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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-Q
(Mark One)
____X____ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended May 23, 1994
--------------------
OR
_________ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
for the transition period from __________________ to _____________________
Commission file number 1-13192
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CKE RESTAURANTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0602639
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 North Harbor Boulevard, Anaheim, CA 92801
- - ---------------------------------------- ----------
(Address of principal executive offices) (zip Code)
Registrant's telephone number, including area code (714) 774-5796
----------------------
NOT APPLICABLE
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
$.01 par value common - 18,782,421 shares as of July 1, 1994
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CKE RESTAURANTS, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I Consolidated Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of May 23, 1994 and January 31, 1994 . . . . . . . . . . . . . 3
Consolidated Statements of Income for the sixteen weeks
ended May 23, 1994 and May 17, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the sixteen weeks ended
May 23, 1994 and May 17, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 9-11
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-13
</TABLE>
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CKE RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
May 23, January 31,
1994 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,936 $ 17,075
Marketable securities 14,621 9,064
Accounts receivable 8,306 8,956
Related party receivables 1,407 1,175
Inventories 7,529 7,485
Deferred tax asset, net 15,310 15,310
Other current assets 3,979 10,339
-------- --------
Total current assets 60,088 69,404
Property and equipment, net 112,553 113,212
Property under capital leases, net 32,761 33,608
Notes receivable 15,789 16,171
Related party notes receivable 1,940 1,976
Other assets 8,714 7,764
-------- --------
$231,845 $242,135
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 11,526 $ 13,207
Current portion of capital lease obligations 3,407 3,354
Accounts payable 13,616 13,161
Other current liabilities 33,735 36,831
-------- --------
Total current liabilities 62,284 66,553
-------- --------
Long-term debt 15,222 17,414
Capital lease obligations 45,045 45,886
Other long-term liabilities 16,765 20,206
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued or outstanding -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued and outstanding
18,758,671 and 18,005,746 shares 188 180
Additional paid-in capital 34,286 33,748
Retained earnings 58,055 58,148
-------- --------
Total stockholders' equity 92,529 92,076
-------- --------
$231,845 $242,135
======== ========
</TABLE>
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except per share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
----------------------------
May 23, May 17,
1994 1993
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<S> <C> <C>
Revenues:
Sales by Company-operated restaurants $111,303 $116,971
Revenues from franchised and licensed restaurants 23,703 23,884
-------- --------
Total revenues 135,006 140,855
-------- --------
Operating costs and expenses:
Company-operated restaurants:
Food and packaging 33,738 34,804
Payroll and other employee benefits 35,528 38,740
Occupancy and other operating expenses 24,807 27,705
-------- --------
94,073 101,249
Franchised and licensed restaurants 22,512 22,506
Advertising expenses 5,857 5,561
General and administrative expenses 9,660 10,127
-------- --------
Total operating costs and expenses 132,102 139,443
-------- --------
Operating income 2,904 1,412
Interest expense (2,641) (2,972)
Other income, net 731 2,993
-------- --------
Income before income taxes and cumulative
effect of change in accounting principle 994 1,433
Income tax expense 338 507
-------- --------
Income before cumulative effect of change
in accounting principle 656 926
Cumulative effect of change in accounting principle
(net of income tax benefit of $512) -- (768)
-------- --------
Net income $ 656 $ 158
======== ========
Net income per share:
Income before cumulative effect of
change in accounting principle $ .04 $ .05
Cumulative effect of change in
accounting principle -- (.04)
-------- --------
Net income $ .04 $ .01
======== ========
Weighted average shares outstanding 18,739 18,092
======== ========
</TABLE>
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
---------------------------------
May 23, May 17,
1994 1993
--------------- --------------
<S> <C> <C>
Net cash flow from operating activities:
Net income $ 656 $ 158
Adjustments to reconcile net income to net cash
