Back to GetFilings.com
1
Securities and Exchange Commission Washington, D.C. 20549
(Mark One)
() ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2000
or
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-13192
FORM 10-K
CKE RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0602639
(State or other jurisdiction of of (I.R.S. employer identification no.)
incorporation or organization)
401 W. CARL KARCHER WAY
ANAHEIM, CALIFORNIA 92801
(Address of principal executive offices)
(714) 774-5796
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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 [ ]
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. [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 31, 2000 was
$285,892,727.
The number of outstanding shares of the registrant's common
stock was 50,501,421 as of March 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the
registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders, which will be filed with the Securities and
Exchange Commission within 120 days after January 31, 2000,
are incorporated by reference into Part III of this Report.
The Exhibit Index is contained in Part IV herein on Page 55.
2
CKE RESTAURANTS, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended January 31, 2000
-------------------------------------------------------------------------------------
PART I Page
-------------------------------------------------------------------------------------
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
-------------------------------------------------------------------------------------
PART II
-------------------------------------------------------------------------------------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial and Operating Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 25
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
-------------------------------------------------------------------------------------
PART III
-------------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management 26
Item 13. Certain Relationships and Related Transactions 26
-------------------------------------------------------------------------------------
PART IV
-------------------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 28
3
1
-
PART I
ITEM 1. Business
OVERVIEW
CKE Restaurants, Inc. (the "Company") owns, operates and franchises 3,865
quick-service restaurants, primarily under the Carl's Jr., Hardee's and Taco
Bueno brand names. Our Hardee's and Carl's Jr. chains are the fourth and seventh
largest quick-service hamburger restaurant chains in the United States,
respectively, based on domestic systemwide sales. Based on publicly available
data, our company-operated Carl's Jr. and Taco Bueno restaurants generate
restaurant-level operating margins that are among the highest of the major
quick-service restaurant chains.
Carl's Jr.(R) - Carl's Jr. was founded in 1956 and is located primarily
in the Western United States, with a leading market presence in
California. The Carl's Jr. menu features several charbroiled hamburgers,
chicken sandwiches, steak sandwiches and other signature items, including
the Famous Star, Western Bacon Cheeseburger(R), Super Star(R),
Charbroiler Chicken Sandwiches(R), Crispy Chicken Sandwiches(R), the
Charbroiled Sirloin Steak Sandwich, the Sourdough Bacon Cheeseburger and
the Spicy Chicken Sandwich. Carl's Jr. differentiates itself from its
competitors by offering menu items that are generally made-to-order, meet
exacting quality standards and have a strong reputation for quality and
taste. As of January 31, 2000, our Carl's Jr. system included 934
restaurants, of which we operated 563 restaurants and our franchisees and
licensees operated 371 restaurants.
Hardee's(R) - We acquired Hardee's in July 1997. This acquisition enabled
us to expand the scope of our operations and become one of the leading
nationwide operators of quick-service hamburger restaurants. Hardee's was
founded in 1961 and has significant market presence in the Southeastern
and Midwestern United States. We believe there is significant value in
Hardee's and Carl's Jr.'s complementary geographic markets and relative
menu strengths. Hardee's strength is in its breakfast menu, which
generates approximately 35% of its overall revenues. This represents one
of the highest percentages in the quick-service hamburger restaurant
industry. Since we acquired Hardee's, we have acquired nearly 700
Hardee's restaurants from franchisees in key markets, including 557
restaurants operated by Flagstar Enterprises, Inc. ("FEI"), then the
largest Hardee's franchisee. These additional acquisitions have enabled
us to exercise further control over the Hardee's brand. As of January 31,
2000, our Hardee's system included 2,788 restaurants, of which we
operated 1,354 restaurants and our franchisees and licensees operated
1,434 restaurants.
Taco Bueno(R) - As of January 31, 2000, we owned and operated 121 Taco
Bueno quick-service Mexican restaurants located in Texas and Oklahoma and
licensed one restaurant. Taco Bueno differentiates itself from its
competitors by offering a diverse menu featuring generous portions of
freshly prepared, high-quality 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 its Mexidips & Chips, Muchaco, Bueno Chilada Platter, Two-handed
Taco and BOB ("Big Ol' Burrito").
STRATEGY
Our strategy is to operate and manage restaurant concepts nationwide. We believe
that our ability to deliver high-quality food with superior service in a clean
and friendly environment is critical to our operating success. We have developed
food, labor and customer service management practices that allow us to
effectively monitor restaurant-level operations, control costs, benchmark
restaurant performance statistics and communicate systemwide best practices
across restaurant concepts. As a result of our strategies, we have improved the
operating results of Carl's Jr. and Taco Bueno. From fiscal 1995 through fiscal
2000, company-operated Carl's Jr. average unit sales increased from $966,000 to
$1,086,000, while we improved restaurant-level operating margins from 18.4% to
24.1%, excluding the Hardee's-to-Carl's Jr. conversion restaurants in Oklahoma,
Texas and Kansas. Since we acquired Taco Bueno in October 1996, we have
increased average unit sales of our Taco Bueno restaurants from $600,000 to
$807,000. In addition, we aggressively promote and enhance awareness of each of
our brands through innovative advertising and remodeling programs.
The revitalization of Hardee's is the most important element of our
growth strategy. We are attempting to successfully turn Hardee's around based on
the success we have experienced at Carl's Jr. and Taco Bueno. Through our
disciplined approach and through our refranchising strategy discussed below, we
believe that the Hardee's brand is capable of generating meaningful profits and
positive same-store sales. The key elements of our growth strategy are to:
Revitalize the Hardee's Brand to Grow Same-Store Sales. We are continuing
our focus on revitalizing the Hardee's brand to generate same-store sales
growth. We introduced certain made-to-order lunch and dinner
4
2
menu items that are currently served in our Carl's Jr. restaurants, such
as the Famous Star, and eliminated unprofitable product offerings. We
also introduced the Carl's Jr.-style limited table service and added
"all-you-can-drink" beverage bars in all of our Hardee's restaurants.
Additionally, we are remodeling our Hardee's restaurants into a new "Star
Hardee's" format, which we designed to revitalize the Hardee's brand with
the menu and operating qualities of Carl's Jr. In addition to the menu
enhancements, a Star Hardee's remodel involves installing charbroilers in
the kitchens, remodeling the interior and exterior of the restaurant and
installing new signage that accents the Hardee's name with the Carl's Jr.
Star logo. In addition, our franchisees are remodeling restaurants to the
Star Hardee's format and continue to support our initiatives. We also
plan to enhance brand awareness through our new advertising campaign,
which was introduced in March 2000 and promotes Hardee's to our target
audience of high-volume lunch and dinner customers. As of January 31,
2000, 639 company and franchise operated Hardee's had been remodeled to
Star Hardee's and we continue to see improvement in revenue after a
remodel is completed. We plan to remodel up to 160 restaurants in fiscal
2001, and our Hardee's franchisees advise us that they plan to remodel
between 200 to 300 restaurants to the Star Hardee's format during that
period.
Refranchise Company-operated Restaurants to New and Existing
Franchisees. We intend to increase our proportion of franchised
restaurants to company-operated restaurants. During fiscal 2000 we sold
24 Carl's Jr. restaurants to franchisees for approximately $18.3 million
and 61 Hardee's restaurants to franchisees for approximately $18.5
million. During fiscal 2001, we plan to sell up to 500 Hardee's
restaurants, which should generate proceeds of approximately $200.0
million. This strategy is intended to increase the number and quality of
our Hardee's franchisees to help us turn around those restaurants, to
generate cash to pay down borrowings under our senior credit facility,
and to allow us to focus on running the balance of our Hardee's system
with a smaller number of company-operated restaurants.
Continue to Increase Hardee's Profitability. We have improved
restaurant-level operating margins and reduced corporate overhead by
implementing the operating initiatives, management practices and
disciplined operating strategy that we employ at Carl's Jr.
Restaurant-level operating margins at our company-operated Hardee's
restaurants increased to 13.6% in fiscal 2000, excluding the $42.0
million store closure reserve and asset impairment charge recorded in the
fourth quarter of fiscal 2000, compared with 6.2% for the year ended
December 31, 1996, the year prior to our acquisition. We expect to
improve further the profitability of our company-operated Hardee's
restaurants by increasing restaurant sales with the help of our new
advertising campaign, remodeling restaurants to the Star Hardee's format,
continuing our customer-focused, disciplined operating strategy and
executing our refranchising strategy which will enable us to operate a
smaller number of Hardee's restaurants more effectively.
Expand Successful Carl's Jr. and Taco Bueno Chains. We intend to continue
expanding our Carl's Jr. and Taco Bueno chains by opening new restaurants
and continuing to improve our innovative advertising campaigns. In fiscal
2000, the Carl's Jr. system grew by a total of 75 new restaurants and our
Taco Bueno chain grew by a total of 12 new restaurants. In fiscal 2001,
if cash flows from operations permits, we plan to open up to 30 new
Carl's Jr. restaurants and up to five new Taco Bueno restaurants in
established markets. Our Carl's Jr. and Hardee's franchisees plan to open
up to 35 and 65 new Carl's Jr. and Hardee's restaurants, respectively, in
fiscal 2001.
RESTAURANT OPERATIONS
CARL'S JR.
Concept. We believe that our Carl's Jr. restaurants' superior food quality,
diverse menu and attentive customer service differentiate Carl's Jr. 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.'s menu features freshly prepared food items that appeal to a broad
audience. We generally make Carl's Jr. charbroiled hamburgers, chicken
sandwiches and signature items at the time of the customer's order, applying
exacting quality standards and offering them in generous portions. By providing
partial table service, unlimited drink refills and an attractive restaurant
decor, Carl's Jr. restaurants offer a pleasant, customer-friendly environment.
We believe that our focus on customers and customer service, superior food
quality and generous portions enables Carl's Jr. restaurants to maintain a
strong price-value image with 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
5
3
-
hamburgers and chicken sandwiches, including the Famous Star, Western Bacon
Cheeseburger, Super Star, Charbroiler Chicken Sandwiches, Crispy Chicken
Sandwiches, the Charbroiled Sirloin Steak Sandwich, the Sourdough Bacon
Cheeseburger and the Spicy Chicken Sandwich. We also offer a fish sandwich,
stuffed baked potatoes, prepackaged salads, french fries, onion rings and fried
zucchini. Most restaurants also have self-service salad bars and 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. Carl's Jr. 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.
We have completed remodeling substantially all of our Carl's Jr.
restaurants to provide them with a fresh, contemporary look. Exterior
improvements include brighter colors, red awnings and a large, tilted Happy
Star(R) logo. The new interiors feature the same bright colors, food murals,
display cases for salads and desserts and accent lighting throughout the dining
area. We believe that Carl's Jr.'s new restaurant design will further increase
consumer awareness of the Carl's Jr. brand.
Operations. We strive to maintain high standards in all products and
equipment used by our restaurants, as well as our operations related to food
preparation, service and cleanliness. We generally prepare or assemble
hamburgers and chicken and steak sandwiches at Carl's Jr. restaurants after the
customer has placed an order and serve them promptly. We charbroil hamburger
patties, chicken breasts and sirloin steaks in a gas-fired double broiler that
sears the meat on both sides in a uniform heating and cooking time.
Each company-operated Carl's Jr. restaurant is operated by a general
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. The restaurant manager trains
other employees in accordance with our guidelines. District managers, who are
responsible for 11 to 14 restaurants, also supervise restaurant managers.
Approximately 56 district managers are under the supervision of six regional
vice presidents, all of whom regularly inspect the operations in their
respective districts and regions.
Dual-Branding. Dual-branding allows a single restaurant to offer
consumers two distinct brand menus. In May 1995, we entered into an agreement
with Santa Barbara Restaurant Group, Inc. ("SBRG") to offer The Green Burrito
menu at selected Carl's Jr. locations. We believe The Green Burrito's position
in the popular Mexican food segment and its dinner menu orientation complement
the Carl's Jr. menu. Customers of the Carl's Jr./Green Burrito dual-brand
restaurants are able to order items from both Carl's Jr.'s and The Green
Burrito's menu boards located at the same counter. Both menus are also available
to customers utilizing the drive-thru. The Green Burrito menu offered at the
dual-brand restaurants features a wide variety of traditional Mexican food
items, including burritos, tostadas, enchiladas, tacos, taquitos and nachos as
well as combination meals which are served with rice and beans. 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. We believe 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.
Our agreement with SBRG provides for the conversion of a total of 192
Carl's Jr. restaurants to Carl's Jr./Green Burrito dual-brand restaurants by
calendar 2002. We are required to pay an initial franchise fee for each
restaurant opened and remit royalties on The Green Burrito food sales to SBRG.
At the end of fiscal 1996, we elected to sub-franchise, and shortly thereafter
began offering, the Carl's Jr./Green Burrito dual-brand to our franchise
community. As of January 31, 2000, 42 franchised Carl's Jr. restaurants have
been converted to the Carl's Jr./Green Burrito concept. We receive a portion of
the fee for each franchise conversion and royalties from our franchisees' Green
Burrito food sales.
Franchised and Licensed Operations. Our franchise strategy is designed to
further the development of the Carl's Jr. chain and reduce the total capital we
need to develop new Carl's Jr. restaurants. Franchise arrangements with Carl's
Jr. franchisees, who operate in Arizona, California, Colorado, Hawaii, Idaho,
Nevada, New Mexico, Oklahoma, Oregon, Texas and Utah, generally provide for
initial fees and continuing royalty payments to us based upon a
6
4
percentage of sales and provide for a minimum percentage of sales each month for
advertising. Additionally, most franchisees purchase food, paper and other
supplies from us. 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. We
also plan to continue to pursue non-traditional franchise development
opportunities through innovative formats, including gasoline stations,
convenience stores and institutional food service outlets.
Our franchising philosophy is that only candidates with appropriate
operational experience and financial stability are considered for the program.
Specific net worth and liquidity requirements must 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 31, 2000, 371 Carl's Jr. restaurants were operated by our
Carl's Jr. franchisees and licensees. The majority of our Carl's Jr. franchisees
own more than one restaurant, with 15 franchisees owning seven or more
restaurants. We presently anticipate that our Carl's Jr. franchisees and
licensees will open up to 35 new Carl's Jr. restaurants during fiscal 2001.
HARDEE'S
Concept. Hardee's has a leading market presence in the Southeastern and
Midwestern United States. The Hardee's restaurant chain offers a variety of menu
items targeted at a broad audience in a quick-service, uniform format. Hardee's
restaurants emphasize hometown hospitality by providing generous portions at
reasonable prices in a friendly environment. Hardee's restaurant promotions
often include "two-for-two" campaigns, which offer two menu items for two
dollars.
Menu and Restaurant Design. Hardee's restaurants currently offer
hamburgers, chicken sandwiches, roast beef sandwiches and fish sandwiches for
lunch and dinner, as well as fried chicken in our restaurants located in the
Southeastern markets. Unlike many quick-service hamburger restaurants, Hardee's
strength has been in its breakfast sales, which generate approximately 35% of
its overall operating revenue, one of the highest in the quick-service hamburger
industry. Hardee's breakfast menu features "made-from-scratch" biscuits, biscuit
breakfast sandwiches and other items such as hash rounds and breakfast platters.
Substantially all of Hardee's restaurants have drive-thru facilities, and
selected restaurants are open 24 hours a day, primarily on weekends. Most
Hardee's restaurants are freestanding, ranging in size from 3,000 to 3,500
square feet, with a seating capacity of 75 to 100 persons. Currently, several
building designs and floor plans are in use system-wide, depending upon
operational needs, local zoning requirements and real estate availability.
Since our acquisition of Hardee's, we introduced certain made-to-order
lunch and dinner menu items that are currently served in our Carl's Jr.
restaurants, such as the Famous Star, and eliminated unprofitable product
offerings. We are continuing our focus on revitalizing the brand to generate
same-store sales growth. We are remodeling our Hardee's restaurants into a new
"Star Hardee's" format, which we designed to accent the Hardee's brand strength
with the menu and operating qualities of Carl's Jr. Star Hardee's is designed to
showcase the new and improved Hardee's menu and to bring customers back to
Hardee's. After testing various combinations of both brands in certain markets,
we are now remodeling Hardee's restaurants to the new Star Hardee's format by
installing charbroilers in the kitchens, remodeling the interior and exterior of
the restaurants and installing new signage that retains the Hardee's name but
shares space with Carl's Jr.'s Star logo.
As of January 31, 2000, we had remodeled 491 company restaurants and had
installed "all-you-can-drink" beverage bars and had introduced the Carl's
Jr.-style limited table service in all of our restaurants. We plan to remodel up
to 160 restaurants in fiscal 2001.
Operations. We strive to maintain high standards in all products and
equipment used by our Hardee's restaurants, as well as the operations related to
food preparation, service and cleanliness. As part of our plan to implement our
Carl's Jr. operating strategy at Hardee's, we are in the process of installing
gas-fired double charbroilers in each existing company-owned Hardee's
restaurant. In addition, we are in the process of implementing our Carl's Jr.
management practices, including our extensive management training program, at
Hardee's.
Franchised and Licensed Operations. Franchise agreements with Hardee's
franchisees, who operate in the Southeastern and Midwestern United States,
generally provide for initial fees and continuing royalty payments to us based
upon a percentage of sales. Most franchisees are required to purchase certain
inventory and supplies from approved suppliers and are required to spend a
minimum percentage of sales each month on advertising. In addition,
7
5
-
most franchisees are required to purchase and install all fixtures, furnishings,
signs and equipment specified in the approved site layout and plan. Prior to the
opening of franchised restaurant, the general manager of each franchise is
required to attend and complete our company-sponsored training program.
Franchisees may also be required to remit lease payments for the use of our
company-owned or leased restaurant facilities and to pay related occupancy
costs.
Since our acquisition of Hardee's, we have worked to restore Hardee's
relationships with its franchisees. We have been supportive in establishing a
franchisee association and improved communications with franchisees. As a
result, our Hardee's franchisees have collectively increased their level of
compliance, as royalty payments and advertising contributions have increased
from before the acquisition. Our Hardee's franchisees have joined us in our Star
Hardee's remodel program and, as of January 31, 2000, had remodeled 148
franchised Hardee's restaurants.
As of January 31, 2000, 1,434 Hardee's restaurants were operated by our
franchisees and licensees. The majority of our Hardee's franchisees own more
than one restaurant, with 25 franchisees owning 10 or more restaurants. We
presently anticipate that our Hardee's franchisees and licensees will open up to
65 new Hardee's restaurants during fiscal 2001.
TACO BUENO
Taco Bueno differentiates itself from its principal competitors by offering a
diverse menu featuring generous portions of freshly prepared, high-quality 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 its Mexidips & Chips, Muchaco, Bueno Chilada Platter,
Two-handed Taco and BOB ("Big Ol' Burrito"). Taco Bueno's Mexican platters
include taco and burrito platters, beef and chicken taco salads and nacho
platters, each of which is accompanied by rice, beans, freshly prepared
guacamole and chips. The restaurants also feature a salsa bar which includes
sliced jalapenos, diced onions, pico de gallo and hot sauce.
Taco Bueno restaurants generally feature a "Santa Fe/Pueblo" architecture
and exterior decor, which was designed for high 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 colors and a southwestern theme, all of which are intended to
create a distinctive atmosphere. In the first quarter of fiscal 2000, we began
the roll-out of our new Taco Bueno remodel program. The new design features
contemporary Mexican architecture, bright, eye-catching colors, serpentine
stainless-steel counters and black slate tile. As of January 31, 2000, 21 Taco
Bueno restaurants were remodeled. We presently anticipate that we will remodel
up to ten Taco Bueno restaurants in fiscal 2001.
Our strategy with respect to our Taco Bueno concept is to increase its
market share and competitive presence in existing markets. We believe that the
growing popularity of Mexican food and the relatively few national or regional
Mexican quick-service restaurant chains provide us with a significant
opportunity to expand the Taco Bueno concept within our core markets in
Dallas/Ft. Worth, Tulsa and Oklahoma City and to enter into new markets. Since
we acquired Taco Bueno in October 1996, we have opened 16 new Taco Bueno
restaurants.
INVESTMENTS IN OTHER RESTAURANT CONCEPTS
We have selectively invested in other restaurant concepts, as follows (see Note
6 of Notes to the Consolidated Financial Statements):
Santa Barbara Restaurant Group, Inc. SBRG owns, operates and franchises
The Green Burrito and La Salsa quick-service Mexican food restaurants, JB's
Restaurants and Galaxy Diner restaurants, which SBRG acquired from us in
September 1998, and Timber Lodge Steakhouse. Through our dual-branding
relationship with The Green Burrito, we are SBRG's largest franchisee. As of
January 31, 2000, we owned approximately 8.9% of SBRG's outstanding common
shares.
Rally's and Checkers. In August 1999, Rally's Hamburgers, Inc.
