,450 shares of
stock were repurchased to date, which includes the purchase of 93,750 shares in
F-16
43
fiscal 1995 from the Chairman Emeritus at the then market price of $6.09 per
share. The balance of these shares were purchased in a series of open market
transactions, at an average price of approximately $4.99 per share, for an
aggregate purchase price of approximately $4.5 million. On October 28, 1996,
the Board of Directors of the Company retired 1,005,450 shares of the Company's
common stock which were previously held as treasury stock.
During the fourth quarter of fiscal 1997, the Company issued 4,312,500 shares
of its common stock at a public offering price of $19.08 per share. Proceeds
from the offering, net of underwriting discounts and commissions and other
related expenses, were $77.6 million. The net proceeds were used to reduce the
Company's existing indebtedness and for working capital and other general
corporate purposes, including the Company's investments in Checkers and
additional investments in Rally's (see Note 6).
NOTE 12 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents information on the Company's financial
instruments:
(Dollars in thousands) 1997 1996
----------------------- ---------------------
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------- ----- ------- -----
Financial assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $39,782 $39,782 $23,429 $23,429
Marketable securities . . . . . . . . . . . . . . . . . -- -- 2,510 2,510
Notes receivable . . . . . . . . . . . . . . . . . . . 17,761 17,864 9,051 9,097
Financial liabilities:
Long-term debt, including current portion . . . . . . . 34,505 34,310 38,896 37,009
The fair value of cash and cash equivalents approximates their carrying amount
due to their short maturity. The estimated fair values of marketable securities
were based on quoted market prices. The estimated fair values of notes
receivable were determined by discounting future cash flows using current rates
at which similar loans would be made to borrowers with similar credit ratings.
The estimated fair value of long- term debt was determined by discounting
future cash flows using rates currently available to the Company for debt with
similar terms and remaining maturities.
NOTE 13 -- RELATED PARTY TRANSACTIONS
Certain members of management and the Karcher family are franchisees of the
Company. A total of 41 restaurants have been sold to these individuals, three
of which occurred during fiscal 1997. As part of these transactions, the
Company received cash and accepted $10.4 million of interest-bearing notes at
rates ranging from 7.0% to 12.5%, of which $47,000 and $626,000 remained
outstanding as of January 31, 1997 and 1996, respectively. Additionally, these
franchisees regularly purchase food and other products from the Company on the
same terms and conditions as other franchisees.
During fiscal 1995, the Company made a salary advance to the Chairman Emeritus
totaling $715,000, a majority of which is non-interest bearing and is to be
repaid through payroll deductions. As of January 31, 1997 and 1996 $220,000 and
$595,000, respectively, remained outstanding. The entire amount will be repaid
by December 1998.
F-17
44
In fiscal 1994, the Chairman Emeritus was granted future retirement benefits
for past services consisting principally of payments of $200,000 per year for
life and supplemental health benefits, which had a net present value of $1.7
million as of that date. This amount was computed using certain actuarial
assumptions, including a discount rate of 7%. A total of $1.3 million remained
accrued in other long-term liabilities as of January 31, 1997. The Company
anticipates funding these obligations as they become due.
In June 1994, the Company reacquired 12 Arizona restaurants from a Karcher
family member who was formerly an officer of the Company. As part of this
transaction, the Company took possession of certain restaurant assets in
exchange for the forgiveness of two notes receivable totaling $1.4 million, and
a cash payment of $650,000. In addition, as described in Note 10, certain
previously established lease subsidy reserves totaling $2.7 million were
reversed in fiscal 1995 as a result of this transaction.
The Company leases various properties, including its corporate headquarters,
one of its distribution facilities and three of its restaurants, from the
Chairman Emeritus. Included in capital lease obligations were $4.0 million and
$4.5 million, representing the present value of lease obligations related to
these various properties at January 31, 1997 and 1996, respectively. Lease
payments under these leases for fiscal 1997, 1996 and 1995 amounted to $1.3,
$1.4, and $1.4 million, respectively. This was net of sublease rentals of
$148,000 in both fiscal 1997 and 1996 and $154,000 in fiscal 1995. In September
1996, the Company purchased a restaurant from the Chairman Emeritus for a
purchase price of $1.1 million.
NOTE 14 -- FRANCHISE AND LICENSE OPERATIONS
Franchise arrangements, with franchisees who operate in Arizona, California,
Hawaii, Nevada, Oregon and Utah, generally provide for initial fees and
continuing royalty payments to the Company based upon a percent of sales. The
Company generally charges an initial franchise fee for each new franchised
restaurant that is added to its system, and in some cases, an area development
fee, which grants exclusive rights to develop a specified number of Carl's Jr.
restaurants in a designated geographic area within a specified time period.