provided by operating activities:
Noncash franchise revenues -- (5)
Depreciation and amortization 6,802 6,935
Loss on sale of property and equipment 1,630 96
Reversal of rent subsidy reserves (2,680) --
Write-down of marketable securities -- 116
Net noncash investment income (3) (19)
Cumulative effect of change in accounting principle -- 768
Payment of arbitration settlement (3,000) --
Net change in marketable securities reserve 211 (64)
Net change in receivables, inventories and other current assets (173) 277
Net change in other assets (988) 9
Net change in accounts payable and other current liabilities 940 3,427
-------- --------
Net cash provided by operating activities 3,395 11,698
-------- --------
Cash flow from investing activities:
Construction of restaurant property to be reimbursed or sold and leased back -- (1,088)
Sale of or reimbursement on restaurant property to be sold and leased back -- 157
Purchases of:
Marketable securities (1,922) (7,910)
Property and equipment (7,017) (3,355)
Proceeds from sales of:
Marketable securities 2,933 25,576
Property and equipment 16 144
Collections on leases receivable 36 31
Increases in notes receivable & related party notes receivable (30) --
Collections on notes receivable and related party notes receivable 581 1,797
-------- ----------
Net cash provided by (used in) investing activities (5,403) 15,352
--------- ----------
Cash flow from financing activities:
Net change in bank overdraft (296) (2,761)
Net change in obligations secured by marketable securities -- (2,422)
Short-term borrowings 2,500 13,100
Repayments of short-term debt (2,500) (31,200)
Repayments of long-term debt (4,172) (5,075)
Repayments of capital lease obligations (698) (638)
Net change in other long-term liabilities (762) (830)
Exercise of stock options 546 506
Payment of dividends (749) (364)
-------- ------------
Net cash used in financing activities (6,131) (29,684)
-------- ----------
Net decrease in cash and cash equivalents $ (8,139) $ (2,634)
========= =========
</TABLE>
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CKE RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
Sixteen Weeks Ended
---------------------------
May 23, May 17,
1994 1993
--------- ----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest (net of amount capitalized) $ 2,609 $ 3,047
Income taxes -- 368
Noncash investing and financing activities:
Investing activities:
Transfer of marketable securities to other assets -- 6,776
Transfer of other current assets to marketable securities 6,776 --
Other investing activities:
Net change in marketable securities from noncash transactions (3) 55
Net change in dividends receivable -- 36
Leasing activities:
Decrease in property under capital leases 91 --
Decrease in capital lease obligations (90) --
Reversal of certain lease subsidy reserves 2,680 --
Franchising activities:
Sale of property and equipment -- 344
Sale of inventory -- 11
Assumption of various liabilities -- 45
Increase in notes receivable -- (405)
Sale/leaseback activities:
Transfer of restaurant property costs to property and equipment -- 5,520
</TABLE>
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 23, 1994 AND MAY 17, 1993
NOTE (A) BASIS OF PRESENTATION
In June 1994, a plan of reorganization and agreement of merger were
approved by the shareholders of Carl Karcher Enterprises, Inc.
("Enterprises"), whereby Enterprises and Boston Pacific, Inc. ("Boston
Pacific") became wholly-owned subsidiaries of CKE Restaurants, Inc.
("Restaurants" and collectively with its subsidiaries, the "Company").
Restaurants is a Delaware holding company recently formed to provide overall
strategic direction and finance, legal and administrative support to
Enterprises, operator and franchisor of over 650 Carl's Jr. restaurants, and
Boston Pacific, a franchisee of Boston Chicken, Inc. that will develop and
operate up to 300 Boston Chicken stores. Upon completion of this transaction,
the shareholders of Enterprises became stockholders of the Company.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the requirements of Form 10-Q and, therefore, do
not include all information and footnotes which would be presented were such
consolidated financial statements prepared in accordance with generally
accepted accounting principles. These statements should be read in conjunction
with the audited financial statements presented in the Company's 1994 Annual
Report to Shareholders. In the opinion of management, all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
financial position and results of operations for the interim periods presented
have been reflected herein. The results of operations for such interim periods
are not necessarily indicative of results to be expected for the full year.
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany profits, transactions and balances have been eliminated.