("Rally's") merged with Checkers Drive-In Restaurants, Inc. ("Checkers") in a
reverse acquisition. Checkers operates and franchises approximately 443 Checkers
and 464 Rally's double drive-thru quick-service hamburger restaurants, primarily
in the Southeastern and Midwestern United States, of which we operate 21 Rally's
restaurants in California and Arizona. We currently have a 16.6% ownership
interest in Checkers and the right to acquire common shares representing an
additional 7.1% of Checkers.
Boston Market. We hold a minority interest in Boston West, LLC ("Boston
West"), which operates Boston Market restaurants in designated markets in
Southern California as a franchised area developer of Boston Chicken, Inc.
("BCI"), the franchisor of the Boston Market restaurant concept. BCI and its
Boston Market subsidiaries filed for protection under Chapter 11 of the Federal
Bankruptcy Code on October 5, 1998. In a separate action, on November 9,
8
6
1998, Boston West filed a voluntary petition under Chapter 11 of the Federal
Bankruptcy Code in order to restructure its overall operations. Since November
1998, Boston West has closed or sold 42 Boston Market restaurants. During the
third quarter of fiscal 1999, we signed an agreement with Boston West to provide
administrative and management services to the Boston Market franchises operated
by Boston West. As of January 31, 2000, Boston West operated 56 Boston Market
restaurants.
We intend to continue to review our investments in other restaurant
concepts. Although we have no present intention to dispose of or acquire
additional interests in other restaurant concepts, we may do so in the future,
depending on the business prospects of the restaurant concept, alternative
business opportunities available to us and general economic conditions.
PURCHASING AND DISTRIBUTION
We purchase most of the primary food products and packaging supplies used in our
Carl's Jr. restaurant system and warehouse and distribute such items to both
company-operated and franchised Carl's Jr. restaurants. Although not required to
do so, substantially all of our Carl's Jr. franchisees in California purchase
most of their supplies from us. Our Carl's Jr. restaurant chain is one of the
few businesses in the quick-service restaurant industry that has elected not to
outsource all of its distribution activities.
We currently purchase substantially all of the food, packaging and
cleaning products sold or used in our Hardee's restaurants from Fast Food
Merchandisers, Inc. ("FFM") and MBM Corporation ("MBM"). MBM, which was the
primary distributor for FEI, acquired FFM in 1998, and consequently consolidated
substantially all of Hardee's distribution requirements. FFM and MBM currently
distribute such products to company-operated restaurants and to many of the
Hardee's restaurants operated by our Hardee's franchisees. Pursuant to the terms
of the distribution agreements, we are obligated to purchase substantially all
of our specified product requirements from FFM and MBM for remaining terms of
four years and five years, respectively. The prices we pay for FFM and MBM
products, and the delivery fees we pay each distribution service, are subject to
adjustment in certain circumstances, which may include increases resulting from
changes in the distributor's cost structure.
We believe our mature procurement process allows us to effectively manage
food costs, provide adequate quantities of food and supplies at competitive
prices, and generate revenues from Carl's Jr. franchisees by adding a nominal
mark-up to cover direct costs and provide better overall service to our
restaurants. We seek competitive bids from suppliers on many of our products,
approve suppliers of those products and require them to adhere to our
established product specifications.
COMPETITION
The foodservice industry is intensely competitive with respect to the quality
and value of food products offered, concept, service, price, dining experience
and location. We primarily compete with major restaurant chains, some of which
dominate the quick-service restaurant industry, and also compete with a variety
of other take-out foodservice companies and fast-food restaurants. Our
competitors also include a variety of mid-price, full-service casual-dining
restaurants, health and nutrition-oriented restaurants, delicatessens and
prepared food stores, as well as supermarkets and convenience stores. We believe
we possess the competitive strength to succeed in the markets in which we have
restaurants. However, many of our competitors have substantially greater
financial, marketing and other resources than we do, which may give them
competitive advantages. Certain of the major quick-service restaurant chains
have increasingly offered selected food items and combination meals at
discounted prices. In recent years, our restaurant sales were adversely affected
by aggressive promotions and price reductions by our competitors. Future changes
in the pricing or other marketing strategies of one or more of our competitors
could have a material adverse effect on our financial condition and results of
operations. As our competitors expand operations, we expect competition to
intensify. Such increased competition could have a material adverse effect on
our financial condition and results of operations. We also face competition from
other quick-service operators, retail chains and other companies and developers
for desirable site locations, which may adversely affect the cost,
implementation and timing of our expansion plans.
TRADEMARKS AND SERVICE MARKS
We own numerous trademarks and service marks, and have registered many of those
marks, including Carl's Jr., the Happy Star logo, Hardee's and proprietary names
for a number of the Carl's Jr., Hardee's and Taco Bueno menu items, with the
United States Patent and Trademark Office. We believe our trademarks and service
marks have significant value and play an important role in our marketing
efforts. Green Burrito(R) is a registered trademark of SBRG.
9
7
-
GOVERNMENT REGULATIONS
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 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.
We are also subject to federal laws 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 to the relationship between franchisor
and franchisee, including limitations on the ability of franchisors to terminate
franchisees and alter franchise arrangements. We believe we are operating in
substantial compliance with applicable laws and regulations governing our
operations.
We and our 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 our employees are paid hourly rates related to the federal and state minimum
wage laws, and, accordingly, increases in the minimum wage increase our labor
cost.
ENVIRONMENTAL MATTERS
We are subject to various federal, state and local environmental laws. These
laws govern discharges to air and water from our restaurants, as well as
handling and disposal practices for solid and hazardous wastes. These laws may
impose liability for damages from and the costs of cleaning up sites of spills,
disposals or other releases of hazardous materials. We may be responsible for
environmental conditions relating to our restaurants and the land on which our
restaurants are located, regardless of whether we lease or own the restaurants
or land in question and regardless of whether such environmental conditions were
created by us or by a prior owner or tenant.
Although we cannot assure you that all such environmental conditions have
been identified, these conditions include the presence of asbestos-containing
materials, leaking underground storage tanks and on-site spills. Further,
certain properties formerly had landfills, historic industrial use, gasoline
stations and/or dry cleaning businesses located on or near the premises.
Corrective action, as required by the regulatory agencies, has been undertaken
at some of the sites, although the majority of these sites are being remediated
by former landowners or tenants. The enforcement of our rights against third
parties for environmental conditions, such as off-site sources of contamination,
may result in additional transaction costs for us.
We are not aware of any environmental conditions that would have a
material adverse effect on our businesses, assets or results of operations taken
as a whole. Although environmental site assessments prepared for certain
properties recommend limited further investigations or minor repairs, based on
the information currently available to us, we do not believe any of these
environmental issues would have a material adverse effect on these properties.
Nevertheless, we cannot assure you that environmental conditions relating to
prior, existing or future restaurants or restaurant sites will not have a
material adverse effect on us. Moreover, we cannot assure you that: (1) future
laws, ordinances or regulations will not impose any material environmental
liability; or (2) the current environmental condition of the properties will not
be adversely affected by tenants or other third parties or by the condition of
land or operations in the vicinity of the properties.
EMPLOYEES
As of January 31, 2000, we employed approximately 61,000 persons, of whom
approximately 57,000 were hourly restaurant, distribution or clerical employees
and the remainder were managerial salaried employees engaged in administrative
and supervisory capacities. A majority of our hourly employees are employed on a
part-time basis to provide service necessary during peak periods of restaurant
operations. None of our employees is currently covered by a collective
bargaining agreement. We have never experienced a work stoppage attributable to
labor disputes, and we believe our employee relations are good.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The information contained in this Form 10-K contains forward-looking statements
that involve a number of risks and uncertainties. Forward-looking statements can
be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "seeks," "pro forma" or "anticipates," or
other variations thereof (including their use in the negative), or by
discussions of strategies, plans or intentions. A number of factors could cause
10
8
results to differ materially from those anticipated by such forward-looking
statements. Among these factors are the Risk Factors described below and:
- our ability to grow and implement cost-saving strategies;
- increases in our food, labor, occupancy and other operating costs;
- our ability to compete in the quick-service restaurant industry;
- our ability to pay principal and interest on our substantial debt;
- our ability to borrow in the future;
- adverse legislation or regulation;
- adverse weather conditions;
- our ability to sustain or increase historical revenues and profit
margins;
- continuation of certain trends and general economic conditions in our
industry; and
- our ability to complete proposed sales of restaurants to qualified
franchisees.
In addition, such forward-looking statements are necessarily dependent
upon assumptions and estimates that may prove to be incorrect. Accordingly,
while we believe that the plans, intentions and expectations reflected in such
forward-looking statements are reasonable, we cannot assure you that such plans,
intentions or expectations will be achieved. The information contained in this
Form 10-K, including the Risk Factors section hereof, identifies important
factors that could cause such differences.
RISK FACTORS
LEVERAGE AND ABILITY TO SERVICE DEBT - TO SERVICE OUR INDEBTEDNESS, WE WILL
REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON
MANY FACTORS BEYOND OUR CONTROL.
We have a significant amount of indebtedness. As of January 31, 2000, we had a
total of $741.4 million of long-term debt and capital lease obligations,
including current portion, and our debt to capitalization ratio was 0.58x. While
in the past we have been able to generate sufficient earnings to satisfy our
debt service obligations and other fixed charges, our substantial indebtedness
could have important consequences to holders of our common stock and other
securities. For example, it could:
- make it more difficult for us to satisfy our obligations under our debt
securities and other indebtedness;
- increase our vulnerability to general adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors that
have less debt; and
- limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional
funds. Failure to comply with those covenants could result in an event
of default which, if not cured or waived, could have a material adverse
effect on us.
Our ability to make payments on or to refinance our indebtedness and to
fund planned capital expenditures will depend on our ability to generate cash in
the future. Our ability to generate cash from our operations is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control, including seasonality. In addition, we
cannot assure you that our business will generate sufficient cash flow from
operations, that currently anticipated cost savings and operating improvements
will be realized on schedule, that we will generate proceeds from the sale of
restaurants at prices and terms considered by us to be appropriate, or that
future borrowings will be available to us under our senior credit facility in an
amount sufficient to enable us to service our indebtedness or to fund our other
liquidity needs.
11
9
-
In the event that our Hardee's restaurants do not show improvements in
same-store sales or our Carl's Jr. restaurants were to experience declines in
same-store sales, and if we are unable to generate proceeds from the sale of
restaurants at prices and on terms sufficient to service our senior credit
facility, we may need to refinance all or a portion of our indebtedness on or
before maturity in order to avoid short and long-term liquidity shortage. The
availability of capital resources will depend upon prevailing market conditions,
interest rates and our then-existing financial position.
UNCERTAINTIES RELATED TO THE REVITALIZATION OF HARDEE'S - WE WILL CONTINUE TO
FACE CHALLENGES IN OUR ATTEMPT TO IMPROVE OUR HARDEE'S OPERATIONS.
Revitalizing Hardee's will continue to challenge our management team. Hardee's
is a well-established but underperforming brand. When we acquired Hardee's, it
was experiencing declining system-wide same-store sales and a declining market
share in the quick-service hamburger restaurant industry. Our initial turnaround
strategy for Hardee's focused on managing costs and realizing purchasing
strategies. We have been able to improve our Hardee's restaurant-level operating
margins above their historical, pre-acquisition levels and we are continuing our
focus on increasing sales by revitalizing the Hardee's brand. Specifically, we
are investing large amounts of capital into reconfiguring our Hardee's
restaurants' kitchens, replacing equipment, and remodeling restaurants to the
Star Hardee's format. We have identified 105 underperforming Hardee's
restaurants which we plan to close within the next 12 months. We have also
embarked on our refranchising strategy whereby we intend to increase our
proportion of franchised restaurants to company-operated restaurants, which will
allow us to generate cash to pay down debt and to increase the number and
quality of our Hardee's franchisees to help turn around those restaurants. We
cannot assure you that these strategies will be successful. If we are unable to
achieve anticipated sales improvements and further improvements in
restaurant-level operating margins in our Hardee's restaurants on a timely
basis, cash flows generated from Hardee's operations may not be adequate to
support our turnaround strategies for Hardee's. Our success will also depend, in
part, on our Hardee's franchisees. Hardee's franchisees are not required to
participate in implementing all our strategies and we cannot assure you that all
Hardee's franchisees will participate. If Hardee's franchisees do not implement
our strategies we may not achieve our goals in the desired timeframe or at all.
Failure to accomplish our goals could have a material adverse effect on our
financial condition and results of operations.
GROWTH STRATEGY - OUR ABILITY TO EXPAND OUR RESTAURANT CHAINS DEPENDS ON FACTORS
BEYOND OUR CONTROL.
Our growth strategy includes, among other things, opening additional
company-operated and franchised restaurants, remodeling our restaurants and
dual-branding our restaurant concepts. The success of our growth strategy will
depend on numerous factors, many of which are beyond our control and the control
of our franchisees, including:
- the hiring, training and retention of qualified management and other
restaurant personnel;
- the ability to obtain necessary governmental permits and approvals;
- competition for desirable site locations;
- the availability of appropriate financing; and
- general economic conditions.
To manage our planned expansion, we must ensure the continuing adequacy
of our existing systems and procedures, including our supply and distribution
arrangements, restaurant management, financial controls and information systems.
Given the improvements we have realized in recent years in the same-store
sales growth in our company-operated Carl's Jr. restaurants, we cannot assure
you that we will be able to maintain the historical level of same-store sales
growth. Our Carl's Jr. company-operated restaurants experienced a decline in
same-store sales in the fourth quarter of fiscal 1999 and the first three
quarters of fiscal 2000. During the fourth quarter of fiscal 2000, our
company-operated Carl's Jr. restaurants reported a same-store sales increase of
0.6%.
COMPETITION - OUR SUCCESS DEPENDS ON OUR ABILITY TO COMPETE WITH OUR MAJOR
COMPETITORS.
The foodservice industry is intensely competitive with respect to the quality
and value of food products offered, concept, service, price, dining experience
and location. We compete with major restaurant chains, some of which dominate
the quick-service restaurant industry. Our competitors also include a variety of
mid-price, full-service casual-dining restaurants, health and nutrition-oriented
restaurants, delicatessens and prepared food stores, as well as supermarkets and
convenience stores. Many of our competitors have substantially greater
financial, marketing and other resources than we have, which may give them
competitive advantages. Our competitors could also make changes to pricing or
other
12
10
- -
marketing strategies. As our competitors expand operations, we expect
competition to intensify. Such increased competition could have a material
adverse effect on our financial condition and results of operations.
THE FOODSERVICE INDUSTRY - CONSUMER PREFERENCES AND PERCEPTIONS, SEASONALITY AND
GENERAL ECONOMIC CONDITIONS MAY HAVE SIGNIFICANT EFFECTS ON OUR BUSINESS.
Foodservice businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions and demographic trends. The
performance of individual restaurants may be adversely affected by traffic
patterns, demographics and the type, number and locations of competing
restaurants. Restaurant performance may also be affected by adverse weather
conditions, particularly in our Hardee's restaurants, because a significant
number of them are located in areas which experience severe winter conditions.
Multi-unit foodservice businesses such as ours can also be materially and
adversely affected by publicity resulting from poor food quality, illness,
injury or other health concerns or operating issues stemming from one or a
limited number of restaurants. We can be similarly affected by consumer concerns
with respect to the nutritional value of quick-service food. In addition, our
dependence on frequent deliveries of food and paper products subjects our
restaurants to the risk that shortages or interruptions in supply, caused by
adverse weather or other conditions, could adversely affect the availability,
quality and cost of ingredients. Unfavorable trends or developments concerning
factors such as inflation, increased food, labor and employee benefit costs
(including increases in hourly wage and unemployment tax rates), increases in
the number and locations of competing quick-service restaurants, regional
weather conditions and the availability of experienced management and hourly
employees may also adversely affect our financial condition and results of
operations. Changes in economic conditions affecting our customers could reduce
traffic in some or all of our restaurants or impose practical limits on pricing,
either of which could have a material adverse effect on our financial condition
and results of operations. Our continued success will depend in part on our
management's ability to anticipate, identify and respond to changing conditions.
GOVERNMENT REGULATIONS - WE MUST DEVOTE SIGNIFICANT RESOURCES TO COMPLY WITH
EXTENSIVE LEGAL REQUIREMENTS APPLICABLE TO OUR FRANCHISE AND OTHER BUSINESS
OPERATIONS.
We are subject to federal regulation and certain state laws which govern the
offer and sale of franchises. Many state franchise laws impose substantive
requirements on franchise agreements, including limitations on noncompetition
provisions and on provisions concerning the termination or nonrenewal of a
franchise. Some states require that certain materials be registered before
franchises can be offered or sold in that state. The failure to obtain or retain
licenses or approvals to sell franchises could adversely affect us or our
franchisees. The restaurant industry is also subject to extensive federal, state
and local governmental regulations, including those relating to the preparation
and sale of food and those relating to building and zoning requirements. We and
our franchisees are also subject to laws governing relationships with employees,
including minimum wage requirements, overtime, working and safety conditions and
citizenship requirements. Many of our employees are paid hourly rates based upon
the federal and state minimum wage laws. Recent legislation increasing the
minimum wage has resulted in higher labor costs to us and our franchisees. We
anticipate that increases in the minimum wage may be offset through pricing and
other cost-control efforts; however, we cannot assure you that we or our
franchisees will be able to pass such additional costs on to customers in whole
or in part.
KEY DISTRIBUTORS - DISRUPTION IN DELIVERIES MAY ADVERSELY AFFECT OUR
RESTAURANTS.
Our profitability is dependent on, among other things, our continuing ability to
offer fresh, high quality food at moderate prices. While we continue to operate
our own distribution business for our Carl's Jr. system, we rely upon
independent distributors for our Hardee's and Taco Bueno restaurants. In
particular, our Hardee's restaurants depend on the distribution services of two
distributors, MBM, an independent supplier and distributor of food and other
products, and FFM, which was recently acquired by MBM. MBM and FFM are
responsible for delivering food, paper and other products from our vendors to
our Hardee's restaurants on a regular basis. MBM and FFM also provide
distribution services to a large number of our Hardee's franchisees. Any
disruption in these distribution services could have a material adverse effect
on our business.
ENVIRONMENTAL MATTERS - COMPLIANCE WITH ENVIRONMENTAL LAWS MAY ADVERSELY AFFECT
OUR FINANCIAL HEALTH.
We are subject to various federal, state and local environmental laws. These
laws govern discharges to air and water, as well as handling and disposal
practices for solid and hazardous wastes. These laws may also impose liability
for damages from and the costs of cleaning up sites of spills, disposals or
other releases of hazardous materials. We may be responsible for environmental
conditions relating to our restaurants and the land on which our restaurants are
located, regardless of whether we lease or own the restaurants or land in
question and regardless of whether such environmental conditions were created by
us or by a prior owner or tenant. Although we cannot assure you that all such
environmental
13
11
-
conditions have been identified, these conditions include the presence of
asbestos containing materials, leaks from chemical storage tanks and on-site
spills.
We are not aware of any environmental conditions that would have a
material adverse effect on our businesses, assets or results of operations taken
as a whole. Although environmental site assessments prepared for certain
properties recommend limited further investigations or minor repairs, based on
the information currently available to us, we do not believe any of these
environmental issues would have a material adverse effect on these properties.
Nevertheless, we cannot assure you that environmental conditions relating to
prior, existing or future restaurants or restaurant sites will not have a
material adverse effect on us. Moreover, we cannot assure you that: (1) future
laws, ordinances or regulations will not impose any material environmental
liability; or (2) the current environmental condition of the properties will not
be adversely affected by tenants or other third parties or by the condition of
land or operations in the vicinity of the properties (such as underground
storage tanks).
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
NAME AGE POSITION
- ----------------------------------------------------------------------------------------------
C. Thomas Thompson 50 Chief Executive Officer and President
Rory J. Murphy 52 President and Chief Operating Officer, Hardee's Food Systems, Inc.
Carl A. Strunk 62 Executive Vice President, Chief Financial Officer
Andrew F. Puzder 49 Executive Vice President, General Counsel and Secretary
Robert W. Wisely 54 Executive Vice President, Marketing
John J. Dunion 42 Executive Vice President, Chief Administrative Officer
Loren C. Pannier 58 Senior Vice President, Investor Relations
C. Thomas Thompson became Chief Executive Officer and a director in March
2000 and has served as President since October 1994 and Chief Operating Officer
from October 1994 to March 2000. Mr. Thompson has been with Carl's Jr. since
1984, and currently operates 17 Carl's Jr. restaurants in the San Francisco and
Bay Area. Mr. Thompson also serves as a member of the Board of Directors of
Checkers. Mr. Thompson has more than 27 years of experience in the restaurant
industry.
Rory J. Murphy was appointed President and Chief Operating Officer of
Hardee's immediately following our acquisition of Hardee's in July 1997. Mr.
