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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-Q/A [Amendment No. 1]
 (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 17, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.For
the transition period from  to .
 Commission file number 1-11313   CKE RESTAURANTS, INC. (Exact name of registrant as specified in its charter)
 Delaware
    
    33-0602639(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)6307 Carpinteria Avenue, Ste. A, Carpinteria, CA
    
    93013(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (805) 745-7500 Former Name, Former Address and Former Fiscal Year, if changed since last report.    Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o As of June 16, 2004, 57,509,524 shares of the Registrants Common Stock
were outstanding.




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Explanatory Note The purpose of this amendment on Form 10-Q/A to the Quarterly Report on Form
10-Q of CKE Restaurants, Inc. for the quarterly period ended May 17, 2004 is to
restate our consolidated financial statements for the sixteen weeks ended May
17, 2004 and May 19, 2003, and as of January 31, 2004, and related disclosures,
as described in Note 2 of the Notes to Condensed Consolidated Financial
Statements. Additional information about the decision to restate these
financial statements can be found in our Current Report on Form 8-K, filed with
the Securities and Exchange Commission (SEC) on November 23, 2004. Generally, no attempt has been made in this Form 10-Q/A to modify or update
other disclosures presented in the original report on Form 10-Q, except as
required to reflect the effects of the restatement. The Form 10-Q/A generally
does not reflect events occurring after the filing of the Form 10-Q or modify
or update those disclosures, including the exhibits to the Form 10-Q affected
by subsequent events. Information not affected by the restatement is unchanged
and reflects the disclosures made at the time of the original filing of the
Form 10-Q on June 22, 2004. Accordingly, this Form 10-Q/A should be read in
conjunction with our filings made with the SEC subsequent to the filing of the
original Form 10-Q, including any amendments to those filings. The following
items have been amended as a result of the restatement:  
    
    Part IItem 1Financial Information  
    
    Part IItem 2Managements Discussion and Analysis of Financial Condition and Results of Operations In previous reports, we have presented in our Managements Discussion and
Analysis of Financial Condition and Results of Operations a detailed, tabular
sensitivity analysis to illustrate our critical accounting policy discussed
under the heading Impairment of Property and Equipment and Other Amortizable
Long-Lived Assets Held and Used, Held for Sale or to be Disposed of Other than
by Sale. In this Amendment No. 1 to Form 10-Q, we have decided to omit the
detailed tabular sensitivity analysis in favor of a more general discussion of
this accounting policy, because the financial information being restated in
this amendment is such that the tabular presentation would have to be entirely
recalculated to reflect the restated results. Because the tabular presentation
serves only to illustrate the general point, management decided our resources
would be better directed towards other activities required in connection with
the restatement. In previous reports, we have also presented in our note under the heading
Facility Action Charges, Net in the Notes to Condensed Consolidated Financial
Statements (Note 6 in this amendment) a table summarizing average annual sales
per restaurant and total operating losses related to restaurants we decided to
close. In this Amendment No. 1 to Form 10-Q, management decided its resources
would be better directed towards other activities required in connection with
the restatement, and we have decided to omit the detailed tabular analysis of
closed restaurant operating data in favor of a more general discussion.  
    
    Part IItem 4Controls and Procedures We have included in this Amendment No. 1 to Form 10-Q substantially the same
discussion of our controls and procedures as we have included in our Quarterly
Report on Form 10-Q for the fiscal quarter ended November 1, 2004, which is
being filed concurrently herewith. While the discussion consequently speaks as
of a date later than May 17, 2004, the end of our first quarter of the 2005
fiscal year that is the subject of this amendment, we concluded that an updated
disclosure is appropriate under the circumstances of the restatement reflected
in this amendment.  
    
    Part IIItem 6Exhibits and Reports on Form 8-K In October 2004, we identified accounting errors that occurred in fiscal 2000
and 1999 which had resulted in an understatement of our deferred rent liability
related to operating leases with fixed rent escalations over the lease terms.
As a result, we concluded that our rent expense, net, had been understated
through fiscal 2004 in the cumulative amount of $2,103. In the sixteen weeks
ended May 17, 2004, and May 19, 2003, rent expense, net, had been understated
by $78 and $311, respectively. As a result, our deferred rent liability as of
May 17, 2004, and 2




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January 31, 2004, had been understated by $2,181 and $2,103, respectively. We
have corrected these errors through restatement of our consolidated financial
statements. In November 2004, after identifying this error, we commenced an extensive
internal review of our consolidated financial statements (the November
Review) in order to identify any other potential accounting errors. Through
the November Review, we identified the following additional accounting errors: (i) Understated Depreciation and Amortization Expense We are party to a substantial number of real property leases and have
significant investments in related buildings, leasehold improvements and
certain intangible assets. In fiscal 1998, we extended the depreciable life we
applied to our owned buildings to the new expected economic life of the assets.
In addition, in certain cases the longer depreciable life exceeded the
duration of the applicable underlying land lease, including option periods,
resulting in an understatement of depreciation expense beginning in fiscal
1999. In determining whether each of our real property leases is an operating
lease or a capital lease and in calculating our straight-line rent expense, we
generally utilize the initial term of the lease, excluding option periods.
Capitalized lease assets and liabilities are generally recorded and amortized
based upon the corresponding initial lease term. Historically, we depreciated
or amortized our investment in the related buildings, leasehold improvements
and certain intangible assets over a period that included both the initial term
of the lease and all option periods provided for in the lease (or the useful
life of the asset if shorter than the lease term plus option periods). During the November Review, we evaluated the propriety of the above accounting
treatment, and determined that we should use one consistent definition of lease
term, typically the initial lease term, for purposes of determining lease
classification, straight-line rent expense, and the depreciation or
amortization period for the related asset. As a result, we concluded that our
depreciation and amortization expense had been understated through fiscal 2004
in the cumulative amount of $30,222. In the sixteen weeks ended May 17, 2004,
and May 19, 2003, depreciation and amortization expense had been understated by
$1,840 and $1,796, respectively. As a result, the our property and equipment,
net, and certain intangible assets as of May 17, 2004, and January 31, 2004,
were overstated by $32,062 and $30,222, respectively, with respect to this
matter. We have corrected these errors through our restatement. Our historical practices for determining depreciable life and amortization
periods also resulted in errors in the timing and classification of expense
recognition for fixed assets subjected to facility action charges in prior
fiscal periods. Generally, restaurants subject to facility action charges were
over-impaired in the fiscal year of the facility action charge to the extent
that such assets had been under-depreciated or under-amortized leading up to
the impairment date. Through fiscal 2004, these errors resulted in a
cumulative net understated expense of $1,014. This was comprised of a
cumulative understatement of depreciation and amortization expense of $17,300,
partially offset by a cumulative overstatement of facility action charges of
$16,286. In the sixteen weeks ended May 17, 2004, and May 19, 2003, we
overstated facility action charges by $621 and $275, respectively, and
understated depreciation and amortization expense by $30 and $131,
respectively. As a result, in the sixteen weeks ended May 17, 2004, and May
19, 2003, these errors resulted in an understatement of net income and
overstatement of net loss by $591 and $144, respectively. Also as a result,
our property and equipment, net, as of May 17, 2004, and January 31, 2004, was
overstated by $423 and $1,014, respectively, with respect to this matter. We
has corrected these errors through our restatement. (ii) Unretired Property and Equipment We identified instances in which property and equipment was not retired in a
timely manner or in which certain expenditures were incorrectly capitalized. During fiscal 2001, we sold many company-operated restaurants to franchisees.
In one of these transactions, we sold 19 restaurant properties, of which eight
were fee-owned properties and eleven were leased properties. We sold the eight
fee-owned properties and subleased the eleven leased properties to the buyer.
In recording the transaction, we did not retire the net book value of the eight
fee-owned properties. Through fiscal 2004, this error resulted in a cumulative
net understated expense of $5,333. As a result of this error, for the sixteen
weeks ended May 17, 2004, and May 19, 2003, we overstated depreciation expense
by $41 and $45, respectively. Also as a result, as of May 17, 3




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2004, and January 31, 2004,our property and equipment was overstated by
approximately $5,292 and $5,333, respectively. We have corrected these errors
through our restatement. We also identified $1,315 of other property and equipment that was not timely
retired when the assets were removed from service, primarily in fiscal 2001 and
2003. Through fiscal 2004, this resulted in a cumulative understatement of
general and administrative expenses, net of subsequent over-depreciation, of
$1,175. As a result of these errors, for the sixteen weeks ended May 17, 2004,
and May 19, 2003, we overstated general and administrative expenses by $16 and
$11, respectively. Also as a result of these errors, as of May 17, 2004, and
January 31, 2004, our property and equipment was overstated by $1,159 and
$1,175, respectively. We have corrected these errors through our restatement. Additionally, we did not timely retire certain software development
expenditures when the software applications were taken out of service. We also
did not properly expense certain software development costs when incurred, in
accordance with Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. These accounting
errors occurred primarily in fiscal 2001 and 2003. Through fiscal 2004, this
resulted in a cumulative understatement of expenses of $2,267. As a result of
these errors, for the sixteen weeks ended May 17, 2004, and May 19, 2003, we
overstated depreciation expense by $163 and understated general and
administrative expenses, net of overstated depreciation expense, by $90,
respectively. Also as a result of these errors, as of May 17, 2004, and
January 31, 2004, our property and equipment was overstated by $2,104 and
$2,267, respectively. We have corrected these errors through our restatement. (iii) Overstated Property Tax Expense We determined that we had misstated our property tax expense and accrued
property taxes in prior fiscal periods. These errors resulted from imprecise
metrics used to calculate our property tax accrual. Through fiscal 2004, this
resulted in a cumulative overstatement of property tax expenses of $1,198. As
a result of these errors, for the sixteen weeks ended May 17, 2004, and May 19,
2003, we understated property tax expenses by $142 and overstated property tax
expenses by $191, respectively. Also as a result, as of May 17, 2004, and
January 31, 2004, accrued property taxes were overstated by $1,056 and $1,198,
respectively. We have corrected these errors through our restatement. (iv) Understated Deferred Tax Liability In September 2004, we determined that, when we adopted SFAS No. 142, Goodwill
and Other Intangible Assets, at the beginning of fiscal 2003, as a result of
temporary differences relating to the treatment of goodwill relating to our
Carls Jr. brand, we should have recorded income tax expense to increase our
deferred tax valuation allowance, which would have resulted in a deferred tax
liability. We had not previously recorded this deferred tax liability.
Through fiscal 2004, this resulted in a cumulative understatement of income tax
expense of $1,413. As a result of these errors, for the sixteen weeks ended
May 17, 2004, and May 19, 2003, our income tax expense was understated by $82
and $144, respectively. Also as a result, as of May 17, 2004, and January 31,
2004, our deferred tax liability was understated by $1,495 and $1,413,
respectively. We determined in September 2004 that the error was immaterial and
did not record an adjustment. In light of the conclusion to restate our
financial statements for the other matters discussed herein, we determined it
was appropriate to also include this adjustment in the restatement. (v) Other Items We identified several other items that we have corrected through our
restatement. For the sixteen weeks ended May 17, 2004, and May 19, 2003, these
additional items aggregate to reduction to expense upon restatement of $157 and
$64, respectively. Also as a result, prior to the restatement, as of May 17,
2004, and January 31, 2004, our accumulated deficit had been understated by
$708 and $865, respectively, with respect to these items. 4




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CKE RESTAURANTS, INC. AND SUBSIDIARIES INDEX  
 PagePart I. Financial InformationItem 1
    
    Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of May 17, 2004 and January 31, 2004
    
    
    6Condensed Consolidated Statements of Operations for the sixteen weeks ended May 17, 2004 and May 19, 2003
    
    
    7Condensed Consolidated Statement of Stockholders' Equity for the sixteen weeks ended May 17, 2004
    
    
    8Condensed Consolidated Statements of Cash Flows for the sixteen weeks ended May 17, 2004 and May 19, 2003
    
    
    9Notes to Condensed Consolidated Financial Statements
    
    
    10Item 2
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    52Item 4
    
    Controls and Procedures
    
    
    53Part II. Other InformationItem 1
    
    Legal Proceedings
    
    
    56Item 2
    
    Changes in Securities and Use of Proceeds
    
    
    56Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    57Signatures
    
    
    58EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 5




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PART 1. FINANCIAL INFORMATION 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands, except par values)
(Unaudited) May 17, 2004
    
    January 31, 2004(as restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    42,740
    
    
    $
    54,355Accounts receivable, net of allowance for doubtful accounts of
$3,196 as of May 17, 2004 and $5,580 as of January 31, 2004
    
    
    22,010
    
    
    
    26,562Related party trade receivables
    
    
    6,960
    
    
    
    7,991Inventories
    
    
    18,461
    
    
    
    17,972Prepaid expenses
    
    
    10,335
    
    
    
    16,053Assets held for sale
    
    
    18,020
    
    
    
    18,760Advertising fund assets, restricted
    
    
    19,438
    
    
    
    Other current assets
    
    
    1,626
    
    
    
    1,656Total current assets
    
    
    139,590
    
    
    
    143,349Notes receivable, net of allowance for doubtful accounts of
$8,135 as of May 17, 2004 and $6,186 as of January 31, 2004
    
    
    2,792
    
    
    
    2,317Property and equipment, net
    
    
    470,512
    
    
    
    479,660Property under capital leases, net
    
    
    41,814
    
    
    
    44,895Goodwill
    
    
    22,649
    
    
    
    22,649Other assets
    
    
    34,755
    
    
    
    37,433Total assets
    
    $
    712,112
    
    
    $
    730,303LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of bank indebtedness and other long-term debt
    
    $
    2,383
    
    
    $
    26,843Current portion of capital lease obligations
    
    
    5,993
    
    
    
    7,028Accounts payable
    
    
    54,284
    
    
    
    47,592Advertising fund liabilities
    
    
    19,438
    
    
    
    Other current liabilities
    
    
    91,333
    
    
    
    105,419Total current liabilities
    
    
    173,431
    
    
    
    186,882Bank indebtedness and other long-term debt, less current portion
    
    
    10,555
    
    
    
    22,428Senior subordinated notes
    
    
    200,000
    
    
    
    200,000Convertible subordinated notes due 2023
    
    
    105,000
    
    
    
    105,000Capital lease obligations, less current portion
    
    
    54,572
    
    
    
    56,877Other long-term liabilities
    
    
    57,570
    
    
    
    56,077Total liabilities
    
    
    601,128
    
    
    
    627,264Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 100,000,000 shares authorized;
59,368,000 shares issued and 57,464,000 shares outstanding at
May 17, 2004; 59,216,000 shares issued and 57,631,000 shares
outstanding at January 31, 2004
    
    
    593
    
    
    
    592Additional paid-in capital
    
    
    465,444
    
    
    
    464,689Officer and non-employee director notes receivable
    
    
    (2,491
    )
    
    
    (2,530
    )Accumulated deficit
    
    
    (338,802
    )
    
    
    (349,306
    )Treasury stock at cost, 1,904,000 and 1,585,000 shares at May
17, 2004 and January 31, 2004, respectively
    
    
    (13,760
    )
    
    
    (10,406
    )Total stockholders equity
    
    
    110,984
    
    
    
    103,039Total liabilities and stockholders equity
    
    $
    712,112
    
    
    $
    730,303
 See Accompanying Notes to Condensed Consolidated Financial Statements 6




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
(Unaudited) Sixteen Weeks EndedMay 17, 2004
    
    May 19, 2003(as restated)
    
    (as restated)Revenue:Company-operated restaurants
    
    $
    365,871
    
    
    $
    339,042Franchised and licensed restaurants and other
    
    
    89,440
    
    
    
    80,511Total revenue
    
    
    455,311
    
    
    
    419,553Operating costs and expenses:Restaurant operations:Food and packaging
    
    
    105,724
    
    

    
    100,097Payroll and other employee benefit expenses
    
    
    112,595
    
    
    
    112,635Occupancy and other operating expenses
    
    
    81,255
    
    
    
    80,719299,574
    
    
    
    293,451Franchised and licensed restaurants and other
    
    
    66,991
    
    
    
    64,921Advertising expenses
    
    
    22,264
    
    
    
    21,013General and administrative expenses
    
    
    37,656
    
    
    
    31,609Facility action charges, net
    
    
    6,817
    
    
    
    787Total operating costs and expenses
    
    
    433,302
    
    
    
    411,781Operating income
    
    
    22,009
    
    
    
    7,772Interest expense
    
    
    (11,720
    )
    
    
    (12,167
    )Other income (expense), net
    
    
    729
    
    
    
    (830
    )Income (loss) before income taxes and discontinued operations
    
    
    11,018
    
    
    
    (5,225
    )Income tax expense
    
    
    351
    
    
    
    363Income (loss) from continuing operations
    
    
    10,667
    
    
    
    (5,588
    )Loss from operations of discontinued segment (net of income tax
benefit of $0 and $1 for the sixteen-week periods ended May 17,
2004 and May 19, 2003, respectively)
    
    
    (163
    )
    
    
    (2,114
    )Net income (loss)
    
    $
    10,504
    
    
    $
    (7,702
    )Basic income (loss) per common share:Continuing operations
    
    $
    0.18
    
    
    $
    (0.09
    )Discontinued operations
    
    
    (0.00
    )
    
    
    (0.04
    )Net income (loss)
    
    $
    0.18
    
    
    $
    (0.13
    )Diluted income (loss) per common share:Continuing operations
    
    $
    0.18
    
    
    $
    (0.09
    )Discontinued operations
    
    
    (0.00
    )
    
    
    (0.04
    )Net income (loss)
    
    $
    0.18
    
    
    $
    (0.13
    )Weighted-average common shares outstanding:Basic
    
    
    57,605
    
    
    
    57,395Dilutive effect of stock options, warrants and convertible notes
    
    
    1,770
    
    
    
    Diluted
    
    
    59,375
    
    
    
    57,395
 See Accompanying Notes to Condensed Consolidated Financial Statements 7




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 (In thousands)
(Unaudited) Sixteen Weeks Ended May 17, 2004Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    Treasury StockOfficer andNumber of
    
    
    
    
    
    Additional
    
    Non-Employee
    
    
    

    
    
    
    
    
    
    
    
    
    
    TotalShares
    
    
    
    
    
    Paid-In
    
    Director Notes
    
    Accumulated
    
    Number of
    
    
    
    
    
    StockholdersIssued
    
    Amount
    
    Capital
    
    Receivable
    
    Deficit
    
    Shares
    
    Amount
    
    EquityBalance at January 31,
2004 (as previously
reported)
    
    
    59,216
    
    
    $
    592
    
    
    $
    464,689
    
    
    $
    (2,530
    )
    
    $
    (306,113
    )
    
    
    (1,585
    )
    
    $
    (10,406
    )
    
    $
    146,232Restatement adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,193
    )
    
    
    
    
    
    
    
    
    
    
    (43,193
    )Balance at January 31,
2004 (as restated)
    
    
    59,216
    
    
    
    592
    
    
    
    464,689
    
    
    
    (2,530
    )
    
    
    (349,306
    )
    
    
    (1,585
    )
    
    
    (10,406
    )
    
    
    103,039Exercise of stock options
    
    
    152
    
    
    
    1
    
    
    
    755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    756Collections on officer
and non-employee
director notes
receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39Repurchase of common
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (319
    )
    
    
    (3,354
    )
    
    
    (3,354
    )Net income (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,504
    
    
    
    
    
    
    
    
    
    
    
    10,504Balance at May 17, 2004
(as restated)
    
    
    59,368
    
    
    $
    593
    
    
    $
    465,444
    
    
    $
    (2,491
    )
    
    $
    (338,802
    )
    
    
    (1,904
    )
    
    $
    (13,760
    )
    
    $
    110,984
 See Accompanying Notes to Condensed Consolidated Financial Statements 8




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CKE RESTAURANTS, INC AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited) Sixteen Weeks EndedMay 17, 2004
    
    May 19, 2003(as restated)
    
    (as restated)Cash flow from operating activities:Net income (loss)
    
    $
    10,504
    
    
    $
    (7,702
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    21,046
    
    
    
    20,679Amortization of loan fees
    
    
    1,042
    
    
    
    1,413(Recovery of) provision for losses on accounts and notes receivable
    
    
    (242
    )
    
    
    2,064Loss (gain) on investments, sale of property and equipment, capital
leases and extinguishment of debts
    
    
    1,284
    
    
    
    (232
    )Facility action charges, net
    
    
    6,817
    
    
    
    787Deferred income taxes
    
    
    82
    
    
    
    144Other non-cash credits
    
    
    (666
    )
    
    
    (18
    )Net change in refundable income taxes
    
    
    4
    
    
    
    142Change in estimated liability for closing restaurants and estimated
liability for self-insurance
    
    
    (3,508
    )
    
    
    (3,236
    )Net change in accounts receivable, inventories, prepaid expenses and
other current assets
    
    
    9,991
    
    
    
    11,177Net change in accounts payable and other current liabilities
    
    
    896
    
    
    
    (9,003
    )Loss from operations of discontinued segment
    
    
    163
    
    
    
    2,114Net cash received from (provided to) discontinued segment
    
    
    28
    
    
    
    (165
    )Net cash provided by operating activities
    
    
    47,441
    
    
    
    18,164Cash flow from investing activities:Purchases of property and equipment
    
    
    (16,384
    )
    
    
    (14,827
    )Proceeds from sale of property and equipment
    
    
    6,624
    
    
    
    3,172Collections on notes receivable and net change in related party receivables
    
    
    702
    
    
    
    630Increase in cash upon consolidation of variable interest entity
    
    
    100
    
    
    
    Net change in other assets
    
    
    111
    
    
    
    172Net cash used in investing activities
    
    
    (8,847
    )
    
    
    (10,853
    )Cash flow from financing activities:Net change in bank overdraft
    
    
    (8,744
    )
    
    
    (15,225
    )Borrowings under credit facility
    
    
    
    
    
    
    106,000Repayments of borrowings under credit facility
    
    
    (13,926
    )
    
    
    (95,000
    )(Repayments of) borrowings under long-term debt
    
    
    (22,407
    )
    
    
    445Repayments of capital lease obligations
    
    
    (2,561
    )
    
    
    (3,125
    )Collections on officer and non-employee director notes receivable
    
    
    39
    
    
    
    Payment of deferred loan fees
    
    
    (12
    )
    
    
    (5
    )Repurchase of common stock
    
    
    (3,354
    )
    
    
    Proceeds from exercise of stock options
    
    
    756
    
    
    
    930Net cash used in financing activities
    
    
    (50,209
    )
    
    
    (5,980
    )Net (decrease) increase in cash and cash equivalents
    
    
    (11,615
    )
    
    
    1,331Cash and cash equivalents at beginning of period
    
    
    54,355
    
    
    
    18,440Cash and cash equivalents at end of period
    
    $
    42,740
    
    
    $
    19,771Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    (14,949
    )
    
    $
    (14,964
    )Income taxes
    
    $
    (2,963
    )
    
    $
    (190
    )Non-cash investing and financing activities:Gain recognized on sale and leaseback transactions
    
