##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q





(Mark One)


|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- |  | ----------------------------------------------------------------------------------------




For the quarter ended November 4, 2002





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- |  | -----------------------------------------------------------------------------------------




For the transition period from 
to  .





Commission file number 1-11313





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CKE RESTAURANTS, INC.


(Exact name of registrant as specified in its charter)





Delaware (State or Other
Jurisdiction of Incorporation or Organization)

33-0602639 (I.R.S.
Employer Identification No.)





3916 State Street, Ste. 300, Santa Barbara, CA (Address of Principal Executive Offices)

93105 (Zip Code)





Registrants telephone number, including area code: (805) 898-8408





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  ̈





As of November 18, 2002, 58,866,757 shares of the Registrants Common Stock were outstanding.


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##### Table of Contents




CKE RESTAURANTS, INC. AND SUBSIDIARIES





INDEX





PagePart I.    Financial InformationItem 1.

Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of November 4, 2002 and January 31, 2002

3Condensed Consolidated Statements of Operations for the twelve and forty weeks ended November 4, 2002 and November 5, 2001

4Condensed Consolidated Statements of Changes in Stockholders Equity for the forty weeks ended November 4, 2002

5Condensed Consolidated Statements of Cash Flows for the forty weeks ended November 4, 2002 and November 5, 2001

6Notes to the Condensed Consolidated Financial Statements

7Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

17Item 3.

Quantitative and Qualitative Disclosures about Market Risk

37Item 4.

Controls and Procedures

38Part II.    Other InformationItem 5.

Other Information

39Item 6.

Exhibits and Reports on Form 8-K

40




2




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##### Table of Contents







PART 1.    FINANCIAL INFORMATION





ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





CKE RESTAURANTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(Dollars in thousands)





(Unaudited) November 4, 2002


January 31, 2002ASSETSCurrent assets:Cash and cash equivalents

$
32,502


$
24,642Accounts receivable, net


34,288



38,942Related party receivables


4,865



5,404Inventories


17,438



17,365Prepaid expenses


11,520



8,318Net assets held for sale


12,000



Other current assets


1,496



1,703Total current assets


114,109



96,374Notes receivable


7,643



7,352Property and equipment, net


542,134



542,193Property under capital leases, net


58,602



64,834Costs in excess of assets acquired, net


56,497



186,868Other assets


51,847



33,968Total assets

$
830,832


$
931,589LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of capital lease obligations

$
9,919


$
10,266Accounts payable


49,010



47,471Other current liabilities


95,481



91,110Total current liabilities


154,410



148,847Convertible subordinated notes


136,334



159,205Capital lease obligations, less current portion


62,291



70,107Senior subordinated notes


200,000



200,000Other long-term liabilities


76,710



91,764Total liabilities


629,745



669,923Stockholders equity:Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued and outstanding






Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 58,880,000 shares at November 4,
2002 and 52,162,000 shares at January 31, 2002


589



522Additional paid-in capital


463,447



383,319Accumulated deficit


(249,859
)


(107,530
)Non-employee director and officer notes receivable


(2,684
)


(4,239
)Treasury stock at cost, 1,585,000 shares


(10,406
)


(10,406
)Total stockholders equity


201,087



261,666Total liabilities and stockholders equity

$
830,832


$
931,589





See Accompanying Notes to Condensed Consolidated Financial Statements




3




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##### Table of Contents




CKE RESTAURANTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands except per share amounts)


(Unaudited)





Twelve Weeks Ended


Forty Weeks EndedNovember 4, 2002


November 5, 2001


November 4, 2002


November 5, 2001Revenue:Company-operated restaurants

$
255,865


$
259,612


$
867,144


$
931,943Franchised and licensed restaurants and other


56,964



65,253



197,653



203,946Total revenue


312,829



324,865



1,064,797



1,135,889Operating costs and expenses:Restaurant operations:Food and packaging


73,735



79,629



249,549



284,392Payroll and other employee benefit expenses


81,402



82,389



277,565



303,545Occupancy and other operating expenses


59,491



59,266



191,141



212,226214,628



221,284



718,255



800,163Franchised and licensed restaurants and other


43,105



48,538



150,561



156,232Advertising expenses


16,710



15,696



55,472



59,022General and administrative expenses


26,937



27,090



87,336



87,145Facility action charges, net


80



2,120



3,713



60,827Total operating costs and expenses


301,460



314,728



1,015,337



1,163,389Operating income (loss)


11,369



10,137



49,460



(27,500
)Interest expense


(10,273
)


(11,751
)


(34,435
)


(46,783
)Other income, net


3,904



220



11,807



839Income (loss) before income taxes, discontinued operations, and cumulative effect of accounting change for
goodwill


5,000



(1,394
)


26,832



(73,444
)Income tax expense (benefit)


(5,059
)


337



(7,187
)


2,204Income (loss) from continuing operations


10,059



(1,731
)


34,019



(75,648
)Discontinued operations (Note 8):Loss from operations of discontinued segment (net of income tax benefit of $30 and $26 for the twelve and forty week
periods ended November 4, 2002, respectively)


(556
)






(569
)


Income (loss) before cumulative effect of accounting change for goodwill


9,503



(1,731
)


33,450



(75,648
)Cumulative effect of accounting change for goodwill










(175,780
)


Net income (loss)

$
9,503


$
(1,731
)

$
(142,329
)

$
(75,648
)Basic income (loss) per common share:Continuing operations

$
0.18


$
(0.03
)

$
0.59


$
(1.50
)Discontinued operations


(0.01
)










Income (loss) before cumulative effect of accounting change


0.17



(0.03
)


0.59



(1.50
)Cumulative effect of accounting change for goodwill










(3.11
)


Net income (loss)

$
0.17


$
(0.03
)

$
(2.52
)

$
(1.50
)Diluted income (loss) per common share:Continued operations

$
0.17


$
(0.03
)

$
0.58


$
(1.50
)Discontinued operations


(0.01
)










Income (loss) before cumulative effect of accounting change


0.16



(0.03
)


0.58



(1.50
)Cumulative effect of accounting change for goodwill










(3.03
)


Net income (loss)

$
0.16


$
(0.03
)

$
(2.45
)

$
(1.50
)Weighted-average common shares outstanding:Basic


57,243



50,507



56,483



50,505Dilutive effect of stock options


1,896







1,610



Diluted


59,139



50,507



58,093



50,505





See Accompanying Notes to Condensed Consolidated Financial Statements







4




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##### Table of Contents




CKE RESTAURANTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


(In thousands except per share amounts)


(Unaudited)





Common Stock

Treasury Stock


Additional Paid-In Capital

Non-Employee Director and Officer Notes Receivable


Accumulated Deficit


Total Stockholders EquityNumber of Shares

Amount

Number of Shares


AmountBalance atJanuary 31, 2002

52,162

$
522

(1,585
)

$
(10,406
)

$
383,319

$
(4,239
)

$
(107,530
)

$
261,666Exercise of stock options

363


3









1,247










1,250Conversion of convertiblenotes

3












130










130Issuance of stock in connection with acquisition

6,352


64









78,751










78,815Payments on non-employee director and officer notes receivable

















1,555







1,555Net loss





















(142,329
)


(142,329
)Balance atNovember 4, 2002

58,880

$
589

(1,585
)

$
(10,406
)

$
463,447

$
(2,684
)

$
(249,859
)

$
201,087





See Accompanying Notes to Condensed Consolidated Financial Statements




5




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##### Table of Contents




CKE RESTAURANTS, INC AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


(Unaudited)





Forty Weeks EndedNovember 4, 2002


November 5, 2001Net cash flow from operating activities:Net loss

$
(142,329
)

$
(75,648
)Adjustments to reconcile net loss to net cash provided by operating activities:Cumulative effect of accounting change


175,780



Depreciation and amortization


53,326



61,367Depreciation and amortization on assets held for sale


1,252



Net change in accounts payable and other current liabilities, net of business acquired


5,872



(14,012
)Change in estimated liability for closing restaurants, self-insurance reserves, and other long-term
liabilities


(13,912
)


(793
)Gains on sale of investments, sale of property and equipment and extinguishment of debt


(10,681
)


(1,659
)Net change in income tax receivable


3,872



Facility action charges, net


3,713



60,827Net change in all other receivables, inventories, prepaid expenses and other current assets, net of business
acquired


(1,116
)


39,634Provision for (recovery of) losses on accounts and notes receivable


(793
)


3,970Other non-cash items


12



(1,848
)Net cash provided by operating activities


74,996



71,838Cash flow from investing activities:Cash received from acquisition, net of payments made to acquire Santa Barbara Restaurant Group, Inc.


1,991



Disposition of Taco Bueno, net of cash surrendered






61,224Purchases of property and equipment


(47,041
)


(16,012
)Proceeds from sale of:Property and equipment


16,051



63,708Long-term investments


8,959



1,871Increase in notes receivable and related party receivables






(4,666
)Collections on notes receivable and related party receivables


1,461



2,251Net change in other assets


345



(7,544
)Net cash provided by (used in) investing activities


(18,234
)


100,832Cash flow from financing activities:Net change in bank overdraft


(9,874
)


(618
)Repurchases of convertible debt


(20,540
)


Net repayments of bank indebtedness


(8,701
)


(162,154
)Repayments of capital lease obligations


(8,541
)


(7,750
)Payment of deferred financing costs


(5,366
)


(1,602
)Net change in other long-term liabilities


1,557



(3,337
)Repayment of non-employee director and officer notes receivable, including accrued interest


1,555



Exercise of stock options and conversion of convertible subordinated notes


1,250



111Net cash used by financing activities


(48,660
)


(175,350
)Net cash used by discontinued operations


(242
)


Net increase (decrease) in cash and cash equivalents


7,860



(2,680
)Cash and cash equivalents at beginning of period


24,642



16,860Cash and cash equivalents at end of period

$
32,502


$
14,180Supplemental disclosures of cash flow information:Cash (paid)/received during the period for:Interest

$
(34,265
)

$
(16,901
)Income taxes

$
12,724


$
32,313Non-cash investing and financing activities:Stock issued to acquire Santa Barbara Restaurant Group

$
78,815


$
Deferred gain on sale leaseback transactions

$
264


$
486Conversion of convertible notes

$
130


$









See Accompanying Notes to
Condensed Consolidated Financial Statements







6




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)







NOTE (1) BASIS OF PRESENTATION





CKE Restaurants, Inc. (CKE or the Company), through its wholly owned subsidiaries, owns, operates, franchises and licenses the Carls
Jr. ® , Hardees ® and The Green Burrito ® (Green Burrito), which is primarily operated as a dual-brand concept with Carls Jr., quick-service
restaurant concepts, as well as the La Salsa Fresh Mexican Grill ® (La
Salsa) and Timber Lodge Steakhouse ® (Timber Lodge) restaurant
concepts. Carls Jr. restaurants are primarily located in the Western United States, predominantly in California. 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 and Timber Lodge restaurants are primarily located in the upper Midwestern United States. As of November 4, 2002,
the Companys system-wide restaurant portfolio consisted of:





Carls Jr.

Hardees

La Salsa

Other

TotalCompany

439

731

57

31

1,258Franchise/license

542

1,524

41

29

2,136Total

981

2,255

98

60

3,394





The accompanying unaudited condensed consolidated financial
statements include the accounts of CKE and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America, the instructions to Form 10-Q, and Article 10 of Regulation
S-X. These statements should be read in conjunction with the audited consolidated financial statements presented in the Companys Annual Report on Form 10-K for the fiscal year ended January 28, 2002. 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. Certain reclassifications have been made to the fiscal 2002 condensed consolidated financial statements to conform with the fiscal 2003 presentation.