Similar fees are charged in connection with the Company's international
licensing operations. These fees are recognized ratably when substantially all
the services required of the Company are complete and the restaurants covered
by these agreements commence operations.
Franchisees may also purchase food, paper and other supplies from the Company.
Additionally, franchisees may be obligated to remit lease payments for the use
of restaurant facilities owned or leased by the Company, generally for a period
of 20 years. Under the terms of these leases, they are required to pay related
occupancy costs which include maintenance, insurance and property taxes.
The Company receives notes from franchisees in connection with the sales of
Company-operated restaurants. During fiscal 1996, the Company sold certain of
its franchise notes receivable, with partial recourse, to an independent third
party for cash proceeds of approximately $8.4 million. The remaining notes bear
interest from 7.0% to 12.5%, mature in five to 15 years and are secured by an
interest in the restaurant equipment sold.
Revenues from franchised and licensed restaurants consist of the following:
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Food service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,035 $ 56,015 $ 57,070
Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,932 10,116 10,257
Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 5,704 6,284
Initial fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305 116 91
-------- -------- --------
$ 77,272 $ 71,951 $ 73,702
======== ======== ========
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45
Operating costs and expenses for franchised and licensed restaurants consist of
the following:
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Food service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,606 $ 56,590 $ 57,334
Occupancy and other operating expenses . . . . . . . . . . . . . . . . . . 12,380 12,249 12,537
-------- -------- --------
$ 71,986 $ 68,839 $ 69,871
======== ======== ========
NOTE 15 -- INTEREST EXPENSE
Interest expense consists of the following:
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,083) $ (5,898) $ (6,194)
Notes payable and revolving credit facility . . . . . . . . . . . . . . . . (3,059) (3,585) (2,484)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (735) (521) (524)
-------- -------- --------
$ (9,877) $(10,004) $ (9,202)
======== ======== ========
NOTE 16 -- OTHER INCOME, NET
Other income, net is comprised of the following:
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,402 $ 2,494 $3,261
Lease income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,081 981 --
Net gain (loss) on sale of investments . . . . . . . . . . . . . . . . . . 728 (145) (157)
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720 854 357
Net gain (loss) on sale of restaurants . . . . . . . . . . . . . . . . . . 516 (338) (463)
Income (loss) from long-term investments . . . . . . . . . . . . . . . . . 140 (1,624) --
-------- -------- --------
$4,587 $ 2,222 $2,998
======== ======== ========
NOTE 17 -- INCOME TAXES
Income tax expense is comprised of the following:
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,963 $ 2,018 $ (1,996)
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,065 772 (304)
-------- -------- --------
8,028 2,790 (2,300)
-------- -------- --------
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,529 3,878 2,517
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 851 333 917
-------- -------- --------
6,380 4,211 3,434
-------- -------- --------
$ 14,408 $ 7,001 $ 1,134
======== ======== ========
F-19
46
A reconciliation of income tax expense at the federal statutory rate to the
Company's provision for taxes on income is as follows:
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Income taxes at statutory rate . . . . . . . . . . . . . . . . . . . . . . $ 12,849 $ 6,104 $ 815
State income taxes, net of federal income tax benefit . . . . . . . . . . . 2,822 738 800
Targeted jobs tax credits . . . . . . . . . . . . . . . . . . . . . . . . . (1,528) (243) (338)
Alternative minimum tax credit . . . . . . . . . . . . . . . . . . . . . . (19) -- (551)
Increase (decrease) in valuation allowance . . . . . . . . . . . . . . . . (76) 152 298
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 250 110
-------- -------- --------
$ 14,408 $ 7,001 $ 1,134
======== ======== ========
Temporary differences and carryforwards gave rise to a significant amount of
deferred tax assets and liabilities as follows:
(Dollars in thousands) 1997 1996
---- ----
Deferred tax assets:
Capitalized leases . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,801 $ 8,641
Workers' compensation reserve . . . . . . . . . . . . . . . . . . . . . . 5,908 5,905
Targeted jobs tax credit carryforward . . . . . . . . . . . . . . . . . . 3,654 3,055
Exit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,522 2,905
Alternative minimum tax credits . . . . . . . . . . . . . . . . . . . . . 1,647 700
Store closure reserve . . . . . . . . . . . . . . . . . . . . . . . . . . 1,613 136
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,799 4,601
-------- --------
29,944 25,943
Less: Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . 4,917 1,945
-------- --------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . 25,027 23,998
-------- --------
Deferred tax liabilities:
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . 8,271 2,017
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,088 9,896
Safe harbor leases . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 586
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,406 1,443
-------- --------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . 17,813 13,942
-------- --------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,214 $ 10,056
======== ========
While there can be no assurance that the Company will generate any earnings or
any specific level of earnings in future years, management believes it is more
likely than not that the Company will realize the majority of the benefit of
the existing net deferred tax assets at January 31, 1997, based on the
Company's current, historical and future pre-tax earnings.