    $
    107
    
    
    $
    108Consolidation of advertising funds
    
    $
    19,438
    
    
    $
    
 See Accompanying Notes to Condensed Consolidated Financial Statements 9




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts
 NOTE (1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS CKE Restaurants, Inc. (CKE or the Company), through its wholly-owned
subsidiaries, owns, operates, franchises and licenses the Carls Jr.®,
Hardees®, The Green Burrito® (Green Burrito) and La Salsa Fresh Mexican
Grill® (La Salsa) concepts. Carls Jr. restaurants are primarily located in
the Western United States. Hardees restaurants are located throughout the
Southeastern and Midwestern United States. Green Burrito restaurants are
located in California, primarily in dual-brand Carls Jr. restaurants. La Salsa
restaurants are primarily located in California. As of May 17, 2004, the
Companys system-wide restaurant portfolio consisted of: Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalCompany-operated
    
    
    428
    
    
    
    692
    
    
    
    63
    
    
    
    4
    
    
    
    1,187Franchised and licensed
    
    
    588
    
    
    
    1,389
    
    
    
    43
    
    
    
    15
    
    
    
    2,035Total
    
    
    1,016
    
    
    
    2,081
    
    
    
    106
    
    
    
    19
    
    
    
    3,222
 The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of CKE and its wholly-owned subsidiaries and have been prepared in
accordance with accounting principles generally accepted in the United States
of America, the instructions to Form 10-Q, and Article 10 of Regulation S-X.
These statements should be read in conjunction with the audited consolidated
financial statements presented in the Companys Annual Report on Form 10-K/A
for the fiscal year ended January 26, 2004. In the opinion of management, all
adjustments consisting of normal recurring accruals necessary for a fair
presentation of financial position and results of operations for the interim
periods presented have been reflected herein. The results of operations for
such interim periods are not necessarily indicative of results for the full
year or for any future period. For clarity of presentation, the Company generally labels all fiscal year ends
as fiscal year ended January 31. Prior year amounts in the consolidated financial statements have been
reclassified to conform with current year presentation. Stock-Based Compensation The Company has various stock-based compensation plans that provide options for
certain employees and outside directors to purchase common shares of the
Company. The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure(SFAS 148). SFAS 148
amended the disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation(SFAS 123), to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Disclosures required by this standard are included in the notes to these
condensed consolidated financial statements. For purposes of the following pro forma disclosures required by SFAS 148 and
SFAS 123, the fair value of each option has been estimated on the date of grant
using the Black-Scholes option-pricing model. The Black-Scholes option-pricing
model was developed for use in estimating the fair value of traded options that
do not have vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Companys stock
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the value of an estimate, in managements opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of its
employee stock options. The assumptions used for grants in the sixteen week periods ended May 17, 2004,
and May 19, 2003, are as follows: May 17, 2004
    
    May 19, 2003Annual dividends
    
    $
    
    
    
    $
    Expected volatility
    
    
    73.2
    %
    
    
    56.4
    %Risk-free interest rate (matched to the expected
term of the outstanding option)
    
    
    3.83
    %
    
    
    4.25
    %Expected life of all options outstanding (years)
    
    
    5.5
    
    
    
    6.7Weighted-average fair value of each option granted
    
    $
    5.65
    
    
    $
    2.63
 10




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##### Table of Contents



The assumptions used to determine the fair value of each option granted are
highly subjective. Changes in the assumptions used would affect the fair value
of the options granted as follows: Increase (Decrease) in Fair Value of Options GrantedSixteen Weeks Ended
    
    Sixteen Weeks EndedChange in Assumption
    
    May 17, 2004
    
    May 19, 200310% increase in expected volatility
    
    $
    0.48
    
    
    $
    0.281% increase in risk-free interest rate
    
    
    0.09
    
    
    
    0.061 year increase in expected life of all options outstanding
    
    
    0.37
    
    
    
    0.1610% decrease in expected volatility
    
    
    (0.53
    )
    
    
    (0.31
    )1% decrease in risk-free interest rate
    
    
    (0.09
    )
    
    
    (0.07
    )1 year decrease in expected life of all options outstanding
    
    
    (0.44
    )
    
    
    (0.18
    )
 The following tables reconcile reported net income (loss) to pro forma net
income (loss) assuming compensation expense for stock-based compensation had
been recognized in accordance with SFAS 123: Sixteen Weeks EndedMay 17, 2004
    
    May 19, 2003(as restated)
    
    (as restated)Net income (loss), as reported
    
    $
    10,504
    
    
    $
    (7,702
    )Add: Stock-based employee
compensation expense included in
reported net income (loss)
    
    
    
    
    
    
    Deduct: Total stock-based employee
compensation expense determined under
fair value based method, net of
related tax effects
    
    
    (1,114
    )
    
    
    (670
    )Net income (loss)  pro forma
    
    $
    9,390
    
    
    $
    (8,372
    )Net income (loss) per common share:Basic  as reported
    
    $
    0.18
    
    
    $
    (0.13
    )Basic  pro forma
    
    
    0.16
    
    
    
    (0.15
    )Diluted  as reported
    
    
    0.18
    
    
    
    (0.13
    )Diluted  pro forma
    
    
    0.16
    
    
    
    (0.15
    )
 NOTE (2)  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS This Note should be read in conjunction with Note 2 of the Notes to
Consolidated Financial Statements in the Companys Annual Report on Form 10-K/A
for the fiscal year ended January 26, 2004. In October 2004, the Company identified accounting errors that occurred in
fiscal 2000 and 1999 which had resulted in an understatement of its deferred
rent liability related to operating leases with fixed rent escalations over the
lease terms. As a result, CKE concluded that its rent expense, net, had been
understated through fiscal 2004 in the cumulative amount of $2,103. In the
sixteen weeks ended May 17, 2004, and May 19, 2003, rent expense, net, had been
understated by $78 and $311, respectively. As a result, the Companys deferred
rent liability as of May 17, 2004, and January 31, 2004, had been understated
by $2,181 and $2,103, respectively. The Company has corrected these errors
through restatement of its consolidated financial statements. In November 2004, after identifying this error, the Company commenced an
extensive internal review of its consolidated financial statements (the
November Review) in order to identify any other potential accounting errors.
Through the November Review, the Company identified the following additional
accounting errors: (i) Understated Depreciation and Amortization Expense The Company is party to a substantial number of real property leases and has
significant investments in related buildings, leasehold improvements and
certain intangible assets. In fiscal 1998, the Company extended the
depreciable life it applied to its owned buildings to the new expected economic
life of the assets. In addition, in certain cases the longer depreciable life
exceeded the duration of the applicable underlying land lease, including option
periods, resulting in an understatement of depreciation expense beginning in
fiscal 1999. 11




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##### Table of Contents



In determining whether each of its real property leases is an operating
lease or a capital lease and in calculating its straight-line rent expense, the
Company generally utilizes the initial term of the lease, excluding option
periods. Capitalized lease assets and liabilities are generally recorded and
amortized based upon the corresponding initial lease term. Historically, the
Company depreciated or amortized its investment in the related buildings,
leasehold improvements and certain intangible assets over a period that
included both the initial term of the lease and all option periods provided for
in the lease (or the useful life of the asset if shorter than the lease term
plus option periods). During the November Review, the Company evaluated the propriety of the above
accounting treatment, and determined that it should use one consistent
definition of lease term, typically the initial lease term, for purposes of
determining lease classification, straight-line rent expense, and the
depreciation or amortization period for the related asset. As a result, CKE
concluded that its depreciation and amortization expense had been understated
through fiscal 2004 in the cumulative amount of $30,222. In the sixteen weeks
ended May 17, 2004, and May 19, 2003, depreciation and amortization expense had
been understated by $1,840 and $1,796, respectively. As a result, the
Companys property and equipment, net, and certain intangible assets as of May
17, 2004, and January 31, 2004, were overstated by $32,062 and $30,222,
respectively, with respect to this matter. The Company has corrected these
errors through its restatement. The Companys historical practices for determining depreciable life and
amortization periods also resulted in errors in the timing and classification
of expense recognition for fixed assets subjected to facility action charges in
prior fiscal periods. Generally, restaurants subject to facility action
charges were over-impaired in the fiscal year of the facility action charge to
the extent that such assets had been under-depreciated or under-amortized
leading up to the impairment date. Through fiscal 2004, these errors resulted
in a cumulative net understated expense of $1,014. This was comprised of a
cumulative understatement of depreciation and amortization expense of $17,300,
partially offset by a cumulative overstatement of facility action charges of
$16,286. In the sixteen weeks ended May 17, 2004, and May 19, 2003, the
Company overstated facility action charges by $621 and $275, respectively, and
understated depreciation and amortization expense by $30 and $131,
respectively. As a result, in the sixteen weeks ended May 17, 2004, and May
19, 2003, these errors resulted in an understatement of net income and
overstatement of net loss by $591 and $144, respectively. Also as a result,
the Companys property and equipment, net, as of May 17, 2004, and January 31,
2004, was overstated by $423 and $1,014, respectively, with respect to this
matter. The Company has corrected these errors through its restatement. (ii) Unretired Property and Equipment The Company identified instances in which property and equipment was not
retired in a timely manner or in which certain expenditures were incorrectly
capitalized. During fiscal 2001, the Company sold many company-operated restaurants to
franchisees. In one of these transactions, the Company sold 19 restaurant
properties, of which eight were fee-owned properties and eleven were leased
properties. The Company sold the eight fee-owned properties and subleased the
eleven leased properties to the buyer. In recording the transaction, the
Company did not retire the net book value of the eight fee-owned properties.
Through fiscal 2004, this error resulted in a cumulative net understated
expense of $5,333. As a result of this error, for the sixteen weeks ended May
17, 2004, and May 19, 2003, the Company overstated depreciation expense by $41
and $45, respectively. Also as a result, as of May 17, 2004, and January 31,
2004, the Companys property and equipment was overstated by approximately
$5,292 and $5,333, respectively. The Company has corrected these errors
through its restatement. The Company also identified $1,315 of other property and equipment that was not
timely retired when the assets were removed from service, primarily in fiscal
2001 and 2003. Through fiscal 2004, this resulted in a cumulative
understatement of general and administrative expenses, net of subsequent
over-depreciation, of $1,175. As a result of these errors, for the sixteen
weeks ended May 17, 2004, and May 19, 2003, the Company overstated general and
administrative expenses by $16 and $11, respectively. Also as a result of
these errors, as of May 17, 2004, and January 31, 2004, the Companys property
and equipment was overstated by $1,159 and $1,175, respectively. The Company
has corrected these errors through its restatement. 12




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##### Table of Contents



Additionally, the Company did not timely retire certain software development
expenditures when the software applications were taken out of service. The
Company also did not properly expense certain software development costs when
incurred, in accordance with Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. These
accounting errors occurred primarily in fiscal 2001 and 2003. Through fiscal
2004, this resulted in a cumulative understatement of expenses of $2,267. As a
result of these errors, for the sixteen weeks ended May 17, 2004, and May 19,
2003, the Company overstated depreciation expense by $163 and understated
general and administrative expenses, net of overstated depreciation expense, by
$90, respectively. Also as a result of these errors, as of May 17, 2004, and
January 31, 2004, the Companys property and equipment was overstated by $2,104
and $2,267, respectively. The Company has corrected these errors through its
restatement. (iii) Overstated Property Tax Expense The Company determined that it had misstated its property tax expense and
accrued property taxes in prior fiscal periods. These errors resulted from
imprecise metrics used to calculate the Companys property tax accrual.
Through fiscal 2004, this resulted in a cumulative overstatement of property
tax expenses of $1,198. As a result of these errors, for the sixteen weeks
ended May 17, 2004, and May 19, 2003, the Company understated property tax
expenses by $142 and overstated property tax expenses by $191, respectively.
Also as a result, as of May 17, 2004, and January 31, 2004, accrued property
taxes were overstated by $1,056 and $1,198, respectively. The Company has
corrected these errors through its restatement. (iv) Understated Deferred Tax Liability In September 2004, the Company determined that, when it adopted SFAS No. 142,
Goodwill and Other Intangible Assets, at the beginning of fiscal 2003, as a
result of temporary differences relating to the treatment of goodwill relating
to its Carls Jr. brand, the Company should have recorded income tax expense to
increase its deferred tax valuation allowance, which would have resulted in a
deferred tax liability. The Company had not previously recorded this deferred
tax liability. Through fiscal 2004, this resulted in a cumulative
understatement of income tax expense of $1,413. As a result of these errors,
for the sixteen weeks ended May 17, 2004, and May 19, 2003, the Companys
income tax expense was understated by $82 and $144, respectively. Also as a
result, as of May 17, 2004, and January 31, 2004, the Companys deferred tax
liability was understated by $1,495 and $1,413, respectively. The Company
determined in September 2004 that the error was immaterial and did not record
an adjustment. In light of the conclusion to restate the Companys financial
statements for the other matters discussed herein, the Company determined it
was appropriate to also include this adjustment in the restatement. (v) Other Items The Company identified several other items that it has corrected through its
restatement. For the sixteen weeks ended May 17, 2004, and May 19, 2003, these
additional items aggregate to reduction to expense upon restatement of $157 and
$64, respectively. Also as a result, prior to the restatement, as of May 17,
2004, and January 31, 2004, the Companys accumulated deficit had been
understated by $708 and $865, respectively, with respect to these items. The impacts of these restatements on the condensed consolidated financial
statements are summarized below: PreviouslyReported
    
    Adjustments
    
    As RestatedMay 17, 2004Balance Sheet DataAccounts receivable, net
    
    $
    22,177
    
    
    $
    (167
    )
    
    $
    22,010Inventories
    
    
    18,981
    
    
    
    (520
    )
    
    
    18,461Prepaid expenses
    
    
    9,847
    
    
    
    488
    
    
    
    10,335Total current assets
    
    
    139,789
    
    
    
    (199
    )
    
    
    139,590Property and equipment, net
    
    
    510,688
    
    
    
    (40,176
    )
    
    
    470,512Property under capital leases, net
    
    
    43,297
    
    
    
    (1,483
    )
    
    
    41,814Other assets
    
    
    36,772
    
    
    
    (2,017
    )
    
    
    34,755Total assets
    
    
    755,987
    
    
    
    (43,875
    )
    
    
    712,112
 13




---



##### Table of Contents



PreviouslyReported
    
    Adjustments
    
    As RestatedCurrent portion of capital lease obligations
    
    
    6,007
    
    
    
    (14
    )
    
    
    5,993Other current liabilities
    
    
    93,211
    
    
    
    (1,878
    )
    
    
    91,333Total current liabilities
    
    
    175,323
    
    
    
    (1,892
    )
    
    
    173,431Capital lease obligations, less current portion
    
    
    54,801
    
    
    
    (229
    )
    
    
    54,572Other long-term liabilities
    
    
    54,957
    
    
    
    2,613
    
    
    
    57,570Total liabilities
    
    
    600,636
    
    
    
    492
    
    
    
    601,128Accumulated deficit
    
    
    (294,435
    )
    
    
    (44,367
    )
    
    
    (338,802
    )Total stockholders equity
    
    
    155,351
    
    
    
    (44,367
    )
    
    
    110,984Total liabilities and stockholders equity
    
    
    755,987
    
    
    
    (43,875
    )
    
    
    712,112
 PreviouslyReported
    
    Adjustments
    
    As RestatedJanuary 31, 2004Balance Sheet DataAccounts receivable, net
    
    $
    26,729
    
    
    $
    (167
    )
    
    $
    26,562Inventories
    
    
    18,492
    
    
    
    (520
    )
    
    
    17,972Prepaid expenses
    
    
    15,589
    
    
    
    464
    
    
    
    16,053Total current assets
    
    
    143,572
    
    
    
    (223
    )
    
    
    143,349Property and equipment, net
    
    
    518,881
    
    
    
    (39,221
    )
    
    
    479,660Property under capital leases, net
    
    
    46,382
    
    
    
    (1,487
    )
    
    
    44,895Other assets
    
    
    39,522
    
    
    
    (2,089
    )
    
    
    37,433Total assets
    
    
    773,323
    
    
    
    (43,020
    )
    
    
    730,303Current portion of capital lease obligations
    
    
    7,042
    
    
    
    (14
    )
    
    
    7,028Other current liabilities
    
    
    107,439
    
    
    
    (2,020
    )
    
    
    105,419Total current liabilities
    
    
    188,916
    
    
    
    (2,034
    )
    
    
    186,882Capital lease obligations, less current portion
    
    
    57,111
    
    
    
    (234
    )
    
    
    56,877Other long-term liabilities
    
    
    53,636
    
    
    
    2,441
    
    
    
    56,077Total liabilities
    
    
    627,091
    
    
    
    173
    
    
    
    627,264Accumulated deficit
    
    
    (306,113
    )
    
    
    (43,193
    )
    
    
    (349,306
    )Total stockholders equity
    
    
    146,232
    
    
    
    (43,193
    )
    
    
    103,039Total liabilities and stockholders equity
    
    
    773,323
    
    
    
    (43,020
    )
    
    
    730,303
 PreviouslyReported
    
    Adjustments
    
    As RestatedSixteen Weeks Ended May 17, 2004Statement of Operations DataFranchised and licensed restaurants and other
revenue
    
    $
    89,448
    
    
    $
    (8
    )
    
    $
    89,440Total revenue
    
    
    455,319
    
    
    
    (8
    )
    
    
    455,311Occupancy and other operating expenses
    
    
    79,303
    
    
    
    1,952
    
    
    
    81,255Franchised and licensed restaurants and other
expenses
    
    
    66,986
    
    
    
    5
    
    
    
    66,991General and administrative expenses
    
    
    37,784
    
    
    
    (128
    )
    
    
    37,656Facility action charges, net
    
    
    7,438
    
    
    
    (621
    )
    
    
    6,817Total operating costs and expenses
    
    
    432,094
    
    
    
    1,208
    
    
    
    433,302Operating income
    
    
    23,225
    
    
    
    (1,216
    )
    
    
    22,009Interest expense
    
    
    (11,335
    )
    
    
    (385
    )
    
    
    (11,720
    )Other income, net
    
    
    220
    
    
    
    509
    
    
    
    729Income before income taxes and discontinued
operations
    
    
    12,110
    
    
    
    (1,092
    )
    
    
    11,018Income tax expense
    
    
    269
    
    
    
    82
    
    
    
    351Income from continuing operations
    
    
    11,841
    
    
    
    (1,174
    )
    
    
    10,667Net income
    
    
    11,678
    
    
    
    (1,174
    )
    
    
    10,504Basic income per common share:Continuing operations
    
    
    0.21
    
    
    
    (0.03
    )
    
    
    0.18Net income
    
    
    0.20
    
    
    
    0.02
    
    
    
    0.18Diluted income per common share:Continuing operations
    
    
    0.20
    
    
    
    (0.02
    )
    
    
    0.18Net income
    
    
    0.20
    
    
    
    (0.02
    )
    
    
    0.18
 14




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##### Table of Contents



PreviouslyReported
    
    Adjustments
    
    As RestatedStatement of Cash Flows DataNet cash provided by operating activities
    
    
    47,439
    
    
    
    2
    
    
    
    47,441Net cash used in investing activities
    
    
    (8,847
    )
    
    
    
    
    
    
    (8,847
    )Net cash used in financing activities
    
    
    (50,207
    )
    
    
    (2
    )
    
    
    (50,209
    )Net decrease in cash and cash equivalents
    
    
    (11,615
    )
    
    
    
    
    
    
    (11,615
    )
 PreviouslyReported
    
    Adjustments
    
    As RestatedSixteen Weeks Ended May 19, 2003Statement of Operations DataFranchised and licensed restaurants and other
revenue
    
    $
    80,516
    
    
    $
    (5
    )
    
    $
    80,511Total revenue
    
    
    419,558
    
    
    
    (5
    )
    
    
    419,553Occupancy and other operating expenses
    
    
    79,021
    
    
    
    1,698
    
    
    
    80,719Franchised and licensed restaurants and other
expenses
    
    
    64,909
    
    
    
    12
    
    
    
    64,921General and administrative expenses
    
    
    31,492
    
    
    
    117
    
    
    
    31,609Facility action charges, net
    
    
    1,062
    
    
    
    (275
    )
    
    
    787Total operating costs and expenses
    
    
    410,229
    
    
    
    1,552
    
    
    
    411,781Operating income
    
    
    9,329
    
    
    
    (1,557
    )
    
    
    7,772Interest expense
    
    
    (12,176
    )
    
    
    9
    
    
    
    (12,167
    )Other expense, net
    
    
    (636
    )
    
    
    (194
    )
    
    
    (830
    )Loss before income taxes and discontinued
operations
    
    
    (3,483
    )
    
    
    (1,742
    )
    
    
    (5,225
    )Income tax expense
    
    
    219
    
    
    
    144
    
    
    
    363Loss from continuing operations
    
    
    (3,702
    )
    
    
    (1,886
    )
    
    
    (5,588
    )Net loss
    
    
    (5,816
    )
    
    
    (1,886
    )
    
    
    (7,702
    )Basic loss per common share:Continuing operations
    
    
    (0.06
    )
    
    
    (0.03
    )
    
    
    (0.09
    )Net loss
    
    
    (0.10
    )
    
    
    (0.03
    )
    
    
    (0.13
    )Diluted loss per common share:Continuing operations
    
    
    (0.06
    )
    
    
    (0.03
    )
    
    
    (0.09
    )Net loss
    
    
    (0.10
    )
    
    
    (0.03
    )
    
    
    (0.13
    )Statement of Cash Flows DataNet cash provided by operating activities
    
    
    18,341
    
    
    
    (177
    )
    
    
    18,164Net cash used in investing activities
    
    
    (11,113
    )
    
    
    260
    
    
    
    (10,853
    )Net cash used in financing activities
    
    
    (5,897
    )
    
    
    (83
    )
    
    
    (5,980
    )Net increase in cash and cash equivalents
    
    
    1,331
    
    
    
    
    
    
    
    1,331
 Certain amounts in Notes 1, 4, 5, 6, 8, 10, and 12 have been restated to
reflect the restatement adjustments described above. NOTE (3) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS On May 17, 2004, the Company completed adoption of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities  an interpretation of Accounting
Research Bulletin (ARB) No. 51(FIN 46). The FASB issued FIN 46 in January 2003. This Interpretation is intended to
clarify the application of the majority voting interest requirement of ARB No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 requires the consolidation of these entities, known as variable
interest entities (VIEs), by the primary beneficiary of the entity. The
primary beneficiary is the entity, if any, that is subject to a majority of the
risk of loss from the VIEs activities, entitled to receive a majority of the
VIEs residual returns, or both. FIN 46 may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
FIN 46 was applicable immediately to variable interests in a variable interest
entity created after January 31, 2003. 15