Murphy served as Executive Vice President, Restaurant Operations from June 1996
until July 1997, and served as our Senior Vice President, Restaurant Operations
from February 1993 until June 1996. Mr. Murphy has been employed by us in
various positions for 21 years.
Carl A. Strunk was appointed Executive Vice President and Chief Financial
Officer in February 1997. Mr. Strunk also serves as Executive Vice President and
Chief Financial Officer of American National Financial, Inc. ("ANF") since
August 1998. Mr. Strunk previously served as Executive Vice President of
Fidelity National Financial, Inc. from 1992 to 1998 and 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 ANF.
Andrew F. Puzder became Executive Vice President, General Counsel and
Secretary in February 1997. Mr. Puzder also serves as Chief Executive Officer of
SBRG, where he has been since August 1997 and Executive Vice President of
Fidelity, where he has been 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. Mr. Puzder is a
member of the Board of Directors of SBRG, Pierre Foods, Javelin Systems, Inc.
and Checkers.
Robert W. Wisely was appointed Executive Vice President, Marketing in
August 1997. Prior to that, he served as Senior Vice President, Marketing from
January 1995. Mr. Wisely has been a Carl's Jr. franchisee since 1990. Prior to
1990, Mr. Wisely served as Senior Vice President, Marketing from 1985 to 1990.
John J. Dunion was appointed Executive Vice President, Chief
Administrative Officer in February 1999. Mr. Dunion served as Senior Vice
President, Purchasing since April 1998 and Vice President, Purchasing since
September 1996. Prior to that, he served as Vice President, Purchasing at
Unigate Restaurants, Inc. from 1993 to September 1996.
14
12
- -
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 our Chief
Financial Officer from 1980 to May 1995. Mr. Pannier has been a Senior Vice
President since 1980, and he has been employed by us for over 27 years.
ITEM 2. Properties
The following table sets forth information regarding our restaurant properties
at January 31, 2000:
Land and Land Leased Land and
Building And Building Building
Owned Owned Leased Total
- -----------------------------------------------------------------------------------------------------------
CARL'S JR.:
Company-operated 90 106 367 563
Franchisee-operated(1) 13 11 112 136
Third party-operated/vacant(2) 7 3 42 52
---------------------------------------------
Subtotal 110 120 521 751
---------------------------------------------
HARDEE'S:
Company-operated 594 241 519 1,354
Franchisee-operated(1) 57 34 65 156
Third party-operated/vacant(2) 26 11 63 100
---------------------------------------------
Subtotal 677 286 647 1,610
---------------------------------------------
TACO BUENO:
Company-operated 84 14 23 121
---------------------------------------------
Total 871 420 1,191 2,482
---------------------------------------------
(1) "Franchisee-operated" properties are those which we own or lease and lease
or sublease to franchisee operators.
(2) "Third party-operated/vacant" are properties we own that are either operated
by unaffiliated entities or are currently vacant.
The terms of our leases or subleases vary in length expiring on various
dates through 2062. We do not expect the expiration of these leases to have a
material impact on our operations in any particular year, as the expiration
dates are staggered over a number of years and many of the leases contain
renewal options. Our corporate headquarters and primary distribution center,
located in Anaheim, California, are leased and contain approximately 78,000 and
102,000 square feet, respectively. We own Hardee's corporate facility in Rocky
Mount, North Carolina.
ITEM 3. Legal Proceedings
We are from time to time the subject of complaints or litigation from customers
alleging illness, injury or other food quality, health or operational concerns.
Adverse publicity resulting from such allegations may materially adversely
affect us and our restaurants, regardless of whether such allegations are valid
or whether we are liable. We are also the subject of complaints or allegations
from employees, former employees and franchisees from time to time. We believe
that the lawsuits, claims and other legal matters to which we have become
subject in the course of our business are not material to our financial
condition or results of operations, but an existing or future lawsuit or claim
could result in an adverse decision against us that could have a material
adverse effect on our financial condition and results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
15
13
-
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters
Our common stock is listed on the New York Stock Exchange under the symbol
"CKR". As of March 31, 2000, there were approximately 1,900 record holders of
our common stock. The following table sets forth, for the periods indicated, the
high and low closing sales prices of our common stock, as reported on the New
York Stock Exchange Composite Tape:
High Low
- ------------------------------------------------------------------------------
FISCAL 2000
First Quarter $26.56 $13.00
Second Quarter 18.94 12.50
Third Quarter 13.75 6.50
Fourth Quarter 8.19 5.69
FISCAL 1999
First Quarter $41.65 $28.07
Second Quarter 40.00 27.10
Third Quarter 35.85 15.63
Fourth Quarter 30.25 18.64
The foregoing prices have been adjusted to give retroactive effect to a
three-for-two stock split effected as a stock dividend in January 1997 and 10%
stock dividends in February 1998 and January 1999.
We have followed a policy of paying semiannual cash dividends, at the
annual rate of $0.07 per share (adjusted to give retroactive effect to the stock
split and stock dividends), during fiscal 1998 and 1999. During fiscal 2000, our
Board of Directors increased the semi-annual dividend rate to $0.04 per share.
On April 7, 2000, we declared a $0.04 dividend, which is payable on May 4, 2000
to holders of record on April 19, 2000. Continued payment of dividends on our
common stock will depend upon our operating results, business requirements and
financial condition, and such other factors that our Board of Directors
considers relevant. Our senior credit facility and certain of our debt
instruments impose limitations on the amount of dividends or other distributions
that we may make on our common stock.
16
14
- -
ITEM 6. Selected Financial and Operating 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 and stock dividends since our inception.
SELECTED FINANCIAL AND OPERATING DATA
- -------------------------------------------------------------------------------------Fiscal-year-ended-or-as-of-January 31,(1)
(In thousands except per share amounts, restaurant counts, and percentages) 2000 1999(2) 1998(3)
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenues(5) $1,990,073 $1,892,044 $1,149,659
Operating income 47,869 168,220 86,191
Interest expense 63,283 43,453 16,914
Net income (loss)(6) (29,117) 77,712 46,757
Net income (loss) per share - diluted $ (0.56) $ 1.45 $ 0.97
Weighted average shares outstanding - diluted 51,668 56,714 48,121
Cash dividends paid per common share $ 0.08 $ 0.07 $ 0.07
Ratio of earnings to fixed charges(7) 0.5x 2.8x 3.2x
CONSOLIDATED BALANCE SHEET DATA:
Total assets $1,568,514 $1,496,914 $ 957,144
Total long-term debt and capital lease obligations, including current
portion 741,419 625,393 216,905
Stockholders' equity $ 545,757 $ 586,842 $ 498,512
- -----------------------------------------------------------------------------------Fiscal-year-ended-or-as-of-January 31,(1)
(In thousands except per share amounts, restaurant counts, and percentages) 1997(4) 1996
- --------------------------------------------------------------------------- -------------------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenues(5) $613,380 $464,667
Operating income 44,139 27,000
Interest expense 9,877 10,004
Net income (loss)(6) 22,302 10,952
Net income (loss) per share - diluted $ 0.61 $ 0.33
Weighted average shares outstanding - diluted 36,603 33,611
Cash dividends paid per common share $ 0.04 $ 0.04
Ratio of earnings to fixed charges(7) 2.9x 2.0x
CONSOLIDATED BALANCE SHEET DATA:
Total assets $410,367 $248,009
Total long-term debt and capital lease obligations, including current
portion 86,993 82,423
Stockholders' equity $214,804 $101,189
(1) Our 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. Fiscal 2000 includes 53 weeks. Fiscal 1999, 1998, 1997 and 1996
include 52 weeks.
(2) Fiscal 1999 includes operating results of FEI from and after April 1, 1998.
(3) Fiscal 1998 includes operating results of Hardee's from and after July 15,
1997. Share and per share data were also affected during fiscal 1998 by a
public offering of 10,088,375 shares of common stock, completed in July
1997.
(4) Share and per share data were affected during fiscal 1997 by a public
offering of 5,218,125 shares of common stock, completed in November 1996.
(5) Fiscal 2000, 1999, 1998 and 1997 include $104.7 million, $135.1 million,
$195.2 million and $94.3 million, respectively, of revenues generated from
other restaurant concepts we acquired during fiscal 1997. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(6) Net income (loss) for fiscal 2000 and 1999 includes an extraordinary gain of
$0.3 million and $3.3 million, respectively, net of applicable income tax
expense, on early retirement of debt. Fiscal 2000 also includes charges of
$80.3 million, or $49.3 million net of tax. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(7) For purposes of calculating the ratio of earnings to fixed charges (a)
earnings represent income (loss) before income taxes and extraordinary item
and fixed charges, and (b) fixed charges consist of interest on all
indebtedness, interest related to capital lease obligations, amortization of
debt issuance costs and a portion of rental expense that is representative
of the interest factor (deemed by us to be one-third).
17
15
-
Fiscal year ended January 31,(1)
- --------------------------------------------------------------------------------------------------------------
2000(2) 1999(2) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
CARL'S JR. RESTAURANTS
Restaurants open (at end of fiscal
year):
Company-operated 563 539 443 415 394
Franchised and licensed 371 322 265 258 273
----------------------------------------------------------------------
Total 934 861 708 673 667
----------------------------------------------------------------------
Systemwide restaurant revenues:
Company-operated restaurants $ 613,155 $ 535,038 $ 488,495 $ 443,304 $ 389,214
Franchised and licensed restaurants 306,564 261,341 214,534 204,700 193,984
----------------------------------------------------------------------
Total systemwide revenues $ 919,719 $ 796,379 $ 703,029 $ 648,004 $ 583,198
----------------------------------------------------------------------
Average annual sales per company-
operated restaurant(3) $ 1,086 $ 1,185 $ 1,157 $ 1,114 $ 1,006
Percentage increase (decrease) in
comparable company-operated
restaurant sales(4) (3.0)% 3.0% 4.8% 10.7% 4.4%
Company-operated restaurant-level
operating margins 22.8% 25.9% 24.2% 23.1% 21.3%
Fiscal Fiscal 28 weeks 28 weeks Fiscal
year ended year ended ended ended year ended
January 31, January 31, January 31, July 15, December 31,
2000(1)(2) 1999(1)(2)(5) 1998(2)(6) 1997(2) 1996(2)
- -------------------------------------------------------------------------------------------------------------------
HARDEE'S RESTAURANTS(7)
Restaurants open (at end of period):
Company-operated 1,354 1,403 863 782 808
Franchised and licensed 1,434 1,401 2,175 2,329 2,417
---------------------------------------------------------------------------
Total 2,788 2,804 3,038 3,111 3,225
---------------------------------------------------------------------------
Systemwide restaurant revenues:
Company-operated restaurants $1,096,805 $1,063,075 $ 339,942 $ 346,481 $ 645,409
Franchised and licensed restaurants 1,219,229 1,412,929 1,123,034 1,152,442 2,350,733
---------------------------------------------------------------------------
Total systemwide revenues $2,316,034 $2,476,004 $1,462,976 $1,498,923 $2,996,142
---------------------------------------------------------------------------
Average annual sales per company-
operated restaurant(3) $ 769 $ 793 $ 803 $ 831 $ 848
Percentage decrease in comparable
company-operated restaurant sales(4) (5.0)% (7.5)% (7.2)% (0.4)% (4.4)%
Company-operated restaurant-level
operating margins(8) 9.7% 16.7% 12.9% 7.8% 6.2%
(1) Our 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. Fiscal 2000 includes 53 weeks. Fiscal 1999, 1998, 1997 and 1996
include 52 weeks.
(2) The Hardee's-to-Carl's Jr. converted restaurants operating in Oklahoma,
Kansas and Texas are included in the number of Carl's Jr. restaurants open
at January 31, 2000 and 1999. The operating results of these restaurants,
however, are included in the Carl's Jr. financial information beginning in
fiscal 2000. In fiscal 1999 and prior, these operating results are included
as part of Hardee's financial results. There were 63 company-operated and
nine franchised restaurants open during fiscal 1999 and 64 company-operated
and eight franchised restaurants open during fiscal 2000 in these markets.
Carl's Jr.'s average annual sales per company-operated restaurant,
percentage decrease in comparable company-operated restaurant sales and
company-operated restaurant-level margins were, $1,150, (2.1%) and 24.1%,
respectively, in fiscal 2000 excluding the Hardee's-to-Carl's Jr. converted
restaurants.
18
16
- -
(3) Calculated on a 52- or 53-week trailing basis for all years presented.
(4) Includes only restaurants open throughout the full years being compared.
(5) Fiscal 1999 includes operating results of FEI from and after April 1, 1998.
(6) Includes results of operations for Hardee's from and after July 15, 1997.
(7) Except as otherwise noted, company-operated Hardee's restaurant data for the
fiscal year ending December 31, 1996 and for the 28 weeks ended July 15,
1997 excludes the results of Hardee's restaurants sold or closed prior to
December 31, 1996 and July 15, 1997, respectively.
(8) Restaurant-level margins for Hardee's in fiscal 2000 were 13.6% after
excluding a $42.0 million store closure reserve and asset impairment charge
recorded in the fourth quarter of fiscal 2000.
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 and Operating
Data" included elsewhere in this Form 10-K.
OVERVIEW
We are a leading nationwide owner, operator and franchisor of quick-service
restaurants, operating principally under the Carl's Jr., Taco Bueno and Hardee's
brand names. Based on domestic systemwide sales, our Hardee's and Carl's Jr.
chains are the fourth and seventh largest quick-service hamburger restaurant
chains in the United States, respectively. As of January 31, 2000, the Carl's
Jr. system included 934 restaurants, of which we operated 563 restaurants and
our franchisees and licensees operated 371 restaurants. The Carl's Jr.
restaurants are located in the Western United States, predominantly in
California. As of January 31, 2000, the Hardee's system consisted of 2,788
restaurants, of which we operated 1,354 restaurants and our franchisees and
licensees operated 1,434 restaurants. Hardee's are located throughout the
Eastern and Midwestern United States, predominantly in the Southeast. As of
January 31, 2000, our Taco Bueno chain consisted of 122 quick-service Mexican
restaurants in Texas and Oklahoma, of which 121 were operated by us and one was
operated by a licensee.
We derive our revenues primarily from sales by company-operated
restaurants and revenues from franchisees, including franchise and royalty fees,
sales to Carl's Jr. franchisees and licensees of food and packaging products,
rentals under real property leases and revenues from the sale of equipment to
our franchisees. 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 our
franchised and licensed restaurants include the cost of food and packaging
products sold to Carl's Jr.'s franchisees and licensees, lease payments on
properties subleased to our franchisees and the costs of equipment purchases.
Other operating expenses, including advertising expenses and general and
administrative expenses, relate to company-operated restaurants as well as
franchisee and licensee operations. Our revenues and expenses are directly
affected by the number and sales volume of company-operated restaurants and, to
a lesser extent, of franchised and licensed restaurants.
FACTORS AFFECTING COMPARABILITY OF FISCAL YEARS 2000, 1999 AND 1998
Our fiscal year results in a fifty-third week every five or six years. Fiscal
2000 includes 53 weeks of operations. Fiscal 1999 and 1998 include 52 weeks of
operations.
In the fourth quarter of fiscal 2000, we recorded pre-tax charges of
$80.3 million ($49.3 million after-tax). These charges consisted of: (a)
establishing a $16.3 million store closure reserve and recording a $25.7 million
asset impairment charge for 105 Hardee's restaurants which we plan on closing
within the next 12 months; (b) recording an impairment charge and equity losses
of $37.3 million to write-down our various long-term investments in other
restaurant concepts to fair market value; (c) recording $2.1 million of
restructuring charges in connection with consolidating certain administrative
functions from Rocky Mount, North Carolina, to Anaheim, California; (d)
writing-off $3.6 million of deferred financing costs as a result of a commitment
decrease in our senior credit facility; (e) writing-off $2.6 million of Year
2000 ("Y2K") costs associated with restaurant computer systems; (f) writing-off
$6.6 million of capitalized software development that will not be utilized; (g)
recording an additional $1.7 million in vacation expense in connection with a
change in vacation policy; (h) recording a gain on the sale of Carl's Jr. and
Hardee's restaurants of $19.5 million and (i) other miscellaneous net
adjustments of $3.9 million.
During fiscal 1999, we recorded a $15.0 million charge to write-down our
investment in Boston West and recognized a gain of $10.3 million on the sale of
our Star Buffet, Inc. ("Star Buffet") investment. In addition, in fiscal
19
17
-
1999, we reversed approximately $9.7 million of allowances for certain Hardee's
franchisee note receivables as the previously established amounts proved to be
unnecessary.
We currently operate 64 Hardee's-to-Carl's Jr. converted restaurants in
Texas, Oklahoma and Kansas and our franchisees operate eight Hardee's-to-Carl's
Jr. converted restaurants in Oklahoma. Operating results for these restaurants
for fiscal 2000 are included in the Carl's Jr. financial information. In fiscal
1999 and prior, these restaurants' operating results are included in the
Hardee's financial information.
We believe our acquisitions of Hardee's in July 1997 and FEI in April
1998 allowed us to significantly expand the scope of our operations and to
become one of the leading nationwide operators of quick-service hamburger
restaurants. Because of the significant effect of the acquisitions of Hardee's
and FEI on our results of operations, our historical results of operations and
year-to-year comparisons will not be indicative of future results and may not be
meaningful. Operating results of Hardee's and FEI are included in our results of
operations from July 15, 1997 and April 1, 1998, respectively. We acquired Taco
Bueno and certain other restaurant concepts in fiscal 1997, and our results of
operations for fiscal 2000, 1999 and 1998 include $104.7 million, $135.1 million
and $195.2 million, respectively, of revenues generated by these restaurants.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items included in our consolidated
statements of operations for the years indicated:
Fiscal year ended January 31,
- ---------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------
Revenues:
Company-operated restaurants 91.2% 91.6% 88.9%
Franchised and licensed restaurants and other 8.8 8.4 11.1
----------------------------
Total revenues 100.0% 100.0% 100.0%
----------------------------
Operating costs and expenses:
Restaurant operations(1):
Food and packaging 30.5% 30.0% 30.7%
Payroll and other employee benefits 31.2 30.9 30.5
Occupancy and other operating expenses 21.1 19.5 20.2
Store closure expense and provision for asset impairment 2.3 -- --
----------------------------
85.1 80.4 81.4
Franchised and licensed restaurants and other(2) 73.1 67.0 73.8
Advertising expenses(1) 6.7 6.1 5.7
General and administrative expenses 7.4 6.3 6.9
Operating income 2.4 8.9 7.5
Interest expense (3.2) (2.3) (1.5)
Other income (expense), net (1.6) -- 0.7
----------------------------
Income (loss) before income taxes and extraordinary item (2.4) 6.6 6.7
Income tax expense (benefit) (0.9) 2.7 2.6
----------------------------
Income (loss) before extraordinary item (1.5) 3.9 4.1
Extraordinary item - gain on early retirement of debt 0.0 0.2 --
----------------------------
Net income (loss) (1.5)% 4.1% 4.1%
----------------------------
(1) As a percentage of revenues from company-operated restaurants.
(2) As a percentage of revenues from franchised and licensed restaurants and
other.
20
18
- -
FISCAL 2000 COMPARED WITH FISCAL 1999 AND FISCAL 1999 COMPARED WITH FISCAL 1998
REVENUES
Company-operated Restaurants. Revenues from company-operated restaurants
increased $82.5 million or 4.8% to $1.815 billion in fiscal 2000 as compared
with fiscal 1999. A large part of this increase in revenues is the inclusion in
fiscal 2000 of an extra week of operating results as compared with fiscal 1999.
Carl's Jr., Hardee's and Taco Bueno company-operated restaurant revenues for the
year accounted for sales increases of $78.1 million, $33.7 million and $10.8
million, respectively, offset in part by the decrease in revenues from our JB's
Restaurants and Galaxy Diner restaurants which were sold to SBRG in September
1998. Same-store sales for our company-operated Carl's Jr. restaurants decreased
3.0% for fiscal 2000, but were positive 0.6% for the fourth quarter of fiscal
2000. Our company-operated Hardee's restaurants experienced a same-store sales
decrease of 5.0%, while same-store sales for our company-operated Taco Bueno
restaurants increased 7.1%, marking the fifth consecutive annual increase in
same-store sales.