Since Boston Pacific began its start-up operations in February 1994 and
Restaurants did not commence its operations until after the 16 weeks ended May
23, 1994, the quarter being reported on in this Form 10-Q, most of the
financial performance for the current fiscal quarter and all of the financial
performance for the prior fiscal quarter discussed and analyzed in this Form
10-Q are comprised solely of the operations of Enterprises, unless otherwise
indicated.
NOTE (B) NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities," as of February 1, 1994, the adoption of which did not have a
material effect on the Company's consolidated financial statements. SFAS 115
requires the inclusion in income or stockholders' equity of unrealized gains
and losses resulting from the fair value accounting of investments in debt and
equity securities, except for debt securities classified as "held to maturity."
Net income for the first quarter of fiscal 1994 was restated to reflect a
charge of $768,000 which represented the cumulative effect related to a change
in the method used to discount the Company's workers' compensation reserve.
NOTE (C) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is subject to various
claims, lawsuits and other disputes with third parties incidental to its
operations. While certain of these matters involve claims for
substantial amounts, the Company intends to defend these actions vigorously and
it is the opinion of the Company's management, in consultation with its
attorneys, that their ultimate resolution will not have a material adverse
affect on the Company's consolidated financial statements.
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CKE RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 23, 1994 AND MAY 17, 1993
(Continued)
NOTE (D) RECLASSIFICATIONS
Certain prior year amounts in the accompanying consolidated financial
statements have been reclassified to conform to the fiscal 1995 presentation.
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In June 1994, a plan of reorganization and agreement of merger were
approved by the shareholders of Carl Karcher Enterprises, Inc. ("Enterprises")
whereby Enterprises and Boston Pacific, Inc. ("Boston Pacific") became
wholly-owned subsidiaries of CKE Restaurants, Inc. ("Restaurants" and
collectively with its subsidiaries, the "Company"). Restaurants is a Delaware
holding company recently formed to provide overall strategic direction and
finance, legal and administrative support to Enterprises, operator and
franchisor of over 650 Carl's Jr. restaurants, and Boston Pacific, a
franchisee of Boston Chicken, Inc. that will develop and operate up to 300
Boston Chicken stores. Upon completion of this transaction, the shareholders
of Enterprises became stockholders of the Company.
Enterprises, the predecessor entity of the Company, set in motion a
strategic plan during the prior fiscal year aimed at improving its sales
performance by refocusing its Carl's Jr. marketing programs on the customer,
improving the cost structure of its Carl's Jr. restaurants and realigning its
organization to streamline and consolidate its workforce. In keeping with this
strategic plan, Enterprises initiated a value-pricing program and simplified
its menu late in the first quarter of this year. This repositioning program is
designed to improve customers' price/value perceptions and increase restaurant
sales, and includes a new marketing campaign that promotes Carl's Jr.
restaurants as having superior food at everyday low prices.
The Company is also aggressively exploring and testing a variety of new
ideas, products and opportunities in the coming months, including a dual
concept test which will offer branded products from other restaurant concepts
in a limited number of Carl's Jr. restaurants, in an effort to further increase
Carl's Jr. restaurant sales.
In connection with the start-up of its Boston Chicken operations, the
Company began converting several of its Carl's Jr. restaurants to Boston
Chicken stores during the first quarter of this year. Of the 20 Boston Chicken
stores scheduled to open in the current fiscal year, it is expected that five
will open during the second quarter and 15 will open during the latter half of
this year.
Since Boston Pacific began its start-up operations in February 1994 and
Restaurants did not commence its operations until after the 16 weeks ended May
23, 1994, the quarter being reported on in this Form 10-Q, most of the
financial performance for the current fiscal quarter and all of the financial
performance for the prior fiscal quarter discussed and analyzed below are
comprised solely of the operations of Enterprises, unless otherwise indicated.
FINANCIAL CONDITION
Several aspects of the value repositioning program required the use of
cash during the 16 weeks ended May 23, 1994, including increased advertising
efforts, additional labor costs associated with anticipated increases in
overall guest counts and the purchase and installation of new menu boards in
all Company-operated Carl's Jr. restaurants. Start-up costs in connection with
the development of Boston Chicken stores also required the use of cash.
