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UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the quarterly period ended May 23, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the transition period fromto.
 Commission file number 1-11313 
 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.)6307 Carpinteria Avenue, Ste. A, Carpinteria, CA
(Address of Principal Executive Offices)
    
    93013
(Zip Code)
 Registrants telephone number, including area code: (805) 745-7500 Former Name, Former Address and Former Fiscal Year, if changed since last report.   Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). Yes þ No o As of June 15, 2005, 59,471,509 shares of the Registrants Common Stock were outstanding.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES INDEX PagePart I. Financial InformationItem 1 Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of May 23, 2005 and January 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the sixteen weeks ended May 23, 2005 and May
17, 2004
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the sixteen weeks ended May 23, 2005
    
    
    5Condensed Consolidated Statements of Cash Flows for the sixteen weeks ended May 23, 2005 and May
17, 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    41Item 4 Controls and Procedures
    
    
    41Part II. Other InformationItem 1 Legal Proceedings
    
    
    43Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 6 Exhibits
    
    
    44Signatures
    
    
    45EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  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, except par values)
(Unaudited)
 May 23, 2005
    
    
    January 31, 2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,023
    
    
    $
    18,432Accounts receivable, net of allowance for doubtful accounts of $2,002
as of May 23, 2005 and $2,542 as of January 31, 2005
    
    
    32,751
    
    
    
    31,199Related party trade receivables
    
    
    5,124
    
    
    
    6,760Inventories, net
    
    
    21,581
    
    
    
    19,297Prepaid expenses
    
    
    15,871
    
    
    
    13,056Assets held for sale
    
    
    339
    
    
    
    1,058Advertising fund assets, restricted
    
    
    22,064
    
    
    
    21,951Other current assets
    
    
    2,390
    
    
    
    2,278Total current assets
    
    
    120,143
    
    
    
    114,031Notes receivable, net of allowance for doubtful accounts of $6,806 as of
May 23, 2005 and $7,081 as of January 31, 2005
    
    
    3,232
    
    
    
    3,328Property and equipment, net of accumulated depreciation of $420,357 as of
May 23, 2005 and $413,021 as of January 31, 2005
    
    
    464,792
    
    
    
    461,286Property under capital leases, net of accumulated depreciation of $53,511
as of May 23, 2005 and $52,182 as of January 31, 2005
    
    
    34,240
    
    
    
    36,060Goodwill
    
    
    22,649
    
    
    
    22,649Other assets, net
    
    
    29,563
    
    
    
    31,529Total assets
    
    $
    674,619
    
    
    $
    668,883LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of bank indebtedness and other long-term debt
    
    $
    9,109
    
    
    $
    16,066Current portion of capital lease obligations
    
    
    4,969
    
    
    
    5,079Accounts payable
    
    
    60,269
    
    
    
    52,484Advertising fund liabilities
    
    
    22,064
    
    
    
    21,951Other current liabilities
    
    
    94,798
    
    
    
    93,358Total current liabilities
    
    
    191,209
    
    
    
    188,938Bank indebtedness and other long-term debt, less current portion
    
    
    122,531
    
    
    
    138,418Convertible subordinated notes due 2023
    
    
    105,000
    
    
    
    105,000Capital lease obligations, less current portion
    
    
    51,362
    
    
    
    52,485Other long-term liabilities
    
    
    65,266
    
    
    
    64,374Total liabilities
    
    
    535,368
    
    
    
    549,215Commitments and contingencies (Note 10)Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued
or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 100,000,000 shares authorized; 59,349,000
shares issued and outstanding at May 23, 2005; 58,082,000 shares issued
and outstanding at January 31, 2005
    
    
    594
    
    
    
    581Additional paid-in capital
    
    
    459,323
    
    
    
    453,391Accumulated deficit
    
    
    (320,666
    )
    
    
    (334,304
    )Total stockholders equity
    
    
    139,251
    
    
    
    119,668Total liabilities and stockholders equity
    
    $
    674,619
    
    
    $
    668,883
 See Accompanying Notes to Condensed Consolidated Financial Statements 3




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
(Unaudited) Sixteen Weeks EndedMay 23, 2005
    