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##### Table of Contents



During the course of 2003, the FASB proposed modifications to FIN 46 and issued
FASB Staff Positions (FSPs) that changed and clarified FIN 46. These
modifications and FSPs were subsequently incorporated into FIN 46 (revised)
(FIN 46R), which was issued on December 23, 2003, and replaced FIN 46. FIN
46R excludes operating businesses, as defined, from its scope subject to four
conditions, and states the provisions of FIN 46R need not be applied to
interests in VIEs created or obtained prior to December 31, 2003, if a company
is unable, subject to making and continuing to make an exhaustive effort, to
obtain the information necessary to determine whether the entity is a VIE,
determine whether the company is the VIEs primary beneficiary or perform the
accounting required to consolidate the VIE. The principal entities in which the Company possesses a variable interest
include franchise entities, which operate its franchised restaurants. The
Company does not possess any ownership interests in its franchisees.
Additionally, the Company generally does not provide financial support to its
franchisees in a typical franchise relationship. Also, the Companys franchise
agreements currently do not require its franchisees to provide the timely
financial information necessary to apply the provisions of FIN 46R to its
franchisees. Upon the adoption of FIN 46R, the Company consolidated one franchise entity
that operates six Hardees restaurants. The Company subleases to this franchise
entity all of its six operating locations and substantially all of its
operating equipment, and this franchise entity received no equity contribution
from its principals upon its inception. Because the principals did not invest a
significant amount of equity, the legal entity within which this franchise
operates is considered to not be adequately capitalized and, as a result, is a
VIE. Because of the relatively significant financial support it provides to
this franchise, the Company determined it is the primary beneficiary of this
VIE. The assets and liabilities of this entity included in the accompanying
Condensed Consolidated Balance Sheet as of May 17, 2004, are as follows: ASSETSCash
    
    $
    100Inventories
    
    
    43Property and equipment, net
    
    
    3Other assets
    
    
    15$
    161LIABILITIESOther current liabilities
    
    $
    125Other long-term liabilities
    
    
    36$
    161
 Although this franchise entity has been included in the accompanying Condensed
Consolidated Balance Sheet as of May 17, 2004, the Company has no rights to the
assets, nor does it have any obligation with respect to the liabilities, of
this franchise entity. None of the Companys assets serve as collateral for the
creditors of this franchisee or any of the Companys other franchisees. There is also a portion of franchised restaurants that are VIEs for which the
Company holds a significant variable interest, but for which the Company is not
the primary beneficiary. The Companys significant exposures related to these
VIEs and other franchisees relate to the collection of amounts due the Company,
which are collected weekly or monthly, guarantees of franchisee debt provided
to third party lenders by the Company (see Note 11) and primary lease
obligations or fee property ownership underlying sublease and lease
arrangements the Company has with several of its franchisees, as more fully
described in Note 11 herein and in Note 9 to the Companys Consolidated
Financial Statements presented in the Companys Annual Report on Form 10-K/A
for the fiscal year ended January 26, 2004. The Company utilizes various advertising funds (Funds) to administer its
advertising programs. The Carls Jr. National Advertising Fund (CJNAF) is
Carls Jr.s sole cooperative advertising program. The Company has historically
consolidated CJNAF into its financial statements on a net basis, whereby
contributions from franchisees are recorded as offsets to the Companys
reported advertising expenses. The Hardees cooperative advertising funds consist of the Hardees National
Advertising Fund (HNAF) and many local advertising cooperative funds (Co-op
Funds). Each of these funds is a separate non-profit association with all 16




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##### Table of Contents



proceeds segregated and managed by a third-party accounting service company.
Upon final adoption of FIN 46R on May 17, 2004, the Company consolidated all of
the Hardees cooperative advertising funds, resulting in the inclusion of
$19,438 of Advertising Fund Assets, Restricted and Advertising Fund
Liabilities in the accompanying Condensed Consolidated Balance Sheet as of May
17, 2004. In future periods, the Hardees cooperative advertising funds will be
reported in the Companys Consolidated Statements of Operations on a net basis,
whereby contributions from franchisees will be recorded as offsets to the
Companys reported advertising expenses. The Company elected to apply FIN 46R
prospectively and, upon final adoption thereof, had no cumulative-effect
adjustment. Advertising Fund Assets, Restricted, and Advertising Fund Liabilities as of
March 31, 2004, the most recent date through which financial statements are
available, are included in the Companys accompanying Condensed Consolidated
Balance Sheet as of May 17, 2004, and consisted of the following: ADVERTISING FUND ASSETS, RESTRICTEDCash
    
    $
    14,880Accounts and notes receivable, net
    
    
    4,322Other assets
    
    
    236$
    19,438ADVERTISING FUND LIABILITIESAccounts payable and other liabilities
    
    $
    9,420Deferred obligations
    
    
    10,018$
    19,438
 NOTE (4) INTANGIBLE ASSETS The table below presents identifiable, definite-lived intangible assets as of
May 17, 2004, and January 31, 2004: May 17, 2004
    
    January 31, 2004Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetIntangible
    
    Carrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingAsset
    
    Amount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    Amount(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Trademarks
    
    $
    17,159
    
    
    $
    (1,881
    )
    
    $
    15,278
    
    
    $
    17,159
    
    
    $
    (1,616
    )
    
    $
    15,543Franchise agreements
    
    
    1,780
    
    
    
    (196
    )
    
    
    1,584
    
    
    
    1,780
    
    
    
    (169
    )
    
    
    1,611Favorable lease agreements
    
    
    9,530
    
    
    
    (5,714
    )
    
    
    3,816
    
    
    
    16,149
    
    
    
    (12,004
    )
    
    
    4,145$
    28,469
    
    
    $
    (7,791
    )
    
    $
    20,678
    
    
    $
    35,088
    
    
    $
    (13,789
    )
    
    $
    21,299
 Amortization expense related to identifiable definite-lived intangible assets
was $733 and $629 for the sixteen week periods ended May 17, 2004, and May 19,
2003, respectively. These intangible assets are amortized over periods of six
to 20 years and are included in Other Assets in the accompanying Condensed
Consolidated Balance Sheets. NOTE (5) INDEBTEDNESS AND INTEREST EXPENSE As of May 17, 2004, the Company had outstanding $200,000 aggregate principal
amount of 9 1/8% Senior Subordinated Notes due 2009 (Senior Notes). The
indenture relating to the Senior Notes limits the Companys ability (and the
ability of its subsidiaries) to incur indebtedness to an amount not greater
than the senior debt outstanding when the Company issued the Senior Notes, less
any contractually required permanent reductions. The indenture also imposes
certain restrictions on the Companys ability (and the ability of its
subsidiaries) to pay dividends on, redeem or repurchase capital stock, make
restricted payments (as defined in the agreement) over a specified amount, make
investments, incur liens on assets, sell assets other than in the ordinary
course of business, or enter into certain transactions with affiliates. The
Senior Notes represent unsecured general obligations subordinate in right of
payment to the Companys senior indebtedness, including its senior credit
facility. All active subsidiaries of the Company are guarantors of the Senior
Notes. As of May 17, 2004, the Companys senior credit facility (Facility) consisted
of a $150,000 revolving credit facility and a $25,000 term loan. The $150,000
revolving credit facility included an $80,000 letter of credit sub-facility and
was scheduled to mature November 15, 2006. As of May 17, 2004, the Company had
cash borrowings outstanding under the term loan portion of the Facility of
$10,137, outstanding letters of credit under the revolving 17




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##### Table of Contents



portion of the Facility of $63,697 and availability under the revolving portion
of the Facility of $86,303. The principal amount of the term loan portion of
the Facility was scheduled to be repaid in quarterly installments maturing on
April 1, 2008. The proceeds from the $25,000 term loan were used to repay and
retire the Companys 4.25% Convertible Subordinated Notes due 2004 (2004
Convertible Notes) during March 2004. On April 1, 2004, the Company amended the Facility to allow it to repurchase up
to $20,000 of its outstanding common stock. During the first quarter of fiscal
2005, the Company repurchased 319,000 shares of its common stock for $3,354
(market value, plus trading commissions) at various prices ranging from $9.93
to $11.00 per share. The Facility contained financial performance covenants, which included a
minimum EBITDA requirement, minimum fixed charge coverage ratio, minimum
consolidated net worth requirements, maximum leverage ratios and capital
expenditures and precluded the Company from paying dividends. Based upon the
financial results originally reported by the Company (i.e., prior to the
restatement of previously issued financial statements, as discussed in Note 2
of the Notes to Condensed Consolidated Financial Statements), the Company was
in compliance with the requirements of the Facility as of May 17, 2004.
However, had the Company reported its as-restated financial results instead
of its originally reported results, and had the Company been unable to obtain
an amendment to or waiver of the applicable sections of the Facility, the
Company would have been in violation of certain of the financial performance
covenants under the Facility as of May 17, 2004. On June 2, 2004, the Company
refinanced the Facility with a new credit facility. Based on the terms of the
new credit facility, the Company continues to classify the Facility as
long-term as of May 17, 2004, in the accompanying Condensed Consolidated
Balance Sheets. On June 2, 2004, subsequent to the quarter end, the Company amended and
restated the Facility to provide for a $380,000 senior secured credit facility
consisting of a $150,000 revolving credit facility and a $230,000 term loan
(Amended Facility). The revolving credit facility matures on May 1, 2007, and
includes an $85,000 letter of credit sub-facility. The principal amount of the
term loan will be repaid in quarterly installments, with a balloon payment of
the remaining principal balance at maturity on July 2, 2008. The Amended
Facility also requires term loan prepayments based upon an annual excess cash
flow formula, as defined therein. Subject to certain conditions as defined in
the Amended Facility, the maturity of the term loan may be extended to May 1,
2010. The Company used a portion of the proceeds from the $230,000 term loan to
repay the balance of the existing Facility term loan. On June 2, 2004, the
Company deposited $212,168 with the trustee for its Senior Notes, constituting
all funds necessary to retire the Senior Notes obligations, and gave notice of
redemption of the Senior Notes to occur on July 2, 2004. On July 2, 2004, the
trustee will apply the depository amount to redeem the entire principal of
$200,000 under the Senior Notes, and pay the Companys optional redemption
premium of $9,126 and accrued interest. The Company will also incur a charge of
approximately $3,100 during its second fiscal quarter to write-off unamortized
debt issuance costs associated with the Senior Notes. The agreement underlying the Amended Facility includes certain restrictive
covenants. Among other things, these covenants restrict the Companys ability
to incur debt, incur liens on its assets, make any significant change in its
corporate structure or the nature of its business, dispose of assets in the
collateral pool securing the Amended Facility, prepay certain debt, engage in a
change of control transaction without the member banks consents, pay dividends
and make investments or acquisitions. The Amended Facility is collateralized by
certain restaurant property deeds of trust. Currently, the applicable interest
rate on the term loan is LIBOR plus 3.00%. The applicable interest rate on the
revolving loan portion of the Amended Facility is LIBOR plus 2.75%. The Company
also incurs fees on outstanding letters of credit under the Amended Facility at
a rate equal to the applicable margin for LIBOR loans, which is currently 3.00%
per annum. Subject to the terms of the Amended Facility, the Company may make capital
expenditures in the amount of $50,000 plus 80% of the amount of actual EBITDA
(as defined in the Amended Facility) in excess of $110,000 during the current
fiscal year and $45,000 plus 80% of the amount of actual EBITDA (as defined in
the Amended Facility) in excess of $110,000 during each subsequent fiscal year.
Additionally, in fiscal 2005 and thereafter, the Company may carry forward any
unused capital expenditure amounts to the following year. The Amended Facility
also permits the Company to repurchase its common stock in the amount of
$27,000 plus a portion of excess cash flow and certain net asset sale proceeds
(as defined in the Amended Facility) during the term of the Amended Facility. Consistent with previous amendments and restatements, the Amended Facility
contains financial performance covenants, which include a minimum EBITDA
requirement, minimum fixed charge coverage ratio, maximum leverage ratios and
capital expenditures and precludes the Company from paying dividends. 18




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##### Table of Contents



The Company was in compliance with the covenant requirements under its Senior
Notes as of May 17, 2004. However, the incurrence of additional senior
indebtedness under the Amended Facility on June 2, 2004, breached the
limitation on additional indebtedness in the Senior Note indenture. The
indenture allows the Company 30 days to cure this breach before the breach
becomes a default. Upon repayment of the entire outstanding balance and the
related optional redemption premium and accrued interest under the Senior Notes
at the end of the notice period on July 2, 2004, the breached covenant will
terminate within the 30-day cure period. On September 29, 2003, the Company completed an offering of $105,000 of its 4%
Convertible Subordinated Notes due 2023 (2023 Convertible Notes), and used
nearly all of the net proceeds of the offering to repurchase $100,000 of the
2004 Convertible Notes. The 2023 Convertible Notes bear interest at 4.0%
annually, are payable in semiannual installments due April 1 and October 1 each
year, and are unsecured general obligations of the Company, contractually
subordinate in right of payment to certain other Company obligations including
the Facility (and the Amended Facility) and the Senior Notes. On October 1 of
2008, 2013 and 2018, the holders of the 2023 Convertible Notes have the right
to require the Company to repurchase all or a portion of the notes at 100% of
the face value plus accrued interest. The 2023 Convertible Notes are
convertible into the Companys common stock at a conversion rate of 112.4859
shares per $1,000 principal amount of the notes as follows: 1) at any time
after the Companys common stock has a closing sale price of more than 110% of
the conversion price per share ($9.78 per share as of May 17, 2004) for at
least 20 days in a period of 30 consecutive trading days ending on the last
trading day of the calendar quarter; 2) in each of the five business days after
any ten consecutive trading day period in which the trading price, as defined
in the agreement, per $1,000 principal amount was less than 98% of the product
of a) the average closing sale price of the common stock over the same ten day
period and b) the number of shares of common stock issuable upon conversion of
$1,000 principal amount of the 2023 Convertible Notes; or 3) during any period
in which the 2023 Convertible Notes are a) rated below CCC by Standard & Poors
Ratings Services or Caa1 by Moodys Investor Services, b) no longer rated by
either one of the aforementioned ratings services, or c) withdrawn or suspended
from rating by one of the aforementioned services. The 2023 Convertible Notes
were not convertible during the sixteen weeks ended May 17, 2004. Interest expense consisted of the following: Sixteen Weeks EndedMay 17, 2004
    
    May 19, 2003(as restated)
    
    (as restated)Facility
    
    $
    426
    
    
    $
    482Senior subordinated notes due 2009.
    
    
    5,615
    
    
    
    5,615Capital lease obligations
    
    
    2,204
    
    
    
    2,4072004 Convertible subordinated notes
    
    
    73
    
    
    
    1,6002023 Convertible subordinated notes
    
    
    1,292
    
    
    
    Amortization of loan fees
    
    
    1,042
    
    
    
    1,413Write-off of unamortized loan fees.

    
    
    393
    
    
    
    Letter of credit fees and other
    
    
    675
    
    
    
    650$
    11,720
    
    
    $
    12,167
 NOTE (6) FACILITY ACTION CHARGES, NET In late fiscal 2000, the Company embarked on a refranchising initiative to
reduce outstanding debt, increase the number of franchise-operated restaurants
and close under-performing restaurants. The following transactions pertaining
to these efforts have been recorded in the accompanying Condensed Consolidated
Statements of Operations as facility action charges, net:  (i)
    
    impairment of long-lived assets for restaurants the Company closes;(ii)
    
    impairment of long-lived assets for restaurants with net asset values in excess of estimated fair values;(iii)
    
    restaurant closure costs (primarily reflecting the estimated liability to terminate leases);(iv)
    
    gains (losses) on the sale of restaurants and surplus properties; and(v)
    
    amortization of discount related to estimated liability for closing
restaurants. 19




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##### Table of Contents



Quarterly, the Company evaluates the adequacy of its estimated liability for
closing restaurants and subsidizing
restaurant lease payments for franchisees and modifies the assumptions used
based on actual results from selling surplus properties and terminating leases.
The Company also assesses the carrying value of closed restaurant properties
each quarter based on estimated property values obtained from a related party
real estate broker. The Company closed 30 Hardees, no Carls Jr. and no La
Salsa company-operated restaurants during the sixteen weeks ended May 17, 2004.
The Company closed three Hardees, no Carls Jr. and two La Salsa
company-operated restaurants during the sixteen weeks ended May 19, 2003.
During the sixteen weeks ended May 17, 2004, the Company identified six
Hardees, three Carls Jr. and three La Salsa company-operated restaurants that
are still in operation, but whose estimated fair values did not support the
related net asset values and, accordingly, an impairment charge was recorded. The components of facility action charges (gains), net are as follows: Sixteen Weeks EndedMay 17, 2004
    
    May 19, 2003(as restated)
    
    (as restated)HardeesNew decisions regarding closing restaurants
    
    $
    4,078
    
    
    $
    169(Favorable)/unfavorable dispositions of leased and fee surplus properties, net
    
    
    154
    
    
    
    (1,061
    )Impairment of assets to be disposed of
    
    
    61
    
    
    
    1,160Impairment of assets to be held and used
    
    
    770
    
    
    
    115(Gain) loss on sales of restaurants and surplus properties, net
    
    
    (1,035
    )
    
    
    145Amortization of discount related to estimated liability for closing restaurants
    
    
    336
    
    
    
    7314,364
    
    
    
    1,259Carls Jr.New decisions regarding closing restaurants
    
    
    
    
    
    
    14Favorable dispositions of leased and fee surplus properties, net
    
    
    (24
    )
    
    
    Impairment of assets to be held and used
    
    
    1,426
    
    
    
    503Gain on sales of restaurants and surplus properties, net
    
    
    (315
    )
    
    
    (387
    )Amortization of discount related to estimated liability for closing restaurants
    
    
    115
    
    
    
    1221,202
    
    
    
    252La Salsa and OtherNew decisions regarding closing restaurants
    
    
    800
    
    
    
    (Favorable)/unfavorable dispositions of leased and fee surplus properties, net
    
    
    39
    
    
    
    (655
    )Impairment of assets to be held and used
    
    
    405
    
    
    
    (Gain) loss on sales of restaurants and surplus properties, net
    
    
    6
    
    
    
    (69
    )Amortization of discount related to estimated liability for closing restaurants
    
    
    1
    
    
    
    1,251
    
    
    
    (724
    )TotalNew decisions regarding closing restaurants
    
    
    4,878
    
    
    
    183(Favorable)/unfavorable dispositions of leased and fee surplus properties, net
    
    
    169
    
    
    
    (1,716
    )Impairment of assets to be disposed of
    
    
    61
    
    
    
    1,160Impairment of assets to be held and used
    
    
    2,601
    
    
    
    618Gain on sales of restaurants and surplus properties, net
    
    
    (1,344
    )
    
    
    (311
    )Amortization of discount related to estimated liability for closing restaurants
    
    
    452
    
    
    
    853$
    6,817
    
    
    $
    787
 Facility action charges for new decisions regarding closing restaurants include
(i) $2,628 of provisions associated with 28 Hardees restaurants the Company
closed during the sixteen weeks ended May 17, 2004, for which the Company had
made the decision to close during the fourth quarter of fiscal 2004; and (ii)
$1,043 for six lease obligations, for which the Company remained liable,
associated with the bankruptcy filing of a Hardees franchisee during December
2003. The following table summarizes the activity in the estimated liability for
closing restaurants: Balance at January 31, 2004
    
    $
    22,325New decisions regarding closing restaurants
    
    
    4,878Usage
    
    
    (3,523
    )Unfavorable dispositions of leased and fee surplus properties, net
    
    
    169Amortization of discount
    
    
    452Balance at May 17, 2004
    
    
    24,301Less current portion, included in Other Current Liabilities
    
    
    8,551Long-term portion, included in Other Long-Term Liabilities
    
    $
    15,750
 20




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##### Table of Contents



NOTE (7) INCOME (LOSS) PER SHARE The Company presents basic and diluted income (loss) per share. Basic
income (loss) per share represents net income (loss) divided by
weighted-average shares outstanding. Diluted income (loss) per share represents
net income (loss) divided by weighted-average shares outstanding, including all
potentially dilutive securities and excluding all potentially anti-dilutive
securities. The dilutive effect of stock options and warrants is determined using the
treasury stock method, whereby exercise is assumed at the beginning of the
reporting period and proceeds from such exercise are assumed to be used to
purchase the Companys common stock at the average market price during the
period. The dilutive effect of convertible debt is determined using the
if-converted method, whereby interest charges, net of taxes, applicable to
the convertible debt are added back to income and the convertible debt is
assumed to have been converted at the beginning of the reporting period, with
the resulting common shares being included in weighted-average shares. The following table presents the number of potentially dilutive shares, in
thousands, of the Companys common stock excluded from the computation of
diluted earnings per share: Sixteen Weeks EndedMay 17, 2004
    
    May 19, 20032004 Convertible Notes
    
    
    
    
    
    
    2,7912023 Convertible Notes
    
    
    11,811
    
    
    
    Stock Options
    
    
    3,654
    
    
    
    5,776Warrants
    
    
    982
    
    
    
    982
 Potentially dilutive shares related to the 2004 Convertible Notes for the
sixteen weeks ended May 19, 2003 were excluded as their effect would have been
anti-dilutive. Potentially dilutive shares related to the 2023 Convertible
Notes were excluded because the notes were not convertible during the period
(see Note 5). Potentially dilutive stock options and warrants were excluded as
their effect would have been anti-dilutive. NOTE (8) SEGMENT INFORMATION The Company principally is engaged in developing, operating and franchising its
Carls Jr., Hardees and La Salsa quick-service restaurants, each of which is
considered an operating segment that is managed and evaluated separately.
Management evaluates the performance of its segments and allocates resources to
them based on several factors, of which the primary financial measure is
segment operating income or loss. General and administrative expenses are
allocated to each segment based on managements analysis of the resources
applied to each segment. Interest expense related to the Facility, Senior
Notes, 2004 Convertible Notes and 2023 Convertible Notes is allocated to
Hardees based on the use of funds. Certain amounts that the Company does not
believe would be proper to allocate to the operating segments are included in
Other (i.e., gains or losses on sales of long-term investments). The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1 of Notes to Consolidated
Financial Statements in our Annual Report on Form 10-K/A for the fiscal year
ended January 31, 2004). Carls Jr.
    