The Company had targeted jobs tax credit carryforwards of $3.7 million, which
expire in the years 2005 through 2011, available at January 31, 1997. The
Company also had an alternative minimum tax credit carryforward of $1.6 million
with no expiration date.
NOTE 18 -- EMPLOYEE BENEFIT AND RETIREMENT PLANS
Profit Sharing and Savings Plan
The Company maintains a voluntary contributory profit sharing and savings
investment plan for all eligible employees other than operations hourly
employees. Annual contributions under the profit sharing portion of the plan
are
F-20
47
determined at the discretion of the Company's Board of Directors. Under the
savings investment portion of the plan, participants may elect to contribute up
to 15% of their annual salary to the plan. Through December 31, 1994, up to 4%
of employee contributions were matched by the Company. Total Company
contributions to this plan for fiscal 1995 were $344,000.
Pension Plan
On January 1, 1996, the Company's pension plan, covering substantially all
operations employees qualified as to age and service, was amended to limit
participation in the plan only to those employees who had become participants
in the plan on or before December 31, 1995. Future contributions of plan
benefits discontinued after this date.
During fiscal year 1997, the plan was terminated and approximately $2.6 million
of the accumulated benefit obligation was settled. As a result of the
termination, the Company recorded approximately $1.3 million in pension plan
expense which was based upon an independent actuarial valuation study. During
fiscal 1996 and 1995, pension contributions were $512,000 and $438,000,
respectively.
Stock Purchase Plan
In fiscal 1995, the Board of Directors adopted, and stockholders subsequently
approved in fiscal 1996, an Employee Stock Purchase Plan ("ESPP"). Under the
terms of the ESPP and subsequent amendments, eligible employees may voluntarily
purchase, at current market prices, up to 750,000 shares of the Company's
common stock through payroll deductions. Pursuant to the ESPP, employees may
contribute an amount between 3% and 15% of their base salary. The Company
contributes varying amounts as specified in the ESPP. During fiscal 1997 and
1996, 42,435 and 38,673 shares, respectively, were purchased and allocated to
employees, based upon their contributions, at an average price of $17.58 and
$8.47 per share, respectively. The Company contributed $116,000 or an
equivalent of 6,168 shares for the year ended January 31, 1997 and $8,000 or an
equivalent of 690 shares for the year ended January 31, 1996.
Stock Incentive Plans
The Company's 1994 stock incentive plan was approved by stockholders in June
1994. The 1994 plan is substantially similar to the 1993 plan under which, as a
result of the Merger, no further options may be granted. Awards granted to
eligible employees under the 1994 plan are not restricted as to any specified
form or structure, with such form, vesting and pricing provisions determined by
the Compensation Committee of the Board of Directors. The 1994 plan also
provides for the automatic annual award of stock options to nonemployee
directors and nonemployee director members of the Executive Committee. Options
generally have a term of five years from the date of grant for the nonemployee
directors and ten years from the date of grant for employees, become
exercisable at a rate of 33-1/3% per year following the grant date and are
priced at the fair market value of the shares on the date of grant. A total of
5,250,000 shares are available for grants of options or other awards under this
plan, of which 2,383,849 stock options were outstanding as of January 31, 1997,
with exercise prices ranging from $4.50 per share to $23.33 per share.
The Company's 1993 stock incentive plan was superseded by the 1994 plan, as
discussed above. As of January 31, 1997, 552,565 stock options, with exercise
prices ranging from $4.83 per share to $8.92 per share, were outstanding under
the plan. No further awards may be granted under this plan.
The Company's 1982 stock option plan expired in September 1992. Under this
plan, stock options were granted to key employees to purchase up to 4,500,000
shares of its common stock at a price equal to or greater than the fair market
value at the date of grant. The options generally had a term of 10 years from
the grant date and became exercisable at a rate of 25%, 35% and 40% per year
following the grant date. The exercise prices of the 250,139 stock options
outstanding as of January 31, 1997 under this plan range from $4.00 per share
to $8.92 per share.
In connection with the acquisition of Summit, the Company assumed the options
outstanding under Summit's existing option plans: the 1984 Incentive Stock
Option Plan, the 1987 Nonqualified Stock Option Plan, the 1987 Employee
Incentive Stock Option Plan and the 1992 Stock Option Plan. Pursuant to the
terms of the acquisition, options under these plans became fully vested on July
15, 1996. The options granted in accordance with these four plans generally had
a term of five to ten years. Under these plans, there were 57,694 stock options
outstanding at January 31, 1997 with exercise prices ranging from $12.90 to
$26.21 per share. No further shares may be granted under these plans.