    
    May 17, 2004Revenue:Company-operated restaurants
    
    $
    371,488
    
    
    $
    365,871Franchised and licensed restaurants and other
    
    
    94,421
    
    
    
    89,440Total revenue
    
    
    465,909
    
    
    
    455,311Operating costs and expenses:Restaurant operations:Food and packaging
    
    
    108,015
    
    
    
    105,724Payroll and other employee benefits
    
    
    113,210
    
    
    
    112,595Occupancy and other
    
    
    85,181
    
    
    
    81,255306,406
    
    
    
    299,574Franchised and licensed restaurants and other
    
    
    72,833
    
    
    
    66,991Advertising
    
    
    22,991
    
    
    
    22,264General and administrative
    
    
    39,971
    
    
    
    37,656Facility action charges, net
    
    
    560
    
    
    
    6,817Total operating costs and expenses
    
    
    442,761
    
    
    
    433,302Operating income
    
    
    23,148
    
    
    
    22,009Interest expense
    
    
    (7,373
    )
    
    
    (11,720
    )Other income, net
    
    
    863
    
    
    
    729Income before income taxes and discontinued operations
    
    
    16,638
    
    
    
    11,018Income tax expense
    
    
    639
    
    
    
    351Income from continuing operations
    
    
    15,999
    
    
    
    10,667Loss from operations of discontinued segment (net of income tax
expense of $0)
    
    
    
    
    
    
    (163
    )Net income
    
    $
    15,999
    
    
    $
    10,504Basic income per common share:Continuing operations
    
    $
    0.27
    
    
    $
    0.18Discontinued operations
    
    
    
    
    
    
    Net income
    
    $
    0.27
    
    
    $
    0.18Diluted income per common share:Continuing operations
    
    $
    0.24
    
    
    $
    0.17Discontinued operations
    
    
    
    
    
    
    Net income
    
    $
    0.24
    
    
    $
    0.17Weighted-average common shares outstanding:Basic
    
    
    58,696
    
    
    
    57,605Dilutive effect of stock options, warrants and convertible notes
    
    
    14,997
    
    
    
    13,581Diluted
    
    
    73,693
    
    
    
    71,186
 See Accompanying Notes to Condensed Consolidated Financial Statements 4




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 (In thousands)
(Unaudited) Sixteen Weeks Ended May 23, 2005Common StockNumber of
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    TotalShares
    
    
    
    
    
    
    Paid-In
    
    
    Accumulated
    
    
    StockholdersIssued
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance at January 31, 2005
    
    
    58,082
    
    
    $
    581
    
    
    $
    453,391
    
    
    $
    (334,304
    )
    
    $
    119,668Cash dividends declared ($0.04 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,361
    )
    
    
    (2,361
    )Exercise of stock options and warrants
    
    
    1,267
    
    
    
    13
    
    
    
    5,932
    
    
    
    
    
    
    
    5,945Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,999
    
    
    
    15,999Balance at May 23, 2005
    
    
    59,349
    
    
    $
    594
    
    
    $
    459,323
    
    
    $
    (320,666
    )
    
    $
    139,251
 See Accompanying Notes to Condensed Consolidated Financial Statements 5




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
 Sixteen Weeks EndedMay 23, 2005
    
    
    May 17, 2004Cash flow from operating activities:Net income
    
    $
    15,999
    
    
    $
    10,504Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    20,605
    
    
    
    21,046Amortization of loan fees
    
    
    1,090
    
    
    
    1,042Recovery of losses on accounts and notes receivable
    
    
    (386
    )
    
    
    (242
    )Loss on sale of property and equipment, capital leases and
extinguishment of debts
    
    
    1,057
    
    
    
    1,284Facility action charges, net
    
    
    560
    
    
    
    6,817Deferred income taxes
    
    
    50
    
    
    
    82Other non-cash charges (credits)
    
    
    (86
    )
    
    
    33Change in estimated liability for closing restaurants and
estimated liability for self-insurance
    
    
    138
    
    
    
    (3,508
    )Net change in refundable income taxes
    
    
    261
    
    
    
    4Net change in accounts receivable, inventories, prepaid
expenses and other current assets
    
    
    (5,388
    )
    