Additionally, a nonrecurring cash payment was made related to an arbitration
settlement that had been accrued as of January 31, 1994. Thus, cash and cash
equivalents decreased $8.1 million during the first quarter of this year.
Total cash available to the Company as of May 23, 1994 was $23.6 million which
includes $14.6 million of holdings in a diversified, highly-liquid investment
portfolio with minimal interest rate risk.
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Other current assets decreased during the current quarter largely as a
result of the reclassification of $6.8 million of investment securities to
marketable securities. These funds, which had been held in trust by the State
of California in connection with the Company's self-insured workers'
compensation program, were returned to the Company in April 1994. The State
requires the Company to secure its potential workers' compensation claims each
year by providing a prescribed amount either through one or more standby
letters of credit or an equivalent amount of cash or investment securities.
The requirement for the period beginning May 1, 1994 is $12.1 million and the
Company recently negotiated with its bank to provide a $15.0 million credit
line through June 1995 under which $12.1 million is committed to a single
standby letter of credit to satisfy this requirement.
During the first quarter of fiscal 1995, the Company reacquired several
Carl's Jr. restaurants from a former franchisee which resulted in the reversal
of $2.7 million of lease subsidy reserves that had previously been established.
On May 12, 1994, the Board of Directors adopted a new stock incentive
plan under which various incentives including stock or stock options may be
awarded to eligible employees and non-employee directors to purchase up to
1,750,000 shares of the Company's common stock. This plan was approved at the
Company's recent annual meeting, and provides for certain automatic grants of
stock options each year to non-employee directors, priced at an amount equal to
or greater than the fair market value on the grant date, totaling 50,000
options in June 1994.
RESULTS OF OPERATIONS
For the 16 weeks ended May 23, 1994, revenues from Company-operated
restaurants decreased 5% to $111.3 million. On a same-store basis, these
sales, which are calculated using only restaurants open for the full quarters
being compared, declined approximately 4% in fiscal 1995, compared with a 7%
decline in the prior year. The Company believes its restaurant sales were
adversely affected by negative customer price/value perceptions prior to the
repositioning program, unseasonably rainy weather in May 1994 in the Company's
core Southern California market and California's continuing recessionary
environment. The weighted-average number of Company restaurants operating in
fiscal 1995 also decreased slightly.
The Company's value repositioning program was introduced late in the
first quarter of fiscal 1995. Although Carl's Jr. restaurants did not generate
positive same-store sales growth overall for the first quarter, results during
the first four weeks of the second quarter showed improvement. For this period
subsequent to the end of the quarter, same-store sales declined only 1.7% and
transaction counts, on a same-store basis, rose 1.6%, which compares favorably
to the 4% sales decline and .3% transaction count decline experienced during
the first quarter of this year. Management is encouraged by these early
results.
Revenues from franchised and licensed restaurants were comprised of sales
of food service products to franchisees and licensees by the Company's
distribution centers, which accounted for nearly 80% of these revenues, rental
income, royalties and initial franchise fees. Overall, there was a 1% decrease
in sales to franchised and licensed restaurants despite a 4% increase in the
weighted-average number of franchised restaurants operating in the first
quarter of fiscal 1995. This was primarily due to decreases in commodities
costs experienced by the Company during the current first quarter, as well as
volume discounts achieved as a result of contract renegotiations with certain
vendors, which were passed along to the Company's franchisees. Royalties rose
in connection with scheduled increases in royalty rates, and an increase in the
franchised restaurant base. These increases were more than offset by the
decrease in other fees related to the sales of and repairs and maintenance on
certain franchise equipment. These sales and services were discontinued near
the end of the second quarter of fiscal 1994.
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CKE RESTAURANTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Although the Company operated slightly fewer restaurants in the current
quarter as compared with the prior year and same-store sales fell 4% during the
quarter, restaurant margins improved from 13.4% a year ago to 15.5% in the
current 16-week period, reflecting the Company's continued commitment to
improving the cost structure of its Carl's Jr. restaurants.