F-21
48
Transactions under all plans are as follows:
Number of Shares 1997 1996 1995
- ---------------- ---- ---- ----
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . 2,417,695 1,782,053 2,058,954
Options assumed in Summit acquisition . . . . . . . . . . . . . . . . . . 77,131 -- --
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,130,876 1,344,609 655,809
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,801) (176,463) (681,444)
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (359,654) (532,504) (251,266)
---------- ---------- ----------
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . 3,244,247 2,417,695 1,782,053
========== ========== ==========
Exercisable at end of year . . . . . . . . . . . . . . . . . . . . . . . 1,235,492 932,612 972,486
========= ========== ==========
For purposes of the following pro forma disclosures required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") the fair value of each option granted after fiscal
1995 has been estimated on the date of grant using the Black-Scholes
option-pricing model, with the following assumptions used for grants in fiscal
1997 and 1996: annual dividends consistent with the Company's current dividend
policy, which resulted in payments of $0.05 per share in fiscal 1997 and 1996;
expected volatility of 25% in fiscal 1997 and 29% in fiscal 1996; risk free
interest rates of 6.25% in fiscal 1997 and 5.25% in fiscal 1996; and an
expected life of 5.45 years. The weighted average fair value of each option
granted during fiscal 1997 and 1996 was $6.80 and $2.51, respectively. Had
compensation expense been recognized for fiscal 1997 and 1996 grants for
stock-based compensation plans in accordance with provisions of SFAS 123, the
Company would have recorded net income and earnings per share of $20.5 million,
or $0.67 per share in fiscal 1997 and $10.7 million, or $0.38 per share in
fiscal 1996. Since the pro forma compensation expense for stock-based
compensation plans is recognized over a three year vesting period, the
foregoing pro forma reductions in the Company's net income are not
representative of anticipated amounts in future years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that do not have vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the value of an estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
NOTE 19 -- SUPPLEMENTAL CASH FLOW INFORMATION
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Cash paid for interest and income taxes are as follows:
Interest (net of amount capitalized) . . . . . . . . . . . . . . . . . $ 9,549 $ 10,198 $ 9,208
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,778 2,156 645
Noncash investing and financing activities are as follows:
Sale of property and equipment . . . . . . . . . . . . . . . . . . . . $ 2,469 $ -- $ --
Increase in long-term investments . . . . . . . . . . . . . . . . . . . (2,469) -- --
Transfers of marketable securities to (from) other current assets . . . -- -- (6,776)
Transfer of inventory, current assets and property and
equipment to long-term investments . . . . . . . . . . . . . . . . . -- 20,352 --
Stock issued in exchange for Summit's assets . . . . . . . . . . . . . 11,411 -- --
F-22
49
NOTE 20 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly results.
(Dollars in thousands, except per share amounts)
Quarter 1ST 2ND 3RD 4TH
------- ------- ------- -------
FISCAL 1997
Total revenues . . . . . . . . . . . . . . . . . . . . . $ 152,934 $ 128,123 $ 162,291 $ 170,732
Operating income . . . . . . . . . . . . . . . . . . . . 10,324 9,982 10,909 10,785
Net income . . . . . . . . . . . . . . . . . . . . . . 5,333 5,192 5,588 6,189
Net income per common and
common equivalent share . . . . . . . . . . . . . . . $ 0.19 $ 0.18 $ 0.19 $ 0.18
========== ========== ========== ==========
FISCAL 1996
Total revenues . . . . . . . . . . . . . . . . . . . . . $ 137,625 $ 108,040 $ 113,074 $ 106,698
Operating income . . . . . . . . . . . . . . . . . . . . 5,264 6,554 7,373 6,544
Net income . . . . . . . . . . . . . . . . . . . . . . 1,915 2,808 3,021 3,208
Net income per common and
common equivalent share . . . . . . . . . . . . . . . $ 0.07 $ 0.10 $ 0.11 $ 0.11
========== ========== ========== ==========
Quarterly operating results are not necessarily representative of operations
for a full year for various reasons, including the seasonal nature of the
quick-service restaurant industry and unpredictable adverse weather conditions
which may affect sales volume and food costs. In addition, all quarters have
12-week accounting periods, except the first quarters of fiscal 1997 and 1996,
which have 16-week accounting periods.
NOTE 21 -- COMMITMENTS AND CONTINGENT LIABILITIES
In conjunction with the new credit facility established during fiscal 1997, a
letter of credit subfacility in the amount of $20.0 million was established
(see Note 9). Several letters of credit are outstanding under this facility
which secure the Company's potential workers' compensation claims. The State of
California requires that the Company provide a letter of credit each year based
on its existing workers' compensation claims experience, or set aside a
comparable amount of cash or investment securities in a trust account. The
upcoming annual security agreement, which begins May 1, 1997, was raised to
$9.2 million due to increased labor hours. A new letter of credit will be
issued for this amount on or before May 1, 1997. Additionally there is a $3.9
million letter of credit outstanding under the subfacility which secures the
Industrial Revenue Bonds issued in connection with the construction of the
Company's Northern California distribution facility.