    
    9,991Net change in accounts payable and other current and
long-term liabilities
    
    
    5,786
    
    
    
    197Loss from operations of discontinued segment
    
    
    
    
    
    
    163Net cash provided to discontinued segment
    
    
    
    
    
    
    28Net cash provided by operating activities
    
    
    39,686
    
    
    
    47,441Cash flow from investing activities:Purchases of property and equipment
    
    
    (25,221
    )
    
    
    (16,384
    )Proceeds from sale of property and equipment
    
    
    3,961
    
    
    
    6,624Collections on notes receivable
    
    
    483
    
    
    
    702Increase in cash upon consolidation of variable interest entity
    
    
    
    
    
    
    100Net change in other assets
    
    
    111
    
    
    
    111Net cash used in investing activities
    
    
    (20,666
    )
    
    
    (8,847
    )Cash flow from financing activities:Net change in bank overdraft
    
    
    1,146
    
    
    
    (8,744
    )Borrowings under revolving credit facility
    
    
    49,500
    
    
    
    Repayments of borrowings under revolving credit facility
    
    
    (56,500
    )
    
    
    Repayment of credit facility term loan
    
    
    (15,829
    )
    
    
    (13,926
    )Repayment of convertible subordinated notes due 2004
    
    
    
    
    
    
    (22,319
    )Repayment of other long-term debt
    
    
    (69
    )
    
    
    (88
    )Borrowing by consolidated variable interest entity
    
    
    54
    
    
    
    Repayments of capital lease obligations
    
    
    (1,576
    )
    
    
    (2,561
    )Collections on officer and non-employee director notes receivable
    
    
    
    
    
    
    39Payment of deferred loan fees
    
    
    (100
    )
    
    
    (12
    )Repurchase of common stock
    
    
    
    
    
    
    (3,354
    )Proceeds from exercise of stock options and warrants
    
    
    5,945
    
    
    
    756Net cash used in financing activities
    
    
    (17,429
    )
    
    
    (50,209
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,591
    
    
    
    (11,615
    )Cash and cash equivalents at beginning of period
    
    
    18,432
    
    
    
    54,355Cash and cash equivalents at end of period
    
    $
    20,023
    
    
    $
    42,740Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    (7,061
    )
    
    $
    (14,949
    )Income taxes, net of refunds received
    
    $
    (561
    )
    
    $
    (2,963
    )Non-cash investing and financing activities:Gain recognized on sale and leaseback transactions
    
    $
    119
    
    
    $
    107Consolidation of advertising funds assets and liabilities
    
    $
    113
    
    
    $
    19,438Declaration of dividend
    
    $
    2,361
    
    
    $
    
 See Accompanying Notes to Condensed Consolidated Financial Statements 6




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 NOTE (1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS CKE Restaurants, Inc. (CKE or the Company), through its wholly-owned subsidiaries, owns,
operates, franchises and licenses the Carls Jr.®, Hardees®, La Salsa Fresh Mexican Grill® (La
Salsa) and The Green Burrito® (Green Burrito) concepts. References to CKE or the Company
throughout these Notes to Condensed Consolidated Financial Statements are made using the first
person notations of we, us and our. Carls Jr. restaurants are primarily located in the Western United States. Hardees
restaurants are located throughout the Southeastern and Midwestern United States. La Salsa
restaurants are primarily located in California. Green Burrito restaurants are located in
California, primarily in dual-brand Carls Jr. restaurants. As of May 23, 2005, our system-wide
restaurant portfolio consisted of: Carls Jr.
    
    
    Hardees
    
    
    La Salsa
    
    
    Green Burrito
    
    
    TotalCompany-operated
    
    
    428
    
    
    
    676
    
    
    
    61
    
    
    
    1
    
    
    
    1,166Franchised and licensed
    
    
    592
    
    
    
    1,353
    
    
    
    39
    
    
    
    15
    
    
    
    1,999Total
    
    
    1,020
    
    
    
    2,029
    
    
    
    100
    
    
    
    16
    
    
    