    Hardees
    
    La Salsa
    
    
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    Other
    
    (as restated)Sixteen Weeks Ended May 17, 2004Revenue
    
    $
    237,085
    
    
    $
    202,920
    
    
    $
    14,759
    
    
    $
    547
    
    
    $
    455,311Operating income (loss)
    
    
    21,049
    
    
    
    3,295
    
    
    
    (2,491
    )
    
    
    156
    
    
    
    22,009Income (loss) before income
taxes and discontinued
operations
    
    
    19,845
    
    
    
    (6,489
    )
    
    
    (2,531
    )
    
    
    193
    
    
    
    11,018Goodwill (as of May 17, 2004)
    
    
    22,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,649Sixteen Weeks Ended May 19, 2003Revenue
    
    $
    218,717
    
    
    $
    187,138
    
    
    $
    13,139
    
    
    $
    559
    
    
    $
    419,553Operating income (loss)
    
    
    17,759
    
    
    
    (10,101
    )
    
    
    (409
    )
    
    
    523
    
    
    
    7,772Income (loss) before income
taxes and discontinued
operations
    
    
    16,642
    
    
    
    (21,868
    )
    
    
    (414
    )
    
    
    415
    
    
    
    (5,225
    )Goodwill (as of May 19, 2003)
    
    
    22,649
    
    
    
    
    
    
    
    34,059
    
    
    
    
    
    
    
    56,708
 21




---



##### Table of Contents



NOTE (9) NET ASSETS HELD FOR SALE In conjunction with the acquisition of Santa Barbara Restaurant Group, Inc.
(SBRG) in fiscal 2003, the Company made the decision to divest Timber Lodge
as the concept does not fit with the Companys core concepts of quick-service
and fast-casual restaurants. During the fourth quarter of fiscal 2004, the
Company received a letter of intent for the sale of Timber Lodge and expects
the sale to be completed during the second quarter of fiscal 2005. Assets held for sale as of May 17, 2004, consisted of the following: Assets held for sale:Total assets of Timber Lodge
    
    $
    16,490Other surplus property
    
    
    1,530$
    18,020
 Net assets of Timber Lodge as of May 17, 2004, consisted of the following: ASSETSCurrent assets
    
    $
    1,582Property and equipment, net
    
    
    8,508Other assets
    
    
    6,400Total assets
    
    
    16,490LIABILITIESCurrent liabilities
    
    
    6,323Other long-term liabilities
    
    
    1,674Total liabilities
    
    
    7,997NET ASSETS
    
    $
    8,493
 Total liabilities of Timber Lodge are included in Other Current Liabilities in
the accompanying Condensed Consolidated Balance Sheets. 22




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##### Table of Contents



The results of Timber Lodge included in the accompanying Condensed Consolidated
Statements of Operations as discontinued operations for the sixteen week
periods ended May 17, 2004, and May 19, 2003, are as follows: Sixteen Weeks EndedMay 17,
    
    May 19,2004
    
    2003Revenue
    
    $
    13,369
    
    

    $
    14,237Operating loss
    
    
    (157
    )
    
    
    (2,102
    )Interest expense
    
    
    6
    
    
    
    13Income tax benefit
    
    
    
    
    
    
    (1
    )Net loss
    
    $
    (163
    )
    
    $
    (2,114
    )
 The operating losses for Timber Lodge for the sixteen weeks ended May 17, 2004
and May 19, 2003, include impairment charges of $617 and $1,566, respectively,
to reduce the carrying value of Timber Lodge to fair value. NOTE (10) SUBSIDIARIES GUARANTY OF INDEBTEDNESS CKE is the issuer and all active subsidiaries of CKE are guarantors of the
Companys Senior Notes. Separate financial statements for each guarantor
subsidiary are not included in this filing because each guarantor subsidiary is
wholly-owned and fully, unconditionally, jointly and severally liable for the
Senior Notes. There were no significant restrictions on the ability of CKE or
any guarantor subsidiary to obtain funds from its subsidiaries by dividend or
loan. The following condensed consolidating financial information presents the
financial position, results of operations and cash flows of (i) CKE, as parent,
as if it accounted for its subsidiaries on the equity method; (ii) the
guarantor subsidiaries; and (iii) the non-guarantor VIEs (included
prospectively upon the adoption of FIN 46R on May 17, 2004 as discussed in Note
1). CKEs independent operations are primarily comprised of the Carls Jr. food
and packaging distribution business. 23




---



##### Table of Contents



Condensed Consolidating Balance Sheet
May 17, 2004 Non-Guarantor
    
    GuarantorParent
    
    Subsidiaries
    
    VIEs
    
    Eliminations
    
    Consolidated(as restated)
    
    (as restated)
    
    
    
    
    
    (as restated)
    
    (as restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    442
    
    
    $
    42,198
    
    
    $
    100
    
    
    $
    
    
    
    $
    42,740Accounts receivable, net
    
    
    9,602
    
    
    
    12,408
    
    
    
    
    
    
    
    
    
    
    
    22,010Related party trade receivables
    
    
    6,043
    
    
    
    917
    
    
    
    
    
    
    
    
    
    
    
    6,960Inventories
    
    
    6,663
    
    
    
    11,755
    
    
    
    43
    
    
    
    
    
    
    
    18,461Assets held for sale
    
    
    
    
    
    
    18,020
    
    
    
    
    
    
    
    
    
    
    
    18,020Prepaid and other current assets
    
    
    1,401
    
    
    
    10,560
    
    
    
    
    
    
    
    
    
    
    
    11,961Advertising fund assets, restricted
    
    
    
    
    
    
    

    
    
    
    19,438
    
    
    
    
    
    
    
    19,438Total current assets
    
    
    24,151
    
    
    
    95,858
    
    
    
    19,581
    
    
    
    
    
    
    
    139,590Property and equipment, net
    
    
    21,276
    
    
    
    449,233
    
    
    
    3
    
    
    
    
    
    
    
    470,512Property under capital leases, net
    
    
    
    
    
    
    41,814
    
    
    
    
    
    
    
    
    
    
    
    41,814Goodwill
    
    
    
    
    
    
    22,649
    
    
    
    
    
    
    
    
    
    
    
    22,649Investments in consolidated subsidiaries
    
    
    251,241
    
    
    
    
    
    
    
    
    
    
    
    (251,241
    )
    
    
    Other assets
    
    
    10,701
    
    
    
    26,831
    
    
    
    15
    
    
    
    
    
    
    
    37,547Total assets
    
    $
    307,369
    
    
    $
    636,385
    
    
    $
    19,599
    
    
    $
    (251,241
    )
    
    $
    712,112LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt,
including capital lease obligations
    
    $
    2,131
    
    
    $
    6,245
    
    
    $
    
    
    
    $
    
    
    
    $
    8,376Accounts payable
    
    
    22,797
    
    
    
    31,487
    
    
    
    
    
    
    
    
    
    
    
    54,284Advertising fund liabilities
    
    
    
    
    
    
    
    
    
    
    19,438
    
    
    
    
    
    
    
    19,438Other current liabilities
    
    
    12,823
    
    
    
    78,385
    
    
    
    125
    
    
    
    
    
    
    
    91,333Total current liabilities
    
    
    37,751
    
    
    
    116,117
    
    
    
    19,563
    
    
    
    
    
    
    
    173,431Long-term debt and capital lease
obligations, excluding current portion
    
    
    313,219
    
    
    
    56,908
    
    
    
    
    
    
    
    
    
    
    
    370,127Other long-term liabilities
    
    
    1,245
    
    
    
    56,289
    
    
    
    36
    
    
    
    
    
    
    
    57,570Total liabilities
    
    
    352,215
    
    
    
    229,314
    
    
    
    19,599
    
    
    
    
    
    
    
    601,128Stockholders equity (deficiency)
    
    
    (44,846
    )
    
    
    407,071
    
    
    
    
    
    
    
    (251,241
    )
    
    
    110,984Total liabilities and stockholders equity
    
    $
    307,369
    
    
    $
    636,385
    
    
    $
    19,599
    
    
    $
    (251,241
    )
    
    $
    712,112
 24




---



##### Table of Contents



Condensed Consolidating Balance Sheet
January 31, 2004 Non-Guarantor
    
    GuarantorParent
    
    Subsidiaries
    
    VIEs
    
    Eliminations
    
    Consolidated(as restated)
    
    (as restated)
    
    
    
    
    
    (as restated)
    
    (as restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,297
    
    
    $
    29,058
    
    
    $
    
    
    
    $
    
    
    
    $
    54,355Accounts receivable, net
    
    
    9,750
    
    
    
    16,812
    
    
    
    
    
    
    
    
    
    
    
    26,562Related party trade receivables
    
    
    6,333
    
    
    
    1,658
    
    
    
    
    
    
    
    
    
    
    
    7,991Inventories
    
    
    6,616
    
    
    
    11,356
    
    
    
    
    
    
    
    
    
    
    
    17,972Assets held for sale
    
    
    
    
    
    
    18,760
    
    
    
    
    
    
    
    
    
    
    
    18,760Prepaid and other current assets
    
    
    1,375
    
    
    
    16,334
    
    
    
    
    
    
    
    
    
    
    
    17,709Total current assets
    
    
    49,371
    
    
    
    93,978
    
    
    
    
    
    
    
    
    
    
    
    143,349Property and equipment, net
    
    
    22,095
    
    
    
    457,565
    
    
    
    
    
    
    
    
    
    
    
    479,660Property under capital leases, net
    
    
    
    
    
    
    44,895
    
    
    
    
    
    
    
    
    
    
    
    44,895Goodwill
    
    
    
    
    
    
    22,649
    
    
    
    
    
    
    
    
    
    
    
    22,649Investments in consolidated subsidiaries
    
    
    241,319
    
    
    
    
    
    
    
    
    
    
    
    (241,319
    )
    
    
    Other assets
    
    
    12,517
    
    
    
    27,233
    
    
    
    
    
    
    
    
    
    
    
    39,750Total assets
    
    $
    325,302
    
    
    $
    646,320
    
    
    $
    
    
    
    $
    (241,319
    )
    
    $
    730,303LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt,
including capital lease obligations
    
    $
    26,595
    
    
    $
    7,276
    
    
    $
    
    
    
    $
    
    
    
    $
    33,871Accounts payable
    
    
    15,973
    
    
    
    31,619
    
    
    
    
    
    
    
    
    
    
    
    47,592Other current liabilities
    
    
    19,068
    
    
    
    86,351
    
    
    
    
    
    
    
    
    
    
    
    105,419Total current liabilities
    
    
    61,636
    
    
    
    125,246
    
    
    
    
    
    
    
    
    
    
    
    186,882Long-term debt and capital lease
obligations, excluding current portion
    
    
    325,000
    
    
    
    59,305
    
    
    
    
    
    
    
    
    
    
    
    384,305Other long-term liabilities
    
    
    1,216
    
    
    
    54,861
    
    
    
    
    
    
    
    
    
    
    
    56,077Total liabilities
    
    
    387,852
    
    
    
    239,412
    
    
    
    
    
    
    
    
    
    
    
    627,264Stockholders equity (deficiency)
    
    
    (62,550
    )
    
    
    406,908
    
    
    
    
    
    
    
    (241,319
    )
    
    
    103,039Total liabilities and stockholders equity
    
    $
    325,302
    
    
    $
    646,320
    
    
    $
    
    
    
    $
    (241,319
    )
    
    $
    730,303
 25




---



##### Table of Contents



Condensed Consolidating Statement of Operations
Sixteen Weeks Ended May 17, 2004 Non-Guarantor
    
    GuarantorParent
    
    Subsidiaries
    
    VIEs
    
    Eliminations
    
    Consolidated(as restated)
    
    (as restated)
    
    
    
    
    
    (as restated)
    
    (as restated)Revenue:Company-operated restaurants
    
    $
    
    
    
    $
    365,871
    
    
    $
    
    
    
    $
    
    
    
    $
    365,871Franchised and licensed restaurants and other
    
    
    52,257
    
    
    
    37,183
    
    
    
    
    
    
    
    
    
    
    
    89,440Total revenue
    
    
    52,257
    
    
    
    403,054
    
    
    
    
    
    
    
    
    
    
    
    455,311Operating costs and expenses:Restaurant operations:Food and packaging
    
    
    
    
    
    
    105,724
    
    
    
    
    
    
    
    
    
    
    
    105,724Payroll and other employee benefit
expenses
    
    
    
    
    
    
    112,595
    
    
    
    
    
    
    
    
    
    
    
    112,595Occupancy and other operating expenses
    
    
    
    
    
    
    81,255
    
    
    
    
    
    
    
    
    
    
    
    81,255
    
    
    
    299,574
    
    
    
    
    
    
    
    
    
    
    
    299,574Franchised and licensed restaurants and other
    
    
    50,987
    
    
    
    16,004
    
    
    
    
    
    
    
    
    
    
    
    66,991Advertising expenses
    
    
    
    
    
    
    22,264
    
    
    
    
    
    
    
    
    
    
    
    22,264General and administrative expenses
    
    
    462
    
    
    
    37,194
    
    
    
    
    
    
    
    
    
    
    
    37,656Facility action charges, net
    
    
    53
    
    
    
    6,764
    
    
    
    
    
    
    
    
    
    
    
    6,817Total operating costs and expenses
    
    
    51,502
    
    
    
    381,800
    
    
    
    
    
    
    
    
    
    
    
    433,302Operating income
    
    
    755
    
    
    
    21,254
    
    
    
    
    
    
    
    
    
    
    
    22,009Interest expense
    
    
    (7,625
    )
    
    
    (4,095
    )
    
    
    
    
    
    
    
    
    
    
    (11,720
    )Allocated interest expense
    
    
    7,625
    
    
    
    (7,625
    )
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    23
    
    
    
    706
    
    
    
    
    
    
    
    
    
    
    
    729Income before income taxes and discontinued
operations
    
    
    778
    
    
    
    10,240
    
    
    
    
    
    
    
    
    
    
    
    11,018Income tax expense
    
    
    185
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    351Income from continuing operations
    
    
    593
    
    
    
    10,074
    
    
    
    
    
    
    
    
    
    
    
    10,667Loss from discontinued operations
    
    
    
    
    
    
    (163
    )
    
    
    
    
    
    
    
    
    
    
    (163
    )Income before equity in income of
consolidated subsidiaries
    
    
    593
    
    
    
    9,911
    
    
    
    
    
    
    
    
    
    
    
    10,504Equity in income of consolidated subsidiaries.
    
    
    9,911
    
    
    
    
    
    
    
    
    
    
    
    (9,911
    )
    
    
    Net income
    
    $
    10,504
    
    
    $
    9,911
    
    
    $
    
    
    
    $
    (9,911
    )
    
    $
    10,504
 26




---



##### Table of Contents



Condensed Consolidating Statement of Operations
Sixteen Weeks Ended May 19, 2003 Non-Guarantor
    
    GuarantorParent
    
    Subsidiaries
    
    VIEs
    
    Eliminations
    
    Consolidated(as restated)
    
    (as restated)
    
    
    
    
    
    (as restated)
    
    (as restated)Revenue:Company-operated restaurants
    
    $
    
    
    
    $
    339,042
    
    
    $
    
    
    
    $
    
    
    
    $
    339,042Franchised and licensed restaurants and other
    
    
    46,579
    
    
    
    33,932
    
    
    
    
    
    
    
    
    
    
    
    80,511Total revenue
    
    
    46,579
    
    
    
    372,974
    
    
    
    
    
    
    
    
    
    
    
    419,553Operating costs and expenses:Restaurant operations:Food and packaging
    
    
    
    
    
    
    100,097
    
    
    
    
    
    
    
    
    
    
    
    100,097Payroll and other employee benefit
expenses
    
    
    
    
    
    
    112,635
    
    
    
    
    
    
    
    
    
    
    
    112,635Occupancy and other operating expenses
    
    
    
    
    
    
    80,719
    
    
    
    
    
    
    
    
    
    
    
    80,719
    
    
    
    293,451
    
    
    
    
    
    
    
    
    
    
    
    293,451Franchised and licensed restaurants and other
    
    
    45,429
    
    
    
    19,492
    
    
    
    
    
    
    
    
    
    
    
    64,921Advertising expenses
    
    
    
    
    
    
    21,013
    
    
    
    
    
    
    
    
    
    
    
    21,013General and administrative expenses
    
    
    546
    
    
    
    31,063
    
    
    
    
    
    
    
    
    
    
    
    31,609Facility action charges, net
    
    
    
    
    
    
    787
    
    
    
    
    
    
    
    
    
    
    
    787Total operating costs and expenses
    
    
    45,975
    
    
    
    365,806
    
    
    
    
    
    
    
    
    
    
    
    411,781Operating income
    
    
    604
    
    
    
    7,168
    
    
    
    
    
    
    
    
    
    
    
    7,772Interest expense
    
    
    (7,769
    )
    
    
    (4,398
    )
    
    
    
    
    
    
    
    
    
    
    (12,167
    )Allocated interest expense
    
    
    7,769
    
    
    
    (7,769
    )
    
    
    
    
    
    
    
    
    
    
    Other income (expense), net
    
    
    16
    
    
    
    (846
    )
    
    
    
    
    
    
    
    
    
    
    (830
    )Income (loss) before income taxes and
discontinued operations
    
    
    620
    
    
    
    (5,845
    )
    
    
    
    
    
    
    
    
    
    
    (5,225
    )Income tax expense
    
    
    131
    
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    363Income (loss) from continuing operations
    
    
    489
    
    
    
    (6,077
    )
    
    
    
    
    
    
    
    
    
    
    (5,588
    )Loss from discontinued operations
    
    
    
    
    
    
    (2,114
    )
    
    
    
    
    
    
    
    
    
    
    (2,114
    )Income (loss) before equity in loss of
consolidated subsidiaries
    
    
    489
    
    
    
    (8,191
    )
    
    
    
    
    
    
    
    
    
    
    (7,702
    )Equity in loss of consolidated subsidiaries
    
    
    (8,191
    )
    
    
    
    
    
    
    
    
    
    
    8,191
    
    
    
    Net loss
    
    $
    (7,702
    )
    
    $
    (8,191
    )
    
    $
    
    
    
    $
    8,191
    
    
    $
    (7,702
    )
 27




---



##### Table of Contents



Condensed Consolidating Statement of Cash Flows
Sixteen Weeks Ended May 17, 2004 Non-Guarantor
    
    GuarantorParent
    
    Subsidiaries
    
    VIEs
    
    Eliminations
    
    Consolidated(as restated)
    
    
    
    
    
    
    
    
    
    (as restated)Net cash provided by operating activities.
    
    $
    3,078
    
    
    $
    44,363
    
    
    $
    
    
    
    $
    
    
    
    $
    47,441Cash flow from investing activities:Purchases of property and equipment
    
    
    (998
    )
    
    
    (15,386
    )
    
    
    
    
    
    
    
    
    
    
    (16,384
    )Proceeds from sale of property and
equipment
    
    
    
    
    
    
    6,624
    
    
    
    
    
    
    
    
    
    
    
    6,624Other
    
    
    9,618
    
    
    
    (8,805
    )
    
    
    100
    
    
    
    
    
    
    
    913Net cash provided by (used in) investing
activities
    
    
    8,620
    
    
    
    (17,567
    )
    
    
    100
    
    
    
    
    
    
    
    (8,847
    )Cash flow from financing activities:Repayments of long-term debt, including
capital lease obligations
    
    
    (22,319
    )
    
    
    (2,649
    )
    
    
    
    
    
    
    
    
    
    
    (24,968
    )Repayments of borrowings under credit
facility
    
    
    (13,926
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,926
    )Other
    
    
    (308
    )
    
    
    (11,007
    )
    
    
    
    
    
    
    
    
    
    
    (11,315
    )Net cash used in financing activities
    
    
    (36,553
    )
    
    
    (13,656
    )
    
    
    
    
    
    
    
    
    
    
    (50,209
    )Net (decrease) increase in cash and cash
equivalents
    
    
    (24,855
    )
    
    
    13,140
    
    
    
    100
    
    
    
    
    
    
    
    (11,615
    )Cash and cash equivalents at beginning of
period
    
    
    25,297
    
    
    
    29,058
    
    
    
    
    
    
    
    
    
    
    
    54,355Cash and cash equivalents at end of period
    
    $
    442
    
    
    $
    42,198
    
    
    $
    100
    
    
    $
    
    
    
    $
    42,740
 28




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Condensed Consolidating Statement of Cash Flows
Sixteen Weeks Ended May 19, 2003 Non-Guarantor
    
    GuarantorParent
    
    Subsidiaries
    
    VIEs
    
    Eliminations
    
    Consolidated(as restated)
    
    (as restated)
    
    
    
    
    
    
    
    
    
    (as restated)Net cash provided by operating activities
    
    $
    2,983
    
    
    $
    15,181
    
    
    $
    
    
    
    $
    
    
    
    $
    18,164Cash flow from investing activities:Purchases of property and equipment
    
    
    (1,021
    )
    
    
    (13,806
    )
    
    
    
    
    
    
    
    
    
    
    (14,827
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    3,172
    
    
    
    
    
    
    
    
    
    
    
    3,172Other
    
    
    (9,498
    )
    
    
    10,300
    
    
    
    
    
    
    
    
    
    
    
    802Net cash used in investing activities
    
    
    (10,519
    )
    
    
    (334
    )
    
    
    
    
    
    
    
    
    
    
    (10,853
    )Cash flow from financing activities:Repayments of long-term debt, including
capital lease obligations
    
    
    (95,000
    )
    
    
    (3,125
    )
    
    
    
    
    
    
    
    
    
    
    (98,125
    )Borrowings under credit facility
    
    
    106,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106,000Other
    
    
    (2,701
    )
    
    
    (11,154
    )
    
    
    
    
    
    
    
    
    
    
    (13,855
    )Net cash provided by (used in) financing
activities
    
    
    8,299
    
    
    
    (14,279
    )
    
    
    
    
    
    
    
    
    
    
    (5,980
    )Net increase in cash and cash equivalents
    
    
    763
    
    
    
    568
    
    
    
    
    
    
    
    
    
    
    
    1,331Cash and cash equivalents at beginning of period
    
    
    87
    
    
    
    18,353
    
    
    
    
    
    
    
    
    
    
    
    18,440Cash and cash equivalents at end of period
    
    $
    850
    
    
    $
    18,921
    
    
    $
    
    
    
    $
    
    
    
    $
    19,771
 NOTE (11) COMMITMENTS AND CONTINGENT LIABILITIES In conjunction with the Amended Facility, a letter of credit sub-facility in
the amount of $85,000 was established (see Note 5). Several standby 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 letters 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. As of May 17, 2004, the Company had
outstanding letters of credit under the revolving portion of the Facility of
$63,697. As of May 17, 2004, the Company has recorded an accrued liability for
contingencies related to litigation in the amount of $3,750. Certain of the
matters for which the Company maintains an accrued liability for litigation
pose risk of loss significantly above the accrued amounts. In addition, as of
May 17, 2004, the Company estimates the liability for those losses related to
other litigation claims that, in accordance with SFAS No. 5, Accounting for
Contingenciesare not accrued, but that it believes are reasonably possible to
result in an adverse outcome, to be in the range of $335 to $645. For several years, the Company has maintained a program whereby it guarantees
the loan obligations of certain franchisees with an independent lending
institution. Franchisees have used the proceeds from such loans to acquire
certain equipment and pay the costs of remodeling Carls Jr. restaurants. In
the event a franchisee defaults under the terms of a program loan, the Company
is obligated, within 15 days following written demand by the lending
institution, to purchase such loan or assume the franchisees obligation
thereunder by executing an assumption agreement and seeking a replacement
franchisee for the franchisee in default. By purchasing such loan, the Company
may seek recovery against the defaulting franchisee. As of May 17, 2004, the
principal outstanding under program loans guaranteed by the Company totaled
approximately $2.1 million, with maturity dates ranging from 2004 through 2009.
Additional loans may be granted under this program in the future. The Companys
remaining loss exposure under this program, based on a formula in the program
agreement and including the existing loans outstanding, is approximately $4.5
million. As of May 17, 2004, the Company had no accrued liability for expected
losses under this program and was not aware of any outstanding loans being in
default. The Company also guarantees a $214 obligation of a former subsidiary to a
related party lending institution associated with an equipment leasing
transaction. The Company maintains an accrual equal to 50% of this obligation
based upon its estimated loss under the guarantee. As of May 17, 2004, the Company had unconditional purchase obligations in the
amount of $57,470, which include contracts for goods and services primarily
related to restaurant operations. 29