During the second quarter of fiscal 2002, the Company operated one chain, Taco Bueno, which was held for sale as of January 31,
2001, and was sold during that quarter. The activity of the Taco Bueno chain is included in the Other segment, as are the Timber Lodge restaurants and those Green Burrito restaurants not dual-branded with Carls Jr. restaurants.





NOTE (2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS





During the first quarter of fiscal 2003, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations
(SFAS 141), which supercedes APB Opinion No. 16, Business Combinations. SFAS 141 requires that business combinations be accounted for using the purchase method. The Company has used this method of accounting for previous
acquisitions and did so for the Santa Barbara Restaurant Group, Inc. (SBRG) acquisition, which was consummated on March 1, 2002 (see Note 3).





During the first quarter of fiscal 2003, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), which supercedes APB Opinion No. 17, Intangible
Assets and certain provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of (SFAS 121). SFAS 142, along with other requirements as more fully described on
our first quarter Form 10-Q, ceases the amortization of goodwill and other intangible assets with indefinite lives.




7




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)







Upon adoption of SFAS 142, the Company ceased amortization of
goodwill effective February 1, 2002. The following table provides a reconciliation of the reported net loss for the twelve and forty weeks ended November 5, 2001 to the pro forma net loss for the twelve and forty weeks ended November 5, 2001, as
though SFAS 142 had been effective for fiscal 2002:





Twelve Weeks Ended November 5, 2001


Forty Weeks Ended November 5, 2001Basic and Diluted
Loss


Basic and Diluted
LossAmount


Per Share


Amount


Per ShareReported net loss

$
(1,731
)

$
(0.03
)

$
(75,648
)

$
(1.50
)Add back goodwill amortization


1,284



0.02



4,452



0.09Adjusted net loss

$
(447
)

$
(0.01
)

$
(71,196
)

$
(1.41
)





During the first quarter of fiscal year 2003, the Company completed
its initial SFAS 142 transitional impairment test of goodwill which included an assessment of a valuation of the Hardees brand provided by an outside party which resulted in recording an impairment charge of $175,780, representing the
write-off of all of the goodwill related to the Hardees brand as a cumulative effect of accounting change.





Goodwill is recorded on the balance sheet as Costs in Excess of Assets Acquired, Net and totaled $56,497 as of November 4, 2002. Because the acquisition of SBRG was made, in part, to enhance future dual branding opportunities, the
Company has determined that $11,100 of the goodwill derived from that acquisition is properly allocable to Carls Jr., which has approximately 200 dual-brand restaurants. As of November 4, 2002, goodwill for the Companys Carls Jr.
segment totaled $22,648. The remaining $33,849 relates to the acquisition of SBRG and has been completely allocated to the La Salsa brand.





The Company adopted SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144) during the first quarter of fiscal 2003. SFAS 144 addresses the recoverability of long-lived
assets, excluding intangible assets. Previously, the Company accounted for the impairment of long-lived assets under SFAS 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Under SFAS 144,
the Company no longer considers the impact of goodwill allocated to the restaurants (in accordance with SFAS 142) when testing the carrying value of long-lived assets for impairment, but now includes the effect of future capital expenditures when
testing for impairment. The adoption of SFAS 144 did not have a material effect on the Companys consolidated financial statements. On a quarterly basis, we update our model for estimating future cash flows based upon experience gained, current
intentions about refranchising and closing restaurants, expected sales trends, internal plans, and other relevant information. In prior fiscal years, because we were significantly engaged in refranchising restaurants to generate cash to repay bank
indebtedness, we had, in some cases, assumed estimated lives that were less than the estimated useful life that a restaurant is functional as a restaurant. As our financial position has improved such that refranchising activities are unnecessary,
more restaurants assume estimated cash flows over their remaining estimated useful life. Additionally, commencing with the second quarter of fiscal year 2003, we reduced the probability weighting for the occurrence of future same-stores sales from
the higher range of our strategic business plan to the lower end of the range in light of our current same-store sales results.





NOTE
(3) ACQUISITIONS





On March 1, 2002, the Company acquired SBRG. SBRG owns, operates and franchises the Green
Burrito, La Salsa and Timber Lodge restaurant chains. Through the Companys dual-branding relationship with the Green Burrito Franchise Corporation, an indirect wholly-owned subsidiary of SBRG, Carls Jr. was SBRGs largest
franchisee. The Company acquired SBRG for strategic purposes, which included gaining control of the Green Burrito brand, eliminating the payment of royalties on 100 franchised restaurants and any future dual-brand restaurants developed or converted,
investing in the fast-casual segment which is an emerging competitor to the quick-service restaurant segment, and providing the Company with a growth opportunity in the Fresh Mex segment with La Salsa. The results of operations of SBRG
(excluding the operations of Timber Lodge which are classified as discontinued operations) are included in the operating results for the periods August 12, 2002 through November 4, 2002 and March 1, 2002 (date of acquisition) through November 4,
2002. The allocation of the resulting purchase price of $80,280 has been finalized.







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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)







The final allocation of the purchase price to the assets acquired,
including the costs in excess of assets acquired and liabilities assumed in the acquisition of SBRG are as follows:





Balance SheetAllocationAs ofMarch 1, 2002(Date of acquisition)

Adjustments


FinalAllocationof Initial BalanceSheetCurrent assets

$
5,173

$
(1,899
)

$
3,274Property and equipment


33,722


(15,904
)


17,818Costs in excess of assets acquired


32,225


4,341



36,566Net assets held for sale





12,000



12,000Other assets


30,566


(6,156
)


24,410Total assets acquired


101,686


(7,618
)


94,068Current liabilities


13,141


(6,247
)


6,894Long-term debt, excluding current portion


6,500






6,500Other long-term liabilities


2,230


(1,836
)


394Total liabilities assumed


21,871


(8,083
)


13,788Net assets acquired

$
79,815

$
465


$
80,280





The Company has made adjustments to the initial purchase price
allocation, the impact of which was immaterial to the Companys results of operations, as follows:





Increase in Assets Held for Sale due to Timber Lodge

$
12,000Decrease in Property and Equipment due to adjustments for capital leases, leasehold improvements, other property and
equipment, and reclass to assets held for sale


(15,904
)Decrease in current assets due to reclass to assets held for sale


(1,899
)Decrease in Other Assets due to adjustments for prepaid expenses and assets held for sale


(6,156
)Increase in Costs in Excess of Net Assets Acquired due to adjustments listed above


4,341Decrease in Current Liabilities due to adjustments for leases at Timber Lodge and reclass to assets held for
sale


6,247Decrease in Other Long-Term Liabilities due to adjustments to record additional estimated liabilities for closing
restaurants and reclass to assets held for sale


1,836Change in purchase price

$
465





The Company acquired identifiable intangible assets as a result of
the acquisition of SBRG. The intangible assets acquired, included in Other Assets above, excluding Costs in Excess of Net Assets Acquired, are classified and valued as follows:








Intangible Asset

Amortization Period

Balance SheetAllocationAs of March 1, 2002(Date of acquisition)

Adjustments


FinalAllocationAs ofNovember 4, 2002Trademarks

20 years

$
17,000

$
171


$
17,171Franchise agreements

20 years


1,700


80



1,780Favorable leases

6 to 15 years


9,600


(6,468
)


3,132Other intangible assets

20 years


46


(46
)


Total intangible assets acquired



$
28,346

$
(6,263
)

$
22,083







9




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)







Amortization expense related to identifiable intangible assets
acquired as a result of the acquisition of SBRG was immaterial for the quarter ended November 4, 2002 and for the period from March 1, 2002 (the date of acquisition) through November 4, 2002.





Selected unaudited pro forma combined results of operations for the forty weeks ended November 4, 2002 and the twelve and forty weeks ended November 5, 2001, assuming
the SBRG acquisition occurred on January 30, 2001, using actual restaurant-level margins and general and administrative expenses prior to the acquisition, are as follows:





Twelve Weeks Ended


Forty Weeks EndedNovember 5, 2001


November 4, 2002


November 5, 2001Total revenue

$
335,501


$
1,103,062


$
1,175,637Income (loss) before cumulative effect of accounting change for goodwill


(1,103
)


31,907



(70,207
)Cumulative effect of accounting change for goodwill






(175,780
)


Net income (loss)

$
(1,103
)

$
(143,873
)

$
(70,207
)Basic income (loss) per common share:Continuing operations

$
(0.02
)

$
0.55


$
(1.23
)Discontinued operations






(0.01
)


Income (loss) before cumulative effect of accounting change

$
(0.02
)

$
0.54


$
(1.23
)Cumulative effect of accounting change for goodwill






(3.02
)


Net income (loss)

$
(0.02
)

$
(2.48
)

$
(1.23
)Diluted income (loss) per common share:Continuing operations

$
(0.02
)

$
0.53


$
(1.23
)Discontinued operations






(0.01
)


Income (loss) before cumulative effect of accounting change

$
(0.02
)

$
0.52


$
(1.23
)Cumulative effect of accounting change for goodwill






(2.94
)


Net income (loss)

$
(0.02
)

$
(2.42
)

$
(1.23
)Weighted-average common shares outstanding:Basic


56,859



58,220



56,857Dilutive effect of stock options and awards






1,610



Diluted


56,859



59,830



56,857





NOTE (4) INDEBTEDNESS AND RELATED INTEREST EXPENSE





The Companys senior credit facility consists of a $100,000 revolving credit facility, which includes a letter of credit
sub-facility. The senior credit facility has a maturity date of December 14, 2003, extendable to November 15, 2006, provided the Company is able to refinance its convertible subordinated notes that are due in March 2004. As of November 4, 2002, the
total amount outstanding under the senior credit facility was $0, outstanding letters of credit were $54,736 and the availability was $45,264. On July 8, 2002, the Company amended the credit facility to, among other things, allow it to use the
proceeds received from its sale of the common stock of Checkers Drive-In Restaurants, Inc. (Checkers) to repurchase its convertible subordinated notes. On October 18, 2002, the Company again amended the credit facility to allow it to
repurchase an additional $15,000 of convertible subordinated notes. During the first, second, and third quarters of fiscal 2003, and through November 4, 2002, the Company has repurchased $22,741 (face value) of convertible notes for $20,540 at
various prices ranging from $85.25 to $91.75. Those transactions resulted in the recognition of a gain on the retirement of debt, which is recorded as Other Income (Expense), Net in the accompanying Condensed Consolidated Statement of Operations of
$704 and $2,201, for the twelve and forty week periods ended November 4, 2002, respectively.