    3,165
 The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of
CKE and our 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 our Annual Report on Form 10-K for the fiscal year
ended January 31, 2005. In the opinion of management, all adjustments consisting of normal
recurring accruals necessary for a fair presentation of financial position and results of
operations for the interim periods presented have been reflected herein. The results of operations
for such interim periods are not necessarily indicative of results for the full year or for any
future period. For clarity of presentation, we generally label all fiscal year ends as fiscal year ended
January 31. Prior year amounts in the Condensed Consolidated Financial Statements have been reclassified
to conform with current year presentation. Consolidation of Variable Interest Entities In accordance with Financial Accounting Standards Board (FASB) Interpretation 46,
Consolidation of Variable Interest Entities  an interpretation of Accounting Research Bulletin
(ARB) No. 51(FIN 46R), which we
adopted on May 17, 2004, we consolidate certain variable interest entities (VIEs) within our
Condensed Consolidated Financial Statements as of May 23, 2005,
and January 31, 2005, based on our determination that we
are the primary beneficiaries of such VIEs. We consolidate one franchise entity that operates six Hardees restaurants. We sublease to
this franchise entity all of its six operating locations and a substantial portion of its operating
equipment. Because the principals did not invest a significant amount of equity, the legal entity
within which this franchise operates is considered to be inadequately capitalized and, as a result,
is a VIE. We determined we are the primary beneficiary of this VIE. The assets and liabilities of
this entity are included in the accompanying Condensed Consolidated Balance Sheets as of May 23,
2005, and January 31, 2005, and are not significant. The operating results of this franchise entity are included within
the accompanying Condensed Consolidated Statement of Operations for the fiscal quarter ended May
23, 2005, and are not significant. The minority interest in the income of this franchise entity is
classified in other income, net, in the accompanying Condensed Consolidated Statement of Operations
for the fiscal quarter ended May 23, 2005, and in other long-term liabilities in the accompanying
Condensed Consolidated Balance Sheet as of May 23, 2005, and also is not significant. We have no
rights to the assets, nor do we have any obligation with respect to the liabilities, of this
franchise entity. None of our assets serve as collateral for the creditors of this franchisee or
any of our other franchisees. 7




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) We also consolidate the Hardees cooperative advertising funds, which consist of the Hardees
National Advertising Fund (HNAF) and approximately 85 local advertising cooperative funds (Co-op
Funds) because we have determined we are the primary beneficiaries of these funds. We have
included $22,064 of advertising fund assets, restricted, and advertising fund liabilities in the
accompanying Condensed Consolidated Balance Sheets as of May 23, 2005 and January 31, 2005. Stock-Based Compensation At January 31, 2005, we had several stock-based employee compensation plans in effect, which
are described more fully in Note 22 of Notes to Consolidated Financial Statements in our Annual
Report on Form 10-K for the fiscal year ended January 31, 2005. We account for those plans under
the recognition and measurement principles of Accounting Principles Board Opinion 25, Accounting
for Stock Issued to Employees(APB 25), and related
FASB interpretations. No stock-based employee
compensation cost is reflected in net income for options granted under these plans, as all such
options had an exercise price equal to the market value of the underlying common stock on the date
of grant. In December 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) 148,
Accounting for Stock-Based Compensation  Transition and Disclosure(SFAS 148). SFAS 148 amends
SFAS 123, Accounting for Stock-Based Compensation(SFAS 123), to provide alternative methods of
transition for a voluntary change to the fair-value method for stock-based employee compensation.
In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported results.
Disclosures required by this standard are included below. For purposes of the following pro forma disclosures required by SFAS 148 and SFAS 123, the
fair value of each option has been estimated on the date of grant using the Black-Scholes
option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that do not have vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective assumptions including
the expected stock price volatility, the risk-free rate and the expected term of the option.
Because our stock options have characteristics significantly different from those of traded options
and because changes in the subjective input assumptions can materially affect the value of an
estimate, in managements opinion, the Black-Scholes model does not necessarily provide a reliable
single measure of the fair value of our employee stock options. No options were granted in the sixteen weeks ended May 23, 2005. The assumptions used for
grants in the sixteen weeks ended May 17, 2004, are as follows: Annual dividends
    
    $
    Expected volatility
    
    
    73.2
    %Risk-free interest rate (matched to the expected term of
the outstanding option)
    