We believe that the increase in revenue from our company-operated Carl's
Jr. restaurants can be primarily attributed to an increase in the number of
restaurants open and operating in fiscal 2000, as compared with fiscal 1999,
offset in part by the decline in same-store sales, the continuation of our
conversion of existing Carl's Jr. locations into Carl's Jr./Green Burrito
dual-brand restaurants, the addition of several new sandwiches, including the
$0.99 Spicy Chicken Sandwich, the Sourdough Bacon Cheeseburger and the Sourdough
Breakfast Sandwich, and the inclusion of $39.2 million of revenue from the
Hardee's-to-Carl's Jr. converted restaurants in fiscal 2000 that had been
included in the Hardee's results of operations in fiscal 1999. Taco Bueno's
increase in revenues is primarily attributable to the addition of 12 new Taco
Bueno restaurants open and operating in fiscal 2000 and the image enhancement
program for the chain, which began in fiscal 1999. The revenue increase from our
Hardee's restaurants was driven by including a full year of operations of the
FEI restaurants and other franchised restaurants acquired during fiscal 1999,
offset, in part, by the revenues from the Hardee's-to-Carl's Jr. restaurants
that were included in Hardee's results for fiscal 1999, but are reflected in
Carl's Jr. results of operations beginning in fiscal 2000. We attribute much of
the decrease in same-store sales at Hardee's to our previous advertising
strategy, which was not successful in promoting the Hardee's brand. The harsh
weather experienced in the Southeast during the third quarter of fiscal 2000,
including the effects of Hurricane Floyd, and the January storms in the
Southeast during fourth quarter were also contributing factors. Average unit
volumes at our company-operated Carl's Jr. and Hardee's restaurants ended the
fiscal year at $1,086,000 and $769,000, respectively. Average unit volumes at
our company-operated Taco Bueno restaurants continue to rise and increased 8% to
$807,000 as of fiscal 2000 year-end.
Revenues from company-operated restaurants increased $709.8 million or
69.4% to $1.732 billion in fiscal 1999 as compared with fiscal 1998. Carl's Jr.
company-operated restaurant revenues for the year accounted for sales increases
of $46.5 million. Our Hardee's and Taco Bueno restaurants contributed $723.1
million and $7.2 million, respectively, to the increase. Partially offsetting
these increases was the decrease in revenues from our HomeTown Buffet and Casa
Bonita concepts, which were disposed of in connection with the initial public
offering of Star Buffet in September 1997, and our JB's Restaurants and Galaxy
Diner restaurants which were sold to SBRG in September 1998. On a same-store
sales basis, our Carl's Jr. sales increased 3.0%, and our Taco Bueno sales
increased 7.3%, marking the fourth consecutive annual increase in same-store
sales for both chains. Same-store sales for our company-operated Hardee's
restaurants decreased 7.5%. The overall increase in revenues from
company-operated Carl's Jr. restaurants was primarily the result of our
continued focus on promoting great-tasting new and existing food products
through increased advertising, the continuation of our conversion of existing
Carl's Jr. locations into Carl's Jr./Green Burrito dual-brand restaurants, the
image enhancement of our restaurants through a chain-wide remodeling program
which was completed in December 1997, and an increase in the number of
company-operated restaurants in operation in fiscal 1999 as compared with fiscal
1998. Taco Bueno's increase in revenues is due in part to a new advertising
campaign, which also focuses on great-tasting food products, and the system-wide
installation of new menu boards and all-you-can-drink beverage bars. In fiscal
1999, we also began an image enhancement program for our Taco Bueno restaurants
and are focusing on real estate that is better located and more heavily
trafficked than the properties previously targeted for new Taco Bueno
restaurants. The revenue increase from our Hardee's restaurants was also driven
by including a full year of operations of the restaurants initially acquired in
July 1997 and by our acquisitions of FEI and other franchised restaurants during
fiscal 1999. We attribute much of the decrease in same-store sales at Hardee's
to menu deletions, as well as our discontinuation of promotional discounting and
monthly new product introductions. The particularly harsh weather experienced in
the Southeast and Midwest during the fourth quarter of fiscal 1999 was also a
contributing factor.
Franchised and Licensed Restaurants. Our revenues from franchised and
licensed restaurants for fiscal 2000 increased $15.6 million, or 9.7%, to $175.4
million over fiscal 1999. This revenue increase was mainly due to increased
royalties from, and food purchases by, Carl's Jr. franchisees and licensees as a
result of an increase in the number of
21
19
-
Carl's Jr. franchised restaurants operating in fiscal 2000 as compared with
fiscal 1999 and an increase in equipment sales to Hardee's franchisees in
connection with the remodeling of Hardee's restaurants to the Star Hardee's
format. Also contributing to the increase was the inclusion of $2.0 million in
franchise fees from the sale of company-operated Carl's Jr. and Hardee's
restaurants to franchisees in fiscal 2000. Offsetting this increase in part was
the loss of royalty revenue from our JB's franchised restaurants, which were
sold to SBRG in September 1998. Our revenues from franchised and licensed
restaurants for fiscal 1999 increased $32.6 million, or 25.6%, to $159.8 million
over fiscal 1998. This increase is principally due to the addition of a full
year of royalties earned by Hardee's franchise system and a full year of
equipment sales to Hardee's franchisees, offset in part by the conversion of
certain Hardee's franchised restaurants into company-operated restaurants,
including our purchase of FEI in April 1998. A large part of the increase can
also be attributed to increased royalties from, and food purchases by, Carl's
Jr. franchisees and licensees as a result of higher sales volume at franchised
and licensed Carl's Jr. restaurants and the increase in the number of Carl's Jr.
franchised restaurants operating in fiscal 1999 as compared with fiscal 1998.
OPERATING COSTS AND EXPENSES
Restaurant Operations. Restaurant-level operating margins of our consolidated
restaurant operations decreased in fiscal 2000 by 4.7% to 14.9% as compared with
fiscal 1999, primarily as a result of establishing a $42.0 million store closure
reserve and asset impairment charge for 105 of our Hardee's restaurants which we
plan to close within the next 12 months. Depreciation and amortization expense
also increased in fiscal 2000 as a result of new unit development of our Carl's
Jr. and Taco Bueno chains, restaurant remodels at Hardee's and Taco Bueno and
upgrades to our computer systems and applications in connection with our effort
to fully integrate our recent restaurant acquisitions. Excluding the expense
relating to the Hardee's store closure reserve and asset impairment charge,
consolidated restaurant-level margins would have been 17.2% for fiscal 2000.
Consolidated restaurant-level margins increased in fiscal 1999 by 1.0% to 19.6%
as compared with fiscal 1998, primarily reflecting the improvement in operating
margins at each of our three core concepts and the disposal of our remaining
higher-cost family-style restaurant concepts in the third quarter of fiscal
1999.
Combined pressures in commodity costs, labor costs, the introduction of
the lower-priced product offerings and increased depreciation expense as a
result of the 49 new Carl's Jr. restaurants opened in fiscal 2000 all
contributed to the decrease in the chain's restaurant-level margins in fiscal
2000 to 22.8% as a percentage of revenues from company-operated restaurants from
25.9% in fiscal 1999 and 24.2% in fiscal 1998. Excluding the operating results
of the Hardee's-to-Carl's Jr. conversion restaurants which were included in
Hardee's operating results prior to fiscal 2000, Carl's Jr. restaurant-level
operating margins for fiscal 2000 were 24.1%. The increase in operating margins
in fiscal 1999 over fiscal 1998 reflects our increased purchasing synergies for
food and paper, improved labor productivity and reduced workers' compensation
costs.
Our Carl's Jr. food and packaging costs as a percentage of
company-operated revenues increased 0.4% to 29.2% in fiscal 2000 following a
decrease of 1.1% in fiscal 1999 as compared with fiscal 1998. Increased
commodity prices for beef and cheese as well as a shift in the product mix
resulting from high sales levels of the $0.99 Spicy Chicken Sandwich, which was
introduced in the third quarter of fiscal 2000, contributed to the increase in
food and paper costs. During fiscal 1999 food costs decreased due to the
purchasing economies our Carl's Jr. chain achieved as a result of the
consolidated buying power directly realized from our addition of other
restaurant concepts, partially offset by increased pressure from commodity
prices and a change in the product mix as a result of the promotion of larger,
more expensive sandwiches such as the Charbroiled Sirloin Steak Sandwich, which
was introduced in the fourth quarter of fiscal 1998.
Payroll and other employee benefits for our Carl's Jr. restaurants
increased 1.2% to 27.0% as a percentage of company-operated revenues in fiscal
2000 from a fairly consistent level in prior years of 25.8% and 25.7% for fiscal
1999 and 1998, respectively. The overall tighter labor market has impacted our
average hourly wage rate and increased competitive pressures in attracting and
retaining qualified employees. The increase in the number of our Carl's
Jr./Green Burrito dual-brand restaurants also contributed to the rise in payroll
and employee benefit costs due to the more labor intensive nature of the Green
Burrito system. Further, we made a conscious decision to add additional employee
hours to improve guest service at the restaurants. During fiscal 1999, the
September 1997 federal and March 1998 California minimum wage increases
contributed to the rise in payroll and employee benefit costs. Offsetting the
impact of these partial year increases was the savings resulting from the
continuation of labor productivity programs implemented in prior fiscal years to
decrease costs further and improve direct labor efficiencies.
Carl's Jr. occupancy and other operating expenses, as a percentage of
revenues from company-operated Carl's Jr. restaurants, were 21.0%, 19.5%, and
20.2% in fiscal 2000, 1999, and 1998, respectively. The increase in fiscal
22
20
- -
2000 was largely a result of additional depreciation expense on the new units
built during fiscal 2000 and increased repair and maintenance expense at the
restaurants as the number of years grows since our last remodel program. Also
increasing occupancy and other operating expenses as a percentage of revenues is
the inclusion in fiscal 2000 of the Hardee's-to-Carl's converted restaurants.
These restaurants' revenues are lower than the Carl's Jr. system, therefore
fixed costs as a percentage of revenues are higher. The decrease in occupancy
and other operating expenses as a percentage of company-operated restaurants in
fiscal 1999, as compared with fiscal 1998, is largely due to our efforts to
maintain costs at the prior fiscal year levels in conjunction with the fixed
nature of the expenses and the increase in revenues in fiscal 1999.
Hardee's company-operated restaurant-level margins for fiscal 2000,
excluding the $42.0 million store closure reserve and asset impairment charge,
were 13.6%, as compared with 16.7% in fiscal 1999 and 12.9% in fiscal 1998.
Although Hardee's restaurant-level operating margins are substantially lower
than our Carl's Jr. and Taco Bueno quick-service restaurant concepts and despite
the decrease in restaurant-level margins from fiscal 1999, we have increased
operating margins at Hardee's from 6.2% for those restaurants open and operating
as of December 31, 1996, the year prior to our acquisition. We have accomplished
this reduction of costs through many of the same cost-saving measures we
implemented at our Carl's Jr. restaurants over the past four to five years,
including: the introduction of the Carl's Jr. labor matrix to refine labor
usage; a focus on safety and accident prevention as a method of lowering
workers' compensation costs; the reduction of food waste and theft tolerance
levels; and the use of purchasing synergies to lower food and paper costs.
Additionally, the simplification of the Hardee's menu and conforming Hardee's
depreciation policies also contributed to the increase in restaurant-level
operating margins since we acquired it.
Hardee's food and packaging costs as a percentage of company-operated
revenues increased during fiscal 2000 by 0.8% to 31.4% and decreased 1.5% in
fiscal 1999 as compared with fiscal 1998. This fiscal 2000 increase was due
mainly to special promotional discounts and an increase in commodity prices.
Partially offsetting the fiscal 2000 increase, and contributing to the decrease
in fiscal 1999, were the effects of a reduction in food waste and theft
tolerance levels and continued purchasing economies achieved as a result of our
increased consolidated buying power.
Payroll and other employee benefits, as a percentage of revenues from
company-operated Hardee's restaurants, increased 0.3% to 33.5% in fiscal 2000
and decreased 2.2% in fiscal 1999 to 33.2% from fiscal 1998. This increase in
payroll and other employee benefits in fiscal 2000 is primarily a result of the
increased labor required in the remodeled Star Hardee's restaurants and higher
average hourly wage rates as a result of a tighter labor market. The decrease in
labor from fiscal 1998 to fiscal 1999 is mainly a result of the introduction of
the Carl's Jr. labor matrix to refine labor usage and a focus on safety and
accident prevention as a method of lowering workers' compensation costs.
As a percentage of revenues from Hardee's company-operated restaurants,
occupancy and other operating expenses increased 2.0% to 21.5% in fiscal 2000
over the fiscal 1999 and 1998 levels of 19.5% and 19.6%, respectively. The
percentage increase in occupancy and other operating expenses in fiscal 2000 is
due primarily to the fixed nature of the costs combined with a decrease in the
same-store revenue base, as well as increased depreciation costs in connection
with remodeling 387 restaurants to the Star Hardee's format during fiscal 2000.
In the fourth quarter of fiscal 2000, we provided a store closure reserve
at Hardee's of $16.3 million for 105 Hardee's restaurants that we plan on
closing over the next 12 months. The store closure reserve represents a
liability for the net present value of any remaining lease obligation after the
expected closure dates, net of estimated sublease income, if any. Additionally,
a related provision for asset impairment of $25.7 million was recorded to reduce
the carrying amount of these restaurants' assets ($15.6 million) and goodwill
($10.1 million) to amounts projected to be recovered by the individual
restaurants' operating cash flows over the restaurants' estimated remaining
period of operation. The provision for restaurant asset impairment is net of
amounts expected to be recovered, if any, from the sale of such assets upon the
closure of the store.
Taco Bueno's restaurant-level operating margins for fiscal 2000 were
24.5%, a decrease of 0.7% from fiscal 1999. In fiscal 1999, Taco Bueno's
restaurant-level margins increased 0.6% to 25.2% from fiscal 1998. The decrease
in fiscal 2000 was mainly a result of increases in commodity costs for meat and
cheese, a change in packaging materials used and an increase in workers
compensation costs as a result of a revaluation of our historical worker's
compensation experience rating. These decreases in restaurant-level margins for
fiscal 2000 were partially offset by a decrease in occupancy and operating
expenses, which is due, in large part, to the fixed nature of these costs in
combination with the increased revenue base at our Taco Bueno restaurants. The
increase in fiscal 1999 over fiscal 1998 was primarily due to the fixed nature
of occupancy and other operating expenses combined with an increase in revenues,
as well as the savings achieved from implementing some of the same labor
productivity programs successfully implemented at our Carl's Jr. restaurants in
the past four to five years. Offsetting these benefits in fiscal 1999 was the
negative impact of the
23
21
-
increased commodity costs for cheese and tomatoes and increased lease expense
for the new point of sale equipment installed in all of our Taco Bueno
restaurants.
Franchised and Licensed Restaurants. Franchised and licensed restaurant
and other costs increased 19.7% to $128.1 million in fiscal 2000 over fiscal
1999 and 14.1% to $107.0 million in fiscal 1999 over fiscal 1998. These
increases are primarily due to increased food and other products purchased from
us by Carl's Jr. franchisees and licensees and increased equipment purchases
from us by Hardee's franchisees and licensees. As a percentage of revenues from
franchised and licensed restaurants, these costs increased 6.1% in fiscal 2000
and decreased 6.8% in fiscal 1999, as compared with fiscal 1999 and 1998,
respectively. While royalties from Hardee's franchised and licensed restaurants
decreased during fiscal 2000 as a result of the repurchase of several of
Hardee's franchised restaurants including FEI, revenues from equipment sales to
Hardee's franchised and licensed restaurants increased. The cost structure
associated with equipment sales is much higher than that associated with the
royalty stream of income. While Carl's Jr. earns its income from both royalties
paid and food purchases by franchisees, Hardee's earns a higher percentage of
its franchised restaurant revenue from royalties paid because its franchisees
purchase food, supplies and other products from independent vendors and
distributors. As a result, the cost structure associated with the Hardee's
franchise operations is substantially lower than that associated with the Carl's
Jr. franchise operations. Consequently, these costs as a percentage of revenues
from franchised and licensed restaurants decreased in fiscal 1999 as compared
with fiscal 1998 due to including a full year of Hardee's operating results in
fiscal 1999.
Advertising Expenses. Advertising expenses increased $16.3 million in
fiscal 2000 over fiscal 1999, and $47.0 million in fiscal 1999 over fiscal 1998,
principally due to increased advertising support for Hardee's. Advertising has
become increasingly important in the current competitive environment, and, as a
result, advertising expenses have increased in terms of dollars spent and as a
percentage of revenues in fiscal 2000 and 1999 as compared with the prior fiscal
years.
General and Administrative Expenses. General and administrative expenses
increased $28.7 million to $147.4 million in fiscal 2000 over fiscal 1999 and
$39.8 million to $118.7 million in fiscal 1999 over fiscal 1998. General and
administrative expenses were 7.4%, 6.3% and 6.9% of total revenues in fiscal
2000, 1999, and 1998, respectively. This increase in general and administrative
expenses in fiscal 2000 reflects the planned addition of regional general and
administrative expenses in the FEI markets that did not exist in the prior year,
including additional quality assurance and regional human resources support;
higher training expenses for the accelerated Star Hardee's remodel rollout; a
full year of FEI goodwill amortization expense; and an increase in information
technology costs associated with the implementation of our new computer system.
Also impacting general and administrative expenses in fiscal 2000 are $8.5
million of charges, including: (a) $2.1 million of restructuring charges in
connection with consolidating certain administrative functions from Rocky Mount,
North Carolina to Anaheim, California; (b) $2.6 million of Y2K expenses
associated with restaurant computer systems; (c) $6.6 million in capitalized
software development costs which were written-off because they will not be
utilized; (d) $1.7 million in additional vacation expense in connection with a
change in our vacation policy; (e) $2.8 gain on the sale of an aircraft that we
acquired in connection with the original Hardee's acquisition; and (f) $1.7
million in other miscellaneous credits. After adjusting for these items, general
and administrative expenses in fiscal 2000 were $138.9 million, or 7.0% of total
revenues.
On November 11, 1999, we announced that we would consolidate the majority
of the corporate functions of our Hardee's subsidiary, located in Rocky Mount,
North Carolina, within our corporate headquarters in Anaheim, California,
creating a single support and administration center for our Carl's Jr., Hardee's
and Taco Bueno restaurants. During the fourth quarter of fiscal 2000, we accrued
$2.1 million of termination benefits for approximately 150 employees we will be
laying-off between mid-January 2000 and August 2000. We paid $0.3 million to
approximately 50 employees who were involuntarily terminated in January 2000.
Such amounts were charged against the severance reserve which is included as
part of other current liabilities.
The increase in general and administrative expenses in fiscal 1999 in
terms of dollars spent is primarily the result of the added expense of
supporting Hardee's restaurant operations. General and administrative expenses
also increased in fiscal 1999 due to recording incentive compensation accruals
for regional restaurant management and selected corporate employees for improved
operating performance. The decrease in general and administrative expenses as a
percentage of total revenues in fiscal 1999 over fiscal 1998 also reflects the
economies of scale we realized by absorbing certain costs associated with FEI
into our existing infrastructure.
24
22
- -
INTEREST EXPENSE
Interest expense for fiscal 2000 increased $19.8 million to $63.3 million as
compared with fiscal 1999. The increase is due to higher levels of borrowings
outstanding and an increase in interest rates under our senior credit facility,
a full year of interest expense on our $159.2 million, 4.25% convertible
subordinated notes in fiscal 2000 as compared with fiscal 1999, and the issuance
of our $200.0 million, 9.125% senior subordinated notes in the first quarter of
fiscal 2000, the net proceeds of which we used to pay down our senior credit
facility which carried a lower rate of interest. Also increasing interest
expense in fiscal 2000 was the write-off of $3.6 million of deferred financing
costs associated with a commitment decrease in our senior credit facility.
Interest expense for fiscal 1999 increased $26.5 million to $43.5 million as
compared with fiscal 1998 due to higher levels of borrowings outstanding,
including the issuance of our convertible subordinated notes in the first
quarter of fiscal 1999, and the assumption of capital lease obligations as a
result of the acquisitions of Hardee's in July 1997 and FEI in April 1998. As a
result of the amendment to our senior credit facility subsequent to year-end,
the applicable margin used to determine our interest rate payable on outstanding
borrowings was increased. As such, we would expect to see our interest expense
rise in future quarters even if our borrowings outstanding under our senior
credit facility remain unchanged. However, we plan to mitigate the effect of
higher interest rates by reducing outstanding borrowings with proceeds from
sales of restaurants.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, mainly consists of interest income, lease income,
dividend income, gains and losses on sales of restaurants, income and loss on
long-term investments, property management expenses and other non-recurring
income and expenses. Other income (expense), net in fiscal 2000 was an expense
of $32.0 million. In fiscal 2000, charges of $28.7 million were recorded during
the fourth quarter. These charges include: (a) recording an impairment charge
and equity losses of $37.3 million to write-down our investments in Checkers
(which merged with Rally's in August 1999), SBRG, and Boston West to fair market
value based upon our conclusion that these investments have experienced an other
than temporary decline in value; (b) recording a gain on the sale of Carl's Jr.
and Hardee's restaurants of $19.5 million; and (c) writing-off approximately
$10.9 million of Hardee's acquisition-related assets which we believe to have no
future benefit. Excluding these charges, other income (expense), net was an
expense of $3.3 million, an increase of $2.6 million as compared with the fiscal
1999 expense of $0.7 million. The increase in expense in fiscal 2000, after
adjusting for these charges, was largely due to a reduction in interest income
as a result of our reduced note receivable from Checkers, the settlement of
certain claims against us relating to our investment in Boston West and the
recognition of lease income from Boston West in the prior year.