Subsequent to
November 4, 2002, the Company repurchased $14,015 of convertible subordinated notes, leaving approximately $122,319 of convertible subordinated notes outstanding and no funds available under our bank agreement to repurchase additional convertible
subordinated notes.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)







Interest expense consists of the following:





Twelve Weeks Ended

Forty Weeks EndedNovember 4, 2002

November 5, 2001

November 4, 2002

November 5, 2001Senior credit facility

$
121

$
224

$
690

$
4,069Senior subordinated notes


4,212


4,212


14,038


14,038Capital lease obligations


2,069


2,382


6,955


7,869Convertible subordinated notes


1,379


1,378


4,837


5,205Amortization of loan fees


1,048


1,034


3,217


3,199Other, principally accretion of discount on estimated liability for closing restaurants


1,444


2,521


4,698


12,403Total interest expense

$
10,273

$
11,751

$
34,435

$
46,783





NOTE (5) FACILITY ACTION CHARGES, NET





In late fiscal 2000, the Company embarked upon a refranchising initiative to reduce its bank indebtedness and shift the restaurant system
mix to one that is more franchised than company-operated. Management also identified and closed many under-performing restaurants. While the bulk of this activity has ceased, the result of this strategy has significantly impacted the comparability
of results from year-to-year and caused the following transactions to be recorded in the accompanying Condensed Consolidated Financial Statements as Facility Action Charges, Net:





|(i) |  | impairment of long-lived assets for restaurants the Company plans to continue to operate and restaurants the Company intends to close beyond the quarter in
which the closure decision is made;
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(ii) |  | restaurant closure costs (primarily reflecting the estimated liability to terminate leases);
|---- |  | --------------------------------------------------------------------------------------------




|(iii) |  | estimated subsidy liabilities for restaurants subleased to franchisees at amounts less than the lease payments made by the Company; and
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------




|(iv) |  | gains (losses) on the sale of restaurants and surplus properties.
|---- |  | -----------------------------------------------------------------




On a quarterly basis, the Company evaluates the adequacy of its estimated liability for closing restaurants and subsidizing restaurant lease payments to franchisees and
modifies the assumptions used based on actual results from selling surplus properties and terminating leases, as well as utilizing estimated property values obtained from third-party real estate brokers. The Company closed no Carls Jr. and
three Hardees company-operated restaurants during the third quarter of fiscal 2003. For the forty weeks ended November 4, 2002, the Company closed three Carls Jr. and 17 Hardees company-operated restaurants. During the third
quarter of fiscal 2003, the Company identified four Hardees restaurants that it believed it should continue operating, but whose estimated fair value (based on projected cash flows from operations  see discussion of Impairment of
Property, Equipment, Property Held and Used and Property Held for Sale or to be Disposed of Other than by Sale) did not support the related net asset values and, accordingly, an impairment charge was recorded.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)







The components of these facility action charges are as follows:





Twelve Weeks Ended


Forty Weeks EndedNovember 4, 2002


November 5, 2001


November 4, 2002


November 5, 2001HardeesIncrease (decrease) in estimated liability for closing restaurants and subsidizing lease payments for
franchisees

$
(851
)

$
1,331


$
(249
)

$
9,395Impairment of assets to be disposed of


296



1,018



2,121



37,700Impairment of assets to be held and used


820



193



3,684



2,075(Gains) losses on sales of restaurants and surplus properties, net


(134
)


540



(2,829
)


6,239131



3,082



2,727



55,409Carls Jr.Increase in estimated liability for closing restaurants and subsidizing lease payments for franchisees


5



107



191



655Impairment of assets to be disposed of






483



477



5,701Impairment of assets to be held and used






183



641



7,853Gains on sales of restaurants and surplus properties, net


(56
)


(1,735
)


(323
)


(13,498
)(51
)


(962
)


986



711Rallys and Taco Bueno loss on divestiture














4,707TotalIncrease (decrease) in estimated liability for closing restaurants and subsidizing lease payments to
franchisees


(846
)


1,438



(58
)


10,050Impairment of assets to be disposed of


296



1,501



2,598



43,401Impairment of assets to be held and used


820



376



4,325



9,928Gains on sales of restaurants and surplus properties, net


(190
)


(1,195
)


(3,152
)


(2,552
)$
80


$
2,120


$
3,713


$
60,827





The following table is a summary of the activity in the estimated
liability for closing restaurants:





Balance at January 31, 2002

$
49,258New decisions


1,053Usage


(12,105
)Favorable dispositions of leased surplus properties


(1,112
)Discount amortization


2,114Balance at November 4, 2002


39,208Less: current portion, included in Other Liabilities


11,372Long-term portion, included in Other Long-term Liabilities

$
27,836





The following table summarizes average annual sales per restaurant
and operating losses related to the restaurants the Company decided to close or was required to close.





Twelve Weeks Ended


Forty Weeks EndedNovember 4, 2003


November 5, 2002


November 4, 2003


November 5, 2002SalesHardees

$
543


$
3,975


$
4,784


$
37,133Carls Jr.

$



$
582


$
297


$
3,223Operating lossHardees

$
(71
)

$
(1,224
)

$
(584
)

$
(9,752
)Carls Jr.

$
(28
)

$
(114
)

$
(136
)

$
(1,195
)




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)







NOTE (6) INCOME (LOSS) PER SHARE





The Company presents basic income or loss per share, which represents net income or loss, divided by the weighted average
shares outstanding excluding all potentially dilutive common shares and diluted income or loss per share reflecting the effect of all potentially dilutive common shares. Potentially dilutive common shares are considered in the
computation of the fiscal 2003 net loss per share because they are dilutive to income before the cumulative effect of accounting change for goodwill.





For the twelve weeks ended November 4, 2002 and November 5, 2001, 3,000,000 and 3,600,000 shares, respectively, relating to the possible conversion of convertible subordinated notes, were not included
in the computation of diluted income or loss per share as their effect would have been anti-dilutive. For the twelve weeks ended November 4, 2002 and November 5, 2001, 5,100,000 and 7,300,000 options, respectively, relating to the possible exercise
of stock options granted, were not included in the computation of diluted loss per share as their effect would have been anti-dilutive.





For the forty weeks ended November 4, 2002 and November 5, 2001, 3,300,000 and 3,600,000 shares, respectively, relating to the possible conversion of convertible subordinated notes, were not included in the computation of
diluted loss per share as their effect would have been anti-dilutive. For the forty weeks ended November 4, 2002 and November 5, 2001, 4,000,000 and 7,400,000 options, respectively, relating to the possible exercise of stock options granted, were
not included in the computation of diluted loss per share as their effect would have been anti-dilutive.





NOTE (7) SEGMENT INFORMATION





The Company principally is engaged in developing, operating and franchising its Carls Jr.,
Hardees and La Salsa 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 attributed to each segment based on managements analysis of the resources applied to each segment. Beginning in fiscal 2003,
management determined that it would allocate all general and administrative costs to the segments, whereas in the past the portion of these costs relating to the management of the overall corporation was included in the operating loss in
Other. The general and administrative expenses included in Other in fiscal 2002 have been reclassified to conform to the current fiscal years presentation. Additionally, certain amounts that the Company does not believe
would be proper to allocate to the operating segments are included on Other (i.e., gains or losses on sales of long-term investments).




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)







Twelve Weeks Ended





Carls Jr.

Hardees


La Salsa

Other


TotalNovember 4, 2002Revenue

$
153,992

$
148,361


$
10,002

$
474


$
312,829Operating income (loss)


10,705


756



14


(106
)


11,369Interest expense


1,727


8,532



14






10,273Total assets


288,268


458,334



45,768


38,462



830,832Capital expenditures


6,444


10,244



553


879



18,120Depreciation and amortization


6,022


9,365



650


42



16,079November 5, 2001Revenue

$
165,005

$
159,860





$



$
324,865Operating income (loss)


16,741


(3,005
)





(3,599
)


10,137Interest expense


1,571


9,150






1,030



11,751Total assets (as of January 31, 2002)


285,134


638,193






8,262



931,589Capital expenditures


1,013


3,083






1,876



5,972Depreciation and amortization


5,441


10,401










15,842Forty Weeks EndedCarls Jr.

Hardees


La Salsa

Other


TotalNovember 4, 2002Revenue

$
533,964

$
499,539


$
29,850

$
1,444


$
1,064,797Operating income (loss)


45,841


3,276



535


(192
)


49,460Interest expense


5,485


28,932



18






34,435Total assets


288,268


458,334



45,768


38,462



830,832Capital expenditures


12,388


29,322



1,386


3,945



47,041Depreciation and amortization


20,339


30,927



1,932


128



53,326November 5, 2001Revenue

$
545,152

$
547,642





$
43,095


$
1,135,889Operating income (loss)


37,794


(64,976
)





(318
)


(27,500
)Interest expense


9,375


36,676






732



46,783Total assets (as of January 31, 2002)


285,134


638,193






8,262



931,589Capital expenditures


4,923


7,712






3,377



16,012Depreciation and amortization


20,564


38,968






1,835



61,367





NOTE (8) NET ASSETS HELD FOR SALE





The Company made the decision to divest Timber Lodge at the time of acquisition of SBRG. However, the Company was unable to determine if
the divestiture would be completed within the 12-month period prescribed by SFAS 144. During the third quarter, the Company was able to make that determination. As a result, the allocation of the purchase price was adjusted to reflect this valuation
(see Note 3).





The results of Timber Lodge are as follows:





Twelve Weeks Ended November 4, 2002


Forty Weeks Ended November 4, 2002Revenue

$
9,901


$
29,635Operating loss

$
(556
)

$
(569
)




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)







The total assets and liabilities of Timber Lodge are as follows:





(Unaudited)November 4, 2002ASSETSCurrent assets

$
1,899Property and equipment, net


1,049Other assets


7,613Total assets

$
19,913LIABILITIESCurrent liabilities

$
6,023Other long-term liabilities


1,890Total liabilities


7,913





On June 10, 2001, the Company completed the sale of its Taco Bueno
concept for $62,412. The net proceeds from this sale were used to reduce the Companys bank indebtedness. The results of Taco Bueno are as follows:








Forty Weeks EndedNovember 5, 2001Revenue

$
37,538Operating income

$
4,204








NOTE (9)    RELATED PARTY
TRANSACTIONS








During the twelve and forty weeks ended November 4,
2002, the Company sold 404,000 and 934,000 shares, respectively, of Checkers common stock and recognized a gain of $3,134 and $8,959, respectively, which are included in Other Income (Loss), Net. As of November 4, 2002, the Company owned 42,000
shares of Checkerss common stock.





As disclosed in the Companys proxy statement, we occasionally make
relocation loans to officers of the Company. Relocation loans are forgiven over time if the officer remains an employee of the Company for a specific term, typically three to five years. As of November 4, 2002, there were six relocation loans
outstanding with an aggregate balance of $425. For the forty weeks ended November 4, 2002, the amount forgiven, including interest, for all such officers is approximately $141.





During the forty weeks ended November 4, 2002, certain loans made under the Employee Stock Purchase Loan Plan and the
Non-Employee Director Stock Purchase Loan Program (collectively the Programs), were fully repaid with cash. The Companys


Board of Directors approved the Programs during July 2001 (as disclosed in Note 15 of Notes to the Condensed Consolidated Financial Statements in the Companys Form 10-K for the annual period
ended January 28, 2002.) The amounts repaid totalled $1,555.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)







NOTE (10) INCOME TAXES





Upon passage of the Job Creation and Worker Assistance Act of 2002 during the first quarter of our 2003 fiscal year which allows the carryback of operating losses to
additional prior taxable years, the Company prepared an amended income tax return using estimated amounts of income for federal income tax purposes. During the third quarter of fiscal 2003, the Company filed an amended income tax return for
approximately $5,500 based upon the final determination of taxable income for federal income tax reporting purposes. That refund was collected during the twelve weeks ended November 4, 2002. For the forty weeks ended November 4, 2002, the Company
recorded an income tax benefit of $7,187. That amount consists of income tax expense of $2,034, which consisted of minimum state franchise taxes and foreign taxes, offset by income tax benefits of $9,221 due to the net operating loss carryback
allowed under the Job Creation and Worker Assistance Act of 2002.





For the twelve and forty weeks ended November
5, 2001, the Company recorded income tax expense of $337 and $2,204, respectively, for minimum franchise taxes only.





NOTE (11) NEW
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED





During August 2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS 143), which will be effective for the Company beginning fiscal year 2004. SFAS 143 addresses the financial accounting and reporting for
obligations related to the retirement of tangible long-lived assets and the associated asset retirement costs. The Company has not yet determined the impact of adopting SFAS 143.