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In prior years, as part of its refranchising program, the Company sold
restaurants to franchisees. In some cases, these restaurants were on leased
sites. The Company entered into agreements with these franchisees but remained
principally liable for the lease obligations. The Company accounts for the
sublease payments received as franchising rental income and the payments on the
leases as rental expense in franchising expense. The present value of the lease
obligations under the master leases primary terms remaining is $130,475.
Franchisees may, from time to time, experience financial hardship and may cease
payment on the sublease obligation to the Company. The present value of the
exposure to the Company from franchisees characterized under financial hardship
is $20,066. 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, at
times, the subject of complaints or allegations from employees, former
employees and franchisees. On October 3, 2001, an action was filed by Adam
Huizar and Michael Bolden, individually and on behalf of all others similarly
situated, in the Superior Court of the State of California, Los Angeles County,
seeking class action status and alleging violations of California wage and hour
laws. Similar actions were filed by Mary Jane Amberson and James Bolin,
individually and on behalf of others similarly situated, in the Superior Court
of the State of California, Los Angeles County, on April 5, 2002 and November
26, 2002, respectively. The complaints allege that salaried restaurant
management personnel at the Companys Carls Jr. restaurants in California were
improperly classified as exempt from California overtime laws, thereby
depriving them of overtime pay. The complaints seek damages in an unspecified
amount, injunctive relief, prejudgment interest, costs and attorneys fees. The
Company believes its employee classifications are appropriate, that it complies
with state and federal wage and hour laws and plans to vigorously defend these
actions. NOTE (12) SUBSEQUENT EVENT As a result of the daily closing sales price levels on the Companys common
stock through June 18, 2004, the 2023 Convertible Notes (see Note 5) will be
convertible into the Companys common stock effective July 1, 2004. Had the
dilutive effect of the 2023 Convertible Notes been included in the calculation
of diluted income per share for the sixteen weeks ended May 17, 2004, the
Companys weighted average diluted common shares outstanding would have
increased from the reported amount of 59,375,000 shares to 71,186,000 shares,
and diluted income per share would have decreased from the reported amount of
$0.18 per diluted share (as restated) to $0.17 per diluted share. For this
calculation, the dilutive effect is determined using the if-converted method,
whereby the interest expense ($1,292) and amortization of loan fees ($250)
incurred for the 2023 Convertible Notes during the sixteen weeks ended May 17,
2004, are added back to income. 30




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Introduction and Safe Harbor Disclosure CKE Restaurants, Inc. and its subsidiaries (collectively referred to as the
Company) is comprised of the operations of Carls Jr., Hardees, La Salsa,
and Green Burrito, which is primarily operated as a dual-brand concept with
Carls Jr. quick-service restaurants. The following Managements Discussion and
Analysis should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements contained herein, and our Annual Report on
Form 10-K/A for the fiscal year ended January 31, 2004. All Note references
herein refer to the accompanying Notes to Condensed Consolidated Financial
Statements. Matters discussed in this Form 10-Q/A contain forward-looking statements
relating to future plans and developments, financial goals, and operating
performance that are based on our current beliefs and assumptions. Such
statements are subject to risks and uncertainties. Factors that could cause our
results to differ materially from those described include, but are not limited
to, whether or not restaurants will be closed and the number of restaurant
closures, consumers concerns or adverse publicity regarding our products, the
effectiveness of operating initiatives and advertising and promotional efforts
(particularly at the Hardees brand), changes in economic conditions or
prevailing interest rates, changes in the price or availability of commodities,
availability and cost of energy, workers compensation and general liability
premiums and claims experience, changes in our suppliers ability to provide
quality and timely products, delays in opening new restaurants or completing
remodels, severe weather conditions, the operational and financial success of
our franchisees, our franchisees willingness to participate in our strategy,
the availability of financing for us and our franchisees, unfavorable outcomes
in litigation, changes in accounting policies and practices, new legislation or
government regulation (including environmental laws), the availability of
suitable locations and terms for the sites designed for development, and other
factors as discussed in our filings with the Securities and Exchange
Commission. Forward-looking statements speak only as of the date they are made. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise,
except as required by law or the rules of the New York Stock Exchange. In October 2004, we identified accounting errors that occurred in fiscal 2000
and 1999 which had resulted in an understatement of our deferred rent liability
related to operating leases with fixed rent escalations over the lease terms.
As a result, we concluded that our rent expense, net, had been understated
through fiscal 2004 in the cumulative amount of $2,103. In the sixteen weeks
ended May 17, 2004, and May 19, 2003, rent expense, net, had been understated
by $78 and $311, respectively. As a result, our deferred rent liability as of
May 17, 2004, and January 31, 2004, had been understated by $2,181 and $2,103,
respectively. We have corrected these errors through restatement of our
consolidated financial statements. In November 2004, after identifying this error, we commenced an extensive
internal review of our consolidated financial statements (the November
Review) in order to identify any other potential accounting errors. Through
the November Review, we identified the following additional accounting errors: (i) Understated Depreciation and Amortization Expense We are party to a substantial number of real property leases and have
significant investments in related buildings, leasehold improvements and
certain intangible assets. In fiscal 1998, we extended the depreciable life we
applied to our owned buildings to the new expected economic life of the assets.
In addition, in certain cases the longer depreciable life exceeded the
duration of the applicable underlying land lease, including option periods,
resulting in an understatement of depreciation expense beginning in fiscal
1999. In determining whether each of our real property leases is an operating
lease or a capital lease and in calculating our straight-line rent expense, we
generally utilize the initial term of the lease, excluding option periods.
Capitalized lease assets and liabilities are generally recorded and amortized
based upon the corresponding initial lease term. Historically, we depreciated
or amortized our investment in the related buildings, leasehold improvements
and certain intangible assets over a period that included both the initial term of
the lease and all option periods provided for in the lease (or the useful life
of the asset if shorter than the lease term plus option periods). 31




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) During the November Review, we evaluated the propriety of the above accounting
treatment, and determined that we should use one consistent definition of lease
term, typically the initial lease term, for purposes of determining lease
classification, straight-line rent expense, and the depreciation or
amortization period for the related asset. As a result, we concluded that our
depreciation and amortization expense had been understated through fiscal 2004
in the cumulative amount of $30,222. In the sixteen weeks ended May 17, 2004,
and May 19, 2003, depreciation and amortization expense had been understated by
$1,840 and $1,796, respectively. As a result, the our property and equipment,
net, and certain intangible assets as of May 17, 2004, and January 31, 2004,
were overstated by $32,062 and $30,222, respectively, with respect to this
matter. We have corrected these errors through our restatement. Our historical practices for determining depreciable life and amortization
periods also resulted in errors in the timing and classification of expense
recognition for fixed assets subjected to facility action charges in prior
fiscal periods. Generally, restaurants subject to facility action charges were
over-impaired in the fiscal year of the facility action charge to the extent
that such assets had been under-depreciated or under-amortized leading up to
the impairment date. Through fiscal 2004, these errors resulted in a
cumulative net understated expense of $1,014. This was comprised of a
cumulative understatement of depreciation and amortization expense of $17,300,
partially offset by a cumulative overstatement of facility action charges of
$16,286. In the sixteen weeks ended May 17, 2004, and May 19, 2003, we
overstated facility action charges by $621 and $275, respectively, and
understated depreciation and amortization expense by $30 and $131,
respectively. As a result, in the sixteen weeks ended May 17, 2004, and May
19, 2003, these errors resulted in an understatement of net income and
overstatement of net loss by $591 and $144, respectively. Also as a result,
our property and equipment, net, as of May 17, 2004, and January 31, 2004, was
overstated by $423 and $1,014, respectively, with respect to this matter. We
has corrected these errors through our restatement. (ii) Unretired Property and Equipment We identified instances in which property and equipment was not retired in a
timely manner or in which certain expenditures were incorrectly capitalized. During fiscal 2001, we sold many company-operated restaurants to franchisees.
In one of these transactions, we sold 19 restaurant properties, of which eight
were fee-owned properties and eleven were leased properties. We sold the eight
fee-owned properties and subleased the eleven leased properties to the buyer.
In recording the transaction, we did not retire the net book value of the eight
fee-owned properties. Through fiscal 2004, this error resulted in a cumulative
net understated expense of $5,333. As a result of this error, for the sixteen
weeks ended May 17, 2004, and May 19, 2003, we overstated depreciation expense
by $41 and $45, respectively. Also as a result, as of May 17, 2004, and
January 31, 2004,our property and equipment was overstated by approximately
$5,292 and $5,333, respectively. We have corrected these errors through our
restatement. We also identified $1,315 of other property and equipment that was not timely
retired when the assets were removed from service, primarily in fiscal 2001 and
2003. Through fiscal 2004, this resulted in a cumulative understatement of
general and administrative expenses, net of subsequent over-depreciation, of
$1,175. As a result of these errors, for the sixteen weeks ended May 17, 2004,
and May 19, 2003, we overstated general and administrative expenses by $16 and
$11, respectively. Also as a result of these errors, as of May 17, 2004, and
January 31, 2004, our property and equipment was overstated by $1,159 and
$1,175, respectively. We have corrected these errors through our restatement. Additionally, we did not timely retire certain software development
expenditures when the software applications were taken out of service. We also
did not properly expense certain software development costs when incurred, in
accordance with Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. These accounting
errors occurred primarily in fiscal 2001 and 2003. Through fiscal 2004, this
resulted in a cumulative understatement of expenses of $2,267. As a result of
these errors, for the sixteen weeks ended May 17, 2004, and May 19, 2003, we
overstated depreciation expense by $163 and understated general and
administrative expenses, net of overstated depreciation expense, by $90,
respectively. Also as a result of these
errors, as of May 17, 2004, and January 31, 2004, our property and equipment
was overstated by $2,104 and $2,267, respectively. We have corrected these
errors through our restatement. 32




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) (iii) Overstated Property Tax Expense We determined that we had misstated our property tax expense and accrued
property taxes in prior fiscal periods. These errors resulted from imprecise
metrics used to calculate our property tax accrual. Through fiscal 2004, this
resulted in a cumulative overstatement of property tax expenses of $1,198. As
a result of these errors, for the sixteen weeks ended May 17, 2004, and May 19,
2003, we understated property tax expenses by $142 and overstated property tax
expenses by $191, respectively. Also as a result, as of May 17, 2004, and
January 31, 2004, accrued property taxes were overstated by $1,056 and $1,198,
respectively. We have corrected these errors through our restatement. (iv) Understated Deferred Tax Liability In September 2004, we determined that, when we adopted SFAS No. 142, Goodwill
and Other Intangible Assets, at the beginning of fiscal 2003, as a result of
temporary differences relating to the treatment of goodwill relating to our
Carls Jr. brand, we should have recorded income tax expense to increase our
deferred tax valuation allowance, which would have resulted in a deferred tax
liability. We had not previously recorded this deferred tax liability.
Through fiscal 2004, this resulted in a cumulative understatement of income tax
expense of $1,413. As a result of these errors, for the sixteen weeks ended
May 17, 2004, and May 19, 2003, our income tax expense was understated by $82
and $144, respectively. Also as a result, as of May 17, 2004, and January 31,
2004, our deferred tax liability was understated by $1,495 and $1,413,
respectively. We determined in September 2004 that the error was immaterial and
did not record an adjustment. In light of the conclusion to restate our
financial statements for the other matters discussed herein, we determined it
was appropriate to also include this adjustment in the restatement. (v) Other Items We identified several other items that we have corrected through our
restatement. For the sixteen weeks ended May 17, 2004, and May 19, 2003, these
additional items aggregate to reduction to expense upon restatement of $157 and
$64, respectively. Also as a result, prior to the restatement, as of May 17,
2004, and January 31, 2004, our accumulated deficit had been understated by
$708 and $865, respectively, with respect to these items. Adoption of New Accounting Pronouncements See Note 3 of Notes to Condensed Consolidated Financial Statements. Critical Accounting Policies Our reported results are impacted by the application of certain accounting
policies that require us to make subjective or complex judgments. These
judgments involve making estimates about the effect of matters that are
inherently uncertain and may significantly impact our quarterly or annual
results of operations and financial condition. Specific risks associated with
these critical accounting policies are described in the following paragraphs. For all of these policies, we caution that future events rarely develop exactly
as expected, and the best estimates routinely require adjustment. Our most
significant accounting policies require:  
    
    estimation of future cash flows used to assess the recoverability
of long-lived assets, including goodwill, and establishing the
estimated liability for closing restaurants and subsidizing lease
payments of franchisees;
    
    estimation, using actuarially determined methods, of our
self-insured claim losses under our workers compensation, property and
general liability insurance programs;
    
    determination of appropriate estimated liabilities for litigation;
    
    determination of the appropriate allowances associated with
franchise and license receivables and estimated liabilities for
franchise subleases; 33




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands)  
    
    determination of the appropriate assumptions to use to estimate the
fair value of stock-based compensation for purposes of disclosures of
pro forma net income; and
    
    estimation of our net deferred income tax asset valuation
allowance. Descriptions of these critical accounting policies follow. Impairment of Property and Equipment and Other Amortizable Long-Lived Assets
Held and Used, Held for Sale or to be Disposed of Other than by Sale (as
restated) Each quarter we evaluate the carrying value of individual restaurants when the
operating results have reasonably progressed to a point to adequately evaluate
the probability of continuing operating losses or a current expectation that a
restaurant will be sold or otherwise disposed of before the end of its
previously estimated useful life. We generally estimate the useful life of land
and owned buildings to be 20 to 35 years and estimate the remaining useful life
of restaurants subject to leases to range from the end of the lease term then
in effect to the end of such lease including all option periods. In making
these judgments, we consider the period of time since the restaurant was opened
or remodeled and the trend of operations and expectations for future sales
growth. For restaurants selected for review, we estimate the future estimated
cash flows from operating the restaurant over its estimated useful life. We
make judgments about future same-store sales and the operating expenses and
estimated useful life that we would expect with such level of same-store sales.
We employ a probability-weighted approach wherein we estimate the effectiveness
of future sales and marketing efforts on same-store sales and related estimated
useful life. In general, in expected same-store sales scenarios where sales are
not expected to increase, we generally assume a shorter than previously
estimated useful life. Quarterly, we update our model for estimating future cash flows based upon
experience gained, current intentions about refranchising restaurants and
closures, expected sales trends, internal plans and other relevant information.
As the operations of restaurants opened or remodeled in recent years progress
to the point that their profitability and future prospects can adequately be
evaluated, additional restaurants will become subject to review and the
possibility that impairments exist. Same-store sales are the key indicator used to estimate future cash flow for
evaluating recoverability. For each of our restaurant concepts, to evaluate
recoverability of restaurant assets we estimate same-store sales will increase
at an annual average rate of approximately 3.0% over the remaining useful life
of the restaurant. The inflation rate assumed in making this calculation
generally is 2.0%. If our same-store sales do not perform at or above our
forecasted level, or cost inflation exceeds our forecast and we are unable to
recover such costs through price increases, the carrying value of certain of
our restaurants may prove to be unrecoverable and we may incur additional
impairment charges in the future. Additionally, typically restaurants are operated for three years before we test
them for impairment. Also, restaurants typically are not tested for either two
or three years following a major remodel (contingent upon the extent of the
remodel). We believe this provides the restaurant sufficient time to establish
its presence in the market and build a customer base. If we were to test all
restaurants for impairment without regard to the amount of time the restaurants
were operating, the total asset impairment would increase substantially. In
addition, if recently opened or remodeled restaurants do not eventually
establish stronger market presence and build a customer base, the carrying
value of certain of these restaurants may prove to be unrecoverable and we may
incur additional impairment charges in the future. Impairment of Goodwill At the reporting unit level, goodwill is tested for impairment at least
annually during the first quarter of our fiscal year, and on an interim basis
if an event or circumstance indicates that it is more likely than not
impairment may have occurred. We consider the reporting unit level to be the
brand level since the components (e.g., restaurants) within each brand have
similar economic characteristics, including products and services, production
processes, types or classes of customers and distribution methods. The
impairment, if any, is measured based on the estimated fair value of the brand.
Fair value can be determined based on discounted cash flows, comparable sales
or valuations
of other restaurant brands. Impairment occurs when the carrying amount of
goodwill exceeds its estimated fair value. 34




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) The most significant assumptions we use in this analysis are those made in
estimating future cash flows. In estimating future cash flows, we use the
assumptions in our strategic plan for items such as same-store sales, store
count growth rates, and the discount rate we consider to be the market discount
rate for acquisitions of restaurant companies and brands. If our assumptions used in performing the impairment test prove inaccurate, the
fair value of the brands may ultimately prove to be significantly lower,
thereby causing the carrying value to exceed the fair value and indicating an
impairment has occurred. During the first quarter of fiscal year 2005, we
performed a valuation of the Carls Jr. brand. We concluded that the fair value
of the net assets of Carls Jr. exceeded the carrying value, and thus no
impairment charge was required. As of May 17, 2004, we had $22,649 in goodwill
recorded on our consolidated balance sheet, all of which relates to Carls Jr. Estimated Liability for Closing Restaurants We make decisions to close restaurants based on prospects for estimated future
profitability, and sometimes we are forced to close restaurants due to
circumstances beyond our control (e.g., a landlords refusal to negotiate a new
lease). Our restaurant operators evaluate each restaurants performance every
quarter. When restaurants continue to perform poorly, we consider the
demographics of the location, as well as the likelihood of being able to
improve an unprofitable restaurant. Based on the operators judgment, we
estimate the future cash flows. If we determine that the restaurant will not,
within a reasonable period of time, operate at break-even cash flow or be
profitable, and we are not contractually obligated to continue operating the
restaurant, we may close the restaurant. Additionally, franchisees may close
restaurants for which we are the primary lessee. If the franchisee cannot make
payments on the lease, we continue making the lease payments and establish an
estimated liability for the closed restaurant if we decide not to operate it as
a company-operated restaurant. The estimated liability for closing restaurants on properties vacated is
generally based on the term of the lease and the lease termination fee we
expect to pay, as well as estimated maintenance costs until the lease has been
abated. The amount of the estimated liability established is generally the
present value of these estimated future payments. The interest rate used to
calculate the present value of these liabilities is based on our incremental
borrowing rate at the time the liability is established. The related discount
is amortized and shown in Facility Action Charges, Net, in our Condensed
Consolidated Statements of Operations. A significant assumption used in determining the amount of the estimated
liability for closing restaurants is the amount of the estimated liability for
future lease payments on vacant restaurants, which we determine based on our
brokers (a related party) assessment of its ability to successfully negotiate
early terminations of our lease agreements with the lessors or sublease the
property. Additionally, we estimate the cost to maintain leased and owned
vacant properties until the lease has been abated. If the costs to maintain
properties increase, or it takes longer than anticipated to sell properties or
sublease or terminate leases, we may need to record additional estimated
liabilities. If the leases on the vacant restaurants are not terminated or
subleased on the terms we used to estimate the liabilities, we may be required
to record losses in future periods. Conversely, if the leases on the vacant
restaurants are terminated or subleased on more favorable terms than we used to
estimate the liabilities, we reverse previously established estimated
liabilities, resulting in an increase in operating income. The present value of
our operating lease payment obligations on all closed restaurants is
approximately $40,145, which represents the discounted amount we would be
required to pay if we are unable to terminate the leases prior to the terms
required in the lease agreements or enter into sublease agreements. However, it
is our experience that we can terminate those leases for less than that amount
or sublease the property and, accordingly, we have recorded an estimated
liability for operating lease obligations of $18,556 as of May 17, 2004. Estimated Liability for Self-Insurance We are self-insured for a portion of our current and prior years losses
related to workers compensation, property and general liability insurance
programs. We have obtained stop loss insurance for individual workers
compensation, property and general liability claims over $500. Insurance
liabilities and reserves are accounted for based on the present value of
actuarial estimates of the amount of incurred and unpaid losses, based
approximately 35




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) on a risk-free interest rate. During the fourth quarter of fiscal 2004, we
adjusted the rate to 4.5% due to prolonged changes in the interest rate
environment. These estimates rely on actuarial observations of historical claim
loss development. The actuary, in determining the estimated liability, bases
the assumptions on the average historical losses on claims we have incurred.
The actual loss development may be better or worse than the development we
estimated in conjunction with the actuary. In that event, we will modify the
reserve. As such, if we experience a higher than expected number of claims or
the costs of claims rise more than expected, then we may, in conjunction with
the actuary, adjust the expected losses upward and our future self-insurance
expenses will rise. Consistent with trends the restaurant industry has
experienced in recent years, particularly in California where claim cost trends
are among the highest in the country, workers compensation liability premiums
and claim costs continue to increase. Additionally, after several years of
increases, our property and general liability insurance premiums have leveled. Loss Contingencies We maintain accrued liabilities for contingencies related to litigation. We
account for contingent obligations in accordance with SFAS No. 5, Accounting
for Contingencies (SFAS 5),which requires that we assess each contingency to
determine estimates of the degree of probability and range of possible
settlement. Those contingencies that are deemed to be probable and where the
amount of such settlement is reasonably estimable are accrued in our condensed
consolidated financial statements. If only a range of loss can be determined,
we accrue to the low end of the range. In accordance with SFAS 5, as of May 17,
2004, we have recorded an accrued liability for contingencies related to
litigation in the amount of $3,750. The assessment of contingencies is highly
subjective and requires judgments about future events. Contingencies are
reviewed at least quarterly to determine the adequacy of the accruals and
related condensed consolidated financial statement disclosure. The ultimate
settlement of contingencies may differ materially from amounts we have accrued
in our condensed consolidated financial statements. In addition, we estimate the liability for those losses related to other
litigation claims that, in accordance with SFAS 5, are not accrued, but that we
believe are reasonably possible to result in an adverse outcome, to be in the
range of $335 to $645. In accordance with SFAS 5, we have not recorded a
liability for those losses. Franchised and Licensed Operations (as restated) We monitor the financial condition of certain franchisees and record provisions
for estimated losses on receivables when we believe that our franchisees are
unable to make their required payments to us. Each quarter we perform an
analysis to develop estimated bad debts for each franchisee. We then compare
the aggregate result of that analysis to the amount recorded in our
consolidated financial statements as the allowance for doubtful accounts and
adjust the allowance as appropriate. Additionally, we cease accruing royalties
and rent income from franchisees that are materially delinquent in paying or in
default for other reasons and reverse any royalties and rent income accrued
during the last 90 days. Over time our assessment of individual franchisees may
change. For instance, we have had some franchisees who, in the past, we had
determined required an estimated loss equal to the total amount of the
receivable, who have paid us in full or established a consistent record of
payments (generally one year) such that we determined an allowance was no
longer required. Depending on the facts and circumstances, there are a number of different
actions we and/or our franchisees may take to resolve franchise collections
issues. These actions may include the purchase of franchise restaurants by us
or by other franchisees, a modification to the franchise agreement, which may
include a provision to defer certain royalty payments or reduce royalty rates
in the future (if royalty rates are not sufficient to cover our costs of
service over the life of the franchise agreement, we record an estimated loss
at the time we modify the agreements), a restructuring of the franchisees
business and/or finances (including the restructuring of leases for which we
are the primary obligee  see further discussion below) or, if necessary, the
termination of the franchise agreement. The allowance established is based on
our assessment of the most probable course of action that will occur.
Many of the restaurants that we sold to Hardees and Carls Jr. franchisees as
part of our refranchising program were on leased sites. Generally, we remain
principally liable for the lease and have entered into a sublease with the
franchisee on the same terms as the primary lease. We account for the sublease
payments received as franchising rental income. Our payments on the leases are
accounted for as rental expense in franchised and licensed restaurants and
other expense in our consolidated statements of operations. As of May 17, 2004,
the present value of our total obligation on such lease arrangements with
Hardees and Carls Jr. franchisees was $39,487 and $90,989, respectively. We
do not expect Carls Jr. franchisees to experience the same level of financial
difficulties as
Hardees franchisees have encountered in the past or may encounter in the
future. However, we can provide no assurance that this will not occur. 36