The Company's standby letter of credit agreements with various banks expire as
follows:
(Dollars in thousands)
April 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55
July 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,947
September 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
October 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,355
January 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,852
April 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
---------
$ 14,608
=========
In fiscal 1996, the Company sold certain of its franchise notes receivable,
with recourse, to an independent third party (see Note 14). In addition, the
Company entered into two limited term guarantees with an independent third
party during fiscal 1997 on behalf of certain of its franchisees. The Company
is contingently liable for an aggregate of approximately $6.6 million under
these guarantees as of January 31, 1997.
In September 1992, Summit sold certain of its restaurants. In connection with
this sale, Summit assigned its rights and obligations under real property
leases to the buyer. As such, Summit remains contingently liable for these
obligations. Future minimum payments under these leases amounts to $1.3 million
in fiscal 1998, $1.2 million in both fiscal 1999 and fiscal 2000, $1.0 million
in fiscal 2001, $800,000 in fiscal 2002 and $2.1 million thereafter.
F-23
50
EXHIBIT INDEX
EXHIBITS
3-1 Certificate of Incorporation of the Registrant, incorporated herein
by reference to exhibit 3-1 to the Registrant's Form S-4 Registration
Statement Number 333-05305.
3-2 Bylaws of Registrants, incorporated herein by reference to exhibit
3-2 to the Registrants Form S-4 Registration Statement Number 333-
05305.
10-1 Franchise Development Agreement dated May 17, 1985 by and between
Carl Karcher Enterprises, Inc. and Carl Leo Karcher, filed as exhibit
10-53 to the Company's Form 10-K Annual Report as amended for fiscal
year ended January 27, 1992, and is hereby incorporated by reference.
10-2 Form of Franchise Agreement by and between Carl Karcher Enterprises,
Inc., and Carl Leo Karcher or CLK, Inc. filed as exhibit 10-54 to the
Company's Form 10-K Annual Report as amended for fiscal year ended
January 27, 1992, and is herein incorporated by reference, relating
to the following units:
Date Unit Address
---- ---- -------
May 17, 1985 724 68980 Highway 111
May 17, 1985 725 102 N. Sunrise Way
May 17, 1985 726 72840 Highway 111
May 17, 1985 727 81-770 Highway 111
May 17, 1985 728 73-125 Highway 111
May 17, 1985 729 57222 29 Palms Highway
May 17, 1985 730 13010 Palm Drive
May 17, 1985 731 2520 Palm Canyon Drive
December 31, 1985 768 2601 W. Broadway
January 25, 1986 769 160 S. Lovekin
January 25, 1986 770 1750 4th Avenue
January 25, 1986 771 2215 S. Fourth
October 27, 1987 772 115 Main Street
March 3, 1987 786 1489 Adams Avenue
July 6, 1987 793 72305 Vaimer Road
October 27, 1987 794 2195 Highway 95
June 14, 1988 811 40050 Washington
June 26, 1989 820 I-8 Business Loop
November 12, 1990 873 32-250 Date Palm Drive
April 1, 1991 895 50-087 Harrison Street
December 16, 1991 7013 41717 Big Bear Blvd.
January 20, 1992 7038 275 N. Lake Havasu Blvd.
April 7, 1993 7085 78-672 Highway 111
10-3 Form of Sublease between Carl Karcher Enterprises, Inc., and Carl
Leo Karcher or CLK, Inc., filed as exhibit 10-62 to the Company's
Form 10-K Annual Report as amended for fiscal year ended January
27, 1992, and is herein incorporated by reference, relating to the
following units:
Date Unit Address
---- ---- -------
May 16, 1985 724 68980 Highway 111
May 16, 1985 725 102 N. Sunrise Way
May 16, 1985 728 73-125 Highway 111
May 16, 1985 729 57222 29 Palms Highway
May 15, 1985 730 13010 Palm Drive
May 16, 1985 731 2520 Palm Canyon Drive
September 25, 1987 794 2195 Highway 95
December 16, 1991 7013 41717 Big Bear Blvd.
E-1
51
10-4 Land and Building Sublease Agreement dated December 31, 1985 by and
between Carl Karcher Enterprises, Inc. and Carl Leo Karcher, filed
as exhibit 10-71 to the Company's Form 10-K Annual Report as
amended for fiscal year ended January 27, 1992, and is hereby
incorporated by reference.
10-5 Lease Agreement dated September 25, 1987 between Carl Karcher
Enterprises, Inc. and Carl Leo Karcher, as amended by the Amendment
to Lease dated October 19, 1990 (Unit 772), filed as exhibit 10-81
to the Company's Form 10-K Annual Report as amended for fiscal year
ended January 27, 1992, and is hereby incorporated by reference.