Other income (expense), net decreased $8.0 million in fiscal 1999 over
1998. The decrease in fiscal 1999 was primarily due to a $15.0 million charge to
our investment in Boston West, offset in part by a non-recurring gain of $10.3
million resulting from the disposition of our investment in Star Buffet.
Decreases in lease, dividend and interest income, as well as larger losses
recorded from our investment in Rally's have also contributed to the overall
decrease in fiscal 1999.
EXTRAORDINARY ITEM
During the third quarter of fiscal 1999, our Board of Directors approved the
buyback of up to $50.0 million aggregate principal amount of convertible
subordinated notes. In fiscal 2000 and fiscal 1999, we repurchased $3.0 million
and $35.0 million, respectively, of such notes for $2.5 million and $28.8
million in cash, respectively, including accrued interest thereon. In connection
with this repurchase, we recognized an extraordinary gain on the early
retirement of debt of $0.3 and $3.3 million, net of applicable income taxes of
$0.2 million and $2.1 million for fiscal 2000 and 1999, respectively.
IMPACT OF INFLATION
Inflation has an impact on food, construction, occupancy, labor and benefit
costs, all of which can significantly affect our operations. Historically, we
have been able to pass any higher costs due to these inflationary factors along
to our customers because those factors have affected nearly all restaurant
companies. During fiscal 2000, 1999, and 1998, however, we have emphasized cost
controls rather than price increases, given the price competitiveness of the
quick-service restaurant industry.
SEASONALITY
Our business is affected by seasonality. Average restaurant sales are normally
higher in the summer months than during the winter months for each of our
restaurant concepts. In comparison with our other restaurant concepts, the
weather has a greater impact on average restaurant sales at our Hardee's
restaurants, because a significant number of them are
25
23
-
located in rural areas that experience severe winter conditions without the
benefit of municipal storm services typical of more urban areas.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $9.8 million to $36.5 million in fiscal
2000. In fiscal 2000, we generated cash flows from operating activities of
$114.6 million, compared with $178.7 million in fiscal 1999. This decrease was
mainly due to the continued decrease in same-store sales at our Hardee's
restaurants, combined with a decreases in operating margins at all of our
restaurant concepts and increased interest expense.
Investing activities absorbed $216.2 million of our cash to fund capital
additions of $263.6 million. Partially generating some of the funds necessary
for these investments were the proceeds of $52.8 million from the sale of
property and equipment to our franchisees and $7.7 million from collections on
and sale of notes receivable, related party receivables and leases receivable.
Financing activities provided us with $91.8 million in cash, primarily
from a net increase of $116.6 million in long-term borrowings. Cash flows from
operating and financing activities were mainly used to fund the remodeling of
our Hardee's restaurants to the Star Hardee's format, to build new Carl's Jr.
and Taco Bueno restaurants, to pay $10.8 million of deferred financing costs
associated with the issuance of $200.0 million of senior subordinated notes, to
repay $7.7 million in capital lease obligations, to purchase $10.4 million of
our common stock and to pay dividends of $4.2 million. Exercises of stock
options and the related tax benefit provided us with an additional $1.9 million.
On March 4, 1999, we completed a private placement of $200.0 million
aggregate principal amount of 9.125% senior subordinated notes due 2009. We
received net proceeds of $194.8 million, of which $190.0 million was used to
repay outstanding term loan balances under our senior credit facility. The
indenture relating to the senior subordinated notes imposes certain restrictions
on our ability (and the ability of our subsidiaries) to incur indebtedness, pay
dividends on, redeem or repurchase our capital stock, make investments, incur
liens on our assets, sell assets other than in the ordinary course of business,
or enter into certain transactions with our affiliates. The senior subordinated
notes represent unsecured general obligations subordinate in right of payment to
our senior indebtedness, including our senior credit facility.
In connection with our private placement of senior subordinated notes, we
also amended and restated our senior credit facility to increase the lenders'
commitments under our revolving credit facility to $500.0 million from $250.0
million. We also increased our letter of credit sub-facility to $75.0 million
from $65.0 million, and changed the maturity date of the senior credit facility
to February 2004. The term loan component of the senior credit facility was
eliminated as a result of these transactions.
Borrowings under the senior credit facility may be used for working
capital and other general corporate purposes, including permitted investments
and acquisitions. We will be required to repay borrowings under the senior
credit facility with the proceeds from (1) certain asset sales, (2) the issuance
of certain equity securities, and (3) the issuance of additional indebtedness.
Of the various options we have regarding interest rates, we have selected LIBOR
plus a margin, with future margin adjustments dependent on certain financial
ratios from time to time.
Our senior credit facility contains the following significant covenants:
- restrictions on our ability to incur additional indebtedness and incur
liens on our assets, subject to specified exceptions;
- requirements that we satisfy specified financial tests as a
precondition to our acquisition of other businesses; and
- limitations on making capital expenditures and certain restricted
payments (including dividends and repurchases of stock) subject in
certain circumstances to specified financial tests.
In addition, we are required to comply with minimum EBITDA requirements,
minimum interest coverage and fixed charge coverage ratios, minimum consolidated
tangible net worth requirements and maximum leverage ratios.
In November 1999, we amended our senior credit facility to modify certain
of the covenants therein for the third and fourth quarters of fiscal 2000 and
for future measurement periods. In addition, the revolving commitments under the
senior credit facility were reduced to $400.0 million from $500.0 million and
were to be further reduced by the first $75.0 million in proceeds from sales of
restaurants. The final maturity date of February 2004 remained
26
24
- -
unchanged; however, the applicable margin used to determine the interest rate
payable on outstanding borrowings was increased and up to $200.0 million of
revolving borrowings will be converted, subject to lender approvals, to term
borrowings with an interest rate not subject to adjustment on the basis of
certain financial ratios. The term loan component will provide for principle
payments of $4.2 million each quarter, beginning in March 2001, with all
remaining principle due on the maturity date.
On April 26, 2000 we further amended our senior credit facility effective
January 31, 2000, to amend certain of the covenants contained therein. The
amended senior credit facility also provides that the revolving commitments
thereunder shall be reduced by the first $100.0 million in net proceeds from
sales of restaurants (as compared with $75.0 million in the November 1999
amendment) and 75% of the second $100.0 million in net proceeds from sales of
restaurants, and by the entire net proceeds from the sale of any of our Carl's
Jr. and Taco Bueno restaurants. The senior credit facility, as amended,
prohibits us from purchasing shares of our common stock, purchasing our senior
subordinated notes or convertible subordinated notes, from prepaying
subordinated indebtedness and from increasing cash dividends paid from current
levels. In addition, capital expenditures were reduced and construction of new
restaurants is limited to construction already begun or committed to begin. The
final maturity date still remains unchanged; however, the interest rate payable
on outstanding borrowings was increased. Failure to complete an asset sale or
sales aggregating $125.0 million in net proceeds by the end of October 2000 will
result in a further increase in the interest rate until such sales are
completed. We were in compliance as of January 31, 2000 with all of our
covenants related to our senior credit facility, as amended.
Our primary source of liquidity is our revenues from company-operated
restaurants, which are generated in cash. Future capital needs will arise
primarily for the construction of new Carl's Jr. and Taco Bueno restaurants, the
remodeling of our Hardee's restaurants to the Star Hardee's format, the
remodeling of existing Taco Bueno restaurants, the conversion of restaurants to
the Carl's Jr./Green Burrito dual-brand concepts and capital expenditures to be
incurred in connection with our previously announced restructuring and
consolidation of administrative functions from Rocky Mount, North Carolina to
Anaheim, California.
We intend to increase our proportion of franchised restaurants to
company-operated restaurants. We are planning to sell up to 500 Hardee's
restaurants to existing and new franchisees in fiscal 2001, which should
generate proceeds of approximately $200.0 million. These sales contemplate
additional development within the given markets and the related agreements will
require that the Hardee's restaurants receive the Star Hardee's remodel. In
almost all cases, these agreements require full royalties at four percent of net
sales. The net proceeds from these asset sales will be used to repay outstanding
borrowings under our senior credit facility.
The quick-service restaurant business generally receives simultaneous
cash payment for sales. We presently use the net cash flow from operations to
repay outstanding indebtedness and to reinvest in long-term assets, primarily
for the remodeling and construction of restaurants. Normal operating expenses
for inventories and current liabilities generally carry longer payment terms
(usually 15 to 30 days). As a result, we typically maintain current liabilities
in excess of current assets.
We believe that cash generated from our various restaurant concept
operations, along with cash and cash equivalents on hand as of January 31, 2000,
and amounts available under our senior credit facility, will provide the funds
necessary to meet all of our capital spending and working capital requirements
for the foreseeable future. As of January 31, 2000, we had $57.5 million of
borrowings available to us under our senior credit facility. If those sources of
capital, together with net proceeds from sales of restaurants, are insufficient
to satisfy our capital spending and working capital requirements, we may be
required to sell additional restaurants or obtain additional credit facilities.
In addition, substantially all of the real properties we own and use for our
restaurant operations are unencumbered and could be used by us as collateral for
additional debt financing or could be sold and subsequently leased back to us.
In the event that our Hardee's restaurants do not show improvements in
same-store sales or our Carl's Jr. restaurants were to experience declines in
same-store sales, and if we are unable to generate proceeds from the sale of
restaurants at prices and on terms sufficient to service our senior credit
facility, we may need to refinance all or a portion of our indebtedness on or
before maturity in order to avoid short and long-term liquidity shortage. The
availability of capital resources will depend upon prevailing market conditions,
interest rates and our then-existing financial position.
YEAR 2000
Our operational, information and financial systems successfully handled the
transition into Year 2000. All restaurants were fully functional and open for
business on January 1, 2000. No communication interruptions were identified with
any third
27
25
-
party suppliers or vendors. Although no Y2K related problems are anticipated, we
are continuing to monitor all systems throughout the first quarter of fiscal
2001.
We are currently involved in a comprehensive program to upgrade computer
systems and applications in connection with our effort to fully integrate our
recent restaurant acquisitions. Total expenditures related to the upgrade of the
information systems are expected to range from $30.0 to $40.0 million and will
be capitalized or expensed in accordance with generally accepted accounting
principles. Through January 31, 2000, we have capitalized approximately $22.9
million of internal staff costs and outside consulting and other expenditures
related to this upgrade process. During fiscal 2000, we incurred $2.6 million in
costs associated with making our Carl's Jr. and Taco Bueno restaurant computer
systems Y2K compliant. These costs were included in general and administrative
expenses. In addition, during the fourth quarter of fiscal 2000, we wrote-off
$6.6 million of capitalized software development costs that we determined will
not be utilized in the future.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our principal exposure to financial market risks is the impact that interest
rate changes could have on our $400.0 million senior credit facility, of which
$269.0 million remained outstanding as of January 31, 2000. Borrowings under our
senior credit facility bear interest at the prime rate or at LIBOR plus an
applicable margin based on certain financial ratios (averaging 7.5% in fiscal
2000). A hypothetical increase of 100 basis points in short-term interest rates
would result in a reduction of approximately $2.7 million in annual pre-tax
earnings. The estimated reduction is based upon the outstanding balance of our
senior credit facility and assumes no change in the volume, index or composition
of debt at January 31, 2000. Substantially all of our business is transacted in
U.S. dollars. Accordingly, foreign exchange rate fluctuations have never had a
significant impact on us and are not expected to in the foreseeable future.
Commodity Price Risk
We purchase certain products which are affected by commodity prices and are,
therefore, subject to price volatility caused by weather, market conditions and
other factors which are not considered predictable or within our control.
Although many of the products purchased are subject to changes in commodity
prices, certain purchasing contracts or pricing arrangements contain risk
management techniques designed to minimize price volatility. Typically we use
these types of purchasing techniques to control costs as an alternative to
directly managing financial instruments to hedge commodity prices. In many
cases, we believe we will be able to address commodity cost increases which are
significant and appear to be long-term in nature by adjusting our menu pricing
or changing our product delivery strategy. However, increases in commodity
prices could result in lower restaurant-level operating margins for our
restaurant concepts.
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 our Proxy Statement to be used in
connection with our 2000 Annual Meeting of Stockholders, to be filed with the
Commission within 120 days of January 31, 2000. Information concerning the
current executive officers 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 our Proxy Statement to be used in connection with our 2000 Annual
Meeting of Stockholders, to be filed with the Commission within 120 days of
January 31, 2000.
28
26
- -
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 our Proxy Statement to be
used in connection with our 2000 Annual Meeting of Stockholders, to be filed
with the Commission within 120 days of January 31, 2000.
ITEM 13. Certain Relationships and Related Transactions
The information pertaining to certain relationships and related transactions is
hereby incorporated by reference to our Proxy Statement to be used in connection
with our 2000 Annual Meeting of Stockholders, to be filed with the Commission
within 120 days of January 31, 2000.
29
27
-
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/ C. THOMAS THOMPSON
--------------------------------------
C. Thomas Thompson
Chief Executive Officer and
President
Date: April 28, 2000
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/ C. THOMAS THOMPSON Chief Executive Officer April 28, 2000
- ----------------------------------------------------- and President
C. Thomas Thompson (Principal Executive Officer)
/s/ CARL A. STRUNK Executive Vice President, April 28, 2000
- ----------------------------------------------------- Chief Financial Officer
Carl A. Strunk (Principal Financial and Accounting Officer)
/s/ BYRON ALLUMBAUGH Director April 28, 2000
- -----------------------------------------------------
Byron Allumbaugh
/s/ PETER CHURM Director April 28, 2000
- -----------------------------------------------------
Peter Churm
/s/ WILLIAM P. FOLEY II Chairman of the Board April 28, 2000
- -----------------------------------------------------
William P. Foley II
/s/ CARL L. KARCHER Director April 28, 2000
- -----------------------------------------------------
Carl L. Karcher
/s/ CARL N. KARCHER Director April 28, 2000
- -----------------------------------------------------
Carl N. Karcher
/s/ DANIEL D. LANE Vice Chairman of the Board April 28, 2000
- -----------------------------------------------------
Daniel D. Lane
/s/ FRANK P. WILLEY Director April 28, 2000
- -----------------------------------------------------
Frank P. Willey
30
28
- -
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page
- ------------------------------------------------------------------------------
(a)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report 29
Consolidated Balance Sheets - as of January 31, 2000 and 30
1999
Consolidated Statements of Operations - for the years ended 31
January 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity - for the 32
years ended January 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - for the years ended 33
January 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements 34
(a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES: Schedule 54
II - Valuation and Qualifying Accounts
All other 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 55 hereof and is
incorporated herein by reference.
(b) CURRENT REPORTS ON FORM 8-K:
A Current Report on Form 8-K dated January 6, 2000, was
filed during the fourth quarter of the fiscal year to report
that on December 28, 1999, Howard Lester resigned as a
member of the Company's Board of Directors.
31
29
-
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. In
connection with our audits of the consolidated financial statements, we also
audited the financial statement schedule as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 31, 2000 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information shown therein.
KPMG LLP
Orange County, California
April 4, 2000, except as to
the eighth paragraph of
Note 9 which is as of
April 26, 2000
32
30
- -
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) January 31, 2000 1999
- ----------------------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $ 36,505 $ 46,297
Accounts receivable, net 42,928 46,820
Related party receivables 5,006 1,474
Inventories 26,463 22,507
Prepaid expenses 14,717 12,349
Other current assets 2,454 4,845
- ----------------------------------------------------------------------------------------------
Total current assets 128,073 134,292
Property and equipment, net 1,051,480 940,178
Property under capital leases, net 84,482 81,895
Long-term investments 3,002 34,119
Notes receivable 7,383 7,898
Related party receivables 583 7,020
Deferred income taxes, net 15,006 --
Costs in excess of net assets acquired, net 243,304 252,035
Other assets 35,201 39,477
- ----------------------------------------------------------------------------------------------
$ 1,568,514 $1,496,914
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $ 5,532 $ 4,273
Current portion of capital lease obligations 9,603 7,838
Accounts payable 99,204 88,462
Other current liabilities 97,582 101,074
- ----------------------------------------------------------------------------------------------
Total current liabilities 211,921 201,647
- ----------------------------------------------------------------------------------------------
Long-term debt 274,996 360,684
Senior subordinated notes 200,000 --
Convertible subordinated notes 159,225 162,225
Capital lease obligations 92,063 90,373
Deferred income taxes, net -- 15,029
Other long-term liabilities 84,552 80,114
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares; none issued or outstanding -- --
Common stock, $.01 par value; authorized 100,000,000
shares; issued and outstanding 52,086,421 shares and
51,850,249 shares 521 519
Additional paid-in capital 383,016 380,423
Retained earnings 172,626 205,900
Treasury stock at cost; 1,585,000 shares and 0 shares (10,406) --
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 545,757 586,842
- ----------------------------------------------------------------------------------------------
$ 1,568,514 $1,496,914
- ----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
33
31
-
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal year ended
- ----------------------------------------------------------------------------------------------------------
(In thousands except per share amounts) January 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Revenues:
Company-operated restaurants $ 1,814,695 $1,732,221 $1,022,453
Franchised and licensed restaurants and other 175,378 159,823 127,206
- ----------------------------------------------------------------------------------------------------------
Total revenues 1,990,073 1,892,044 1,149,659
- ----------------------------------------------------------------------------------------------------------
Operating costs and expenses:
Restaurant operations:
Food and packaging 553,451 519,443 314,412
Payroll and other employee benefits 566,394 535,638 311,612
Occupancy and other operating expenses 383,144 337,668 206,436
Store closure expense and provision for asset impairment 41,988 -- --
- ----------------------------------------------------------------------------------------------------------
1,544,977 1,392,749 832,460
Franchised and licensed restaurants and other 128,128 107,019 93,773
Advertising expenses 121,727 105,397 58,383
General and administrative expenses 147,372 118,659 78,852
- ----------------------------------------------------------------------------------------------------------
Total operating costs and expenses 1,942,204 1,723,824 1,063,468
- ----------------------------------------------------------------------------------------------------------
Operating income 47,869 168,220 86,191
Interest expense (63,283) (43,453) (16,914)
Other income (expense), net (32,046) (670) 7,363
- ----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary item (47,460) 124,097 76,640
Income tax expense (benefit) (18,053) 49,645 29,883
- ----------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (29,407) 74,452 46,757
Extraordinary item - gain on early retirement of debt, net
of applicable income taxes of $186 and $2,084 290 3,260 --
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $ (29,117) $ 77,712 $ 46,757
- ----------------------------------------------------------------------------------------------------------
Basic income (loss) per share before extraordinary item $ (0.57) $ 1.44 $ 1.00
Extraordinary item - gain on early retirement of debt, net
of applicable income taxes - basic 0.01 0.07 --
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per share - basic $ (0.56) $ 1.51 $ 1.00
- ----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 51,668 51,599 46,634
- ----------------------------------------------------------------------------------------------------------
Diluted income (loss) per share before extraordinary item $ (0.57) $ 1.39 $ 0.97
Extraordinary item - gain on early retirement of debt, net
of applicable income taxes - diluted 0.01 0.06 --
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per share - diluted $ (0.56) $ 1.45 $ 0.97
- ----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - diluted 51,668 56,714 48,121
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
34
32
- -
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock
----------------------------------------- Additional Total
(In thousands except per share Number of Number of Paid-In Retained Stockholders'
amounts) Shares Amount Shares Amount Capital Earnings Equity
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 31, 1997 40,195 $ 402 -- $ -- $ 126,209 $ 88,193 $ 214,804
Cash dividends ($.07 per
share) -- -- -- -- -- (3,013) (3,013)
Exercise of stock options 594 6 -- -- 3,786 -- 3,792
Purchase of Hardee's Green
Bay, Inc. 298 3 -- -- 9,402 -- 9,405
Common stock offering, net 10,088 101 -- -- 222,243 -- 222,344
Tax benefit associated with
exercise of stock options -- -- -- -- 4,423 -- 4,423
Net income -- -- -- -- -- 46,757 46,757
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 31, 1998 51,175 512 -- -- 366,063 131,937 498,512
Cash dividends ($.07 per
share) -- -- -- -- -- (3,749) (3,749)
Exercise of stock options 624 6 -- -- 6,068 -- 6,074
Repurchase of Hardee's
franchised restaurants 51 1 -- -- 1,662 -- 1,663
Tax benefit associated with
exercise of stock options -- -- -- -- 6,630 -- 6,630
Net income -- -- -- -- -- 77,712 77,712
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 31, 1999 51,850 519 -- -- 380,423 205,900 586,842
Cash dividends ($.08 per
share) -- -- -- -- -- (4,157) (4,157)
Exercise of stock options 181 2 -- -- 1,363 -- 1,365
Purchase of treasury shares -- -- (1,585) (10,406) -- -- (10,406)
Shares issued to third-party 55 -- -- -- 722 -- 722
Tax benefit associated with
exercise of stock options -- -- -- -- 508 -- 508
Net loss -- -- -- -- -- (29,117) (29,117)
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 31, 2000 52,086 $ 521 (1,585) $(10,406) $ 383,016 $172,626 $ 545,757
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
35
33
-
CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year ended
------------------------------------------
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands) January 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
Net cash flows from operating activities:
Net income (loss) $ (29,117) $ 77,712 $ 46,757
Adjustments to reconcile net income (loss) to net cash
provided by operating activities, excluding the effect of
acquisitions and dispositions:
Extraordinary gain on early retirement of debt (476) (5,344) --
Depreciation and amortization 104,450 77,119 46,402
Provision for losses on accounts and notes receivable 1,485 (5,497) 5,636
(Gain) loss on sale of property and equipment and capital
leases (16,922) 1,941 4,657
Shares issued for litigation settlement 722 -- --
Net non-cash charges 105,601 15,000 --
Net non-cash investment and dividend income -- (1,259) (3,029)
Deferred income taxes (30,035) 9,038 12,889
(Gain) loss on non-current asset and liability
transactions 4,744 (8,818) (5,632)
Net change in receivables, inventories, prepaid expenses
and other current assets (12,457) (16,009) (16,589)
Net change in accounts payable and other current
liabilities (13,406) 34,787 (18,955)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 114,589 178,670 72,136
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of:
Property and equipment (263,589) (124,288) (89,210)
Long-term investments and marketable securities -- (27) (14,687)
Proceeds from sale of:
Marketable securities and long-term investments -- 12,500 393
Property and equipment 52,753 10,723 5,952
Increases in notes receivable and related party receivables (5,544) (2,930) (200)
Collections on and sale of notes receivable, related party
receivables and leases receivable 7,725 8,457 5,946
Net change in other assets (5,012) 1,295 (1,674)
Acquisitions, net of cash acquired (2,491) (406,376) (351,294)
Dispositions, net of cash surrendered -- 940 16,286
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (216,158) (499,706) (428,488)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from common stock offering -- -- 222,344
Net change in bank overdraft 14,210 (13,809) 3,316
Short-term borrowings -- -- 20,000
Repayments of short-term debt (3,600) (433) (12,500)
Long-term borrowings 467,500 530,095 131,489
Repayments of long-term debt (350,853) (151,650) (20,570)
Repayments of capital lease obligations (7,689) (8,698) (4,956)
Deferred financing costs (10,759) (10,384) (4,426)
Net change in other long-term liabilities (4,342) (16,901) 281
Payment of dividends (4,157) (3,749) (3,013)
Purchase of treasury stock (10,406) -- --
Exercise of stock options 1,365 6,074 3,792
Tax benefit associated with the exercise of stock options 508 6,630 4,423
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 91,777 337,175 340,180
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (9,792) 16,139 (16,172)
Cash and cash equivalents at beginning of year 46,297 30,158 46,330
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 36,505 $ 46,297 $ 30,158
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
36
34
- -
CKE RESTAURANTS, INC. AND SUBSIDIARIES
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" or the "Company") owns, operates, franchises and
licenses the Carl's Jr., Hardee's and Taco Bueno quick-service restaurant
concepts. As of January 31, 2000, the Carl's Jr. system included 934
restaurants, of which 563 were operated by the Company and 371 were operated by
the Company's franchisees and licensees. Carl's Jr. restaurants are located in
the Western United States, predominantly in California. As of January 31, 2000,
the Company's Hardee's system included 2,788 restaurants, of which 1,354 were
operated by the Company and 1,434 were operated by the Company's franchisees and
licensees. Hardee's restaurants are located throughout the Eastern and
Midwestern United States, predominantly in the Southeast. As of January 31,
2000, the Company also operated a total of 142 other restaurants, including 121
Taco Bueno quick-service Mexican restaurants in Texas and Oklahoma.