    
    3.83
    %Expected life of all options outstanding (years)
    
    
    5.5Weighted-average fair value of each option granted
    
    $
    5.65
 8




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) The assumptions used to determine the fair value of each option granted are highly subjective.
Changes in the assumptions used would affect the fair value of the options granted in the sixteen
weeks ended May 17, 2004, as follows: Increase (Decrease) inChange in Assumption
    
    Fair Value of Options Granted10% increase in expected volatility
    
    $
    0.481% increase in risk-free interest rate
    
    
    0.091 year increase in expected life of all options outstanding
    
    
    0.3710% decrease in expected volatility
    
    
    (0.53
    )1% decrease in risk-free interest rate
    
    
    (0.09
    )1 year decrease in expected life of all options outstanding
    
    
    (0.44
    )
 The following tables reconcile reported net income to pro forma net income assuming
compensation expense for stock-based compensation had been recognized in accordance with SFAS 123: Sixteen Weeks EndedMay 23, 2005
    
    
    May 17, 2004Net income, as reported
    
    $
    15,999
    
    
    $
    10,504Add: Stock-based employee
compensation expense included in
reported net income
    
    
    
    
    
    
    Deduct: Total stock-based
employee compensation expense
determined under fair value
based method, net of related tax
effects
    
    
    (1,508
    )
    
    
    (1,114
    )Net income  pro forma
    
    $
    14,491
    
    
    $
    9,390Net income per common share:Basic  as reported
    
    $
    0.27
    
    
    $
    0.18Basic  pro forma
    
    
    0.25
    
    
    
    0.16Diluted  as reported
    
    
    0.24
    
    
    
    0.17Diluted  pro forma
    
    
    0.22
    
    
    
    0.15
 NOTE (2) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In December 2004, the FASB issued SFAS 123 (Revised 2004), Share-Based Payment(SFAS 123R),
which replaces SFAS 123, supersedes APB 25 and related interpretations and amends SFAS 95,
Statement of Cash Flows. The provisions of SFAS 123R are similar to those of SFAS 123; however,
SFAS 123R requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements as compensation cost based on their fair
value on the date of grant. Fair value of share-based awards will be determined using
option-pricing models (e.g. Black-Scholes or binomial models) and assumptions that appropriately
reflect the specific circumstances of the awards. Compensation cost will be recognized over the
vesting period based on the fair value of awards that actually vest. We will be required to choose between the modified-prospective and modified-retrospective
transition alternatives in adopting SFAS 123R. Under the modified-prospective-transition method,
compensation cost would be recognized in financial statements issued subsequent to the date of
adoption for all shared-based payments granted, modified or settled after the date of adoption, as
well as for any unvested awards that were granted prior to the date of adoption. As we previously
adopted only the pro forma disclosure provisions of SFAS 123, under this method we would recognize
compensation cost relating to the unvested portion of awards granted prior to the date of adoption
using the same estimate of the grant-date fair value and the same attribution method used to
determine the pro forma disclosures under SFAS 123. Under the modified-retrospective-transition
method, compensation cost 9