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) In addition to the sublease arrangements with franchisees described above, we
also lease land and buildings to franchisees. As of May 17, 2004, the net book
value of property under lease to Hardees and Carls Jr. franchisees was
$21,211 and $9,739, respectively. Troubled franchisees are those with whom we
have entered into workout agreements and who may have liquidity problems in the
future. In the event that a troubled franchisee closes a restaurant for which
we own the property, our options are to operate the restaurant as a
company-owned restaurant, lease the property to another tenant or sell the
property. These circumstances would cause us to consider whether the carrying
value of the land and building was impaired. If we determined the property
value was impaired, we would record a charge to operations for the amount the
carrying value of the property exceeds its fair value. As of May 17, 2004, the
net book value of land and buildings under lease to Hardees franchisees that
are considered to be troubled franchisees was approximately $18,851 and is
included in the amount above. During fiscal 2005 or thereafter, some of these
franchisees may close restaurants and, accordingly, we may record an impairment
loss in connection with some of these closures. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities(SFAS 146), which we adopted on January 1, 2003, an
estimated liability for future lease obligations on restaurants operated by
franchisees for which we are the primary obligee is established on the date the
franchisee closes the restaurant. Also, we record an estimated liability for
subsidized lease payments when we sign a sublease agreement committing us to
the subsidy. The amount of the estimated liability is established using the methodology
described in Estimated Liability for Closing Restaurants above. Consistent
with SFAS 146, we have not established an additional estimated liability for
potential losses not yet incurred. The present value of the lease obligations
for which we remain principally liable and have entered into subleases to
troubled franchisees is approximately $20,066 (six troubled franchisees
represent all of this amount). If sales trends/economic conditions worsen for
our franchisees, their financial health may worsen, our collection rates may
decline and we may be required to assume the responsibility for additional
lease payments on franchised restaurants. Entering into restructured franchise
agreements may result in reduced franchise royalty rates in the future (see
discussion above). The likelihood of needing to increase the estimated
liability for future lease obligations is related to the success of our
Hardees concept (i.e., if our Hardees concept results improve from the
execution of our comprehensive plan, we would reasonably expect that the
financial performance of our franchisees would improve). Stock-Based Compensation As discussed in Notes 1 and 24 of Notes to Consolidated Financial Statements of
our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004, we
have various stock-based compensation plans that provide options for certain
employees and outside directors to purchase common shares of stock. We have
elected to account for stock-based compensation in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees,which utilizes the intrinsic value method of accounting for
stock-based compensation, as opposed to using the fair-value method prescribed
in SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123). Because
of this election, we are required to make certain disclosures of pro forma net
income assuming we had adopted SFAS 123. We determine the estimated fair value
of stock-based compensation on the date of the grant using the Black-Scholes
option-pricing model. The Black-Scholes option-pricing model requires the input
of highly subjective assumptions, including the historical stock price
volatility, expected life of the option and the risk-free interest rate. A
change in one or more of the assumptions used in the Black-Scholes
option-pricing model may result in a material change to the estimated fair
value of the stock-based compensation (see Note 1 of Notes to Condensed
Consolidated Financial Statements for analysis of the effect of certain changes
in assumptions used to determine the fair value of stock-based compensation). Valuation Allowance for Net Deferred Tax Assets(as restated) As disclosed in Note 21 of Notes to Consolidated Financial Statements of our
Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004, we
have recorded a valuation allowance against our deferred tax assets of
$188,689. The valuation allowance provides a 100% allowance against the
Companys deferred tax assets, net of deferred tax liabilities that may be
offset by the Companys deferred tax assets for income tax accounting purposes. 37




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) If our business turnaround is successful, and we have been profitable for a
number of years, and our prospects for the realization of our deferred tax
assets are more likely than not, we would reverse our valuation allowance and
credit income tax expense. In assessing the prospects for future profitability,
many of the assessments of same-store sales and cash flows mentioned above
become relevant. When circumstances warrant, we assess the likelihood that our
net deferred tax assets will more likely than not be realized from future
taxable income. As of January 31, 2004, we maintained a deferred tax liability
of $ 1,413, which results from our net deferred tax assets and tax valuation
allowance of approximately $187,276 and $188,689 respectively. As of May 17, 2004, and January 31, 2004, we have a net deferred tax liability
of $1,495 and $1,413, respectively, that arose from a financial versus tax
reporting difference in accounting for goodwill. With goodwill no longer
amortized for financial reporting purposes, while such amortization continues
for income tax reporting purposes, the reversal timing of the associated
deferred tax liability has become indeterminable. Accordingly, such deferred
tax liability may not be offset by the Companys deferred tax assets, which all
have determinable reversal timing for purposes of reducing the Companys
deferred tax valuation allowance. Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal
2005 Comparisons with Fiscal 2004(as restated) The factors discussed below impact comparability of operating performance for
the sixteen weeks ended May 17, 2004, to the sixteen weeks ended May 19, 2003,
or could impact comparisons for the remainder of fiscal 2005. Divestiture of Timber Lodge As discussed in Note 9 of Notes to Condensed Consolidated Financial Statements,
Timber Lodge is accounted for as a discontinued operation. The results of
Timber Lodge included in our Condensed Consolidated Statements of Operations as
discontinued operations for the sixteen week periods ended May 17, 2004 and May
19, 2003, are as follows: Sixteen Weeks EndedMay 17, 2004
    
    May 19, 2003Revenue
    
    $
    13,369
    
    
    $
    14,237Operating loss
    
    
    (157
    )
    
    
    (2,102
    )Interest expense
    
    
    6
    
    
    
    13Income tax benefit
    
    
    
    
    
    
    (1
    )Net loss
    
    $
    (163
    )
    
    $
    (2,114
    )
 The operating losses for Timber Lodge for the sixteen weeks ended May 17, 2004,
and May 19, 2003, include impairment charges of $617 and $1,566, respectively,
to reduce the carrying value of Timber Lodge to fair value. We have a letter of
intent for the sale of Timber Lodge and expect the sale to be completed during
the second quarter of fiscal 2005. New Accounting Pronouncements See Note 3 of Notes to Condensed Consolidated Financial Statements. Seasonality We operate on a retail accounting calendar. Our fiscal year has 13 four-week
accounting periods and ends the last Monday in January. The first quarter of
our fiscal year has four periods, or 16 weeks. All other quarters have three
periods, or 12 weeks. Fiscal 2005 will be a 53-week fiscal year. The fourth
quarter of this fiscal year will have two accounting periods of four weeks and
one accounting period of five weeks. Our restaurant sales, and therefore our profitability, are subject to seasonal
fluctuations and are traditionally higher during the spring and summer months
because of factors such as increased travel upon school vacations and improved
weather conditions, which affect the publics dining habits. 38




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Business Strategy We remain focused on pursuing vigorously a comprehensive business strategy. The
main components of our strategy are as follows:  
    
    remain focused on restaurant fundamentals  quality, service and cleanliness;
    
    offer premium products that compete on quality and taste  not price;
    
    build on the strength of the Carls Jr. brand, including dual branding opportunities with Green Burrito;
    
    continue to execute and refine the Hardees Revolution;
    
    continue to control costs while increasing revenues;
    
    leverage our infrastructure and marketing presence to build out existing core markets; and
    
    strengthen our franchise system and pursue further franchising opportunities. We believe a key factor in operating Hardees profitably is increasing sales.
For the trailing thirteen periods ended May 17, 2004, the average unit volume
(AUV) at our company-operated Hardees restaurants was approximately $823,
while franchise-operated AUV was $874. If we are unable to grow sales at
Hardees to the level at which we estimate the brand would operate profitably
and improve operating margins, it will affect our ability to access both the
amount and terms of financing available to us in the future (see Liquidity and
Capital Resources section below). Hardees Revolution We completed a comprehensive plan to revitalize Hardees involving a
repositioning of the brand as a premium burger restaurant (Hardees Revolution)
during fiscal 2004. The plan included menu adjustments and associated
advertising and media strategies. This menu, featuring Angus beef Thickburgers,
along with related media, seeks to distinguish Hardees as a premium burger
specialist. Franchisees Operations Like others in the quick-service restaurant industry, some of our franchise
operators experience financial difficulties from time to time with respect to
their operations. Our approach to dealing with financial and operational issues
that arise from these situations is described under Critical Accounting
Policies above, under the heading Franchised and Licensed Operations. Some
franchise operators in the Hardees system have experienced significant
financial problems and, as discussed above, there are a number of potential
resolutions of these financial issues. We continue to work with franchisees in an attempt to maximize our future
franchising income. Our franchising income is dependent on both the number of
restaurants operated by franchisees and their operational and financial
success, such that they can make their royalty and lease payments to us.
Although we quarterly review the allowance for doubtful accounts and the
estimated liability for closed franchise restaurants (see discussion under
Critical Accounting Policies  Franchised and Licensed Operations), there can
be no assurance that the number of franchisees or franchised restaurants
experiencing financial difficulties will not increase from our current
assessments, nor can there be any assurance that we will be successful in
resolving financial issues relating to any specific franchisee. As of May 17,
2004, our consolidated provision for doubtful accounts of notes receivable was
74% of the gross balance of notes receivable and our consolidated provision for
doubtful accounts on accounts receivable was 7% of the gross balance of
accounts receivable. During fiscal 2004, we received several notes receivable
pursuant to completing workout agreements with several troubled franchisees.
Also, as of May 17, 2004, we have not recognized $5,160 in accounts receivable
and $6,292 in notes receivable pertaining to royalty and rent revenue due from
franchisees that are in default under the terms of their franchise agreements.
We still experience specific problems with troubled franchisees (see Critical
Accounting Policies  Franchise and Licensed Operations) and may be required to
increase the amount of our provisions for doubtful accounts and/or increase the
amount of our estimated liability for future lease obligations. The result of
increasing the allowances for doubtful accounts is an effective royalty rate
lower than our standard contractual royalty rate. Effective royalty rate reflects royalties deemed collectible as a percent of
franchise-generated revenue for all franchisees for which we are recognizing
revenue. For the trailing thirteen periods ended May 17, 2004, the
effective royalty rates for domestic Carls Jr. and Hardees were 3.8% and
3.6%, respectively. 39




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Financial Comparison Our results reflect the substantial changes we have made in executing our
business turnaround including the sale and closure of under-performing
restaurants, the disposal of non-core investments, the reduction of corporate
overhead and our efforts to improve margins and repay debt. The table below is
a condensed presentation of those activities, and other changes in the
components of net income, designed to facilitate the discussion of results in
this Form 10-Q/A. (All amounts areapproximate and inmillions)First Fiscal Quarter(as restated)Current Year:Net income
    
    $
    10.5Prior Year:Net loss
    
    $
    (7.7
    )Increase in net income
    
    $
    18.2
 First QuarterFiscal Year 2005 vs.First QuarterFiscal Year 2004(as restated)Items causing net income to increase from the prior year to the current year:Approximate store margin improvement in Hardees restaurants
    
    $
    16.5Approximate store margin improvement in Carls Jr. restaurants
    
    
    4.8Increase in net franchising income, excluding provisions for doubtful accounts
    
    
    6.1Increase in corporate overhead
    
    
    (6.4
    )Increase in facility action charges
    
    
    (6.0
    )Decrease in loss from discontinued operations
    
    
    2.0Decrease in provisions for doubtful accounts
    
    
    2.3Increase in advertising expense, excluding La Salsa and Green Burrito
    
    
    (1.2
    )Decrease in interest expense
    
    
    0.8Increase in operating loss of La Salsa and Green Burrito, excluding facility
action charges and provisions for doubtful accounts
    
    
    (0.6
    )All other, net
    
    
    (0.1
    )Increase in net income
    
    $
    18.2
 40




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Operating Review The following tables are presented to facilitate Managements Discussion and
Analysis and are presented in the same format in which we present segment
information (See Note 8 of Notes to Condensed Consolidated Financial
Statements). Sixteen Weeks Ended May 17, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other (A)
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    
    
    
    
    (as restated)Company-operated revenue
    
    $
    170,209
    
    
    $
    181,017
    
    
    $
    14,202
    
    
    $
    443
    
    
    $
    365,871Company-operated average weekly unit volume
(actual $- not in thousands)
    
    
    24,912
    
    
    
    16,279
    
    
    
    14,462Company-operated average unit volume (trailing 13
periods)
    
    
    1,228
    
    
    
    823
    
    
    
    732Franchise-operated average unit volume (trailing
13 periods)
    
    
    1,109
    
    
    
    874
    
    
    
    759Average check (actual $- not in thousands)(B)
    
    
    5.80
    
    
    
    4.57
    
    
    
    9.51Company-operated same-store sales increase (C)
    
    
    9.8
    %
    
    
    11.9
    %
    
    
    6.0
    %Company-operated same-store transactions increase
(D)
    
    
    1.8
    %
    
    
    1.5
    %
    
    
    2.6
    %Franchise-operated same-store sales increase (C)
    
    
    9.3
    %
    
    
    10.9
    %
    
    
    4.4
    %Operating costs as a % of company-operated revenue:Food and packaging
    
    
    28.4
    %
    
    
    29.4
    %
    
    
    27.8
    %Payroll and employee benefits
    
    
    28.0
    %
    
    
    33.1
    %
    
    
    33.3
    %Occupancy and other operating costs
    
    
    21.7
    %
    
    
    21.7
    %
    
    
    33.7
    %Restaurant level margin
    
    
    21.9
    %
    
    
    15.6
    %
    
    
    5.2
    %Advertising as a percentage of company-operated
revenue
    
    
    6.5
    %
    
    
    5.9
    %
    
    
    2.9
    %Franchising revenue:Royalties
    
    $
    7,581
    
    
    $
    13,338
    
    
    $
    524
    
    
    $
    104
    
    
    $
    21,547Distribution centers
    
    
    52,257
    
    
    
    5,237
    
    
    
    
    
    
    
    
    
    
    
    57,494Rent
    
    
    6,672
    
    
    
    3,212
    
    
    
    
    
    
    
    
    
    
    
    9,884Other
    
    
    366
    
    
    
    116
    
    
    
    33
    
    
    
    
    
    
    
    515Total franchising revenue
    
    
    66,876
    
    
    
    21,903
    
    
    
    557
    
    
    
    104
    
    
    
    89,440Franchising expense:Administrative expense (including provision for
bad debts)
    
    
    1,352
    
    
    
    1,282
    
    
    
    451
    
    
    
    
    
    
    
    3,085Distribution centers
    
    
    50,987
    
    
    
    5,410
    
    
    
    
    
    
    
    
    
    
    
    56,397Rent and other occupancy
    
    
    5,335
    
    
    
    2,174
    
    
    
    
    
    
    
    
    
    
    
    7,509Total franchising expense
    
    
    57,674
    
    
    
    8,866
    
    
    
    451
    
    
    
    
    
    
    
    66,991Net franchising income
    
    $
    9,202
    
    
    $
    13,037
    
    
    $
    106
    
    
    $
    104
    
    
    $
    22,449Facility action charges, net
    
    $
    1,202
    
    
    $
    4,364
    
    
    $
    1,198
    
    
    $
    53
    
    
    $
    6,817Operating income (loss)
    
    $
    21,049
    
    
    $
    3,295
    
    
    $
    (2,491
    )
    
    $
    156
    
    
    $
    22,009
 41




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Sixteen Weeks Ended May 19, 2003Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other (A)
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    
    
    
    
    (as restated)Company-operated revenue
    
    $
    158,284
    
    
    $
    167,613
    
    
    $
    12,696
    
    
    $
    449
    
    
    $
    339,042Company-operated average weekly unit volume
(actual $- not in thousands)
    
    
    22,376
    
    
    
    14,337
    
    
    
    13,888Company-operated average unit volume (trailing
13 periods)
    
    
    1,151
    
    
    
    756
    
    
    
    736Franchise-operated average unit volume
(trailing 13 periods)
    
    
    1,058
    
    
    
    805
    
    
    
    635Average check (actual $- not in thousands)(B)
    
    
    5.36
    
    
    
    4.15
    
    
    
    9.10Company-operated same-store sales decrease (C)
    
    
    (0.4
    )%
    
    
    (3.8
    )%
    
    
    (1.9
    )%Company-operated same-store transactions
decrease (D)
    
    
    (2.1
    )%
    
    
    (10.0
    )%
    
    
    (5.1
    )%Franchise-operated same-store sales decrease (C)
    
    
    (1.6
    )%
    
    
    (6.8
    )%
    
    
    (0.4
    )%Operating costs as a % of company-operated
revenue:Food and packaging
    
    
    28.3
    %
    
    
    30.9
    %
    
    
    26.3
    %Payroll and employee benefits
    
    
    28.9
    %
    
    
    37.4
    %
    
    
    31.5
    %Occupancy and other operating costs
    
    
    22.3
    %
    
    
    24.6
    %
    
    
    31.9
    %Restaurant level margin
    
    
    20.5
    %
    
    
    7.1
    %
    
    
    10.3
    %Advertising as a percentage of company-operated
revenue
    
    
    6.3
    %
    
    
    6.3
    %
    
    
    3.0
    %Franchising revenue:Royalties
    
    $
    6,569
    
    
    $
    10,472
    
    
    $
    413
    
    
    $
    110
    
    
    $
    17,564Distribution centers
    
    
    46,579
    
    
    
    6,858
    
    
    
    
    
    
    
    
    
    
    
    53,437Rent
    
    
    7,090
    
    
    
    2,120
    
    
    
    
    
    
    
    
    
    
    
    9,210Other
    
    
    195
    
    
    
    75
    
    
    
    30
    
    
    
    
    
    
    
    300Total franchising revenue
    
    
    60,433
    
    
    
    19,525
    
    
    
    443
    
    
    
    110
    
    
    
    80,511Franchising expense:Administrative expense (including provision
for bad debts)
    
    
    1,359
    
    
    
    1,553
    
    
    
    135
    
    
    
    1
    
    
    
    3,048Distribution centers
    
    
    45,429
    
    
    
    7,367
    
    
    
    
    
    
    
    
    
    
    
    52,796Rent and other occupancy
    
    
    6,811
    
    
    
    2,266
    
    
    
    
    
    
    
    
    
    
    
    9,077Total franchising expense
    
    
    53,599
    
    
    
    11,186
    
    
    
    135
    
    
    
    1
    
    
    
    64,921Net franchising income
    
    $
    6,834
    
    
    $
    8,339
    
    
    $
    308
    
    
    $
    109
    
    
    $
    15,590Facility action charges (gains), net
    
    $
    252
    
    
    $
    1,259
    
    
    $
    
    
    
    $
    (724
    )
    
    $
    787Operating income (loss)
    
    $
    17,759
    
    
    $
    (10,101
    )
    
    $
    (409
    )
    
    $
    523
    
    
    $
    7,772
  (A)
    
    Other consists of Green Burrito. Additionally, amounts that we do not
believe would be proper to allocate to the operating segments are included
in Other.(B)
    
    Average check represents total restaurant sales divided by total
transactions for any given period. The average check is viewed in
conjunction with same-store sales and same-store transactions, as defined
below. This indicator, when viewed with other measures, may illustrate
revenue growth or decline resulting from a change in menu or price
offering. When we introduce menu items or pricing initiatives with higher
or lower price points than the existing menu base, the average check may
reflect the benefit or impact from these new items or pricing on the
average price paid by the consumer.(C)
    
    Same-store sales is a key performance indicator in our industry. This
indicator is a measure of revenue growth on the existing comparable store
base of a multi-unit chain company such as ours and is measured as a
percentage variance over the same fiscal period in the prior year.
Same-store sales illustrate how competitive forces and external economic
conditions benefit or impact us, as well as any benefit from the diverse
value propositions and marketing initiatives undertaken by us. In
calculating same-store sales, we include restaurants open for 14 full
accounting periods, which allows for a year-over-year comparison. 42




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands)  (D)
    
    Same-store transactions represent the number of consumer visits to our
restaurants. Transactions are viewed on the same basis as same-store sales
above and are another key performance indicator in our industry. This
indicator is a measure of consumer frequency in the existing comparable
store base and is measured as a percentage variance over the same fiscal
period in the prior year. Same-store transactions are another measure of
the effects of competitive forces and economic conditions on consumer
behavior and resulting benefit, or impact, to us. Transactions also
reflect any benefit from the diverse value propositions and marketing
initiatives undertaken by us. Presentation of Non-GAAP Measures EBITDA EBITDA is a typical non-GAAP measure (i.e. a measure calculated and presented
on the basis of methodologies other than in accordance with accounting
principles generally accepted in the United States of America, or GAAP) for
companies that issue public debt and a measure used by the lenders under our
bank credit facility. We believe EBITDA is useful to our investors as an
indicator of earnings available to service debt. EBITDA is not a recognized
term under GAAP and does not purport to be an alternative to income from
operations, an indicator of cash flow from operations or a measure of
liquidity. We calculate EBITDA as earnings before cumulative effect of
accounting changes, discontinued operations, interest expense, income taxes,
depreciation and amortization, facility action charges, impairment of goodwill
and impairment of assets held for sale. Because not all companies calculate
EBITDA identically, this presentation of EBITDA may not be comparable to
similarly titled measures of other companies. Additionally, we believe EBITDA
is a more meaningful indicator of earnings available to service debt when
certain charges, such as impairment of goodwill and facility action charges are
excluded from income (loss) from continuing operations. EBITDA is not intended
to be a measure of free cash flow for managements discretionary use, as it
does not consider certain cash requirements such as interest expense, income
taxes and debt service payments and cash costs arising from facility actions. Sixteen Weeks Ended May 17, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    
    
    
    
    (as restated)Net income (loss)
    
    $
    19,704
    
    
    $
    (6,513
    )
    
    $
    (2,532
    )
    
    $
    (155
    )
    
    $
    10,504Income from discontinued segment, excluding impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (454
    )
    