Basis of Presentation and Fiscal Year
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 year 2000 included 53 weeks of operations. Fiscal
years 1999 and 1998 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.
The equity method of accounting is used for investments in which the
Company has the ability to exercise significant influence. Under the equity
method, the Company recognizes its share of the net earnings or losses of these
entities and adjusts the carrying value of its investment by the amount of net
earnings or losses recognized and by the amount of contributions made or
distributions received. The Company's share of net earnings or losses is
calculated based on the Company's expected share of the investment's estimated
profit or loss.
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.
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.
Deferred Lease Costs
Deferred lease costs arising from an acquisition represent the excess of actual
rent payments on an operating lease over the current market rate on the date of
the acquisition. Deferred lease costs are amortized over the remaining lives of
the related leases.
Deferred Pre-opening Costs
The Company adopted Statement of Position 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5") in fiscal 1999. SOP 98-5 requires that costs
incurred during a start-up activity (including organization costs) be expensed
as incurred. The impact of the adoption of SOP 98-5 on the Company's
consolidated financial position and results of operations was not material.
37
35
-
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. The Company's results of operations include the revenue and
expenses of these Rally's restaurants. As of January 31, 2000, the Company
operated 21 Rally's restaurants under this operating agreement.
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 40 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
The Company assesses certain long-lived assets for possible impairment when
events or circumstances indicate carrying amounts may not be recoverable. Losses
are recognized when the carrying value exceeds the total estimated undiscounted
cash flows expected to be generated over the assets' estimated life.
In connection with the Company's decision to close 105 Hardee's
restaurants over the next fiscal year, the Company performed an impairment
evaluation of these restaurants' underlying assets and goodwill during the
fourth quarter of fiscal 2000. A resulting provision for asset impairment of
$25.7 million was recorded to reduce the carrying amount of the restaurants'
assets ($15.6 million) and goodwill ($10.1 million) to amounts projected to be
recovered by the individual restaurants' operating cash flows over the stores
estimated remaining period of operation. The provision for restaurant asset
impairment is net of amounts expected to be recovered, if any, from the sale of
such assets upon the closure of the store.
The costs in excess of net assets acquired are amortized on a
straight-line basis, principally over 40 years. The Company periodically reviews
the costs in excess of net assets acquired for impairment. Accumulated
amortization of costs in excess of net assets acquired was $17.0 million and
$9.8 million at January 31, 2000 and 1999, respectively.
Store Closure Costs
During the fourth quarter of fiscal 2000, the Company recorded a store closure
reserve at Hardee's of $16.3 million for 105 Hardee's restaurants to be closed
over the next fiscal year. The store closure reserve represents a liability for
the net present value of any remaining lease obligations after the expected
closure dates, net of estimated sublease income, if any.
Advertising
Production costs of commercials and programming are charged to operations when
first aired. The costs of other advertising, promotion and marketing programs
are charged to operations when incurred.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
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 17, 1998, the Company declared a 10% stock dividend to stockholders
of record on December 28, 1998, distributed on January 11, 1999. On January 6,
1998, the Company declared a 10% stock dividend to stockholders of record on
January 20, 1998, distributed on February 4, 1998.
38
36
- -
All data with respect to earnings (loss) 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
are retroactively adjusted to reflect the stock dividends.
Earnings (Loss) per Share
The Company presents "basic" earnings (loss) per share which represents net
earnings divided by the weighted average shares outstanding excluding all common
stock equivalents and "diluted" earnings (loss) per share reflecting the
dilutive effect of all common stock equivalents. The following table illustrates
the computation of basic and diluted earnings (loss) per share:
(In thousands, except per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item $(29,407) $74,452 $46,757
Extraordinary item - gain on early retirement of debt, net
of applicable income taxes 290 3,260 --
------------------------------
Net income (loss) $(29,117) $77,712 $46,757
------------------------------
Weighted average number of common shares outstanding during
the year 52,010 51,599 46,634
Purchase of treasury shares (342) -- --
------------------------------
51,668 51,599 46,634
------------------------------
Basic income (loss) per share before extraordinary item $ (0.57) $ 1.44 $ 1.00
Extraordinary item - gain on early retirement of debt, net
of applicable income taxes - basic 0.01 0.07 --
------------------------------
Basic net income (loss) per share $ (0.56) $ 1.51 $ 1.00
------------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item $(29,407) $74,452 $46,757
Interest expense and amortization of debt issuance costs,
net of income tax effect, applicable to convertible
subordinated notes -- 4,635 --
------------------------------
Income (loss) before extraordinary item (29,407) 79,087 46,757
Extraordinary item - again on early retirement of debt, net
of applicable income taxes 290 3,260 --
------------------------------
Net income (loss) $(29,117) $82,347 $46,757
------------------------------
Weighted average number of common shares outstanding during
the year 52,010 51,599 46,634
Incremental common shares attributable to:
Exercise of stock options -- 1,336 1,487
Issuance of convertible subordinated notes -- 3,779 --
Purchase of treasury shares (342) -- --
------------------------------
51,668 56,714 48,121
------------------------------
Diluted income (loss) per common share before extraordinary
item $ (0.57) $ 1.39 $ 0.97
Extraordinary item - gain on early retirement of debt, net
of applicable income taxes - diluted 0.01 0.06 --
------------------------------
Diluted net income (loss) per share $ (0.56) $ 1.45 $ 0.97
------------------------------
In fiscal 2000, 1999 and 1998, 6.2 million, 4.0 million and 3.6 million
shares, respectively, relating to the possible exercise of outstanding stock
options and in fiscal 2000, 3.6 million shares issuable upon conversion of
convertible subordinated notes, were not included in the computation of diluted
earnings (loss) per share as their effect would have been anti-dilutive.
39
37
-
Comprehensive Income
The Company did not have any other comprehensive income items requiring
reporting under Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income".
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in fiscal 1999. SFAS 131 establishes standards for the reporting of
information about operating segments in annual and interim financial statements
and requires restatement of prior year information. Operating segments are
defined as components of an enterprise for which separate financial information
is available that is evaluated regularly by the chief operating decision
maker(s) in deciding how to allocate resources and in assessing performance.
SFAS 131 also requires disclosures about products and services, geographic areas
and major customers. Adoption of SFAS 131 changed the disclosure of segment
information presented in Note 18.
Reclassifications
Prior year amounts in the accompanying consolidated financial statements are
reclassified to conform with current year presentation.
NOTE 2 - ACQUISITIONS
On April 1, 1998, the Company acquired Flagstar Enterprises, Inc. ("FEI"), the
largest franchisee in the Hardee's system, previously operating 557 Hardee's
restaurants located primarily in the Southeastern United States. The Company
acquired all issued and outstanding shares of common stock of FEI from Advantica
Restaurant Group, Inc. ("Advantica") for cash consideration of $380.6 million
(which includes miscellaneous expenses paid to Advantica) and the assumption of
approximately $45.6 million in capital lease obligations. The Company used the
majority of the net proceeds from the issuance of $197.2 million of convertible
subordinated notes together with borrowings of $213.2 million under its senior
credit facility to finance the acquisition (see Note 9).
On July 15, 1997, the Company acquired Hardee's, the operator and
franchisor of the Hardee's quick-service hamburger restaurant concept. The
Company acquired all of the issued and outstanding shares of Hardee's for cash
consideration of $335.0 million, including a $8.0 million purchase price
adjustment paid to Imasco Holdings, Inc. in fiscal 2000. The Company used the
net proceeds from the sale of 10,088,375 shares of the Company's common stock to
the public of $222.3 million (see Note 11) in conjunction with borrowings of
$133.9 million under the Company's senior credit facility (see Note 9) to
finance the acquisition.
After the acquisition of Summit Family Restaurants, Inc. ("Summit") in
fiscal 1997, the Company determined that its principal focus was on the
quick-service segment of the restaurant industry as opposed to the family-dining
segment. Accordingly, in September 1997, the Company transferred Summit's JB's
Restaurants and Galaxy Diner assets to a newly formed subsidiary, JB's Family
Restaurants, Inc. ("JB's"). The Company then contributed its remaining interest
in Summit, whose principal remaining asset was a subsidiary which operated 16
HomeTown Buffet restaurants, and its two Casa Bonita restaurants to Star Buffet,
Inc. ("Star Buffet"). The Company subsequently participated in the initial
public offering of Star Buffet (see Note 6). In September 1998, the Company
completed two additional transactions which resulted in the disposition of JB's
(see Note 6).
The assets acquired under the purchase method of accounting, including
the costs in excess of net assets acquired, and liabilities assumed in the
acquisitions of FEI and Hardee's are as follows:
(Dollars in thousands) FEI Hardee's
- -----------------------------------------------------------------------------------
Tangible assets acquired at fair value $319,603 $ 417,835
Costs in excess of net assets acquired 150,442 67,284
Liabilities assumed at fair value (89,408) (150,135)
---------------------
Total purchase price $380,637 $ 334,984
---------------------
40
38
- -
Selected unaudited pro forma combined results of operations for the year
ended January 31, 1999, assuming the FEI and Hardee's acquisitions occurred on
February 1, 1998, using actual restaurant-level margins and general and
administrative expenses prior to the acquisition of each entity, is presented as
follows:
(Dollars in thousands, except per share amounts) 1999
- ------------------------------------------------------------------------
Total revenues $2,013,241
Income before extraordinary item $ 74,897
Net income $ 78,157
Net income per share - basic $ 1.51
Net income per share - diluted $ 1.45
NOTE 3 - ACCOUNTS RECEIVABLE, NET
Details of accounts receivables, net are as follows:
(Dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------------
Trade receivables $36,531 $ 49,952
Allowance for doubtful accounts (4,917) (10,981)
Income tax receivable 8,874 5,024
Notes receivable, current 2,203 2,555
Other 237 270
-------------------
$42,928 $ 46,820
-------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Estimated
(Dollars in thousands) Useful Life 2000 1999
- ----------------------------------------------------------------------------------------------------
Land $ 269,211 $ 267,287
Leasehold improvements 4-25 years 274,820 186,369
Buildings and improvements 7-40 years 421,674 400,366
Equipment, furniture and fixtures 3-10 years 412,818 343,827
--------------------------------------
1,378,523 1,197,849
Less: Accumulated depreciation and amortization 327,043 257,671
------------------------
$1,051,480 $ 940,178
------------------------
NOTE 5 - LEASES
The Company occupies land and buildings under lease agreements expiring on dates
through 2062. 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 leases obligate the
Company to pay costs of maintenance, insurance and property taxes.
Property under capital leases consists of the following:
(Dollars in thousands) 2000 1999
- ----------------------------------------------------------------------------------
Buildings $131,033 $124,215
Less: Accumulated amortization 46,551 42,320
--------------------
$ 84,482 $ 81,895
--------------------
41
39
-
Amortization is calculated on a 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, 2000 are as follows:
(Dollars in thousands) Capital Operating
- -----------------------------------------------------------------------------------
Fiscal Year:
2001 $ 20,453 $ 91,286
2002 20,154 84,865
2003 19,590 77,763
2004 17,716 69,950
2005 13,799 56,623
Thereafter 85,651 324,035
---------------------
Total minimum lease payments 177,363 $704,522
---------
Less: Amount representing interest 75,697
--------
Present value of minimum lease payments 101,666
Less: Current portion 9,603
--------
Capital lease obligations, excluding current portion $ 92,063
--------
Total minimum lease payments have not been reduced for future minimum
sublease rentals of $88.9 million 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 current
assets and other assets, are as follows:
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------
Net minimum lease payments receivable $2,095 $4,323
Less: Unearned income 583 1,690
----------------
Net investment $1,512 $2,633
----------------
Minimum future rentals to be received as of January 31, 2000 are as follows:
Capital Operating
Leases or Lessor
(Dollars in thousands) Subleases Leases
- ------------------------------------------------------------------------------------
Fiscal Year:
2000 $ 414 $ 2,658
2001 420 2,609
2002 363 2,243
2003 302 1,486
2004 277 1,207
Thereafter 319 5,796
---------------------
Total minimum future rentals $2,095 $15,999
---------------------
42
40
- -
Total minimum future rentals do not include contingent rentals which may be
received under certain leases.
Aggregate rents under noncancelable operating leases during fiscal 2000, 1999
and 1998 are as follows:
(Dollars in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------
Minimum rentals $92,107 $81,809 $60,469
Contingent rentals 5,275 6,393 4,002
Less: Sublease rentals 10,064 12,033 9,238
-----------------------------
$87,318 $76,169 $55,233
-----------------------------
NOTE 6 - LONG-TERM INVESTMENTS
The Company has selectively invested in other restaurant concepts, as follows:
Santa Barbara Restaurant Group, Inc.
Santa Barbara Restaurant Group, Inc. ("SBRG") (formerly GB Foods Corporation)
owns, operates and franchises The Green Burrito and La Salsa quick-service
Mexican food restaurants, JB's Restaurants and Galaxy Diner Restaurants, which
SBRG acquired from the Company, and Timber Lodge Steakhouse. Through the
Company's dual-branding relationship with The Green Burrito, the Company is
SBRG's largest franchisee.
On September 1, 1998, the Company sold 14 company-operated JB's
Restaurants and two Galaxy Diner restaurants to Timber Lodge Steakhouse, Inc.
("Timber Lodge") for 687,890 shares of Timber Lodge common stock, which was
converted into SBRG common stock in connection with the merger of Timber Lodge
and SBRG. The Company also sold its wholly owned subsidiary, JB's, which
consisted of the remaining 48 company-operated JB's Restaurants and the JB's
franchise system together with four Galaxy Diner restaurants, to SBRG for one
million shares of SBRG common stock. As of January 31, 2000, the Company owned
approximately 8.9% of SBRG's outstanding common stock and accounts for its
investment in SBRG under the equity method of accounting. During the fourth
quarter of fiscal 2000, the Company wrote-down its investment in SBRG by $9.0
million to its fair value of approximately $2.0 million, upon its conclusion
that the investment has experienced an other than temporary decline in value.
Although the Company's investment represents less than a 20% ownership interest
in SBRG, management believes that the Company has the ability to exercise
significant influence because of certain shared executive management and common
board members.
Rally's Hamburgers, Inc. and Checkers Drive-In Restaurants, Inc.
In August 1999, Rally's merged with Checkers Drive-In Restaurants, Inc.
("Checkers") in a reverse acquisition. Checkers operates and franchises
approximately 443 Checkers and 464 Rally's double drive-thru quick-service
hamburger restaurants, primarily in the Southeastern and Midwestern United
States. As a result of the August 1999 merger, each share of Rally's common
stock was converted into 1.99 shares of Checkers' common stock. Simultaneous
with the merger, Checkers declared a reverse one-for-twelve stock split. Prior
to the merger, the Company, through a series of transactions, owned
approximately 9.4 million shares, or 32.1% of Rally's common stock and held
warrants to purchase an additional 1.5 million shares of Rally's common stock.
The Company, also prior to the merger, held warrants to purchase 7.4 million
shares of Checkers' common stock. As a result of the merger and as of January
31, 2000, the Company holds approximately 1.6 million shares, or 16.6% of
Checkers outstanding common stock and accounts for its investment in Checkers
under the equity method of accounting. Assuming full exercise of the warrants,
the Company would beneficially own approximately 23.7% of Checkers' outstanding
common stock.
During the fourth quarter of fiscal 2000, the Company wrote-down its
investment in Checkers by $16.6 million to its fair market value upon its
conclusion that the investment has experienced an other than temporary decline
in value. Further, as a result of the Company recognizing its share of the net
losses of Checkers, as of January 31, 2000, the Company's investment in Checkers
was zero.
As of January 31, 2000, the Company also held a $3.2 million note
receivable from Checkers. The note receivable, which was entered into during
fiscal 1997, bears interest at 13% and is due April 30, 2000. The note
receivable from Checkers was paid in full on March 31, 2000.
43
41
-
Boston Market
The Company, through its wholly owned subsidiary, Boston Pacific, Inc. ("BPI"),
owns an 11% interest in Boston West, LLC ("Boston West"), which operates Boston
Market restaurants in designated markets in Southern California as a franchised
area developer of Boston Chicken, Inc. ("BCI"), the franchisor of the Boston
Market restaurant concept. BCI and its Boston Market subsidiaries filed for
protection under Chapter 11 of the Federal Bankruptcy Code on October 5, 1998.
In a separate action, on November 9, 1998, Boston West filed a voluntary
petition under Chapter 11 of the Federal Bankruptcy Code to restructure its
overall operations. Pursuant to Boston West's plan of organization, as filed
with the bankruptcy court, it was anticipated that the Company would own
approximately 25% of Boston West after emergence from bankruptcy. As a result,
in fiscal 1999, the Company recorded a $15.0 million charge to its Boston West
investment to reflect its remaining value. In addition, during fiscal 1999, the
Company signed an agreement with Boston West to provide administrative and
management services to the Boston Market franchises operated by Boston West and
Boston West closed or sold 42 Boston Market restaurants.