10-6 Form of Assignment of Franchise Agreement, Release and Continuing
Guaranty between Carl Karcher Enterprises, Inc., and Carl Leo
Karcher or CLK, Inc., filed as exhibit 10-51 to the Company's Form
10-K Annual Report as amended for fiscal year ended January 27,
1992, and is herein incorporated by reference, relating to the
following units:
Date Unit Address
---- ---- -------
June 9, 1992 724 68980 Highway 111
June 9, 1992 725 102 N. Sunrise Way
June 9, 1992 727 81-770 Highway 111
June 9, 1992 728 73-125 Highway 111
June 9, 1992 729 57222 29 Palms Highway
June 9, 1992 731 2520 Palm Canyon Drive
June 9, 1992 768 2601 W. Broadway
June 9, 1992 769 160 S. Lovekin
June 9, 1992 770 1750 4th Avenue
June 9, 1992 771 2215 S. Fourth
October 27, 1987 772 115 Main Street
January 27, 1987 786 1498 Adams Avenue
October 5, 1987 793 72305 Vaimer Road
August 1, 1988 811 40050 Washington
January 1, 1990 820 388 West 32nd Street
November 13, 1990 873 32-250 Date Palm Drive
March 29, 1991 895 50-087 Harrison Street
December 16, 1991 7013 41717 Big Bear Boulevard
January 20, 1992 7038 275 N. Lake Havasu Boulevard
April 7, 1993 7085 78-672 Highway 111
10-7 Assignment of Franchise Agreement and Sublease Agreement by Carl
Leo Karcher to CLK, Inc. and Continuing Guaranty each dated August
17, 1989 (Unit 730), filed as exhibit 10-39 to the Company's Form
10-K Annual Report as amended for fiscal year ended January 27,
1992, and is hereby incorporated by reference.
10-8 Assignment of Franchise Agreement and Lease Agreement by Carl Leo
Karcher to CLK, Inc. and Continuing Guaranty each dated August 17,
1989 (Unit 726) filed as exhibit 10-94 to the Company's Form 10-K
Annual Report as amended for fiscal year ended January 27, 1992,
and is hereby incorporated by reference.
10-9 Assignment of Restaurant Franchise Agreement by Carl Leo Karcher to
CLK, Inc. dated November 28, 1989 (Unit 794), filed as exhibit
10-95 to the Company's Form 10-K Annual Report as amended for
fiscal year ended January 27, 1992, and is hereby incorporated by
reference.
10-10 License Agreement dated January 27, 1987 by and between Carl
Karcher Enterprises, Inc. and CLK, Inc., as amended by the
Amendment to License Agreement dated October 10, 1990, filed as
exhibit 10-76 to the Company's Form 10-K Annual Report as amended
for fiscal year ended January 27, 1992, and is hereby incorporated
by reference.
10-11 Agreement to Purchase dated October 27, 1987 by and between Carl
Karcher Enterprises, Inc. and Carl Leo Karcher (Unit 772), filed as
exhibit 10-83 to the Company's Form 10-K Annual Report as amended
for fiscal year ended January 27, 1992, and is hereby incorporated
by reference.
E-2
52
10-12 Agreement to Purchase dated October 27, 1987 by and between Carl
Karcher Enterprises, Inc. and Carl Leo Karcher (Unit 794), filed as
exhibit 10-84 to the Company's Form 10-K Annual Report as amended
for fiscal year ended January 27, 1992, and is hereby incorporated
by reference.
10-13 Conditional Assignment of Lease dated November 7, 1990 between CLK,
Inc. and Carl Karcher Enterprises, Inc. (Unit 770), filed as
exhibit 10-97 to the Company's Form 10-K Annual Report as amended
for fiscal year ended January 27, 1992, and is hereby incorporated
by reference.
10-14 Conditional Assignment of Lease dated November 7, 1990 between CLK,
Inc. and Carl Karcher Enterprises, Inc. (Unit 771), filed as
exhibit 10-98 to the Company's Form 10-K Annual Report as amended
for fiscal year ended January 27, 1992, and is hereby incorporated
by reference.
10-15 Conditional Assignment of Lease dated December 18, 1990 by and
between CLK, Inc. and Carl Karcher Enterprises, Inc. (Unit 726),
filed as exhibit 10-101 to the Company's Form 10-K Annual Report as
amended for fiscal year ended January 27, 1992, and is hereby
incorporated by reference.
10-16 Development Agreement dated March 22, 1991 between Carl Karcher
Enterprises, Inc. and Carl Leo Karcher, filed as exhibit 10-102 to
the Company's Form 10-K Annual Report as amended for fiscal year
ended January 27, 1992, and is hereby incorporated by reference.