    
    (454
    )Interest expense (income)
    
    
    1,673
    
    
    
    10,071
    
    
    
    (24
    )
    
    
    
    
    
    
    11,720Income tax expense
    
    
    141
    
    
    
    24
    
    
    
    1
    
    
    
    185
    
    
    
    351Depreciation and amortization
    
    
    7,430
    
    
    
    12,217
    
    
    
    1,344
    
    
    
    55
    
    
    
    21,046Facility action charges, net
    
    
    1,202
    
    
    
    4,364
    
    
    
    1,198
    
    
    
    53
    
    
    
    6,817Impairment of Timber Lodge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    617
    
    
    
    617EBITDA
    
    $
    30,150
    
    
    $
    20,163
    
    
    $
    (13
    )
    
    $
    301
    
    
    $
    50,601
 Sixteen Weeks Ended May 19, 2003Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    
    
    
    
    (as restated)Net income (loss)
    
    $
    16,299
    
    
    $
    (21,899
    )
    
    $
    (414
    )
    
    $
    (1,688
    )
    
    $
    (7,702
    )Loss from discontinued segment, excluding impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    548
    
    
    
    548Interest expense
    
    
    1,526
    
    
    
    10,631
    
    
    
    3
    
    
    
    7
    
    
    
    12,167Income tax expense (benefit)
    
    
    343
    
    
    
    31
    
    
    
    
    
    
    
    (11
    )
    
    
    363Depreciation and amortization
    
    
    8,099
    
    
    
    11,401
    
    
    
    1,122
    
    
    
    57
    
    
    
    20,679Facility action charges, net
    
    
    252
    
    
    
    1,259
    
    
    
    
    
    
    
    (724
    )
    
    
    787Impairment of Timber Lodge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,566
    
    
    
    1,566EBITDA
    
    $
    26,519
    
    
    $
    1,423
    
    
    $
    711
    
    
    $
    (245
    )
    
    $
    28,408
 43




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) The following table reconciles EBITDA (a non-GAAP measure) to cash flow
provided by operating activities (a GAAP measure): Sixteen Weeks EndedMay 17, 2004
    
    May 19, 2003(as restated)
    
    (as restated)Cash flow provided by operating activities
    
    $
    47,441
    
    
    $
    18,164Interest expense
    
    
    11,720
    
    
    
    12,167Income tax expense
    
    
    351
    
    
    
    363Amortization of loan fees
    
    
    (1,042
    )
    
    
    (1,413
    )Recovery of (provision for) losses on accounts and notes receivable
    
    
    242
    
    
    
    (2,064
    )(Loss) gain on investments, sales of property and equipment, capital leases and
extinguishment of debts
    
    
    (1,284
    )
    
    
    232Deferred income taxes
    
    
    (82
    )
    
    
    (144
    )Other non-cash credits
    
    
    666
    
    
    
    18Net change in refundable income taxes
    
    
    (4
    )
    
    
    (142
    )Change in estimated liability for closing restaurants and estimated liability
for self-insurance
    
    
    3,508
    
    
    
    3,236Net change in receivables, inventories, prepaid expenses and other current assets
    
    
    (9,991
    )
    
    
    (11,177
    )Net change in accounts payable and other current liabilities
    
    
    (896
    )
    
    
    9,003EBITDA from discontinued operations
    
    
    460
    
    
    
    (536
    )Net cash (received from) provided to discontinued segment
    
    
    (28
    )
    
    
    165EBITDA, including discontinued segment
    
    
    51,061
    
    
    
    27,872Less: EBITDA from discontinued segment
    
    
    (460
    )
    
    
    536EBITDA
    
    $
    50,601
    
    
    $
    28,408
 Carls Jr. During the sixteen weeks ended May 17, 2004, we opened two Carls Jr.
restaurants. Carls Jr. franchisees and licensees opened eight restaurants. The
following table shows the change in the Carls Jr. restaurant portfolio, as
well as the change in revenue for the current quarter: Restaurant Portfolio
    
    RevenueFirst Fiscal Quarter
    
    First Fiscal Quarter2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change(as restated)
    
    (as restated)
    
    (as restated)Company
    
    
    428
    
    
    
    443
    
    
    
    (15
    )
    
    $
    170,209
    
    
    $
    158,284
    
    
    $
    11,925Franchised and licensed(a)
    
    
    588
    
    
    
    553
    
    
    
    35
    
    
    
    66,876
    
    
    
    60,433
    
    
    
    6,443Total
    
    
    1,016
    
    
    
    996
    
    
    
    20
    
    
    $
    237,085
    
    
    $
    218,717
    
    
    $
    18,368
  (a)
    
    Includes $52,257 and $46,579 of revenues from distribution of food,
packaging and supplies to franchised and licensed restaurants during the
sixteen weeks ended May 17, 2004, and May 19, 2003, respectively. Company-Operated Restaurants Revenue from company-operated Carls Jr. restaurants increased $11,925, or
7.5%, to $170,209 during the sixteen weeks ended May 17, 2004, as compared to
the sixteen weeks ended May 19, 2003. This increase resulted primarily from a
9.8% increase in same-store sales, partially offset by the impact of selling 15
company stores located in Arizona to a franchisee in the fourth quarter of
fiscal 2004. We believe the launch of several new products during the fiscal
quarter ended May 17, 2004, including The Low Carb Six Dollar Burger and the
Low Carb Breakfast Bowl, as well as conversion to 100 percent Angus beef in
The Six Dollar Burger , contributed to the growth in same-store sales.
Promotional item sales also increased $1,326 during the sixteen weeks ended May
17, 2004, as compared to the prior year comparable period, primarily due to a
current year bobblehead promotion featuring members of the National
Basketball Associations (NBA) Los Angeles Lakers, which was broader than a
similar promotion featuring members of the NBAs Sacramento Kings in the prior
year. 44




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) The changes in the restaurant-level margin are explained as follows: (as restated)Restaurant-level margin for the sixteen weeks ended May 19, 2003
    
    
    20.5
    %Decrease in labor costs, excluding workers compensation
    
    
    0.8Decrease in general liability insurance expense
    
    
    0.3Increase in cost of promotional items
    
    
    (0.5
    )Decrease in utilities expense
    
    
    0.2Decrease in repair and maintenance expense
    
    
    0.2Decrease in depreciation, rent, property taxes and licenses
    
    
    0.1Decrease in workers compensation expense
    
    
    0.1Increase in food and packaging costs
    
    
    (0.1
    )Other, net
    
    
    0.3Restaurant-level margin for the sixteen weeks ended May 17, 2004
    
    
    21.9
    %
 Labor costs, excluding workers compensation, as a percent of sales decreased
during the sixteen weeks ended May 17, 2004, as compared to the sixteen weeks
ended May 19, 2003, due mainly to reduced restaurant manager salaries and
hourly wages resulting from benefits of sales leverage, partially offset by an
increase in restaurant manager bonuses due to improved financial performance.
General liability insurance expense decreased during the sixteen weeks ended
May 17, 2004, from the comparable prior year period, primarily as a result of
lower estimated claims losses. Since the beginning of fiscal 2004, loss
development on general liability claims for recent fiscal years has been less
than previously estimated. Promotional items costs as a percent of sales increased during the sixteen
weeks ended May 17, 2004, due to the promotional items sales increase noted
above. Utilities expense as a percent of sales decreased during the sixteen weeks
ended May 17, 2004, as compared to the prior year, due mainly to benefits of
sales leverage, partially offset by recording a decrease to estimated utility
costs in the prior year upon finalizing contract terms with a new fixed-rate
energy provider. Previously, we had a fixed-rate contract with Enron to supply
energy to a majority of our California Carls Jr. restaurants. As part of its
bankruptcy reorganization, Enron rejected that contract during the third
quarter of fiscal 2003. In connection with Enron rejecting our fixed-rate
contract, we have filed bankruptcy court claims totaling $14,204 against Enron.
At this time, we cannot make a determination as to the potential recovery, if
any, with respect to these claims and, accordingly, no recognition of this
uncertainty has been recorded in our consolidated financial statements. Repair and maintenance expense, as well as depreciation, rent, property taxes
and licenses expenses as percents of sales decreased during the sixteen weeks
ended May 17, 2004, from the comparable prior year period, due mainly to sales
leverage. Food and packaging costs as a percent of sales increased slightly during the
sixteen weeks ended May 17, 2004, from the comparable prior year period,
primarily due to an increase in beef and other commodity costs. On October 5, 2003, the Governor of California signed Senate Bill 2, known as
the Health Insurance Act of 2003 (SB2), which will require certain
California businesses either to pay at least 80% of the premiums for a basic
individual health insurance package for its employees who work over 100 hours
per month and their dependents, or to pay a fee into a state pool for the
purchase of health insurance for uninsured, low-income workers. California
businesses that employ 200 or more employees must comply with the new law
beginning on January 1, 2006. We currently do not offer health insurance
benefits to our hourly employees. SB2 is currently being challenged on several
fronts. We continue to evaluate the status and impact of this legislation,
which could be material to our results of operations. Franchised and Licensed Restaurants Franchised and licensed restaurant revenues increased $6,443, or 10.7%, to
$66,876 during the sixteen weeks ended May 17, 2004, as compared to the sixteen
weeks ended May 19, 2003. The increase is comprised mainly of an increase of
$5,678, or 12.2%, in food, paper and supplies sales to franchisees, resulting
from the increase in the franchise store base over the comparable prior year
period and the food purchasing volume impact of the 9.3% increase in franchise
same-store sales. For similar reasons, franchise royalties also grew $1,012, or
15.4%, during
the sixteen weeks ended May 17, 2004, as compared to the sixteen weeks ended
May 19, 2003. 45




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Net franchising income increased $2,368, or 34.7%, during the sixteen weeks
ended May 17, 2004, as compared to the sixteen weeks ended May 19, 2003. The
increase is primarily due to increased profits from subleasing facilities to
franchisees and the increase in franchise royalties. Although not required to do so, approximately 88% of Carls Jr. franchised and
licensed restaurants purchase food, paper and other supplies from us. Hardees During the sixteen weeks ended May 17, 2004, we closed 30 Hardees restaurants
and opened one restaurant. During the same period, Hardees franchisees and
licensees opened five restaurants and closed 16 restaurants. The following
table shows the change in the Hardees restaurant portfolio, as well as the
change in revenue for the current quarter: Restaurant Portfolio
    
    RevenueFirst Fiscal Quarter
    
    First Fiscal Quarter2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change(as restated)
    
    (as restated)Company
    
    
    692
    
    
    
    730
    
    
    
    (38
    )
    
    $
    181,017
    
    
    $
    167,613
    
    
    $
    13,404Franchised and licensed
    
    
    1,389
    
    
    
    1,451
    
    
    
    (62
    )
    
    
    21,903
    
    
    
    19,525
    
    
    
    2,378Total
    
    
    2,081
    
    
    
    2,181
    
    
    
    (100
    )
    
    $
    202,920
    
    
    $
    187,138
    
    
    $
    15,782
 During the fourth quarter of fiscal 2003, we introduced a new menu at Hardees
pursuant to our Hardees Revolution strategy. We determined that significant
management and staff training would be required to properly execute the new
menu. We also invested in additional labor in the restaurants to ensure
outstanding customer service during the training stage of the Hardees
Revolution. These investments significantly impacted our financial results
during the sixteen week period ended May 19, 2003. In addition, the deletion of
up to 40 menu items pursuant to the Hardees Revolution strategy negatively
affected sales at both company-operated and franchised Hardees restaurants
through the first half of fiscal 2004. As the training, implementation and
introduction of the Hardees Revolution were completed in early fiscal 2004, we
have returned to pre-Hardees Revolution staffing levels. We have also
experienced significant sales trend improvements since the completion of
Hardees Revolution rollout, including same-store sales growth at
company-operated restaurants for 11 consecutive four-week reporting periods
through May 17, 2004. Company-Operated Restaurants Same-store sales for company-operated Hardees restaurants increased 11.9%
during the sixteen weeks ended May 17, 2004. We believe this increase reflects
positive consumer reception of the Hardees Revolution menu changes. A 4% price
increase implemented at the beginning of the fourth quarter of fiscal 2004 to
address cost pressures, particularly the cost of beef, also contributed to our
same-store sales growth. Revenue from company-operated Hardees restaurants
increased $13,404, or 8.0%, during the sixteen weeks ended May 17, 2004, as
compared to the sixteen weeks ended May 19, 2003. This increase is due to the
increase in same-store sales during the sixteen weeks ended May 17, 2004,
partially offset by the closure of 30 restaurants that did not adequately
respond to the Hardees Revolution strategy. The average check during the
sixteen weeks ended May 17, 2004 was $4.57, as compared to $4.15 during the
sixteen weeks ended May 19, 2003, primarily due to our shift to premium
products and the price increase in the fourth quarter of fiscal 2004. The changes in restaurant-level margins are explained as follows: (as restated)Restaurant-level margin for the sixteen weeks ended May 19, 2003
    
    
    7.1
    %Decrease in labor costs, excluding workers compensation
    
    
    4.1Decrease in food and packaging costs
    
    
    1.5Decrease in utilities expense
    
    
    0.9Decrease in general liability insurance expense
    
    
    0.5Decrease in rent, depreciation, property taxes and licenses
    
    
    0.4Decrease in restaurant opening costs
    
    
    0.4Decrease in workers compensation insurance expense
    
    
    0.2Decrease in repair and maintenance expenses
    
    
    0.2Decrease in incentive program costs
    
    
    0.2Increase in asset retirement expense
    
    
    (0.2
    )Other, net
    
    
    0.3Restaurant-level margin for the sixteen weeks ended May 17, 2004
    
    
    15.6
    %
 46




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Labor costs, excluding workers compensation, decreased significantly as a
percent of sales during the sixteen week period ended May 17, 2004, from the
comparable prior year period. This decrease resulted mainly from the return to
normal staffing levels after completing the Hardees Revolution rollout, the
benefits of sales leverage, and certain labor cost management improvements
commencing in the fourth quarter of fiscal 2004, slightly offset by increased
restaurant manager bonuses due to improved financial performance. Food and packaging costs decreased from the prior year comparable period as a
percent of sales primarily due to lower discounting during the current year
versus the prior year while we were still transitioning to the Hardees
Revolution menu, as well as the price increase implemented in the fourth
quarter of fiscal 2004 discussed above. General liability insurance expense
decreased from the prior year comparable period as well, primarily due to lower
estimated claims losses and a decrease in insurance premiums as a result of
recent loss trend improvements. The decrease in rent, depreciation, property taxes and licenses as a percent of
sales from the prior year comparable period primarily resulted from adjustment
to deferred rents based on current lease terms (0.3% margin impact) and
benefits of sales leverage, partially offset by increased depreciation expense
on point-of-sale equipment under capital lease which, in late fiscal 2004, we
determined we will replace earlier than originally planned (0.3% margin
impact). We do not anticipate similar deferred rent adjustments in future
periods. We expect accelerated amortization of point-of-sale equipment to
continue into the second quarter of fiscal 2006. Restaurant opening costs and asset retirement expenses are dependent upon
restaurant actions that occur only from time to time. During the sixteen weeks
ended May 17, 2004, we opened one Hardees restaurant, while in the prior year
comparable period we opened three Hardees restaurants. In addition, we applied
certain new uniform and training costs pursuant to the Hardees Revolution
conversion to opening costs in the prior year comparable period. During the
sixteen weeks ended May 17, 2004, we retired a minor amount of obsolete
restaurant cooking equipment assets whereas we had no significant asset
retirement activity in the prior year comparable period. Workers compensation and repair and maintenance expenses decreased as percents
of sales from the prior year comparable period due mainly to the benefits of
sales leverage. Incentive costs decreased due to curtailment of a particular
program. Franchised and Licensed Restaurants Franchised and licensed restaurant revenues increased $2,378, or 12.2%, to
$21,903 during the sixteen weeks ended May 17, 2004, as compared to the sixteen
weeks ended May 19, 2003. Franchise royalties grew $2,866, or 27.4%, during the
sixteen weeks ended May 17, 2004 as compared to the sixteen weeks ended May 19,
2003, primarily due to improved financial health of certain franchisees, which
allowed them to resume royalty payments to us, and the 10.9% increase in
franchise same-store sales, partially offset by the decrease in the number of
franchised restaurants. Similarly, rent revenues increased $1,093 during the
sixteen weeks ended May 17, 2004, as the improved financial health of certain
franchisees has allowed them to resume making lease or sublease payments to the
Company. Distribution revenues decreased $1,621, or 23.6%, to $5,237 during the sixteen
weeks ended May 17, 2004 from the prior year comparable period due to decreased
equipment sales to franchisees. Equipment sales have slowed after franchisees
made significant investments in fiscal 2003 and early fiscal 2004 pursuant to
the Star Hardees remodel program. Net franchising income increased $4,698, or 56.3%, during the sixteen weeks
ended May 17, 2004 as compared to the sixteen weeks ended May 19, 2003. The
increase is primarily due to the increases in franchise royalties and rents
noted above. 47




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) La Salsa During the sixteen weeks ended May 17, 2004, we opened two La Salsa
restaurants. During the same period, La Salsa franchisees and licensees opened
two restaurants. The following table shows the change in the La Salsa
restaurant portfolio, as well as the change in revenue at La Salsa for the
current quarter: Restaurant Portfolio
    
    RevenueFirst Fiscal Quarter
    
    First Fiscal Quarter2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeCompany
    
    
    63
    
    
    
    57
    
    
    
    6
    
    
    $
    14,202
    
    
    $
    12,696
    
    
    $
    1,506Franchised and licensed
    
    
    43
    
    
    
    40
    
    
    
    3
    
    
    
    557
    
    
    
    443
    
    
    
    114Total
    
    
    106
    
    
    
    97
    
    
    
    9
    
    
    $
    14,759
    
    
    $
    13,139
    
    
    $
    1,620
 Same-store sales for company-operated La Salsa restaurants increased 6.0%
during the sixteen weeks ended May 17, 2004. Revenue from company-operated La
Salsa restaurants increased $1,506, or 11.9%, when compared to the sixteen
weeks ended May 19, 2003, primarily due to the net increase in the number of
company-operated restaurants and the increase in same-store sales. Restaurant-level margins were 5.8% and 10.8% as a percent of company-operated
restaurant revenues for the sixteen-week periods ended May 17, 2004, and May
19, 2003, respectively. Margins were negatively impacted by approximately 150
basis points due to an increase in food and packaging costs as a percent of
sales, resulting primarily from higher produce and dairy costs. Margins were
also negatively impacted by approximately 180 basis points primarily as a
result of increased hourly labor related to higher costs associated with new
restaurant openings and the fixed nature of labor on lower sales at more
labor-intensive full service locations. Occupancy and other expenses negatively
impacted margins by approximately 170 basis points, due mainly to amortization
of intangible assets (approximately 210 basis points), which had been
classified as general and administrative expenses in the prior year comparable
period. Consolidated Advertising Expense Advertising expenses increased $1,251, or 6.0%, to $22,264 during the sixteen
weeks ended May 17, 2004. Advertising expenses as a percentage of
company-operated restaurant revenue decreased marginally from 6.2% to 6.1%
during the sixteen weeks ended May 17, 2004, due to higher advertising in the
prior year during the Hardees Revolution rollout at the Hardees brand,
partially offset by the management decision to slightly increase advertising
spending at the Carls Jr. brand. Consolidated General and Administrative Expense (as restated) General and administrative expenses were 8.3% of total revenue during the
sixteen weeks ended May 17, 2004, as compared to 7.5% during the sixteen weeks
ended May 19, 2003. General and administrative expenses increased $6,047, or
19.1%, to $37,656 during the sixteen weeks ended May 17, 2004, as compared to
the same period last year. This increase is primarily due to increased
incentive compensation expense as a result of our improved financial
performance, increased consulting expenses pursuant to payroll services
outsourcing and compliance work associated with the Sarbanes-Oxley Act of 2002
(and new corporate governance requirements imposed by the New York Stock
Exchange), and increased legal fees with respect to ongoing litigation,
partially offset by a decrease in depreciation expense with respect to
information systems software. Consolidated Interest Expense (as restated) During the sixteen weeks ended May 17, 2004, interest expense decreased $447,
or 3.7%, to $11,720, as compared to the sixteen weeks ended May 19, 2003,
primarily as a result of a decrease in deferred financing cost amortization
expense, lower average borrowings under convertible debt financing and further
amortization of our capital lease obligations since the prior year comparable
period, partially offset by $393 of deferred financing cost write-offs during
the current quarter upon prepayment of a portion of the Companys term loan
under its senior credit facility. 48




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Consolidated Other Income (Expense), Net (as restated) Other income (expense), net, primarily consists of lease and sublease income
from non-franchisee tenants, provisions for bad debts on certain notes
receivable from franchisees and other non-operating charges. Other income
increased by $1,559, to $729, during the sixteen weeks ended May 17, 2004, over
the prior year comparable period due mainly to a $1,422 provision for bad debts
for Hardees notes receivable in the prior year comparable period.. Consolidated Income Tax Expense (as restated) We recorded income tax expense of $351 and $363 for the sixteen weeks periods
ended May 17, 2004, and May 19, 2003, respectively. These amounts for both
periods were comprised primarily of foreign income taxes and deferred taxes
associated with a difference in amortization of goodwill for financial
reporting versus income tax reporting purposes. We believe that our net
operating loss carryforward is such that we will not be required to pay federal
income taxes on this fiscal years taxable earnings, if any, and have only
provided for foreign income taxes.
At January 31, 2004, we had federal net operating loss (NOL) carryforwards of
approximately $91,970, expiring in varying amounts in the years 2010 through
2024, and state NOL carryforwards totaling approximately $335,948, expiring in
varying amounts in the years 2006 through 2024. We have federal NOL
carryforwards for alternative minimum tax purposes of approximately $72,210 and
an alternative minimum tax credit carryforward of approximately $10,691. We
have also generated general business credit carryforwards of approximately
$10,952, expiring in varying amounts in the years 2020 through 2024, and
foreign tax credits in the amount of $2,829, expiring in varying amounts in the
years 2008 and 2009. We have recorded a 100% valuation allowance against our net deferred tax
assets, net of deferred tax liabilities that may be offset by our deferred tax
assets for income tax accounting purposes. If our business turnaround
continues to result in sustained profitability and our prospects for the
realization of our deferred tax assets are more likely than not, we would then
reverse our valuation allowance and record an income tax benefit. As
circumstances warrant, we continue to assess the likelihood that our net
deferred tax assets will more likely than not be realized. As of January 31,
2004, we maintained a deferred tax liability of $1,413, which results from our
net deferred tax assets and tax valuation allowance of approximately $187,276
and $188,689, respectively. Liquidity and Capital Resources (as restated) We have historically financed our business through cash flow from operations,
borrowings under our credit facility and the sale of restaurants. Our most
significant cash uses during the next 12 months will arise primarily from
funding our capital expenditures. We amended and restated our senior credit
facility (Amended Facility) on June 2, 2004 (see below). We anticipate that
existing cash balances, availability under the Amended Facility and cash
generated from operations will be sufficient to service existing debt and to
meet our operating and capital requirements for the next 12 months.
Additionally, we are able to sell restaurants as a source of liquidity,
although we have no intention to do so significantly at this time. We have no
potential mandatory payments of principal on our $105,000 of 4% Convertible
Subordinated Notes due 2023 until October 1, 2008. On July 2, 2004, we will
redeem our $200,000 of Senior Subordinated Notes due 2009 with proceeds from
the Amended Facility. We, and the restaurant industry in general, maintain relatively low levels of
accounts receivable and inventories, and vendors grant trade credit for
purchases such as food and supplies. We also continually invest in our business
through the addition of new sites and the refurbishment of existing sites,
which are reflected as long-term assets and not as part of working capital. As
a result, we typically maintain current liabilities in excess of current
assets, resulting in a working capital deficit. As of May 17, 2004, our current
ratio was 0.80 to 1. On June 2, 2004, we amended and restated our senior credit facility to provide
for a $380,000 senior secured credit facility consisting of a $150,000
revolving credit facility and a $230,000 term loan. The revolving credit
facility matures on May 1, 2007, and includes an $85,000 letter of credit
sub-facility. The principal amount of the term loan will be repaid in quarterly
installments, with a balloon payment of the remaining principal balance at
maturity on July 2, 2008. The Amended Facility also requires term loan
prepayments based upon an annual excess cash flow formula, as defined therein.
Subject to certain conditions as defined in the Amended Facility, the maturity
of the term loan may be extended to May 1, 2010. We used a portion of the
proceeds from the $230,000 term loan to repay the balance of the existing
Facility term loan of $10,137 and to pay approximately $5,800 in transaction
fees. 49