During April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement 13 and Technical Corrections
(SFAS 145), which will be effective for the Company in fiscal 2004, although earlier adoption is encouraged. SFAS 145 eliminates the classification of debt extinguishment activity as extraordinary items, eliminates inconsistencies in
lease modification treatment and makes various technical corrections or clarifications of other existing authoritative pronouncements. As permitted, the Company implemented the provisions of SFAS 145 regarding debt extinguishment in the first
quarter of fiscal 2003. The Company has not yet determined the impact of adopting the remaining provisions of SFAS 145.





During August 2002, the FASB issued SFAS No. 146, Accounting for the Costs Associated with Exit or Disposal Activities (SFAS 146), which will be effective for the Company beginning fiscal year 2004. SFAS 146
primarily addresses the timing of when to record liabilities for decisions to terminate operations and how to establish liabilities for employee termination costs. The Company has not yet determined the impact of adopting SFAS 146.




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##### Table of Contents



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 Subsidiaries
(collectively referred to as the Company) is comprised of the worldwide operations of Carls Jr., Hardees, La Salsa Fresh Mexican Grill (La Salsa), The Green Burrito (Green Burrito), which is primarily
operated as a dual-brand concept with Carls Jr. quick-service restaurant concepts, and Timber Lodge Steakhouse (Timber Lodge). The following Managements Discussion and Analysis should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements contained herein, and our Annual Report on Form 10-K for the fiscal year ended January 28, 2002 (collectively, the 2002 Financial Statements). All Note references herein refer to the
accompanying Notes to the Condensed Consolidated Financial Statements (Financial Statements).





Matters
discussed in this Form 10-Q contain forward-looking statements relating to future plans and developments, financial goals, and operating performance that are based on managements current beliefs and assumptions. Such statements are subject to
risks and uncertainties. Factors that could cause the Companys results to differ materially from those described include, but are not limited to, anticipated and unanticipated restaurant closures for the Company and its franchisees, whether or
not restaurants will be closed and the number of restaurant closures, consumers concerns or adverse publicity regarding the Companys products, effectiveness of operating initiatives and advertising and promotional efforts (particularly
at the Hardees brand), changes in economic conditions, changes in the price or availability of commodities, availability and cost of energy, workers compensation and general liability premiums and claims experience, changes in the
Companys suppliers ability to provide quality and timely products to the Company, delays in opening new restaurants or completing remodels, severe weather conditions, the operational and financial success of the Companys
franchisees, franchisees willingness to participate in our strategy, availability of financing for the Company and its franchisees, unfavorable outcomes on litigation, changes in accounting policies and practices, new legislation or government
regulation (including environmental laws), the availability of suitable locations and terms for the sites designed for development, and other factors as discussed in the Companys filings with the Securities and Exchange Commission.





Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law or the rules of the New York Stock Exchange.





New Accounting Pronouncements Not Yet Adopted





See Note (11) 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. We believe our most significant accounting policies
require:





    Estimation of future cash flows used to assess the recoverability of
long-lived assets and establishment of the estimated liability for closing restaurants and subsidizing sublease payments of franchisees.





    Determination of the appropriate allowances associated with franchise and license receivables and estimated liabilities for franchise subleases.





    Estimation, using actuarially determined methods, of our self-insured claim losses under our workers
compensation and fire and general liability insurance programs.





    Estimation of our
net deferred income tax asset valuation allowance.





Descriptions of these critical accounting policies follow.





Impairment of Property, Equipment, Property Held and Used and Property Held for Sale or To Be Disposed of
Other Than By Sale





Each quarter we evaluate the carrying value of individual restaurants when the operating
results of a restaurant have reasonably progressed to a point to demonstrate the probability of continuing operating losses or a current expectation that a restaurant will be sold or otherwise disposed of before the end of its previously estimated
useful life. In making this judgment, we consider the period of time since the restaurant was opened, or remodeled, the trend of operations and expectations for future sales growth of a restaurant.




17




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







For restaurants selected for review, we estimate the future estimated cash flow 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. A material accounting judgment is the estimated useful life and, in general, in expected same-store sales
scenarios where sales are not expected to increase, we assume a shorter than previously estimated useful life. On a quarterly basis, we update our model for estimating future cash flows based upon experience gained, current intentions about
refranchising restaurants and closures, expected sales trends, internal plans, and other relevant information. In prior fiscal years, because we were significantly engaged in refranchising restaurants to generate cash to repay bank indebtedness, we
had assumed, in some cases, estimated lives that were less than the estimated useful life that a restaurant is functional as a restaurant. As our financial position has improved such that refranchising activities are unnecessary, more restaurants
assume estimated cash flows over their remaining estimated useful life. Additionally, commencing with the second quarter, we reduced the probability weighting for the occurrence of future same-stores sales from the higher range of our strategic
business plan to the lower end of the range in light of our current same-store sales results. As the operations of restaurants opened or remodeled in recent years progress to the point that their profitability and prospects for future profitability
can be sufficiently evaluated, additional restaurants will become subject to review and the possibility for an impairment in value exists. Most likely, this would arise in new markets the Company expanded into in recent years. As described above,
same-store sales are the key indicator in the estimation of future cash flow for evaluating recoverability of restaurants. To provide a sensitivity analysis of the impairment that could arise were the actual same-store sales increase of all
restaurants we owned to grow at only the assumed rate of inflation, for no real growth, the aggregate additional impairment loss would be approximately $7,400. The inflation rate assumed in making this calculation is 2% for both revenue and
expenses.





Additionally, restaurants are operated for three years before we test them for impairment (the
Three Year Rule). 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 amount of asset impairment would increase substantially. Assuming all restaurants were tested under the same assumptions described above, we would be required to record additional impairment losses of
approximately $4,300.





The following tables summarize the sensitivity analysis for both same-store sales
sensitivity and time open sensitivity:





Carls Jr.





Net Book Value

Number of Stores

Impairment Under Sensitivity TestTested based on Three Year RulePositive cash flow this quarter

$
25,773

51

$
Negative cash flow this quarter


4,478

19


4,40030,251

70


4,400Not tested based on Three Year RulePositive cash flow this quarter


88,314

347


Negative cash flow this quarter


5,355

22


1,00093,669

369


1,000TotalPositive cash flow this quarter


114,087

398


Negative cash flow this quarter


9,833

41


5,400$
123,920

439

$
5,400




18




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







Hardees





Net Book Value

Number of Stores

Impairment Under Sensitivity TestTested based on Three Year RulePositive cash flow this quarter

$
160,579

350

$
Negative cash flow this quarter


9,682

62


3,000170,261

412


3,000Not tested based on Three Year RulePositive cash flow this quarter


112,956

291


Negative cash flow this quarter


6,391

28


3,300119,347

319


3,300TotalPositive cash flow this quarter


273,535

641


Negative cash flow this quarter


16,073

90


6,300$
289,608

731

$
6,300





Combined Carls Jr. and Hardees





Net Book Value

Number of Stores

Impairment Under Sensitivity TestTested based on Three Year RulePositive cash flow this quarter

$
186,352

401

$
Negative cash flow this quarter


14,160

81


7,400200,512

482


7,400Not tested based on Three Year RulePositive cash flow this quarter


201,270

638


Negative cash flow this quarter


11,746

50


4,300213,016

688


4,300TotalPositive cash flow this quarter


387,622

1,039


Negative cash flow this quarter


25,906

131


11,700$
413,528

1,170

$
11,700





Impairment of Goodwill





Goodwill is tested for impairment at least annually at the reporting unit level, which is the individual brand level for the Company. The
impairment, if any, is measured based on the estimated fair value of the brand. Fair value can be determined based on discounted cash flows, comparable sales or valuations of other restaurant brands. Impairment occurs when the carrying amount of
goodwill exceeds its estimated fair value.





The most significant assumptions we use in this analysis are those
made in estimating future cash flows. In estimating future cash flows, we generally use the financial assumptions in our strategic plan for items such as same-store sales growth rates and the discount rate we consider to be the market discount rate
for acquisitions of companies and brands.





If our assumptions used in performing the impairment test prove
insufficient, the fair value estimate of the brands may 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 2003, we engaged an
outside party to perform a valuation of the Hardees brand. That valuation concluded




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







that the current value of the goodwill associated with the acquisition of Hardees is
$0 and, accordingly, we recorded a transitional impairment charge to write-off all of the goodwill related to the Hardees brand (see Note 2 of Notes to the Condensed Consolidated Financial Statements) of $175,780. Currently, we have $56,497 in
goodwill recorded on the November 4, 2002, balance sheet as Costs in Excess of Assets Acquired, Net, which primarily relates to our recent acquisition of SBRG on March 1, 2002.





Estimated Liability for Self-Insurance





We are self-insured for a portion of our current and prior years losses related to workers compensation, fire and general liability insurance programs. We have obtained stop loss insurance for individual workers
compensation claims and individual general liability claims over $500. Insurance liabilities and reserves are accounted for based on the net present value of independent actuarial estimates of the amount of loss expected. These estimates rely on
actuarial observations of historical claim loss development for similar events. 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 continue to increase.





The actuary, in determining the estimated
liability, bases the assumptions on the average historical losses on claims we have incurred. The actual loss development may be better or worse than the development estimated by the actuary. In that event, we modify the reserve. Also, if we
experience a higher than expected number of claims or the costs of claims rise more than expected, the actuary may adjust the expected losses upward and our future self-insurance expenses will rise.





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 based on circumstances beyond our control (e.g., a
landlords refusal to negotiate a new lease). Our restaurant operators evaluate each restaurants performance every financial period. When restaurants continue to perform poorly, we consider the demographics of the location, as well as the
likelihood of being able to turn an unprofitable restaurant around. Based on the operators judgment, we estimate the future cash flows. If we determine that the restaurant will not, within a reasonable period of time, operate at break-even
cash flow or be profitable, and there are no contractual requirements to continue operating the restaurant, we close the restaurant. Additionally, franchisees may close restaurants for which we are the primary lessee. If the franchisee cannot make
payments on the lease, we continue making the lease payments and establish an estimated liability for the closed restaurant if we decide not to operate it as a company-operated restaurant. We establish the estimated liability in the period we decide
to close a restaurant, which may be before the actual closure date.





The estimated liability for closing
restaurants on properties to be 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 net present value of these estimated future payments. The interest rate used to calculate the net 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 as Interest Expense in our Condensed Consolidated Statement 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 management determines based on
our third party brokers (a related party) assessment of its ability to successfully negotiate early termination of our lease agreements with the lessors. Additionally, we estimate the cost to maintain leased and owned vacant properties until
the lease has been abated. If the costs to maintain properties increase, or it takes longer than anticipated to sell properties or terminate leases, we may need to record additional estimated liabilities. If the leases on the vacant restaurants are
not terminated on the terms we used to estimate the liabilities, we may be required to record losses in future periods. Conversely, if the leases on the vacant restaurants are terminated on more favorable terms than we used to estimate the
liabilities, we may recover previously established estimated liabilities. The net present value of lease payments on all closed restaurants is $70,000, 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. However, it is our experience that we can terminate those leases for less than that amount and, accordingly, we have recorded an estimated liability for lease obligations of $30,000 as
of November 4, 2002.





Franchise and Licensed Operations





We monitor the financial condition of 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 establish the allowance for bad debts for franchisee accounts and notes receivable based upon a franchisee-by-franchisee analysis. We compare this
computed amount to what is recorded in our financial statements and make adjustments as appropriate. Additionally, we cease accruing royalty income from franchisees that are materially delinquent in paying or in default until such time as we have a
history of receiving timely payments.