On December 1, 1999, McDonald's Corporation and BCI jointly announced
that a definitive purchase agreement had been signed by McDonald's subsidiary,
Golden Restaurants Operations, Inc. ("GRO") and BCI for the sale to GRO of the
majority of the assets of Boston Market. GRO has since approached the Company
with a different reorganization plan for Boston West and the Company and GRO are
currently negotiating the details of that plan. Under the proposed
reorganization plan, it is anticipated that the Company will no longer provide
administrative or management services to Boston Market franchises operated by
Boston West and will have no ownership interest in Boston West. As such, in the
fourth quarter of fiscal 2000, the Company wrote-down its investment in Boston
West to zero by recording a $8.4 million charge. As of January 31, 2000, Boston
West operated 56 Boston Market restaurants.
Star Buffet, Inc.
Star Buffet is an operator of approximately 45 buffet-style restaurants and 11
franchised, family-style JB's Restaurants. On September 30, 1997, the Company
participated in an initial public offering of its buffet-style restaurant
operations. Prior to the offering, the Company formed Star Buffet to continue to
operate its 16 HomeTown Buffet franchised restaurants and two Casa Bonita theme
restaurants. Star Buffet then completed an initial public offering of 3,450,000
shares of its common stock, of which 600,000 shares were sold by the Company as
a selling shareholder. The Company received net proceeds of $6.7 million in
connection with such sale, and retained an approximate 37% interest in Star
Buffet. The Company also received a cash dividend of $9.3 million in the
transaction and sold the net assets of two Casa Bonita restaurants to Star
Buffet for their net book value of $1.1 million.
On November 2, 1998, the Company sold its remaining two million shares of
Star Buffet common stock to Star Buffet, for a cash sales price of $12.5
million. In connection with the sale, the Company recognized a non-recurring
gain of $10.3 million in the third quarter of fiscal 1999, which is included in
other income (expense), net (see Note 16).
NOTE 7 - OTHER ASSETS
Other assets consist of the following:
(Dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Deferred financing costs $15,521 $11,632
Deferred lease costs 12,850 14,275
Leases receivable 1,274 2,365
Other intangibles 256 3,366
Other assets 5,300 7,839
------------------
$35,201 $39,477
------------------
44
42
- -
NOTE 8 - OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
(Dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------------
Salaries, wages and other benefits $28,964 $ 38,503
State sales taxes 12,136 14,236
Accrued interest 10,645 4,217
Property taxes 6,353 5,288
Closure reserves 6,147 1,333
Other self-insurance reserves 5,802 5,044
Self-insured workers' compensation reserve 2,454 5,230
Other accrued liabilities 25,081 27,223
-------------------
$97,582 $101,074
-------------------
Included in other accrued liabilities is a severance reserve of $1.8
million for approximately 100 employees who will be laid off between February 1,
2000 and June 2000. The Company announced its decision in November 1999 to
create a single support and administration center for all of its restaurant
concepts by consolidating the majority of the corporate functions of its
Hardee's subsidiary, located in Rocky Mount, North Carolina, within its
corporate headquarters in Anaheim, California. As a result of this decision, the
Company accrued $2.1 million of termination benefits for a total of
approximately 150 employees that will be laid-off in phases through August 2000.
The severance expense is included in general and administration expenses. During
the fourth quarter of fiscal 2000, the Company paid $0.3 million of termination
benefits to approximately 50 employees who were involuntarily terminated in
January 2000. Such amounts were charged against the severance reserve.
NOTE 9 - LONG-TERM DEBT
Long-term debt consists of the following:
(Dollars in thousands) 2000 1999
- ----------------------------------------------------------------------------------
Senior Credit Facility, interest based on LIBOR plus
applicable margin, averaging 7.46% in fiscal 2000 $269,000 $349,113
Senior subordinated notes due 2009, interest at 9.125% 200,000 --
Convertible subordinated notes due 2004, interest at 4.25% 159,225 162,225
Secured note payable, principal payments in specified
amounts monthly through 2001, interest at 8.17% 4,261 4,568
Industrial Revenue Bonds, payable in 1999 -- 3,600
Other 7,267 7,676
--------------------
639,753 527,182
Less: Current portion 5,532 4,273
--------------------
$634,221 $522,909
--------------------
On July 15, 1997, the Company entered into a new $300.0 million credit
facility (the "Senior Credit Facility") with a group of financial institutions.
The Senior Credit Facility initially consisted of a $75.0 million term loan
facility ("Term Loan Facility") and a $225.0 million revolving credit facility
("Revolving Credit Facility"), which included a $55.0 million letter of credit
sub-facility. On July 15, 1997, the Company incurred $75.0 million of borrowings
under the Term Loan Facility and $58.9 million of borrowings under the Revolving
Credit Facility to fund a portion of the consideration needed to acquire
Hardee's (see Note 2). The Senior Credit Facility was amended on April 1, 1998
to increase the aggregate principal amounts of the lenders' commitments under
the Term Loan Facility to $250.0 million and under the Revolving Credit Facility
to $250.0 million, which included a $65.0 million letter of credit sub-facility,
and to extend the
45
43
-
final maturity date until April 2003. The Company incurred borrowings of $213.2
million thereunder to finance a portion of the purchase price of FEI (see Note
2).
On March 13, 1998, the Company completed a private placement of $197.2
million aggregate principal amount of convertible subordinated notes (the
"Convertible Notes"), in which the Company received net proceeds of
approximately $192.3 million, of which $24.1 million was used to repay
indebtedness under the Senior Credit Facility. The Convertible Notes, which
represent unsecured general obligations subordinate in right of payment to
certain other obligations, including the Senior Credit Facility and the senior
subordinated notes, described below, are due in 2004, are convertible into the
Company's common stock at a conversion price of $43.82 (adjusted for the 10%
stock dividend paid on January 11, 1999) and carry a 4.25% coupon. The remaining
net proceeds from the Convertible Notes, together with borrowings under the
Senior Credit Facility, were used to fund the acquisition of FEI on April 1,
1998 (see Note 2). In fiscal 2000 and fiscal 1999, the Company repurchased $3.0
million and $35.0 million, respectively, aggregate principal amount of
Convertible Notes for $2.5 million and $28.8 million in cash, respectively,
including accrued interest thereon. The Company recognized an extraordinary gain
on the early retirement of debt of $0.3 million and $3.3 million, net of
applicable taxes of $0.2 million and $2.1 million for fiscal 2000 and fiscal
1999, respectively.
On March 4, 1999, the Company completed a private placement of $200.0
million aggregate principal amount of 9.125% senior subordinated notes ("Senior
Subordinated Notes") due 2009. The Company received net proceeds of $194.8
million, of which $190.0 million was used to repay outstanding term loan
balances under the Senior Credit Facility. The Senior Subordinated Notes are due
in May 2009, carry a 9.125% coupon rate and are redeemable by the Company
beginning on May 1, 2004. The indenture relating to the Senior Subordinated
Notes impose restrictions on the Company's ability (and the ability of its
subsidiaries) to incur indebtedness, pay dividends on, redeem or repurchase its
capital stock, make investments, incur liens on its assets, sell assets other
than in the ordinary course of business, or enter into certain transactions with
its affiliates. The Senior Subordinated Notes represent unsecured general
obligations subordinate in right of payment to the Company's senior
indebtedness, including its Senior Credit Facility.
In connection with the private placement of Senior Subordinated Notes,
the Company also amended and restated its Senior Credit Facility to increase the
lenders' commitments under its Revolving Credit Facility to $500.0 million from
$250.0 million. The Company also increased its letter of credit sub-facility to
$75.0 million from $65.0 million, and changed the maturity date of the Senior
Credit Facility to February 2004. The term loan component of the Senior Credit
Facility was eliminated as a result of these transactions.
Borrowings and other obligations of the Company under the Senior Credit
Facility are general unsubordinated obligations of the Company and secured by a
pledge of the capital stock of certain of the Company's present and future
subsidiaries, which subsidiaries guarantee such borrowings and other
obligations, and are secured by certain franchise rights, contract rights,
general intangibles (including trademarks) and other assets of the Company and
such subsidiaries. The Company is required to repay borrowings under the Senior
Credit Facility with the proceeds from certain asset sales from the issuance of
certain equity securities or from the issuance of additional indebtedness. Of
the various options the Company has regarding interest rates, it has selected
LIBOR plus a margin, with future margin adjustments dependent on certain
financial ratios from time to time.
The Senior Credit Facility contains a number of significant covenants
that, among other things, (i) restrict the ability of the Company and its
subsidiaries to incur additional indebtedness and incur liens on their assets,
in each case subject to specified exceptions, (ii) impose specified financial
tests as a precondition to the Company's and its subsidiaries' acquisition of
other businesses and (iii) limit the Company and its subsidiaries from making
capital expenditures and certain restricted payments (including dividends and
repurchases of stock), subject in certain circumstances to specified financial
tests. In addition, the Company is required to comply with specified financial
ratios and tests, including minimum EBITDA requirements, minimum interest
coverage and fixed charge coverage ratios, minimum consolidated tangible net
worth requirements and maximum leverage ratios.
In November 1999, the Company amended its Senior Credit Facility to
modify certain of the covenants therein for the third and fourth quarters of
fiscal 2000 and for future measurement periods. In addition, the revolving
commitments under the Senior Credit Facility were reduced to $400.0 million from
$500.0 million and were to be further reduced by the first $75.0 million in
proceeds from sales of restaurants. The final maturity date of February 2004
remained unchanged; however, the applicable margin used to determine the
interest rate payable on outstanding borrowings was increased and up to $200.0
million of revolving borrowings will be converted, subject to lender approvals,
to term borrowings with an interest rate not subject to adjustment on the basis
of certain financial ratios. The term loan component will provide for principle
payments of $4.2 million each quarter, beginning in March 2001, with all
remaining principle due on the maturity date.
46
44
- -
On April 26, 2000, the Company further amended its Senior Credit Facility
effective January 31, 2000, to amend certain of the covenants contained therein.
The amended Senior Credit Facility also provides that the revolving commitments
thereunder shall be reduced by the first $100.0 million in net proceeds from
sales of restaurants (as compared with $75.0 million in the November 1999
amendment) and 75% of the second $100.0 million in net proceeds from sales of
restaurants, and by the entire net proceeds from the sale of any of the
Company's Carl's Jr. or Taco Bueno restaurants. The Senior Credit Facility, as
amended, prohibits the Company from purchasing shares of its common stock,
purchasing its Senior Subordinated Notes or Convertible Notes, from prepaying
subordinated indebtedness and from increasing cash dividends paid from current
levels. In addition, capital expenditures were reduced and construction of new
restaurants is limited to construction already begun or committed to begin. The
final maturity date remains unchanged; however, the interest rate payable on
outstanding borrowings was increased. Failure to complete an asset sale or sales
aggregating $125.0 million in net proceeds by the end of October 2000 will
result in a further increase in the interest rate until such sales are
completed. The Company was in compliance as of January 31, 2000 with all of its
covenants governing its Senior Credit Facility, as amended. As of fiscal 2000,
the Company had $57.5 million of borrowings available under its Senior Credit
Facility.
Secured notes payable are collateralized by certain restaurant property
deeds of trust, with a carrying value of $9.4 million as of January 31, 2000.
Long-term debt matures in fiscal years ending after January 31, 2000 as follows:
(Dollars in thousands)
- ------------------------------------------------------------------------
Fiscal Year:
2001 $ 5,532
2002 339
2003 369
2004 428,735
2005 417
Thereafter 204,361
--------
$639,753
--------
NOTE 10 - OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
(Dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Closure reserves $37,158 $29,294
Self-insured workers' compensation reserve 21,381 21,068
Other self-insurance reserves 7,989 10,302
Deferred revenues 6,891 4,674
Deferred lease costs 5,241 5,277
Other 5,892 9,499
------------------
$84,552 $80,114
------------------
The closure reserves primarily consist of amounts provided for in the
acquisition of Hardee's for the closure of certain restaurants and corporate
facilities. In addition, during the fourth quarter of fiscal 2000, the Company
recorded a store closure reserve at Hardee's of $16.3 million for 105 Hardee's
restaurants to be closed over the next fiscal year. The store closure reserve
relates primarily to the net present value of any remaining lease obligations
after the expected closure date, net of estimated sublease income, of which
$11.2 million is included in other long-term liabilities and $5.1 million is
included in other current liabilities. In prior years, the Company initiated
programs to dispose of or franchise its Arizona and Texas Carl's Jr. restaurant
operations. As of January 31, 2000 and 1999, $4.0 million and $5.1 million,
respectively, were accrued for these costs, including the current portion. These
balances consist mainly of estimated lease subsidies which represent the net
present value of the excess of future lease payments over estimated sublease
income.
47
45
-
The remaining unamortized discount to present value these lease subsidies at
January 31, 2000 was $2.8 million and will be amortized to operations over the
remaining sublease terms, which range up to 15 years.
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 $23.8 million and $26.3 million was accrued as of
January 31, 2000 and 1999, 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 present value
discount of $5.2 million and $4.9 million in fiscal 2000 and 1999, respectively.
NOTE 11 - STOCKHOLDERS' EQUITY
During the third quarter of fiscal 2000, the Company's Board of Directors
authorized the purchase of up to five million shares of the Company's common
stock. As of January 31, 2000, the Company had repurchased 1,585,000 shares of
common stock for $10.4 million, at an average price of $6.53 per share.
During the second quarter of fiscal 1998, the Company issued 10,088,375
shares of its common stock at a public offering price of $23.14 per share.
Proceeds from the offering, net of underwriting discounts and commissions and
other related expenses, were $222.3 million. The net proceeds were primarily
used to finance the acquisition of Hardee's (see Note 2).
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents information on the Company's financial instruments:
2000 1999
- --------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(Dollars in thousands) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 36,505 $ 36,505 $ 46,297 $ 46,297
Notes receivable 13,498 14,501 17,473 20,618
Financial liabilities:
Long-term debt, including current portion $639,753 $526,906 $527,182 $518,048
The fair value of cash and cash equivalents approximates their carrying
amount due to their short maturity. 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 and using market quotes as of January 31, 2000
for the Company's Senior Subordinated Notes and Convertible Notes.
NOTE 13 - RELATED PARTY TRANSACTIONS
Certain members of management and the Karcher family are franchisees of the
Company. A total of 43 restaurants have been sold to these individuals.
Additionally, these franchisees regularly purchase food and other products from
the Company on the same terms and conditions as other franchisees.
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 $1.0 million remained
accrued in other long-term liabilities as of January 31, 2000. The Company
anticipates funding these obligations as they become due.
The Company leases various properties, including its corporate
headquarters, a distribution facility and three restaurants from the Chairman
Emeritus. Included in capital lease obligations were $2.4 million and $3.0
million, representing the present value of lease obligations related to these
various properties at January 31, 2000 and 1999, respectively. Lease payments
under these leases for fiscal 2000, 1999 and 1998 amounted to $1.5 million, $1.2
million, and $1.3 million, respectively. This was net of sublease rentals of
$161,000 in fiscal 2000 and $157,000 in fiscal 1999.
48
46
- -
In fiscal 2000, the Company sold 14 Carl's Jr. restaurants to a relative
of a board of director member for $14.1 million and recorded a gain on the sale
of these restaurants of $12.2 million.
NOTE 14 - FRANCHISE AND LICENSE OPERATIONS
Franchise arrangements generally provide for initial fees and continuing royalty
payments to the Company based upon a percentage 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 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.
Certain franchisees may also purchase food, paper, supplies and equipment
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.
Revenues from franchised and licensed restaurants consist of the following:
(Dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------
Foodservice $ 80,094 $ 75,895 $ 63,890
Royalties 52,692 56,316 42,929
Equipment sales 27,876 14,038 9,989
Rental income 10,916 11,644 9,854
Initial fees 3,800 1,930 544
--------------------------------
$175,378 $159,823 $127,206
--------------------------------
Operating costs and expenses for franchised and licensed restaurants consist of
the following:
(Dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------
Foodservice $ 78,881 $ 74,230 $ 62,801
Occupancy and other operating expenses 28,241 22,113 23,588
Equipment purchases 21,006 10,676 7,384
--------------------------------
$128,128 $107,019 $ 93,773
--------------------------------
NOTE 15 - INTEREST EXPENSE
Interest expense consists of the following:
(Dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------
Notes payable and Senior Credit Facility $(26,674) $(23,013) $ (9,689)
Senior Subordinated Notes (16,880) -- --
Capital lease obligations (11,570) (12,030) (6,578)
Convertible Notes (7,509) (7,725) --
Other (650) (685) (647)
--------------------------------
$(63,283) $(43,453) $(16,914)
--------------------------------
49
47
-
NOTE 16 - OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following:
(Dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------
Net gain (loss) on sale of restaurants $ 15,186 $ (71) $ (141)
Interest income 2,615 4,916 4,955
Lease income (expense) (235) 1,101 1,819
Property management (971) (792) (1,167)
Bad debt expense (1,218) 50 (279)
Loss from long-term investments (39,302) (6,246) (366)
Dividend income -- -- 1,800
Other (8,121) 372 742
------------------------------
$(32,046) $ (670) $ 7,363
------------------------------
NOTE 17 - INCOME TAXES
Income tax expense (benefit) consists of the following:
(Dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------
Current:
Federal $ 10,883 $34,433 $19,031
State 1,285 6,289 5,160
------------------------------
12,168 40,722 24,191
------------------------------
Deferred:
Federal (26,353) 8,607 3,468
State (3,682) 2,400 2,224
------------------------------
(30,035) 11,007 5,692
------------------------------
$(17,867) $51,729 $29,883
------------------------------
Total income tax expense (benefit) for the years ended January 31, 2000, 1999
and 1998 was allocated as follows:
(Dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------
Income (loss) from continuing operations $(18,053) $49,645 $29,883
Extraordinary gain 186 2,084 --
------------------------------
$(17,867) $51,729 $29,883
------------------------------
A reconciliation of income tax expense (benefit) at the federal statutory rate
to the Company's provision for taxes on income is as follows:
(Dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------
Income taxes at statutory rate $(16,444) $45,305 $26,824
State income taxes, net of federal income tax benefit (3,637) 5,637 4,153
Work opportunity tax credits (1,119) (1,048) (1,508)
Increase (decrease) in valuation allowance 3,378 664 (515)
Other, net (45) 1,171 929
------------------------------
$(17,867) $51,729 $29,883
------------------------------
50
48
- -
Temporary differences and carryforwards gave rise to a significant amount of
deferred tax assets and liabilities as follows:
(Dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------------
Deferred tax assets:
Workers' compensation reserve $10,182 $ 10,353
Capitalized leases 9,024 8,424
Closure reserves 9,011 1,982
Long-term investments 7,224 --
Insurance reserves 5,352 5,126
State net operating losses 2,971 --
Other reserves 2,112 636
Accrued payroll 1,813 1,478
State taxes 544 3,888
Other 3,348 1,907
-------------------
51,581 33,794
Alternative minimum tax credits 7,612 --
General business tax credits 1,620 --
Less: Valuation allowance 5,398 2,020
-------------------
Total deferred tax assets 55,415 31,774
-------------------
Deferred tax liabilities:
Depreciation 40,362 35,293
Long-term investments -- 5,392
Intangibles -- 4,802
Other 47 1,316
-------------------
Total deferred tax liabilities 40,409 46,803
-------------------
Net deferred tax asset (liability) $15,006 $(15,029)
-------------------
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 deferred tax assets at January 31, 2000, based on the
Company's historical and future pre-tax earnings.
The Company has fully reserved against state net operating loss
carryforwards available at January 31, 2000, which represent a potential future
state income tax benefit of $3.0 million and expire in fiscal 2003 through 2020.
As of January 31, 2000, the Company also had work opportunity tax credit
carryforwards of $1.6 million which expire in fiscal 2020. Further, as of
January 31, 2000, the Company had available federal and state alternative
minimum tax credit carryforwards of $7.1 million and $0.5 million, respectively,
with no expiration date.
NOTE 18 - SEGMENT INFORMATION
The Company is engaged principally in developing, operating and franchising its
Carl's Jr., Hardee's and Taco Bueno quick-service restaurants, each of which are
considered strategic businesses that are managed and evaluated separately. As
such, the Company considers its Carl's Jr., Hardee's and Taco Bueno chains to
each be a reportable segment. Management evaluates the performance of its
segments and allocates resources to them based on several factors, of which the
primary financial measure is segment operating income. The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies in Note 1.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "other" column includes corporate
related items and results of insignificant operations. The amounts reported
51
49
-
for Hardee's reflect only the periods subsequent to the acquisition date of
April 1, 1998 for FEI and July 15, 1997 for Hardee's.