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) On June 2, 2004, we deposited $212,168 with the trustee for our Senior Notes,
constituting all funds necessary to
retire the Senior Notes obligations, and gave notice of redemption of the
Senior Notes to occur on July 2, 2004. On July 2, 2004, the trustee will apply
the depository amount to redeem the entire principal of $200,000, and pay our
optional redemption premium of $9,126 and accrued interest, under our 9.125%
Senior Subordinated Notes due 2009. We will also incur a charge of
approximately $3,100 during our second fiscal quarter to write-off unamortized
debt issuance costs associated with the Senior Notes. We anticipate this
redemption will result in annual interest savings of approximately $7,000
during the first year. We will use the remaining proceeds of the term loan for
general corporate purposes. We use the Amended Facility to fund letters of credit required for our
self-insurance programs. Additionally, the Amended Facility provides working
capital during those periods when seasonality affects our cash flow. As of May
17, 2004 (prior to amendment and restatement of the Facility), we had cash
borrowings outstanding under the term loan portion of the Facility of $10,137,
outstanding letters of credit under the revolving portion of the Facility of
$63,697 and availability under the revolving portion of the Facility of
$86,303. Upon the closing of the Amended Facility, we had $230,000 outstanding
under the term loan, $63,697 of outstanding letters of credit and borrowing
availability of $86,303. Borrowings bear interest at either LIBOR plus an
applicable margin or the Prime Rate plus an applicable margin, with interest
due monthly or quarterly depending on the interest period. Currently, the
applicable interest rate on the term loan is LIBOR plus 3.00%. The applicable
interest rate on the revolving loan portion of the Amended Facility is LIBOR
plus 2.75%. We also incur fees on outstanding letters of credit under the
Amended Facility at a rate equal to the applicable margin for LIBOR loans,
which is currently 3.00% per annum. Subsequent to May 17, 2004, we repaid
$20,000 of the outstanding term loan balance under the Amended Facility in
advance of the terms of the Amended Facility. The agreement underlying the Amended Facility includes certain restrictive
covenants. Among other things, these covenants restrict our ability to incur
debt, incur liens on our assets, make any significant change in our corporate
structure or the nature of our business, dispose of assets in the collateral
pool securing the Amended Facility, prepay certain debt, engage in a change of
control transaction without the member banks consents, pay dividends and make
investments or acquisitions. Subject to the terms of the Amended Facility, we may make capital expenditures
in the amount of $50,000 plus 80% of the amount of actual EBITDA (as defined in
the Facility) in excess of $110,000 during our current fiscal year and $45,000
plus 80% of the amount of actual EBITDA (as defined in the Facility) in excess
of $110,000 during each subsequent fiscal year. Additionally, in fiscal 2005
and thereafter we may carry forward any unused capital expenditure amounts to
the following year. The Amended Facility also permits us to repurchase our common stock in the
amount of $27,000 plus a portion of excess cash flow and certain net asset sale
proceeds (as defined in the Amended Facility) during the term of the Amended
Facility. On April 13, 2004, our Board of Directors authorized a program to
allow us to repurchase up to $20,000 of our common stock. Pursuant to this
authorization, during the sixteen weeks ended May 17, 2004, we repurchased
319,000 shares of our common stock at an average price of $10.49 per share, for
a total cost, including trading commissions, of $3,354. We may make additional
repurchases of our common stock if we believe it to be a good investment of our
corporate funds and in the best interests of our stockholders. The Amended Facility also requires that, by no later than August 31, 2004, we
enter into an interest rate hedge agreement, for a period expiring no sooner
than June 2, 2007, that effectively fixes or caps the interest expense on at
least $70,000 of the term loan under the Facility. The full text of the contractual requirements imposed by this financing is set
forth in the Sixth Amended and Restated Credit Agreement, dated as of June 2,
2004, which we are filing with the Securities and Exchange Commission as an
exhibit to this report. Based upon the financial results we originally
reported (i.e., prior to our restatement of previously issued financial
statements, as discussed in Note 2 of the Notes to Condensed Consolidated
Financial Statements), we were in compliance with the requirements of the
Facility as of May 17, 2004. However, had we reported our as-restated
financial results instead of our originally reported results, and had we been
unable to obtain an amendment to or waiver of the applicable sections of the
Facility, we would have been in violation of certain of the financial
performance covenants under the Facility as of May 17, 2004. On June 2, 2004,
were financed the Facility with a new credit facility. Based on the terms of
the new credit facility, we continue to classify the Facility as long-term as
of May 17, 2004, in the accompanying Condensed Consolidated 50




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Balance Sheets. Subject to cure periods in certain instances, the lenders
under our Amended Facility may demand repayment of borrowings prior to stated
maturity upon certain events, including if we breach the terms of the
agreement, suffer a material adverse change, engage in a change of control
transaction, suffer certain adverse legal judgments, in the event of specified
events of insolvency or if we default other significant obligations. In the
event the Amended Facility is declared accelerated by the lenders (which can
occur only if we are in default under the Amended Facility), our 4% Convertible
Subordinated Notes due 2023 (2023 Convertible Notes) may also become
accelerated under certain circumstances and after all cure periods have
expired. The 2023 Convertible Notes, which are our unsecured general obligations, are
governed by an indenture. The indenture requires that we pay interest at a rate
of 4.00% per annum in semiannual coupons due each April 1 and October 1, with
all outstanding principal due and payable October 1, 2023. We have the right to
prepay the notes after October 1, 2008 for an amount equal to 100% of the
principal amount of the notes redeemed plus accrued interest, subject to a
notice requirement. The full text of the contractual requirements imposed by
this financing is set forth in the related indenture, which has been filed with
the Securities and Exchange Commission. The indenture contains certain
restrictive covenants. We were in compliance with the covenants of the 2023
Convertible Notes as of May 17, 2004. Subject in certain instances to cure
periods, the holders of the 2023 Convertible Notes may demand repayment of
these borrowings prior to stated maturity upon certain events, including if we
breach the terms of the indenture, in the event of specified events of
insolvency, or if other significant obligations are accelerated. On October 1
of 2008, 2013 and 2018, holders of the 2023 Convertible Notes have the right to
require us to repurchase all or a portion of the notes at prices specified in
the related indenture. The notes are convertible into our common stock on the
conditions set forth in the related indenture. The notes were not convertible
during the period September 29, 2003 through May 17, 2004. The net proceeds
from the issuance of these notes were used to repay a portion of the 2004
Convertible Notes. The Senior Notes, which are unsecured obligations but are guaranteed by our
subsidiaries, are governed by an indenture. The indenture requires that we pay
interest at a rate of 9.125% per annum in semi-annual coupons due on each May 1
and November 1, with all outstanding principal due and payable May 1, 2009. On
May 1, 2004, we began to have the right to prepay the notes for an amount equal
to principal, accrued interest and a premium, subject to a notice requirement.
The premium from May 1, 2004 to May 1, 2005, is 4.56% of the principal amount
redeemed. The full text of the contractual requirements imposed by this
financing is set forth in the indenture, which has been filed with the
Securities and Exchange Commission. We were in compliance with such
requirements as of May 17, 2004. However, our incurrence of additional senior
indebtedness under the Amended Facility on June 2, 2004, breached the
limitation on additional indebtedness in the Senior Notes indenture. The
indenture allows us 30 days to cure this breach before the breach becomes a
default. As noted above, we will repay the entire outstanding balance and the
related optional redemption premium and accrued interest under the Senior Notes
at the end of the notice period on July 2, 2004, which will result in the
termination of the breached covenant within the 30-day cure period. On March 15, 2004, we repaid and retired the remaining outstanding principal
balance of $22,319 on our 2004 Convertible Notes, using a portion of the
proceeds of the $25,000 term loan issued under the Facility on November 12,
2003. The terms of the Amended Facility are not dependent on any change in our credit
rating. The 2023 Convertible Notes contain a convertibility trigger based on
the credit ratings of the notes (see discussion in Note 5 of Notes to Condensed
Consolidated Financial Statements). We believe the key company-specific factors
affecting our ability to maintain our existing debt financing relationships and
to access such capital in the future are our present and expected levels of
profitability and cash flow from operations, asset collateral bases and the
level of our equity capital relative to our debt obligations. In addition, as
noted above, our existing agreements include significant restrictions on future
financings including, among others, limits on the amount of indebtedness we may
incur or which may be secured by any of our assets. During the sixteen weeks ended May 17, 2004, cash provided by operating
activities was $47,441, an increase of $29,277 over the prior year comparable
period. The increase resulted mainly from the increase in net income over the
prior year and a trend change in the accounts payable balance fluctuation in
the current year first fiscal quarter as compared to the prior year first
fiscal quarter. Such trend can be vary significantly from quarter to quarter
depending upon the timing of large vendor payments. 51




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Cash used in investing activities during the sixteen weeks ended May 17, 2004,
totaled $8,847, which principally
consisted of purchases of property and equipment, partially offset by proceeds
from the sale of property and equipment and collections on notes receivable and
related party receivables. Cash used in financing activities during the sixteen weeks ended May 17, 2004,
totaled $50,209, which principally consisted of redemption of $22,319 of our
2004 Convertible Notes, repayment of $13,926 of the term loan under our bank
credit facility (of which $13,515 represented voluntary prepayment thereof) and
a decrease in our bank overdraft position, which is generally not a significant
source or use of cash over the long term. Capital expenditures for the sixteen weeks ended May 17, 2004 were: (as restated)New restaurants (including restaurants under development)Carls Jr.
    
    $
    1,996Hardees
    
    
    1,324La Salsa
    
    
    202Remodels/Dual-branding (including construction in process)Carls Jr.
    
    
    130Hardees
    
    
    1,734Other restaurant additionsCarls Jr.
    
    
    3,890Hardees
    
    
    5,288La Salsa
    
    
    718Corporate/other
    
    
    1,102Total
    
    $
    16,384
 As of May 17, 2004, we had remodeled 80% of the Hardees company-operated
restaurants to the Star Hardees format. Contractual Obligations We enter into purchasing contracts and pricing arrangements to control costs
for commodities and other items that are subject to price volatility. These
arrangements in addition to any unearned supplier funding and distributor
inventory obligations result in unconditional purchase obligations (see further
discussion regarding these obligations in Item 3  Quantitative and
Qualitative Disclosures About Market Risk) which, as of May 17, 2004, totaled
$57,470. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Our principal exposure to financial market risks relates to the impact that
interest rate changes could have on our Facility. As of May 17, 2004, we had
$10,137 of borrowings and $63,697 of letters of credit outstanding under the
Facility. Borrowings under the Facility bear interest at the prime rate or
LIBOR plus an applicable margin. A hypothetical increase of 100 basis points in
short-term interest rates would result in a reduction in the Companys annual
pre-tax earnings of $101. The estimated reduction is based upon the outstanding
balance of the Facility (including outstanding letters of credit) and the
weighted-average interest rate for the quarter and assumes no change in the
volume, index or composition of debt as in effect May 17, 2004. Substantially
all of our business is transacted in U.S. dollars. Accordingly, foreign
exchange rate fluctuations have not had a significant impact on us and are not
expected to in the foreseeable future. Commodity Price Risk We purchase certain products which are affected by commodity prices and are,
therefore, subject to price volatility caused by weather, market conditions and
other factors which are not considered predictable or within our control.
Although many of the products purchased are subject to changes in commodity
prices, certain purchasing contracts or pricing arrangements contain risk
management techniques designed to minimize price volatility. The purchasing
contracts and pricing arrangements we use may result in unconditional purchase
obligations, which are not reflected in the consolidated balance sheet.
Typically, we use these types of purchasing techniques to control costs as an
alternative to directly managing financial instruments to hedge commodity
prices. In many cases, we believe we will be able to address material commodity
cost increases by adjusting our menu pricing or changing our product delivery
strategy. However, increases in commodity prices, without adjustments to our
menu prices, could result in lower restaurant-level operating margins for our
restaurant concepts. 52




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
CONTROLS AND PROCEDURES 
 Item 4. Controls and Procedures Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in the Companys reports
under the Securities Exchange Act of 1934, such as this Form 10-Q/A, is
reported in accordance with the Securities and Exchange Commissions rules.
Disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In connection with the preparation of the Form 10-Q as of May 17, 2004, the
Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures as of the end of the period
covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 as amended. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures, as of the end of the period
covered by the Form 10-Q report, were effective in timely alerting them to
material information relating to the Company required to be included in the
Companys periodic filings. Beginning with the Companys fiscal year ending January 31, 2005, in addition
to reporting on disclosure controls and procedures, Section 404 of the
Sarbanes-Oxley Act of 2002 will require the Companys senior management to
provide an annual report on internal controls over financial reporting. This
report must contain (i) a statement of managements responsibility for
establishing and maintaining adequate internal controls over financial
reporting for the Company, (ii) a statement identifying the framework used by
management to conduct the required evaluation of the effectiveness of internal
controls over financial reporting, (iii) managements assessment of the
effectiveness of internal controls over financial reporting as of the end of
the most recent fiscal year, including a statement as to whether or not the
Companys internal controls over financial reporting are effective, and (iv) a
statement that the Companys independent auditors have issued an attestation
report on managements assessment of internal controls over financial
reporting. Pursuant to this requirement, in early fiscal 2005 management
established an internal control steering committee and project team, engaged
outside consultants and adopted a detailed project work plan to document and
assess the adequacy of internal controls over financial reporting, remediate
any control weaknesses that may be identified, validate through testing that
the controls are functioning as documented and implement a continuous reporting
and improvement process for internal controls over financial reporting. In October and November of 2004, through an extensive internal review of its
consolidated financial statements, the Companys management identified several
accounting matters that led to a conclusion by the Companys Audit Committee of
the Board of Directors that previously filed financial statements of the
Company should be restated. See Managements Discussion and Analysis of
Financial Condition and Results of Operations and Note 2 of the Notes to
Consolidated Financial Statements included within this Form 10-Q/A for further
detailed discussion and quantification of the accounting errors identified. In December 2004, management determined that the accounting errors identified
in its internal review resulted collectively from material weaknesses in
internal controls over financial reporting in the associated accounting areas.
The Companys independent registered public accounting firm, KPMG LLP,
concurred with the Company that the matters identified in the Companys
internal review collectively resulted from a material weakness (as such term is
defined under standards established by the American Institute of Certified
Public Accountants) in the Companys internal controls over financial
reporting. Based on the information obtained during its internal review and Section 404
compliance work subsequent to May 17, 2004, the Companys Chief Executive
Officer and Chief Financial Officer concluded in December 2004 that, because of
the material weaknesses in internal controls over financial reporting described
above, the Companys disclosure controls and procedures, as of the end of the
period covered by this Form 10-Q/A report, were not effective in timely
alerting them to material information relating to the Company required to be
included in the 53




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Companys periodic filings. Except as described below, there have been no changes in the Companys internal
controls over financial reporting during the Companys fiscal quarter ended May
17, 2004, or thereafter, that have materially affected, or are reasonably
likely to affect, the Companys internal controls over financial reporting. The Company has addressed several deficiencies identified during its internal
review and Section 404 compliance work. These efforts have resulted in the
following:  
    
    Revisions to the Companys accounting policies to eliminate
inconsistencies in its definition of lease term, strengthening of
accounting practices whereby applicable lease terms are reviewed and
appropriately considered by the Fixed Asset Accounting Department when
establishing the depreciable lives for fixed and intangible assets that
are subject to leases, and establishment of management review and
approval procedures related thereto.
    
    Formalization and improvement of existing communication practices
among the Companys Real Estate, Fixed Assets and General Accounting
Departments to ensure timely and complete accounting for and financial
reporting of facility actions such as restaurant sales, closures and
lease/sublease modifications, or changes in the Companys intention to
sell or close restaurants or modify lease or sublease arrangements.
    
    Increases to lease accounting staffing levels, additional training
of General Accounting Department personnel with respect to all facets
of lease accounting applicable to the Company, and implementation of
management review and approval procedures related thereto.
    
    Formalization and improvement of existing documentation practices
to ensure communication of asset dispositions to the Companys
Accounting Department.
    
    Implementation of annual fixed asset physical inventories in
restaurant operations and annual fixed asset listing reviews by
Facilities Department and Information Technology Department personnel.
    
    Training of Information Technology Department and General
Accounting Department personnel, and establishment of communication
mechanisms between these two departments with respect to accounting for
the costs of computer software developed or obtained for internal use.
    
    Development and implementation of an enhanced Delegation of
Authority policy to ensure that Company expenditures and contractual
commitments are approved in accordance with the Companys management
plan.
    
    Additional training of the Companys Accounts Payable Department
personnel to ensure they review invoices, before making payment, to
ensure approval compliance in accordance with the Delegation of
Authority.
    
    Formalization and improvement of existing communication practices
among General Accounting and other Corporate Departments throughout the
Company to ensure timely and complete accrual for incurred but unbilled
legal, information technology and other professional services.
    
    Enhancement of property tax accrual preparation and management
review within the Companys Corporate Tax Department.
    
    Additional training of individuals in the Companys Corporate Tax
Department regarding the appropriate accounting for deferred income
taxes arising from financial versus tax reporting differences with
respect to goodwill.
    
    Segregation of development and production support duties within the
Companys Information Technology Department with respect to its key
accounting and financial reporting systems. 54




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
    
    Formalization of documentation of management reviews that occur
during the periodic accounting close process.
    
    Segregation of wire transfer and other electronic payment
initiation and approval duties within the Companys Treasury
Department.
    
    Enhancement of revenue recognition cut-off procedures in the
Companys equipment distribution business to ensure proper revenue
recognition within each fiscal quarter. The Company continues to implement remedial measures in response to specific
accounting and reporting issues related to the restatement and its ongoing
Section 404 compliance work. These remedial measures will include additional
personnel and organizational changes to improve supervision and increased
training for finance and accounting personnel. The Company will also continue
to develop new policies and procedures and educate and train its employees on
its existing policies and procedures in an effort to constantly improve its
internal controls over financial reporting and other disclosure controls and
procedures. Furthermore, the Section 404 compliance work may identify
additional weaknesses in the Companys system of internal controls that may
require additional remedial measures. Management will consider the status of
these remedial measures when assessing the effectiveness of the Companys
internal controls over financial reporting and other disclosure controls and
procedures as of January 31, 2005. 55




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
OTHER INFORMATION
(In thousands, except per share amounts) 
 Part II. Other Information. 
 Item 1. Legal Proceedings. Information regarding legal proceedings is incorporated by reference from
Note 11 to the Companys Condensed Consolidated Financial Statements set
forth in Part 1 of this report. 
 Item 2. Changes in Securities and Use of Proceeds. Issuer Purchase of Equity Securities The following
table provides information as of May 17, 2004, with respect to shares of Common Stock repurchased by the Company during the fiscal quarter
then ended (dollars in thousands, except per share amounts): (a)
    
    (b)
    
    (c)
    
    (d)MaximumNumber (orApproximateDollarValue) ofTotal
    
    Shares (orNumber of Shares
    
    Units) thatAverage
    
    (or Units)
    
    May Yet BeTotal
    
    Price
    
    Purchased as Part
    
    PurchasedNumber of Shares
    
    Paid per
    
    of Publicly
    
    Under the(or Units)
    
    Share
    
    Announced Plans
    
    Plans orPeriod
    
    Purchased
    
    (or Unit)
    
    or Programs
    
    ProgramsJanuary 27, 2004 February 25, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 26, 2004  March 25, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 26, 2004  April 25, 2004
    
    
    319
    
    
    $
    10.49
    
    
    
    319
    
    
    $
    16,646April 26, 2004  May 17, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    319
    
    
    $
    10.49
    
    
    
    319
    
    
    $
    16,646
 In April 2004, our Board of Directors authorized a program to allow us to
repurchase up to $20,000 of our Common Stock through April 2005. Pursuant to
this authorization, during the sixteen weeks ended May 17, 2004, we
repurchased 319,000 shares of our Common Stock at an average price of $10.49
per share, for a total cost, including trading commissions, of $3,354. 56




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
EXHIBITS AND REPORTS ON FORM 8-K 
 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit #
    
    Description10.57
    
    Employment agreement, effective as of January 27, 2004, by and
between the Company and Brad R. Haley.* 10.58
    
    Sixth Amended and Restated Credit Agreement, dated as of June 2,
2004, by and among the Company, the Lenders party thereto, and
BNP Paribas, a bank organized under the laws of France acting
through its Chicago Branch (as successor in interest to
Paribas), as Agent. 31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
  *
    
    A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 15(a)(3) of Form 10-K.
    
    Previously filed. (b) Reports on Form 8-K: A Current Report on Form 8-K, dated April 7, 2004, was filed during the
first quarter of fiscal 2005, furnishing the Companys financial results
for the fourth quarter and Fiscal Year ended January 26, 2004. 57




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized. CKE RESTAURANTS, INC.(Registrant)Date: December 17, 2004
    
    /s/ Theodore AbajianTheodore AbajianExecutive Vice PresidentChief Financial Officer
 58




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Exhibit Index Exhibit #
    
    Description10.57
    
    Employment agreement, effective as of January 27, 2004, by and between the
Company and Brad R. Haley.* 10.58
    
    Sixth Amended and Restated Credit Agreement, dated as of June 2, 2004, by
and among the Company, the Lenders party thereto, and BNP Paribas, a bank
organized under the laws of France acting through its Chicago Branch (as
successor in interest to Paribas), as Agent. 31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  *
    
    A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 15(a)(3) of Form 10-K.
    
    Previously filed. 59