Depending on the facts and circumstances, there are a number of different
actions we may take to resolve collections issues. These 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




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







to cover our costs of service over the life of the franchise agreement, we record an
estimated loss at the time we modify the agreements); a restructuring of the franchisees business and/or finances (including the restructuring of leases for which we are the primary obligee  see further discussion below); or, if
necessary, the termination of the franchise agreement. The allowance established is based on our assessment of the most probable course of action that will occur. If we believe we will operate the restaurants as company-operated restaurants, the
allowance for loss is recorded net of the estimated fair value of the related restaurant assets.





Many of the
restaurants that we sold to franchisees as part of our refranchising program were on leased sites. Generally, we remain principally liable for the lease and 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 in our Condensed Consolidated Statement of Operations. As of November 4,
2002, the net present value of the total obligation of such lease arrangements was $46,800.





The determination of
when to establish an estimated liability for future lease obligations on restaurants operated by franchisees for which we are the primary obligee is based on the date that the following events occur:





(1)  the franchisee and the Company mutually make the decision to close a restaurant and we assume the responsibility for the
lease, usually after a franchise agreement is terminated or the franchisee declares bankruptcy; or





(2)  we enter into a workout agreement with a financially troubled franchisee, wherein we agree to make part or all of the lease payments for the franchisee.





The amount of the estimated liability is established using the methodology described under Estimated Liability for Closing Restaurants above. Troubled
franchisees may have liquidity problems in the future. Consistent with current generally accepted accounting principles, we have not established an additional estimated liability for this eventuality. The net present value of the related lease
obligation with all troubled franchisees in these circumstances is approximately $21,100 (four franchisees represent 90% of this amount). However, we do not anticipate that the majority of such franchisees will be involved in future situations
wherein we will have to record an additional liability for such subleases. However, no assurances can be given. As of November 4, 2002, we have recorded an estimated liability for future lease obligations related to agreed upon subsidies for these
franchise restaurants of $4,600. If sales trends/economic conditions worsen for our franchisees, their financial health may worsen, our collection rates may decline and we may be required to assume the responsibility for additional lease payments on
franchised restaurants. Entering into restructured franchise agreements may result in reduced franchise royalty rates in the future (see discussion below). The likelihood of needing to increase the estimated liability for future lease obligations is
related to the success of our Hardees concept (i.e., if our Hardees concept results improve from the execution of our comprehensive plan, we would reasonably expect that the financial performance of our franchisees would improve).





Valuation Allowance for Net Deferred Tax Asset





As disclosed in Note 1 of Notes to the Consolidated Financial Statements on our Form 10-K for the fiscal year ended January 31, 2002, we record net deferred tax assets.
When circumstances warrant, we assess the likelihood that our net deferred tax assets will more likely than not be recovered from future projected taxable income. During fiscal 2001, because we had experienced two years of net operating losses, we
established, and have since maintained, a 100% valuation allowance for our net deferred tax asset. As of November 4, 2002, our valuation allowance aggregated approximately $175,000.





Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal 2003 Comparisons with Fiscal 2002





The factors discussed below impact comparability of operating performance for the quarter and year-to-date ended November 4, 2002 to the
quarter and year-to-date ended November 5, 2001, or could impact comparisons for the remainder of fiscal 2003.





Acquisition of Santa Barbara Restaurant Group, Inc.





As discussed in Note 3 of Notes to
Condensed Consolidated Financial Statements, we acquired SBRG on March 1, 2002 (Acquisition Date). The operations of SBRG, subsequent to the Acquisition Date, are included in the Consolidated Financial Statements for fiscal 2003.





A significant amount of goodwill was recorded in connection with the acquisition of SBRG. The recoverability of
that goodwill is dependent on future operations and the development of new La Salsa restaurants (see discussion of financing new restaurants under Financial Condition and Liquidity below). The acquisition of new restaurant sites is
highly competitive.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







Divestiture of Timber Lodge





As discussed in Note 8 of Notes to Condensed Consolidated Financial Statements, Timber Lodge is a discontinued operation. The operations
of Timber Lodge, a loss of approximately $569, subsequent to the Acquisition Date, are included in the Consolidated Financial Statements for fiscal 2003 as Discontinued Operations.





Adoption of New Accounting Pronouncements





See Note 2 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.





Our restaurant sales, and therefore our profitability, are subject to seasonal fluctuations and are traditionally higher during the spring and summer months because of factors such as increased travel
and improved weather conditions, which affect the publics dining habits. This seasonality, in addition to rising utility and insurance costs as well as flat to negative same-store sales, will result in our operating at a loss during the fourth
quarter of fiscal year 2003. For the fiscal year, we expect to report earnings per share consistent with our earlier guidance in the range of $0.50 to $0.52.





Business Turnaround





Revitalizing Hardees continues
to be the primary focus for our management team in fiscal year 2003. Hardees is currently reporting negative same-store sales and, accordingly, it is still an under-performing brand. While we will continue to focus on restaurant fundamentals,
such as quality, service and cleanliness, we know we must revitalize Hardees to reestablish the brands connection with its consumers. Our success will depend on the successful execution of our comprehensive marketing and operations plans
for the Hardees concept. The following risk factors are discussed in detail in our Annual Report on Form 10-K for the fiscal year ended January 28, 2002:





| |  |  | opening additional company-operated and franchised restaurants;
| | - |  | ---------------------------------------------------------------




| |  |  | remodeling our existing restaurants as planned;
| | - |  | -----------------------------------------------




| |  |  | implementation of our strategies by our franchisees, as well as their operational and financial success;
| | - |  | --------------------------------------------------------------------------------------------------------




| |  |  | changes in national, regional and local economic conditions;
| | - |  | ------------------------------------------------------------




| |  |  | changes in commodity prices, labor costs and insurance costs;
| | - |  | -------------------------------------------------------------




| |  |  | our ability to compete with our major competitors, many of whom have substantially greater financial, marketing and other resources than we have, which may give
them competitive advantages;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | changes in consumer preferences and perceptions;
| | - |  | ------------------------------------------------




| |  |  | our ability to integrate SBRG; and
| | - |  | ----------------------------------




| |  |  | adverse weather conditions.
| | - |  | ---------------------------




The next steps in our strategic plan to increase the Companys profitability are:





| |  |  | maintain the Carls Jr. brand profitability;
| | - |  | --------------------------------------------




| |  |  | continue to focus on premium, rather than discounted, products;
| | - |  | ---------------------------------------------------------------




| |  |  | continue to focus on cost controls;
| | - |  | -----------------------------------




| |  |  | remodel the Hardees restaurants;
| | - |  | ---------------------------------



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MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







| |  |  | integrate SBRG;
| | - |  | ---------------




| |  |  | consummate the sale of Timber Lodge;
| | - |  | ------------------------------------




| |  |  | develop a strategy for addressing the maturity of our convertible subordinated notes;
| | - |  | -------------------------------------------------------------------------------------




| |  |  | grow the La Salsa brand;
| | - |  | ------------------------




| |  |  | leverage dual brand opportunities with Green Burrito; and
| | - |  | ---------------------------------------------------------




| |  |  | continue to develop and begin to implement a new comprehensive marketing plan for Hardees, which is currently in test mode, to refocus and redirect the
brand.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------




Although we have reported income before accounting changes for three consecutive
quarters, if we are unable to further improve Hardees sales and operating margins, it may significantly affect our future profitability and cash flows which, in turn, would affect our ability to access financing in the future, both in terms of
the amount of financing available to us and the terms of such financing. See additional discussion under Financial Condition and Liquidity below. In addition, because our plans for the Hardees concept involve the deletion of
certain menu items at some restaurants, we may incur inventory obsolescence costs. At this time, we cannot reasonably estimate these costs as they will be dependent upon the timing of new product introductions and our ability to redistribute deleted
product inventory to other Hardees restaurants.





Although our principal brands same-store sales rose
over the majority of quarters during the last two years, it has been achieved by our strategy that emphasized premium products, as well as routine price increases prompted by increases in labor, food or utility costs. The impact of this strategy is
evidenced by the increase in average guest check as shown in the tables on pages 26-29. However, a possible consequence of this strategy has been a decrease in transaction counts, also shown in the same table, as some customers show a preference for
lower priced fare. Many of our competitors strategies are to offer lower prices or discounted fare and those competitors have recently increased their efforts in this regard, which has possibly affected our transaction counts. Although
difficult to quantify, we have generally experienced negative transaction counts at Hardees at least since our acquisition of the brand and at Carls Jr. for nearly two years, which we believe is due in part to increased competition from
fast casual dining and other quick-service restaurant (QSR) companies offering products at discounted prices. Further, we note that others in the industry also are experiencing negative same-store sales trends. In addition, the fast-food
sector has been impacted by the economic downturn and a shift in customer food preference. Accordingly, we cannot quantify how much of our declines are related to our business segment and how much are related to circumstances involving our own
brands. Nonetheless, we can make the observations below.





For the current year, Carls Jr. same-store sales
results are impacted by the fact that in the prior year our restaurant sales benefited significantly from the introduction of The Six Dollar Burger ® . Beginning in the second quarter, we offered new products, chiefly the Grilled Onion Cheeseburger, the Jalapeno
Cheeseburger and the Chili Burger, along with advertising and media, to maintain and continue to grow same-store sales. The new product and advertising did not produce the hoped for results. As a result, we anticipate our same-store sales for
Carls Jr. will be negative to flat for the remainder of this fiscal year, resulting in overall flat same-store sales for the entire year. Individual periods will vary considerably as we compare over the prior years successful
introduction of The Six Dollar Burger ® .





The Six Dollar Burger ® was not introduced at Hardees until the third and fourth quarters of last fiscal year. We anticipate similar difficulties as described above for our Hardees concept. At the
beginning of the fiscal year, we devised a comprehensive plan to revitalize Hardees involving a repositioning of the brand with its customer base, menu adjustments (including new products and deletions of old products) and associated
advertising and media strategies. The plan is in test mode and because we currently believe that the comprehensive plan will not be executed in all stores until the first half of next fiscal year, we believe we will continue to experience negative
same-store sales at Hardees for the balance of this fiscal year.





As shown in
the tables on pages 26-29, the operating margins for each brand have improved over the prior year periods. For each brand, a positive component of the comparative margins is the impact of lower food commodity prices and the change in menu mix to
premium products, which have higher margins than discounted food offerings, as described above. Although we believe food costs will not materially increase for the balance of the fiscal year, if food costs increase, or any of our production costs
increase such as labor and utilities, we would have to increase the prices of our products to preserve the operating margin. We have been successful at passing on such price increases in the past, but it has likely had an impact on transaction
counts as described above. The sensitivity analysis for the recoverability of restaurants (see Impairment of Property, Equipment, Property Held and Used and Property Held for Sale or To Be Disposed of Other Than By Sale) assumes that our same-store
sales in the future grow at the same rate of inflation (our




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MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







costs for delivering our products of food, labor, utilities, etc). If we were unable to pass
along such price increases, and at the same time could not increase our transaction counts, the recoverability of the carrying value of our restaurants would be impacted.