(Dollars in thousands) Carl's Jr. Hardee's Taco Bueno Other Total
- --------------------------------------------------------------------------------------------------------------
2000
Revenues $714,495 $1,170,834 $ 91,950 $ 12,794 $1,990,073
Segment operating income (loss) 61,157 (4,920) 8,136 (16,504) 47,869
Total assets 383,124 1,089,867 77,507 18,016 1,568,514
Capital expenditures 72,804 146,677 24,308 19,800 263,589
Depreciation and amortization 26,873 63,398 4,119 10,060 104,450
1999
Revenues $629,837 $1,127,130 $ 81,200 $ 53,877 $1,892,044
Segment operating income (loss) 76,960 95,110 8,717 (12,567) 168,220
Total assets 280,201 1,072,594 62,539 81,580 1,496,914
Capital expenditures 46,527 56,424 7,077 14,260 124,288
Depreciation and amortization 22,869 43,835 3,031 7,384 77,119
1998
Revenues $569,225 $ 385,237 $ 73,993 $121,204 $1,149,659
Segment operating income (loss) 61,458 23,463 6,793 (5,523) 86,191
Total assets 241,644 527,312 52,034 136,154 957,144
Capital expenditures 55,902 17,035 4,822 11,451 89,210
Depreciation and amortization 21,749 12,566 3,028 9,059 46,402
NOTE 19 - 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
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 salaries to the plan.
Post Retirement Benefits Other Than Pensions
The Company provides an unfunded retiree medical benefit plan for substantially
all Hardee's employees (except restaurant hourly employees) who retire on or
after age 55 with at least five years of service. The retiree pays the actual
costs of the plan with a Company subsidy provided for retirees with 10 or more
years of credited service. The dollar amount of this subsidy will be capped in
2003. Such benefits provided by the Company are immaterial.
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 907,500 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 salaries. The Company contributes
varying amounts as specified in the ESPP. During fiscal 2000, 1999 and 1998,
338,417, 128,477 and 59,458 shares, respectively, were purchased and allocated
to employees, based upon their contributions, at an average price of $10.15,
$28.43 and $28.20 per share, respectively. The Company contributed $1.2 million
or an equivalent of 137,568 shares for the year ended January 31, 2000, $0.6
million or an equivalent of 22,496 shares for the year ended January 31, 1999
and $0.3 million or an equivalent of 11,095 shares for the year ended January
31, 1998.
Stock Incentive Plans
The Company's 1999 stock incentive plan was approved by stockholders in June
1999. Awards granted to eligible employees under the 1999 plan are not
restricted as to any specified form or structure, with such form, vesting and
52
50
- -
pricing provision determined by the compensation committee of Board of
Directors. Options generally have a term of 10 years from the date of grant,
except for five years from the date of grant in the case of incentive stock
options granted to 10% or greater shareholders of the Company. Options are
generally granted at a price equal to or greater than the fair market value of
the underlying common stock on the date of grant, except that incentive stock
options granted to 10% or greater shareholders of the Company may not be granted
at less that 110% of the fair market value of the common stock on the date of
grant. A total of 1,500,000 shares are available for grants of options or other
awards under the 1999 plan, with such amount of available shares increased by
350,000 shares on the date of each annual meeting of shareholders. As of January
31, 2000, 1,147,000 options were outstanding under this plan with exercise
prices ranging from $8.13 per share to $18.13 per share.
The Company's 1994 stock incentive plan expired in April 1999. Options
generally had a term of five years from the date of grant for the nonemployee
directors and 10 years from the date of grant for employees, became exercisable
at a rate of 33 1/3% per year following the grant date and were priced at the
fair market value of the shares on the date of grant. A total of 6,352,500
shares were available for grants of options or other awards under this plan, of
which 4,805,164 stock options were outstanding as of January 31, 2000, with
exercise prices ranging from $3.72 per share to $36.65 per share.
The Company's 1993 stock incentive plan was superseded by the 1994 plan,
as discussed above. As of January 31, 2000, 195,964 stock options, with exercise
prices ranging from $3.99 per share to $6.27 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
5,445,000 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 60,801 stock
options outstanding as of January 31, 2000 under this plan range from $3.31 per
share to $4.27 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 10 years. Under these plans, there were 14,912 stock options
outstanding at January 31, 2000, with exercise prices ranging from $12.03 to
$21.32 per share. No further shares may be granted under these plans.
Transactions under all plans are as follows:
Weighted Average
Shares Exercise Price Exercisable
- --------------------------------------------------------------------------------------------------------------
Balance, January 31, 1997 3,925,585 $ 9.29 1,495,005
Granted 1,947,495 24.13
Canceled (233,803) 20.28
Exercised (594,410) 6.32
---------
Balance, January 31, 1998 5,044,867 $14.86 2,059,307
Granted 1,144,230 35.41
Canceled (197,409) 25.83
Exercised (624,502) 9.41
---------
Balance, January 31, 1999 5,367,186 $19.47 3,064,429
Granted 1,830,300 16.66
Canceled (791,974) 33.38
Exercised (181,671) 8.28
---------
Balance, January 31, 2000 6,223,841 $17.20 3,997,831
---------
53
51
-
The following table summarizes information related to stock options outstanding
and exercisable at January 31, 2000:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------- ----------------------------
Weighted Weighted Average Weighted
Range of Shares Average Remaining Shares Average
Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------
$ 3.31 to $ 4.48 556,310 $ 3.95 4.35 556,310 $ 3.95
5.10 6.27 72,518 6.07 3.76 72,518 6.07
8.13 12.03 942,825 8.56 5.49 940,825 8.56
12.88 19.28 2,744,230 16.54 8.24 1,169,391 15.99
21.32 28.50 1,506,623 24.35 7.13 1,114,853 24.42
33.64 36.65 401,335 35.51 8.06 143,934 35.43
--------- ---------
$ 3.31 $36.65 6,223,841 $17.20 7.14 3,997,831 $15.44
----------- -----------
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
2000, 1999 and 1998: annual dividends consistent with the Company's current
dividend policy, which resulted in payments of $0.08 per share in fiscal 2000
and $0.07 per share in fiscal 1999 and 1998; expected volatility of 50% in
fiscal 2000, 30% in fiscal 1999 and 25% in fiscal 1998; risk-free interest rates
of 6.69% in fiscal 2000, 4.55% in fiscal 1999, and 5.51% in fiscal 1998; and an
expected life of 5.40 years in fiscal 2000, 5.45 years in fiscal 1999 and 5.50
years for fiscal 1998. The weighted average fair value of each option granted
during fiscal 2000, 1999 and 1998 was $8.07, $12.50 and $8.30, respectively. Had
compensation expense been recognized for fiscal 2000, 1999 and 1998 grants for
stock-based compensation plans in accordance with provisions of SFAS 123, the
Company would have recorded net income (loss) and earnings (loss) per share of
$(35.2) million, or $(0.68) per basic and diluted share in fiscal 2000; $61.6
million, or $1.19 per basic share and $1.17 per diluted share in fiscal 1999;
and $39.9 million, or $0.85 per basic share and $0.83 per diluted share in
fiscal 1998.
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.
54
52
- -
NOTE 20 - SUPPLEMENTAL CASH FLOW INFORMATION
(Dollars in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------
Cash paid for interest and income taxes are as follows:
Interest (net of amount capitalized) $50,009 $37,501 $14,448
Income taxes 15,193 39,400 18,938
Non-cash charges are as follows:
Store closure expense and provision for asset impairment $41,998 $ -- $ --
Provision for impairment of long-term investments 34,431 15,000 --
Write-off of Hardee's acquisition-related assets 10,989 -- --
Write-off of capitalized software development cost 6,553 -- --
Write-off of deferred financing costs 3,565 --
Restructuring charges 2,058 -- --
Other, net 6,007 -- --
Non-cash investing and financing activities are as follows:
Common stock issued in connection with Hardee's franchisee
acquisitions $ -- $ 1,663 $ 9,405
NOTE 21 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly results:
Quarter
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1st 2nd 3rd 4th
- ----------------------------------------------------------------------------------------------------------
FISCAL 2000
Total revenues $595,723 $465,259 $453,623 $475,468
Operating income (loss) 47,605 31,147 19,373 (50,256)
Income (loss) before extraordinary item 19,130 10,298 3,007 (61,842)
Extraordinary item 290 -- -- --
Net income (loss) 19,420 10,298 3,007 (61,842)
Net income (loss) per share - basic $ 0.37 $ 0.20 $ 0.06 $ (1.22)
--------------------------------------------
Net income (loss) per share - diluted $ 0.37 $ 0.20 $ 0.06 $ (1.22)
--------------------------------------------
FISCAL 1999
Total revenues $528,211 $474,841 $457,605 $431,387
Operating income 45,634 49,138 40,894 32,554
Income before extraordinary item 22,732 22,604 16,146 12,970
Extraordinary item -- -- 2,738 522
Net income 22,732 22,604 18,884 13,492
Net income per share - basic $ 0.44 $ 0.44 $ 0.36 $ 0.26
--------------------------------------------
Net income per share - diluted $ 0.43 $ 0.42 $ 0.35 $ 0.26
--------------------------------------------
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
2000 and 1999, which have 16-week accounting periods. Further, the fourth
quarter of fiscal 2000 includes 13 weeks, whereas the fourth quarter of fiscal
1999 includes 12 weeks.
55
53
-
In the fourth quarter of fiscal 2000, the Company recorded pre-tax
charges of $80.3 million ($49.3 million after-tax). These charges consisted of:
(a) establishing a $16.3 million store closure reserve and recording a $25.7
million asset impairment charge for 105 Hardee's restaurants which the Company
plans on closing within the next 12 months; (b) recording an impairment charge
and equity losses of $37.3 million to write-down the Company's various long-term
investments in other restaurant concepts to fair market value; (c) recording
$2.1 million of restructuring charges in connection with consolidating certain
administrative functions from Rocky Mount, North Carolina, to Anaheim,
California; (d) writing-off $3.6 million of deferred financing costs as a result
of a commitment decrease in the Company's senior credit facility; (e)
writing-off $2.6 million of Y2K costs associated with restaurant computer
systems; (f) writing-off $6.6 million of capitalized software development that
will not be utilized; (g) recording an additional $1.7 million in vacation
expense in connection with a change in vacation policy; (h) recording a gain on
the sale of Carl's Jr. and Hardee's restaurants of $19.5 million and (i) other
miscellaneous net adjustments of $3.9 million.
In the third quarter of fiscal 1999, the Company recorded a $15.0 million
charge to write-down its investment in Boston West and recognized a gain of
$10.3 million on the sale of its Star Buffet investment.
NOTE 22 - COMMITMENTS AND CONTINGENT LIABILITIES
In conjunction with the Senior Credit Facility, a letter of credit sub-facility
in the amount of $75.0 million was established (see Note 9). Several letters of
credit are outstanding under this facility which secure the Company's potential
workers' compensation claims and general and health liability claims. The
Company is required to provide a letter of credit each year based on its
existing claims experience, or set aside a comparable amount of cash or
investment securities in a trust account.
The Company's standby letter of credit agreements with various banks expire as
follows:
(Dollars in thousands)
- ------------------------------------------------------------------------------------
July 2000 $ 28,923
November 2000 345
February 2001 1,316
March 2001 6,651
April 2001 7,300
----------------------
$ 44,535
-------------------
In fiscal 1996, the Company sold certain of its Carl's Jr. franchise
notes receivable, with recourse, to an independent third party. In addition, the
Company entered into a limited term guarantee with an independent third party
during fiscal 1997 on behalf of a Carl's Jr. franchisee and an additional
limited term guarantee in fiscal 1998 with an independent third party on behalf
of its Hardee's franchisees. The Company is contingently liable for an aggregate
of approximately $4.4 million under these guarantees as of January 31, 2000.
The Company's Senior Credit Facility is guaranteed on a secured basis by
the Company's direct and indirect subsidiaries (the "Subsidiary Guarantors"),
other than non-guarantor subsidiaries which conduct no material operations, have
no significant assets on a consolidated basis and account for only an
insignificant share of the Company's consolidated revenues. Each of the
Subsidiary Guarantors also fully and unconditionally guarantee the Company's
9.125% Senior Subordinated Notes due 2009 on a joint and several basis.
The Company is from time to time the subject of complaints or litigation
from customers 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
is also the subject of complaints or allegations from employees, former
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 its financial condition and results of operations.
56
54
- -
CKE RESTAURANTS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for
(Dollars in thousands) Doubtful Accounts
- ---------------------------------------------------------------------------------
Balance at January 31, 1997 $ 1,380
Charges to operations 5,636
Deductions (3,989)
Acquired through acquisitions 29,884
-----------------
Balance at January 31, 1998 32,911
Charges to operations 4,192
Deductions (11,389)
Adjustments (9,689)
Write-off from dispositions (471)
-----------------
Balance at January 31, 1999 15,554
Charges to operations 1,485
Deductions (6,643)
-----------------
Balance at January 31, 2000 $ 10,396
--------
57
55
-
EXHIBIT INDEX
Exhibits Description
- ------------------------------------------------------------------------
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 Certificate of Amendment of Certificate of Incorporation, as
filed with the Delaware Secretary of State on December 9,
1997, filed as exhibit 3-2 to the Company's Form 10-K Annual
Report for the fiscal year ending January 26, 1998, and is
hereby incorporated by reference.
3-3 Bylaws of the Registrant, incorporated herein by reference
to exhibit 3-2 to the Registrant's Form S-4 Registration
Statement Number 333-05305.
4-1 Indenture, dated as of March 14, 1998 for 4.25% Convertible
Subordinated Notes due 2004 by and between CKE Restaurants,
Inc. and Chase Manhattan Bank and Trust Company, National
Association, as Trustee, filed as exhibit 4.1 to the
Company's Form 10-K Annual Report for fiscal year ended
January 26, 1998, and is hereby incorporated by reference.
4-2 Form of Note (included in exhibit 4.1).
4-3 Registration Rights Agreement dated as of March 13, 1998
between the Company and Morgan Stanley & Co. Incorporated,
BT Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Schroder & Co. Inc., filed as an
exhibit 4.3 to the Company's Form 10-K Annual Report for
fiscal year ended January 26, 1998, and is hereby
incorporated by reference.
4-4 Indenture, dated as of March 4, 1999, by and among the
Company, its subsidiary guarantors and Chase Manhattan Bank
and Trust Company, N.A., as Trustee, filed as exhibit 4.1 to
the Company's Current Report on Form 8-K dated February 25,
1999, and is hereby incorporated by reference.
4-5 Form of Note (included in exhibit 4.4).
4-6 Registration Rights Agreement, dated as of March 4, 1999, by
and among the Company, the Subsidiary Guarantors and the
Initial Purchasers, filed as exhibit 4.3 to the Company's
Registration Statement on Form S-4, file No. 333-76377, and
is hereby incorporated by reference.
10-1 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)
10-2 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)
10-3 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)
10-4 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)
10-5 CKE Restaurants, Inc. 1999 Stock Incentive Plan,
incorporated herein by reference to exhibit 4-1 to the
Registrant's Form S-8 Registration Statement Number
333-83601.(2)
10-6 CKE Restaurants, Inc. 1994 Employee Stock Purchase Plan, as
amended, filed as exhibit 10-22 to the Company's Form 10-K
Annual Report for fiscal year ended January 27, 1997, and is
hereby incorporated by reference.(2)
10-7 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)
10-8 First Amendment to Employment Agreement dated November 1,
1997, by and between Carl N. Karcher and Carl Karcher
Enterprises, Inc., filed as exhibit 10-8 to the Company's
Form 10-K Annual Report for fiscal year ended January 26,
1998, and is hereby incorporated by reference.(2)
10-9 Employment Agreement dated as of April 9, 1999, by and
between the Company and William P. Foley, II, filed as
exhibit 10-1 to the Company's Form 10-Q Quarterly Report for
the quarterly period ended May 17, 1999, and is hereby
incorporated by reference.(2)
10-10 Employment Agreement dated as of April 9, 1999, by and
between the Company and C. Thomas Thompson, filed as exhibit
10-2 to the Company's Form 10-Q Quarterly Report for the
quarterly period ended May 17, 1999, and is hereby
incorporated by reference.(2)
58
56
- -
Exhibits Description
- ------------------------------------------------------------------------
10-11 Employment Agreement dated as of April 9, 1999, by and
between the Company and Rory J. Murphy, filed as exhibit
10-3 to the Company's Form 10-Q Quarterly Report for the
quarterly period ended May 17, 1999, and is hereby
incorporated by reference.(2)
10-12 Employment Agreement dated as of April 9, 1999, by and
between the Company and Robert W. Wisely, filed as exhibit
10-4 to the Company's Form 10-Q Quarterly Report for the
quarterly period ended May 17, 1999, and is hereby
incorporated by reference.(2)
10-13 Employment Agreement dated as of April 9, 1999, by and
between the Company and Carl A. Strunk, filed as exhibit
10-5 to the Company's Form 10-Q Quarterly Report for the
quarterly period ended May 17, 1999, and is hereby
incorporated by reference.(2)
10-14 Employment Agreement dated as of April 9, 1999, by and
between the Company and Andrew F. Puzder, filed as exhibit
10-6 to the Company's Form 10-Q Quarterly Report for the
quarterly period ended May 17, 1999, and is hereby
incorporated by reference.(2)
10-15 Employment Agreement dated as of April 9, 1999, by and
between the Company and John J. Dunion, filed as exhibit
10-7 to the Company's Form 10-Q Quarterly Report for the
quarterly period ended May 17, 1999, and is hereby
incorporated by reference.(2)
10-16 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.
10-17 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.*
10-18 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.
10-19 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,
filed as exhibit 10-31 to the Company's Form 10-K Annual
Report for the fiscal year ended January 27, 1997, and is
hereby incorporated by reference.
10-20 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.
10-21 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.
10-22 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., filed as
exhibit 10-42 to the Company's Form 10-K Annual Report for
the fiscal year ended January 27, 1997, and is hereby
incorporated by reference.
10-23 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.*
10-24 Stock Purchase Agreement, dated as of April 27, 1997, by and
among CKE Restaurants Inc., Imasco Holdings, Inc. and
Hardee's Food Systems, Inc., filed as exhibit 10.1 to the
Company's Current Report on Form 8-K dated April 27, 1997,
and is hereby incorporated by reference.*
10-25 Supply Agreement, dated as of July 14, 1997, by and between
Hardee's Food Systems, Inc. and Fast Food Merchandisers,
Inc. (Forest City Division), filed as exhibit 99.3 to the
Company's Current Report on Form 8-K dated April 27, 1997,
and is hereby incorporated by reference.*
10-26 Supply Agreement, dated as of July 14, 1997, by and between
Hardee's Food Systems, Inc. and Fast Food Merchandisers,
Inc. (Monterey Division), filed as exhibit 99.4 to the
Company's Current Report on Form 8-K dated April 27, 1997,
and is hereby incorporated by reference.*
59
57
-
Exhibits Description
- ------------------------------------------------------------------------
10-27 Supply Agreement, dated as of July 14, 1997, by and between
Hardee's Food Systems, Inc. and QVS, Inc., filed as exhibit
99.5 to the Company's Current Report on Form 8-K dated April
27, 1997, and is hereby incorporated by reference.*
10-28 Distribution Agreement, dated as of July 14, 1997, by and
among the Company, Hardee's Food Systems, Inc. and Fast Food
Merchandisers, Inc., filed as exhibit 99.6 to the Company's
Current Report on Form 8-K dated April 27, 1997, as is
hereby incorporated by reference.*
10-29 Exchange Agreement, dated as of December 8, 1997, by and
between Rally's Hamburgers, Inc., CKE Restaurants, Inc.,
Fidelity National Financial, Inc., Giant Group, LTD and
others, filed as exhibit 10-35 to the Company's Form 10-K
Annual Report for the fiscal year ended January 26, 1998,
and is hereby incorporated by reference.*
10-30 Stock Purchase Agreement dated February 18, 1998, among CKE
Restaurants, Inc., Advantica Restaurant Group, Inc., Spartan
Holdings, Inc. and Flagstar Enterprises, Inc., filed as
exhibit 99.2 to the Company's Current Report on Form 8-K
dated February 19, 1998, and is hereby incorporated by
reference.*
10-31 Third Amended and Restated Credit Agreement, dated as of
November 24,1999, by and between the Company and Paribas, as
agent, and the Lenders party thereto, filed as exhibit 10.8
to the Company's form 10-Q Quarterly Report for the
quarterly period ended November 1, 1999, and is hereby
incorporated by reference.*
10-32 Amendment No. 1 to Third Amended and Restated Credit
Agreement, dated as of April 26, 2000, by and between the
Company and Paribas, as agent, and the Lenders party
thereto.(1)
12-1 Computation of Ratios.(1)
21-1 Subsidiaries of Registrant.(1)
23-1 Consent of KPMG 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.