10-17 Security Agreement dated December 16, 1991 between Carl Karcher
Enterprises, Inc. and Carl Leo Karcher (Unit 7013/433), filed as
exhibit 10-111 to the Company's Form 10-K Annual Report as amended
for fiscal year ended January 27, 1992, and is hereby incorporated
by reference.
10-18 Carl Karcher Enterprises, Inc. Profit Sharing Plan, as amended,
filed as exhibit 10-21 to the Company's Registration Statement on
Form S-1, file No. 2-73695, and is hereby incorporated by
reference.(2)
10-19 Carl Karcher Enterprises, Inc. Key Employee Stock Option Plan,
filed as exhibit 10-24 to the Company's Registration Statement on
Form S-1, file No. 2-80283, and is hereby incorporated by
reference.(2)
10-20 Carl Karcher Enterprises, Inc. 1993 Employee Stock Incentive Plan,
filed as exhibit 10-123 to the Company's Form 10-K Annual Report
for fiscal year ended January 25, 1993, and is hereby incorporated
by reference.(2)
10-21 CKE Restaurants, Inc. 1994 Stock Incentive Plan, as amended,
incorporated herein by reference to exhibit 4-1 to the Registrant's
Form S-8 Registration Statement Number 333-12399.(2)
10-22 CKE Restaurants, Inc. 1994 Employee Stock Purchase Plan, as
amended.(1)(2)
10-23 Summit Family Restaurants Inc. 1992 Stock Option Plan; 1987
Employee Incentive Stock Option Plan; 1987 Non Qualified Stock
Option Plan; and the 1984 Incentive Stock Option Plan, incorporated
herein by reference to exhibits 4-1, 4-2, 4-3 and 4-4 to CKE
Restaurants, Inc. Form S-8 Registration Statement Number
333-12404.(2)
10-24 Employment Agreement dated January 1, 1994, by and between Carl
Karcher Enterprises, Inc. and Carl N. Karcher, filed as exhibit 10-
89 to the Company's Form 10-K Annual Report for fiscal year ended
January 31, 1994, and is hereby incorporated by reference.(2)
10-25 Employment Agreement dated November 8, 1994, by and between Carl
Karcher Enterprises, Inc. and C. Thomas Thompson, filed as exhibit
10-83 to the Company's Form 10-K Annual Report for fiscal year
ended January 30, 1995, and is hereby incorporated by reference.(2)
10-26 First Amendment to Employment Agreement dated March 31, 1996, by
and between Carl Karcher Enterprises, Inc. and C. Thomas Thompson,
filed as exhibit 10-44 to the Company's Form 10-Q Quarterly Report
for the quarterly period ended May 20, 1996, and is hereby
incorporated by reference.(2)
10-27 Employment Agreement dated January 24, 1996, by and between CKE
Restaurants, Inc. and Robert E. Wheaton, filed as exhibit 10-45 to
the Company's Form 10-Q Quarterly Report for the quarterly period
ended May 20, 1996, and is hereby incorporated by reference.(2)
E-3
53
10-28 Settlement Agreement and Release dated as of April 26, 1996, by and
between Giant Group, Ltd; William P. Foley II; CKE Restaurants,
Inc.; Fidelity National Financial, Inc.; and other parties, filed
as exhibit 10-42 to the Company's Form 10-Q Quarterly Report for
the quarterly period ended May 20, 1996, and is hereby incorporated
by reference.
10-29 Operating Agreement by and between Rally's Hamburgers, Inc. and
Carl Karcher Enterprises, Inc. dated May 26, 1996, filed as exhibit
10-43 to the Company's Form 10-Q Quarterly Report for the quarterly
period ended May 20, 1996, and is hereby incorporated by
reference.*
10-30 Settlement and Development Agreement by and between Carl Karcher
Enterprises, Inc., CKE Restaurants, Inc. and GB Foods Corporation
dated as of May 1995, filed as exhibit 10-31 to the Company's Form
10-K Annual Report for the fiscal year ended January 29, 1996, and
is hereby incorporated by reference.
10-31 First Amendment to Settlement and Development Agreement by and
between Carl Karcher Enterprises, Inc., CKE Restaurants, Inc. and
GB Foods Corporation dated as of February 20, 1997.(1)
10-32 Agreement to Contribute Assets dated April 17, 1995 by and between
Boston West, L.L.C. and Boston Pacific, Inc., filed as exhibit
10-84 to the Company's Form 10-K Annual Report for fiscal year
ended January 30, 1995, and is hereby incorporated by reference.
10-33 Amended and Restated Limited Liability Company Agreement of Boston
West, L.L.C. (a Delaware Limited Liability Company) dated April 16,
1995, filed as exhibit 10-85 to the Company's Form 10-K Annual
Report for fiscal year ended January 30, 1995, and is hereby
incorporated by reference.