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 franchise 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 Franchise 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 contractual royalty payments to us. Although the Company reviews quarterly the allowance for bad debts and the estimated liability for closed franchise
restaurants, there can be no assurance that the number of franchise operators or 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 franchise operator. During the prior fiscal year, we increased our allowance for doubtful accounts at Hardees from 38% of the gross balance of accounts and notes receivable to 49%. During the current
year, our allowance for doubtful accounts increased to 55% of the gross balance of accounts and notes receivable. The increase in the ratio this year is the result of collections reducing the gross amount of receivables outstanding while the dollar
amount of the allowance has remained relatively static. During the first three quarters of fiscal year 2003, we have seen collections stabilize and the required allowance modestly decrease. However, we still experience specific problems with certain
franchisees and expect to continue to enter into what we refer to as workout agreements with troubled franchisees (see Critical Accounting Policies  Franchise and Licensed Operations above). The result is an effective royalty rate
lower than our contractual royalty rate. Our effective royalty rate has decreased from fiscal year 2002 to fiscal year 2003. The following table is a reconciliation of our contractual royalty rate to our effective royalty rate for fiscal year 2003:





Standard royalty rate

4.00
%Contractual reductions, workout agreements, and franchisees in default

(0.62
%)Effective royalty rate

3.38
%





Restaurant Portfolio Strategy





In late fiscal 2000, we embarked on a refranchising initiative to reduce our bank indebtedness, as well as to rebalance the system to one
that is primarily franchise operated. Additionally, as sales trends for the Hardees restaurants and certain Carls Jr. restaurants (primarily in the Oklahoma area) continued to decline in fiscal 2000 through fiscal 2001, we determined
that it was necessary to close restaurants for which a return to profitability was not likely. As part of the business turnaround plan, we sold the Taco Bueno brand, incurred net losses on the sales of Hardees restaurants and recorded charges
to establish an estimated liability for closed restaurants. Additionally, we reduced our operating costs to a level more commensurate with the revenue mix resulting from the rebalancing of our system-wide restaurant portfolio. We also were required
to write down the carrying value of certain properties and charge a loss to operations, as the expected performance of the properties did not support their carrying values. The results of these actions (other than reducing G&A) are reported as
Facility Action Charges, Net in the Condensed Consolidated Statements of Operations. Currently, we believe we have substantially completed a sufficient level of restaurant sales and closures of under-performing restaurants to reposition the Company
and we do not currently expect to incur future facility action charges at the same levels as in previous years. However, as discussed above, the level of future same-store sales drives the level of future facility action charges. The results of
these portfolio strategies have significantly impacted the comparability of results from year to year. See Note 5 of Notes to Condensed Consolidated Financial Statements for additional disclosure of Facility Action Charges, Net.





For the twelve and forty weeks ended November 4, 2002, Hardees royalty income decreased $2,300 and $6,800, respectively,
as compared to the prior fiscal year. This is the result of having 180 fewer franchise restaurants in the system as franchisees have closed stores and, as discussed above, a reduction in the effective royalty rate due to workout agreements we
entered into.




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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
underperforming restaurants, efforts to contain corporate overhead, improve margins and pay down bank indebtedness. The table below is a condensed presentation of those activities, and other changes in the components of income, designed to
facilitate the discussion of results in this Form 10-Q.





(All amounts are
approximate)





Quarter-to-Date


Year-to-DateCurrent Period:Reported net income (loss) under accounting principles generally accepted in the United States of America

$
9,503


$
(142,329
)Repositioning activities (facility action charges, net)


80



3,713Adoption of accounting rule change for goodwill






175,780Current period results, net of repositioning activities and adoption of accounting rule change (A)

$
9,583


$
37,164Prior Period:Reported net loss under accounting principles generally accepted in the United States of America

$
(1,731
)

$
(75,648
)Repositioning activities:Facility action charges, net


2120



60,827Write-off of deferred financing charges






4,100Severance


400



1,000Repositioning subtotal


2,520



65,927Amortization of goodwill, no longer recorded in fiscal year 2003


(1,284
)


(4,452
)Prior period results, net of repositioning activities (B)

$
(495
)

$
(14,173
)





Quarter-to-DatedFiscal Year 2003 vs. Quarter-to-Date Fiscal Year 2002


Year-to-Date Fiscal Year 2003 vs.Year-to-Date Fiscal Year 2002Increase in earnings, without repositioning activities and adoption of accounting rule change (A-B)

$
10.1


$
51.4Items causing earnings to increase (decrease) from the prior period to the current period:Approximate restaurant margin improvement in restaurants operated (other than SBRG brands) at November 4, 2002 and
November 5, 2001

$
1.3


$
16.7Gains on sales of investments and repurchases of convertible subordinated notes


3.8



11.2One-time income tax benefit


5.5



9.3Approximate operating loss of restaurants (including Taco Bueno) involved in facility actions, including related field
general and administrative expenses and advertising costs


2.8



8.8Reduction in interest expense excluding write-off of deferred financing fees


1.4



8.1Decrease in the provision for doubtful accounts


0.4



4.4Decrease in net franchising income and distribution centers


(2.9
)


(2.4
)Increase in corporate overhead


(1.0
)


(2.1
)Increase in estimated liability for litigation


(0.1
)


(1.5
)Increase in advertising expenses, excluding restaurants involved in facility actions


(1.3
)


(0.6
)Approximate operating income of SBRG restaurants


(0.7
)


(0.2
)All other, net


0.9



(0.3
)Increase in earnings without repositioning charges and effect of adoption of accounting rule change

$
10.1


$
51.4




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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 is presented in the same format we present
segment information (See Note 7 of Notes to Condensed Consolidated Financial Statements).





Third Quarter FY 2003Carls Jr.


Hardees


La Salsa


Other (A)


TotalCompany-operated sales

$
113,783


$
131,987


$
9,701


$
394


$
255,865Company-operated average unit volume (trailing 13-periods)


1,146



775



779Franchise-operated average unit volume (trailing 13-periods)


1,050



819Average check

$
5.14


$
3.94


$
8.80Company-operated same-store sales increase (decrease)


(5.0
)%


(3.5
)%


0.8
%Company-operated same-store transaction increase (decrease)


(5.8
)%


(8.2
)%


1.3
%Franchise-operated same-store sales increase (decrease)


(6.2
)%


(4.7
)%


4.2
%Operating costs as a % of company-operated revenueFood and packaging


27.8
%


29.8
%


27.4
%Payroll and employee benefits


29.2
%


34.1
%


30.8
%Occupancy and other operating costs


23.2
%


22.9
%


27.8
%Gross margin


19.8
%


13.1
%


14.1
%Advertising as a percentage of company-operated revenue


6.8
%


6.5
%


3.3
%






6.5
%Franchising revenue:Royalties

$
4,679


$
8,728


$
301


$
80


$
13,788Distribution centers


31,956



4,723











36,679Rent


3,453



2,718











6,171Other


121



205











326Total franchising revenue


40,209



16,374



301



80



56,964Franchising expense:Administrative expense (including provision for bad debts)


598



1,350



86







2,034Distribution centers


31,066



4,682











35,748Rent & other occupancy


3,178



2,145











5,323Total franchising expense


34,842



8,177



86







43,105Net franchising income (B)

$
5,367


$
8,197


$
215


$
80


$
13,859Operating income (loss) (C)

$
10,705


$
756


$
14


$
(106
)

$
11,369Facility action charges, net


(51
)


131











80Operating income (loss) excluding facility action charges

$
10,654


$
887


$
14


$
(106
)

$
11,449EBITDA

$
17,068


$
8,892


$
667


$
3,013


$
29,640




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







Third Quarter FY 2002Carls Jr.


Hardees


Other (A)


TotalCompany-operated sales

$
120,643


$
138,969


$



$
259,612Company-operated average unit volume (trailing 13-periods)


1,120



741Franchise-operated average unit volume (trailing 13-periods)


999



826Average check

$
5.11


$
3.73Company-operated same-store sales increase (decrease)


6.1
%


1.0
%Company-operated same-store transaction increase (decrease)


(1.4
)%


(4.6
)%Franchise-operated same-store sales increase (decrease)


5.5
%


(1.2
)%Operating costs as a % of company-operated revenueFood and packaging


28.8
%


32.3
%Payroll and employee benefits


28.5
%


34.6
%Occupancy and other operating costs


21.8
%


23.7
%Gross margin


21.0
%


9.4
%Advertising as a percentage of company-operated revenue


6.1
%


6.0
%






6.0
%Franchising revenue:Royalties

$
4,872


$
10,979


$



$
15,851Distribution centers


35,639



3,754







39,393Rent


3,743



3,953







7,696Other


108



2,205







2,313Total franchising revenue


44,362



20,891







65,253Franchising expense:Administrative expense (including provision for bad debts)


692



1,703







2,395Distribution centers


34,783



4,081







38,864Rent & other occupancy


4,302



2,977







7,279Total franchising expense


39,777



8,761







48,538Net franchising income (B)

$
4,585


$
12,130


$



$
16,715Operating income (loss) (C)

$
16,741


$
(3,005
)

$
(3,599
)

$
10,137Facility action charges, net


(961
)


3,081







2,120Operating income (loss) excluding facility action charges

$
15,780


$
76


$
(3,599
)

$
12,257EBITDA

$
22,327


$
4,966


$
(3,336
)

$
23,957




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







Year-to-Date FY 2003Carls Jr.


Hardees


La Salsa


Other (A)


TotalCompany-operated sales

$
391,009


$
446,153


$
28,813


$
1,169


$
867,144Operating costs as a % of company-operated revenueFood and packaging


27.9
%


29.7
%


27.0
%Payroll and employee benefits


28.7
%


35.0
%


31.5
%Occupancy and other operating costs


21.2
%


22.5
%


26.6
%Gross margin


22.3
%


12.9
%


14.9
%Advertising as a percentage of company-operated revenue


6.8
%


6.2
%


3.3
%






6.4
%Franchising revenue:Royalties

$
15,704


$
30,228


$
1,037


$
275


$
47,244Distribution centers


111,796



13,619











125,415Rent


14,939



9,141











24,080Other


516



398











914Total franchising revenue


142,955



53,386



1,037



275



197,653Franchising expense:Administrative expense (including provision for bad debts)


1,914



3,806



302







6,022Distribution centers


108,837



13,495











122,332Rent & other occupancy


14,603



7,604











22,207Total franchising expense


125,354



24,905



302







150,561Net franchising income (B)

$
17,601


$
28,481


$
735


$
275


$
47,092Operating income (loss) (C)

$
45,841


$
3,276


$
535


$
(192
)

$
49,460Facility action charges, net


986



2,727











3,713Operating income (loss) excluding facility action charges

$
46,827


$
6,003


$
535


$
(192
)

$
53,173EBITDA

$
66,714


$
31,142


$
2,467


$
8,844


$
109,167




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







Year-to-Date FY 2002Carls Jr.


Hardees


Other (A)


TotalCompany-operated sales

$
402,619


$
486,229


$
43,095


$
931,943Operating costs as a % of company-operated revenueFood and packaging


29.1
%


31.8
%Payroll and employee benefits


29.4
%


35.2
%Occupancy and other operating costs


22.0
%


23.8
%Gross margin


19.6
%


9.3
%Advertising as a percentage of company-operated revenue


6.8
%


6.0
%






6.3
%Franchising revenue:Royalties

$
15,281


$
37,049


$



$
52,330Distribution centers


111,799



11,184







122,983Rent


14,330



10,858







25,188Other


1,123



2,322







3,445Total franchising revenue


142,533



61,413







203,946Franchising expense:Administrative expense (including provision for bad debts)


2,068



8,226







10,294Distribution centers


109,403



12,371







121,774Rent & other occupancy


14,450



9,714







24,164Total franchising expense


125,921



30,311







156,232Net franchising income (B)

$
16,612


$
31,102


$



$
47,714Operating income (loss) (C)

$
37,794


$
(64,976
)

$
(318
)

$
(27,500
)Facility action charges, net


711



55,409



4,707



60,827Operating income (loss) excluding facility action charges

$
38,505


$
(9,567
)

$
4,389


$
33,327EBITDA

$
58,190


$
(36,781
)

$
3,546


$
24,955





(A)     Other consists of Green Burrito in fiscal 2003 and
Taco Bueno and Rallys in fiscal 2002. Additionally, amounts that we do not believe would be proper to allocate to the operating segments are included in Other (i.e., gains or losses on sales of long-term investments).