Company-operated restaurant costs decreased a total of 7% in the first
quarter of fiscal 1995. Food and packaging costs decreased 3% as compared with
the first quarter of fiscal 1994 as a result of decreases in commodity costs,
and volume discounts achieved as a result of contract renegotiations with
certain vendors. Payroll and other employee benefits decreased 8% due to the
Company's continuous efforts to improve labor productivity and decrease its
workers' compensation costs. Occupancy and other operating expenses decreased
10%, largely due to reduced repair and maintenance costs as a result of
outsourcing and downsizing in this area, which was begun in the second quarter
of fiscal 1994.
Nearly 80% of all operating costs associated with franchised and licensed
restaurants in the first quarter of fiscal 1995 were related to the sales of
food service products to franchisees. Gross margins for franchised and
licensed restaurants decreased slightly due to the Company's decision to share
decreases in commodities costs and savings associated with volume discounts
with its franchisees.
Although sales by Company-operated restaurants decreased 5%, advertising
expenses increased 5% in the first quarter of fiscal 1995 in connection with
the introduction of the Company's value repositioning program during April
1994.
General and administrative expenses were 5% lower in the first quarter of
fiscal 1995 compared with the same fiscal 1994 quarter primarily in connection
with the reacquisition of several Carl's Jr. franchises restaurants during the
first quarter of fiscal 1995, which resulted in the reversal of certain
previously established lease subsidy reserves totaling $2.7 million. Partially
offsetting this reversal were $472,000 in nonrecurring expenses associated with
the value repositioning program, including the rollout of new menu boards in
all Company restaurants, and the corresponding write-off of the old menu
boards. Additionally, the Company incurred $582,000 in expenses in its Boston
Chicken operations, related to start-up expenses and site conversions. Staff
additions were made in operations, marketing, strategic planning and
information systems, also offsetting the reversal discussed above.
Consistent with the fiscal 1995 first quarter decrease in the Company's
total debt outstanding compared to the same fiscal 1994 quarter, interest
expense also decreased.
Other income, net, in both fiscal 1995 and 1994 was comprised of
investment income, gains on sales of restaurants, interest on notes and leases
receivable and other nonrecurring interest income. The liquidation of the
investment portfolio during fiscal 1994 caused investment income to decrease
$1.5 million in the first quarter of fiscal 1995. There was also a $582,000
decrease in gains on sales or dispositions of restaurants because considerably
fewer sales have occurred this year as compared with the first quarter of
fiscal 1994.
The fiscal 1995 effective tax rate was comparable to the effective rate
applied in the same period a year ago. Lower income before income taxes in the
first quarter of fiscal 1995 resulted in less tax expense as compared with the
same fiscal 1994 quarter.
Net income for the first quarter of fiscal 1994 was restated to reflect a
charge of $768,000 which represented the cumulative effect related to a change
in the method used to discount the Company's workers' compensation reserve.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 Calculation of Earnings per Share
(b) No reports on Form 8-K were filed during the sixteen weeks ended
May 23, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CKE RESTAURANTS, INC.
(Registrant)
July 6, 1994 /s/ Loren C. Pannier
- - ------------ -------------------------
Date Senior Vice President,
Chief Financial Officer and
Duly Authorized Officer
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EXHIBIT 11
CKE RESTAURANTS, INC.
CALCULATION OF EARNINGS PER SHARE
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Sixteen Weeks Ended
------------------------
May 23, May 17,
1994 1993
---------- ---------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
- - --------------------------
Net income $ 656 $ 158
========= =======
Weighted average shares outstanding:
Common stock outstanding from
beginning of period 18,677 18,091
Pro-Rata Shares:
Exercise of stock options 60 1
Dilutive effect of outstanding
stock options 2 210
-------- --------
18,739 18,302
======== =======
Primary earnings per share $ .04 $ .01
======== =======
FULLY DILUTED EARNINGS PER SHARE
- - --------------------------------
Net income $ 656 $ 158
========= =======
Weighted average shares outstanding:
Common stock outstanding from
beginning of period 18,677 18,091
Pro-Rata Shares:
Exercise of stock options 60 1
Dilutive effect of outstanding
stock options 2 210
-------- --------
18,739 18,302
======== =======
Fully diluted earnings per share $ .04 $ .01
======== =======
</TABLE>
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