10-34 First Amendment to the Amended and Restated Limited Liability
Company Agreement of Boston West, L.L.C. dated May 15, 1995, filed
as exhibit 10-34 to the Company's Form 10-K Annual Report for the
fiscal year ended January 29, 1996, and is hereby incorporated by
reference.
10-35 Second Amendment to the Amended and Restated Limited Liability
Company Agreement of Boston West, L.L.C. dated May 30, 1995, filed
as exhibit 10-35 to the Company's Form 10-K Annual Report for the
fiscal year ended January 29, 1996, and is hereby incorporated by
reference.
10-36 Third Amendment to the Amended and Restated Limited Liability
Company Agreement of Boston West, L.L.C. dated September 12, 1995,
filed as exhibit 10-36 to the Company's Form 10-K Annual Report for
the fiscal year ended January 29, 1996, and is hereby incorporated
by reference.
10-37 Fourth Amendment to the Amended and Restated Limited Liability
Company Agreement of Boston West, L.L.C. dated January 31, 1996,
filed as exhibit 10-37 to the Company's Form 10-K Annual Report for
the fiscal year ended January 29, 1996, and is hereby incorporated
by reference.
10-38 Unit Option Agreement by and between Boston West, L.L.C. and Boston
Pacific, Inc., dated as of September 12, 1995, filed as exhibit
10-38 to the Company's Form 10-K Annual Report for the fiscal year
ended January 29, 1996, and is hereby incorporated by reference.
10-39 Unit Repurchase Agreement by and between Boston West, L.L.C. and
Boston Pacific, Inc. dated as of September 12, 1995, filed as
exhibit 10-39 to the Company's Form 10-K Annual Report for the
fiscal year ended January 29, 1996, and is hereby incorporated by
reference.
10-40 Term Loan and Security Agreement between Carl Karcher Enterprises,
Inc. and Heller Financial, Inc., dated December 19, 1995, filed as
exhibit 10-40 to the Company's Form 10-K Annual Report for the
fiscal year ended January 29, 1996, and is hereby incorporated by
reference.
10-41 Amendment No. One to Term Loan and Security Agreement dated as of
January 22, 1996, by and between Carl Karcher Enterprises, Inc.
and Heller Financial, Inc. filed as exhibit 10-41 to the Company's
Form 10-K Annual Report for the fiscal year ended January 29, 1996,
and is hereby incorporated by reference.
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54
10-42 Amendment No. Two to Term Loan and Security Agreement dated as of
January 14, 1997, by and between Carl Karcher Enterprises, Inc.
and Heller Financial, Inc.(1)
10-43 Credit Agreement dated August 1, 1996, by and between CKE
Restaurants, Inc.; NationsBank of Texas, N.A.; and other parties,
filed as exhibit 10-1 to the Company's Current Report on Form 8-K,
dated August 20, 1996, and is hereby incorporated by reference.*
10-44 First Amendment to Credit Agreement dated September 30, 1996, by
and between CKE Restaurants, Inc.; NationsBank of Texas, N.A.; and
other parties, filed as exhibit 10-42 to the Company's Form 10-Q
Quarterly Report for the quarterly period ended November 4, 1996,
and is hereby incorporated by reference.
10-45 Second Amendment to Credit Agreement dated November 25, 1996, by
and between CKE Restaurants, Inc., NationsBank of Texas, N.A.; and
other parties.(1)
10-46 Third Amendment to Credit Agreement dated February 14, 1997, by and
between CKE Restaurants, Inc., NationsBank of Texas, N.A.; and
other parties.(1)
10-47 Stock Purchase Agreement, dated as of August 27, 1996, by and
between CKE Restaurants, Inc. and Casa Bonita Holdings, Inc., filed
as exhibit 10-1 to the Company's Current Report on Form 8-K dated
August 27, 1996, and is hereby incorporated by reference.*
10-48 Loan Agreement as of December 18, 1996, by and between FFCA
Mortgage Corporation, CBI Restaurants, Inc., and Casa Bonita Texas,
L.P.(1)*
10-49 Loan Agreement as of December 18, 1996, by and between FFCA
Mortgage Corporation, CBI Restaurants, Inc., and Casa Bonita
Incorporated.(1)*
11-1 Computation of Earnings Per Share.(1)
12-1 Computation of Ratios. (1)
21-1 Subsidiaries of Registrant.(1)
23-1 Consent of KPMG Peat Marwick LLP.(1)
27-1 Financial Data Schedule (included only with electronic filing).
_________________________
* Schedules omitted. The Registrant shall furnish supplementally to
the Securities and Exchange Commission a copy of any omitted
schedule upon request.
(1) Filed herewith.
(2) A management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report pursuant to Item 14(c) of
Form 10-K.
E-5