(B)     The Company made certain reclassifications between Franchise Revenue and Other Expense, Net in prior period amounts to
conform to the current periods presentation.





(C)     The Company now fully allocates all general and
administrative costs to the brands and has made certain reclassifications in prior period amounts to conform to the current periods presentation.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







Presentation of Non-GAAP Measurements





EBITDA





EBITDA is a typical non-GAAP measurement for companies that issue public debt. EBITDA represents net income before taxes, interest, depreciation and amortization of leasehold improvements and goodwill, and the cumulative effect of
the accounting change for goodwill. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to operating income as an indicator of operating cash flows as a measure of liquidity. Because not all companies calculate
EBITDA identically, this presentation of EBITDA may not be comparable to other similarly titled measures of other companies. Additionally, EBITDA is not intended to be a measure of free cash flow for managements discretionary use, as it does
not consider certain cash requirements such as interest payments, tax payments and debt service payments.





Third Quarter FY 2003Carls Jr.


Hardees


La Salsa

Other


TotalNet income (loss)

$
10,482


(3,393
)



2,970


10,059Interest expense


1,727


8,532


14




10,273Income tax benefit


(1,036
)

(4,023
)






(5,059
)Depreciation and amortization (1)


5,895


7,776


653

43


14,367EBITDA

$
17,068


8,892


667

3,013


29,640Third Quarter FY 2002Carls Jr.


Hardees


La Salsa

Other


TotalNet income (loss)

$
15,292


(12,615
)



(4,408
)

(1,731
)Interest expense


1,571


9,150




1,030


11,751Income tax expense


21


274




42


337Depreciation and amortization (1)


5,443


8,157







13,600EBITDA

$
22,327


4,966




(3,336
)

23,957Year-to-Date FY 2003Carls Jr.


Hardees


La Salsa

Other


TotalNet income (loss)

$
43,630


(18,843
)

517

8,715


34,019Interest expense


5,485


28,932


18




34,435Income tax benefit


(2,325
)

(4,862
)






(7,187
)Depreciation and amortization (1)


19,924


25,915


1,932

129


47,900EBITDA

$
66,714


31,142


2,467

8,844


109,167Year-to-Date FY 2002Carls Jr.


Hardees


La Salsa

Other


TotalNet income (loss)

$
28,286


(104,910
)



976


(75,648
)Interest expense


9,375


36,676




732


46,783Income tax expense (benefit)


(35
)

2,239







2,204Depreciation and amortization (1)


20,564


29,214




1,838


51,616EBITDA

$
58,190


(36,781
)



3,546


24,955





| | (1) |  | Excludes amortization of bank fees and the amortization of discount on our estimated liability for closing restaurants which are already included in interest
expense in the Condensed Consolidated Statements of Operations.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Same-store sales
percentages





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 period in the prior year. Same-store sales illustrate how competitive forces and external economic
conditions benefit or impact the Company, as well as any benefit from the diverse value propositions and marketing initiatives undertaken by the Company. In calculating company-operated same-store sales, we include restaurants open for 14 full
accounting periods, which allows for a year over year comparison. As of November 4, 2002, we had 1,205 company-operated restaurants open for at least 14 full accounting periods for Hardees, Carls Jr., and La Salsa combined.




30




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







Same-store transaction percentages





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 period in the prior year. Same-store
transactions are another measure of the effects of competitive forces and economic climate on consumer behavior and resulting benefit, or impact, to the Company. Transactions also reflect any benefit from the diverse value propositions and marketing
initiatives undertaken by the Company.





Average check





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 above. This indicator, when viewed with other measures, may illustrate revenue growth, or decline, resulting from a change in menu or price offering. When the Company introduces 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.





Free cash flow





In calculating free cash flow, we subtract capital expenditures from cash flow from operations.





Carls Jr.





During the third quarter of fiscal 2003, we opened one restaurant.
Carls Jr. franchisees and licensees opened five restaurants and closed two restaurants. The following table shows the change in the Carls Jr. component of our restaurant portfolio, as well as the change in revenue for both the current
quarter and the year-to-date:








Restaurant Portfolio


RevenueFiscal Quarter




Quarter-to-Date




Year-to-Date2003

2002

Change


2003

2002

Change


2003

2002

ChangeCompany

439

441

(2
)

$
113,783

$
120,643

$
(6,860
)

$
391,009

$
402,619

$
(11,610
)Franchised and licensed

542

530

12



40,209


44,362


(4,153
)


142,955


142,533


422Total

981

971

10


$
153,992

$
165,005

$
(11,013
)

$
533,964

$
545,152

$
(11,188
)





For the reasons discussed above, same-store sales for
company-operated Carls Jr. restaurants decreased 5.0% in the current quarter and, accordingly, revenue from company-operated Carls Jr. restaurants decreased $6,860. Revenue from company-operated Carls Jr. restaurants decreased
$11,610, or 2.9%, to $391,009 for the forty week period ended November 4, 2002, when compared to the same period in the prior year.








The increase in franchise income is due to an approximately $800 increase in rental income, partially offset by a $200 decrease in distribution center income.








The changes in restaurant-level margins are explained as follows:





Twelve Weeks Ended


Forty Weeks EndedRestaurant-level margins for the period ended November 5, 2001

21.0
%

19.6
%Increase due to an emphasis on premium products

1.0
%

1.8
%Increase due to reduced workers compensation claim reserve, net of premium increase

0.1
%

0.9
%Decrease due to higher repair and maintenance expenditures

(0.3
)%

(0.4
)%Increase (decrease) due to increased general liability reserve, net of premium increase

(0.2
)%

0.4
%Decrease due to changes in labor costs

(1.1
)%

(0.3
)%Increase (decrease) due to natural gas and electricity costs

(1.0
)%

0.2
%Increase due to all other, net

0.3
%

0.1
%Restaurant-level margins for the period ended November 4, 2002

19.8
%

22.3
%




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







Enron canceled our contract with the utility providers during the
third quarter in a manner such that we were billed at regular rates versus our prior fixed rates. Further, the manner in which Enron canceled the contract with the providers and set up our new billing resulted in our stores being billed on a
store-by-store basis rather than a group basis, which would be more advantageous for us. We are in the process of converting our billing from the store-by-store basis to the group basis and expect to have that completed by the end of the fiscal
year. The impact of store-by-store billings versus group billings increased energy costs by approximately $1,400 during the third quarter. After our billing arrangements have been rectified, our ongoing utility costs for our California stores will
be higher than what we paid under the prior fixed rates and we estimate that increase to be at least $1,500 annually.





Because the majority of our Carls Jr. restaurants are located in California, legislation in that state can have a significant impact on our financial results. The governor of California recently signed into law Assembly Bill
No. 749 relating to workers compensation claims. The bill requires that payments for certain benefits that occur after January 1, 2003 for injuries sustained prior to January 1, 2001 shall be made at the rate in effect at the time the payment
is made. The expected impact to our recorded estimated liability for self-insurance claim losses as of November 4, 2002 is not material. However, we estimate that the impact of this legislation could be approximately $1,000 annually in future years
(see discussion of price increases under Business Turnaround).





Hardees





During the third quarter, we closed three restaurants. Hardees franchisees and licensees opened four restaurants and closed 59
restaurants. The following table shows the change in the Hardees component of our restaurant portfolio, as well as the change in revenue at Hardees for both the current quarter and the year-to-date:





Restaurant Portfolio


RevenueFiscal Quarter




Quarter-to-Date




Year-to-Date2003

2002

Change


2003

2002

Change


2003

2002

ChangeCompany

731

751

(20
)

$
131,987

$
138,969

$
(6,982
)

$
446,153

$
486,229

$
(40,076
)Franchised and licensed

1,524

1,706

(182
)


16,374


20,891


(4,517
)


53,386


61,413


(8,027
)Total

2,255

2,457

(202
)

$
148,361

$
159,860

$
(11,499
)

$
499,539

$
547,642

$
(48,103
)





Same-store sales for company-operated Hardees restaurants
decreased 3.5% in the current quarter. Revenue from company-operated Hardees restaurants decreased $6,982, or 5.0%. The decrease in total revenue is due to the decline in same-store sales and the closing of under-performing company-operated
restaurants and asset dispositions made during the Companys repositioning program initially implemented two years ago. The average check for the third quarter was $3.94, as compared to $3.73 in the comparable period of the prior fiscal year
primarily due to our shift to premium products, menu changes and a small price increase. Revenue from company-operated Hardees restaurants decreased $40,076, or 8.2%, to $446,153 for the forty week period ended November 4, 2002, when compared
to the same period in the prior year. The decrease in revenue is due to the decline in same-store sales and asset dispositions made during the Companys repositioning program.





The decline in franchise income is due to i) an approximately $2,300 decline in royalty revenue arising from a smaller franchise system and the impact of workout agreements
as discussed above, and ii) a decline in rental income also resulting from the closure of franchise restaurants.





The changes in restaurant-level margins are explained as follows:





Twelve Weeks Ended


Forty Weeks EndedRestaurant-level margins for the period ended November 5, 2001

9.4
%

9.3
%Increase due to an emphasis on premium products

2.5
%

1.9
%Increase due to decreased general liability reserve, net of premium increase

0.1
%

0.7
%Increase (decrease) due to changes in labor costs

0.1
%

(0.5
)%Decrease due to higher repair and maintenance expenditures

(0.3
)%

(0.5
)%Increase due to reduced workers compensation reserve, net of premium increase


%

0.1
%Increase due to lower natural gas and electricity costs

(0.4
)%


%Increase due to all other, net (principally repositioning activities)

1.7
%

1.9
%Restaurant-level margins for the period ended November 4, 2002

13.1
%

12.9
%




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







La Salsa





Same-store sales for our company-operated La Salsa restaurants increased 0.8%. Restaurant-level margins were 14.1% as a percentage of company-operated restaurant revenue as
compared to approximately 16.1% in the prior quarter due to additional labor in the restaurants. Food and packaging costs were 27.4%, payroll and other employee benefits were 30.8% and occupancy and other operating costs were 27.8%. La Salsa
operated at essentially breakeven during the third quarter.





Since the acquisition of SBRG on March 1, 2002,
revenue from company-operated La Salsa restaurants was $28,813. Restaurant-level margins were 14.9% as a percentage of company-operated restaurant revenue. Food and packaging costs were 27.0%, payroll and other employee benefits were 31.5% and
occupancy and other operating costs were 26.6%. La Salsa has contributed $517 of net income to the Company since the acquisition of SBRG.





Interest Expense





Interest expense for the third quarter of fiscal 2003 decreased
$1,478, or 12.6%, to $10,273 as compared with previous year third quarter primarily due to prior year acceleration of the amortization of loan fees as a result of an amendment shortening the term of the senior credit facility, as sell as lower
interest rates during the third quarter of fiscal 2003.





For the forty week period ended November 4, 2002,
interest expense decreased $12,348, or 26.4%, to $34,435 as compared to the previous year due to lower levels of borrowings outstanding under our senior credit facility.





Other Consolidated Income and Expenses





Advertising
expenses increased modestly in an effort to bolster sales following a decline in same-store sales. General and administrative expenses decreased $153 for the twelve-week period ended November 4, 2002, as compared to the prior year. The prior year
included amortization of goodwill in the amount of $1,284 (which is no longer amortized in accordance with SFAS 142, see Note 2 of Notes to the Condensed Consolidated Financial Statements) and the current quarter includes general and administrative
expenses of the SBRG companies in the amount of $1,429 (including amortization of intangible assets). For the forty week period ended November 4, 2002, general and administrative expenses increased $191, or 0.2%, to $87,336, as compared to the prior
year. The current year includes general and administrative expenses of the SBRG companies in the amount of $4,053 (including the amortization of intangible assets), while the prior year includes amortization of goodwill in the amount of $4,452
(which is no longer amortized in accordance with SFAS 142, see Note 2 of Notes to the Condensed Consolidated Financial Statements.





Other Income (Expense), Net increased $3,684 during the twelve week period ended November 4, 2002. As we sold 404,000 shares of Checkers stock, realizing a net gain of $3,134. We intend to sell all of the remaining
42,000 shares of Checkers stock as price and market conditions permit. Additionally, during the third quarter of fiscal 2003, we repurchased $5,545 (face value) of convertible notes. During the forty week period ended November 4, 2002, Other Income
(Expense), Net increased $10,968, primarily due to the sale of Checkers common stock and the repurchase of senior convertible notes resulting in net gains of $8,959 and $2,201, respectively.





Income Taxes





As discussed in Note 10 of
Notes to the Condensed Consolidated Financial Statements. We recorded a net tax benefit for the twelve and forty weeks ended November 4, 2002 of $5,059 and $7,187, respectively, arising from filing amended tax returns to carryback operating losses
as permitted by the Job Creation and Worker Assistance Act of 2002. We believe that our net operating losses are such that we will not be required to pay federal income taxes on this fiscal years taxable earnings and have only provided for
minimum state franchise taxes. We have not recorded deferred tax assets due to the existence of our tax valuation allowance because we believe that it is more likely than not that we will not realize such deferred tax assets. As such, excluding the
tax benefit described above, we have provided only for the minimum state taxes ($337 for the third quarter and $2,204 for the year-to-date) in our Condensed Consolidated Statement of Operations based on the effective rate expected for the full
fiscal year.





Financial Condition and Liquidity





Our need for liquidity during the next 12 months will arise primarily from the funding of capital expenditures and any voluntary open market repurchases of Convertible
Subordinated Notes. We have historically financed our operations through internally generated funds and borrowings under our credit facilities. We have no mandatory payments of principal on the $136,334 of




33




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)







Convertible Subordinated Notes outstanding or the $200,000 of Senior
Subordinated Notes outstanding prior to their final maturities in 2004 and 2009, respectively.





The senior credit
facility permits borrowings of up to $100,000. As of November 4, 2002, we had $0 outstanding under our senior credit facility, $54,736 outstanding on standby letters of credit and available borrowings of $45,264. In addition to a blanket lien,
certain assets secure the credit facility including all of our personal property assets and certain restaurant property deeds of trust with an estimated sales value of $218,200. Borrowings bear interest at either the LIBOR rate plus an applicable
margin or the prime rate plus an applicable margin, with interest due monthly. The applicable interest rate at November 4, 2002 is LIBOR plus 4.0%, or 6.75% per annum, on a balance of $0. The agreement underlying the senior credit 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 above
described collateral pool, prepay certain debt, engage in a change of control transaction without the member banks consents, pay dividends, make investments or acquisitions and incur capital expenditures. The full text of the contractual
requirements imposed by this financing is set forth in the Amended and Restated Loan and Security Agreement which has been filed with the Securities and Exchange Commission. We were in compliance with such requirements as of November 4, 2002.
Subject in certain instances to cure periods, the lenders under our credit facility may demand repayment of these borrowings prior to stated maturity upon certain events, including if we breach the terms of our 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 senior credit facility is declared accelerated
by the lenders (which can occur only if we are in default under the facility), our 9.125% senior subordinated notes due 2009 and our 4.25% convertible subordinated notes due 2004 may also become accelerated under certain circumstances and after all
cure periods have expired.





The Convertible Subordinated Notes, which are unsecured obligations, are governed by
an indenture. The indenture requires that we pay interest at a rate of 4.25% per annum in semi-annual coupons due on each March 15 and September 15, with all outstanding principal due and payable in March 2004. We have the right to prepay the notes
at any time for an amount equal to principal, accrued interest and a premium, subject to a notice requirement. The premium is presently 1.417% of the principal amount redeemed, but reduces annually through 2004 at which point no premium is payable.
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 November 4, 2002. Subject in
certain instances to cure periods, the holders of the Convertible Subordinated 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.





The Senior Subordinated Notes, which
are unsecured obligations, are governed by an indenture. The indenture requires that we pay interest at a rate of 9.125% per annum in semi-annual coupons due on each May 1 and November 1, with all outstanding principal due and payable May 1, 2009.
We do not have the right to prepay the notes until May 1, 2004, at which time we may prepay the notes for an amount equal to principal, accrued interest and a premium, subject to a notice requirement. The premium from May 1, 2004 to May 1, 2005 is
4.563% of the principal amount redeemed, but reduces annually through 2007 at which point no premium is payable. The indenture includes certain restrictive covenants including our ability to incur debt, incur liens on our assets, make any
significant change in our corporate structure or the nature of our business, pay dividends, make investments, dispose of assets and make restricted payments. Restricted payments include certain loans, treasury stock repurchases and voluntary
repurchases of outstanding debt. As of December 5, 2002, after taking into account the repurchase of convertible debt as described in Note 4 of Notes to the Condensed Consolidated Financial Statements, the amount of permitted restricted payments is
$28,185. 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 November 4, 2002.
Subject in certain instances to cure periods, the holders of the Convertible Subordinated 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, if we suffer certain adverse legal judgments or if other significant obligations are accelerated.





The terms of our significant financing agreements, the senior credit facility, the Convertible Subordinated Notes and the Senior Subordinated Notes, are not dependent on any change in our credit rating. 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 equity capital of the company relative to the level of 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 and whether or not such indebtedness may be secured by any of our assets.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)





During the forty weeks ended November 4, 2002, cash provided by operating activities was $74,866, which is approximately the same as the
amount provided during the same period in the prior year. Although there are many components of cash flow from operating activities, during the forty weeks ended November 5, 2001, the Company collected $20,000 more in tax refunds than the same
period this year. Cash used in investing activities during the forty weeks ended November 4, 2002, totaled $18,234, which principally consisted of purchases of property and equipment, which were partially offset by proceeds from the sale of property
and equipment and long-term investments. Cash used in financing activities during the forty weeks ended November 4, 2002, totaled $48,660, which principally consisted of repurchases of convertible debt. During the twelve weeks ended November 4,
2002, we did not draw on the credit facility and, as of November 4, 2002, had $19,000 in overnight cash investments. There was no free cash flow for the quarter as capital expenditures exceeded cash flow from operations by $8,300. Free cash flow
during the forty weeks ended November 4, 2002, was $27,955.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)





Capital expenditures were:





Twelve weeks ended November 4, 2002

Forty weeks ended November 4, 2002New restaurants (including restaurants under development)Carls Jr.

$
1,470

$
3,289Hardees


6,144


10,357La Salsa


332


832Timber Lodge


527


1,180RemodelsCarls Jr.





Hardees


2,263


8,605La Salsa





Timber Lodge





Other restaurant additionsCarls Jr.


1,304


2,960Hardees


1,837


8,598La Salsa


221


554Timber Lodge


352


788Corporate




3,670


9,878Total




18,120


47,041





As of November 4, 2002, we had remodeled 72% of the Hardees
company-operated restaurants to the Star Hardees format and had installed charbroilers in 76% of the company-operated restaurants.





In an effort to improve operations and reduce future operating costs, we have relocated several of our corporate facilities to new locations. During 2002, we began relocating our executive headquarters to Santa Barbara,
California as well as the corporate offices of Carls Jr. We have entered into a five year agreement to lease the facility. During 2001, we relocated Hardees corporate offices to St. Louis, Missouri and have entered into a five year
agreement to lease the facility.





We are considering various strategies to address the maturation of our
Convertible Subordinated Notes. Strategies we may implement include the selected sale of assets (including real estate and restaurants) without incurring a loss on sale, a public debt offering, a debt swap, new bank debt, or some combination of
those items. In the event that we are unable to successfully implement one or more of those options we may be required to sell additional restaurants which may be at a loss to raise sufficient funds to retire the debt. Those losses may be material
and may have a significant negative impact on our operating results.





We, as well as 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. Additionally, we have made several repurchases of Convertible Subordinated Notes. As a result, we typically maintain current liabilities in
excess of current assets resulting in a working capital deficit. As of November 4, 2002, our current ratio was 0.74 to 1.





The Company anticipates that existing cash balances, availability under existing loan agreements, and cash generated from operations will be sufficient to service existing debt and to meet the Companys operating needs for the
next twelve months.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


QUANTITATIVE AND QUALITATIVE DISCLOSERS ABOUT MARKET RISK


(Dollars in thousands)







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 $100,000 senior credit facility, of which $0 remained outstanding as of November 4, 2002. Borrowings under our senior credit facility bear interest at the LIBOR rate plus an applicable margin. Because we had no outstanding balance on our
senior credit facility, a hypothetical increase of 100 basis points in short-term interest rates would not result in a reduction in the Companys annual pre-tax earnings. The estimated reduction is based upon the outstanding balance of our
senior credit facility and assumes no change in the volume, index or composition of debt as in effect November 4, 2002. 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 typically result in unconditional purchase obligations, which are not reflected in the consolidated
balance sheet. Typically, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address material commodity
cost increases by adjusting our menu pricing or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices (see page 24), could result in lower restaurant-level operating margins for our
restaurant concepts.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


CONTROLS AND PROCEDURES







Item 4.
Controls and Procedures





Within 90 days prior to the date of this report, we carried out
an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be
noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.





In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation; including any corrective actions with regard to significant deficiencies and material
weaknesses.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


OTHER INFORMATION







Part II.    Other Information.





Item 5.    
Other Information.





During the twelve weeks ended November 4, 2002, KPMG LLP provided
certain information technology systems services to the Company. The Companys audit committee pre-approved the terms of these non-audit services to the Company. This disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange
Act of 1934, as amended, as added by Section 202 of the Sarbanes-Oxley Act of 2002.




39




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


EXHIBITS AND REPORTS ON FORM 8-K


(Dollars in thousands)







Item 6.    
Exhibits and Reports on Form 8-K





Exhibit #

Description12.1

Computation of Ratios99.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. section 135099.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350





(b)    Current Reports on Form 8-K:





None.





SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





CKE RESTAURANTS, INC. (Registrant)December 4, 2002





/s/ DENNIS J. LACEYDate







Dennis J. LaceyExecutive Vice PresidentChief Financial Officer




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


EXHIBITS AND REPORTS ON FORM 8-K


(Dollars in thousands)





Certifications





I, Andrew F. Puzder, certify that:





|1. |  | I have reviewed this Quarterly Report on Form 10-Q of CKE Restaurants, Inc.;
|-- |  | ----------------------------------------------------------------------------




|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants Board of Directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date:

December 4, 2002





/s/    ANDREW F. PUZDERAndrew F. Puzder Chief Executive Officer


*     *     *




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


EXHIBITS AND REPORTS ON FORM 8-K


(Dollars in thousands)





I, Dennis J. Lacey, certify that:





|1. |  | I have reviewed this Quarterly Report on Form 10-Q of CKE Restaurants, Inc.;
|-- |  | ----------------------------------------------------------------------------




|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants Board of Directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date:

December 4, 2002





/s/    DENNIS J. LACEYDennis J. Lacey Chief Financial Officer




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


EXHIBITS AND REPORTS ON FORM 8-K


(Dollars in thousands)





EXHIBIT INDEX





Exhibit #

Description12.1

Computation of Ratios99.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. section 135099.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350