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) would be recognized in a manner consistent with the modified-prospective-transition method;
however, prior period financial statements would also be restated by recognizing compensation cost
as previously reported in the pro forma disclosures under SFAS 123. The restatement provisions can
be applied to either (i) all periods presented or (ii) to the beginning of the fiscal year in which
SFAS 123R is adopted. SFAS 123R is effective at the beginning of the first annual period beginning after June 15,
2005 (fiscal 2007 for us) and early adoption is encouraged. We will evaluate the use of certain
option-pricing models as well as the assumptions to be used in such models. When such evaluation is
complete, we will determine the transition method to use and the timing of adoption. We do not
currently anticipate that the impact on net income on a full year basis of the adoption of SFAS
123R will be significantly different from the historical pro forma impacts as disclosed in
accordance with SFAS 123. NOTE (3) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In October 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force
(EITF) on Issue 04-1, Accounting for Preexisting Relationships between the Parties to a Business
Combination(EITF 04-1). EITF 04-1 requires that a business combination between two parties that
have a preexisting relationship be evaluated to determine if a settlement of a preexisting
relationship exists. EITF 04-1 also requires that certain reacquired rights (including the rights
to the acquirers trade name under a franchise agreement) be recognized as intangible assets apart
from goodwill. However, if a contract giving rise to the reacquired rights includes terms that are
favorable or unfavorable when compared to pricing for current market transactions for the same or
similar items, EITF 04-1 requires that a settlement gain or loss should be measured as the lesser
of (i) the amount by which the contract is favorable or unfavorable to market terms from the
perspective of the acquirer or (ii) the stated settlement provisions of the contract available to
the counterparty to which the contract is unfavorable. EITF 04-1 was effective prospectively for business combinations consummated in reporting
periods beginning after October 13, 2004 (our fiscal quarter beginning November 2, 2004). EITF 04-1
applies to acquisitions of restaurants we may make from our franchisees or licensees. We currently
attempt to have our franchisees or licensees enter into standard franchise or license agreements
for the applicable brand and/or market when renewing or entering into a new agreement. However, in
certain instances franchisees or licensees have existing agreements that possess terms, including
royalty rates, that differ from our current standard agreements for the applicable brand and/or
market. If in the future we were to acquire a franchisee or licensee with such an existing
agreement, we would be required to record a settlement gain or loss at the date of acquisition. The
amount and timing of any such gains or losses we might record is dependent upon which franchisees
or licensees we might acquire and when they are acquired. Accordingly, any impact cannot be
currently determined. NOTE (4) INTANGIBLE ASSETS The table below presents identifiable, definite-lived intangible assets as of May 23, 2005,
and January 31, 2005: May 23, 2005
    
    
    January 31, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetIntangible
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAsset
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountTrademarks
    
    $
    17,171
    
    
    $
    (2,770
    )
    
    $
    14,401
    
    
    $
    17,171
    
    
    $
    (2,487
    )
    
    $
    14,684Franchise agreements
    
    
    1,780
    
    
    
    (266
    )
    
    
    1,514
    
    
    
    1,780
    
    
    
    (258
    )
    
    
    1,522Favorable lease agreements
    
    
    5,861
    
    
    
    (3,179
    )
    
    
    2,682
    
    
    
    6,265
    
    
    
    (3,369
    )
    
    
    2,896$
    24,812
    
    
    $
    (6,215
    )
    
    $
    18,597
    
    
    $
    25,216
    
    
    $
    (6,114
    )
    
    $
    19,102
 Amortization expense related to identifiable definite-lived intangible assets was $494 and
$733 for the sixteen week periods ended May 23, 2005, and May 17, 2004, respectively. These
intangible assets are amortized over 10




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) periods of six to 20 years and are included in other assets, net in the accompanying Condensed
Consolidated Balance Sheets. NOTE (5) INDEBTEDNESS AND INTEREST EXPENSE On June 2, 2004, we amended and restated our senior credit facility (the Facility) to
provide for a $380,000 senior secured credit facility consisting of a $150,000 revolving credit
facility and a $230,000 term loan. The Facility is collateralized by a lien on all of our personal
property assets and by certain restaurant property deeds of trust. The revolving credit facility
matures on May 1, 2007, and includes an $85,000 letter of credit sub-facility. The principal amount
of the term loan is scheduled to be repaid in quarterly installments, with a balloon payment of the
remaining principal balance at maturity on July 2, 2008. The Facility also requires term loan
prepayments based upon an annual excess cash flow formula, as defined therein. Subject to certain
conditions as defined in the Facility, the maturity of the term loan may be extended to May 1,
2010. We used a portion of the proceeds from the $230,000 term loan to repay the $10,137 remaining
balance of the prior Facility term loan. On July 2, 2004, we used additional proceeds from the
$230,000 term loan to redeem $200,000 of our 9.125% Senior Subordinated Notes due 2009 (Senior
Notes). During the sixteen weeks ended May 23, 2005, we voluntarily prepaid $15,500 of the $230,000
term loan, in addition to the $329 regularly scheduled quarterly payment. As of May 23, 2005, we
had (i) borrowings outstanding under the term loan and revolving portions of the Facility of
$122,822 and $7,500, respectively, (ii) outstanding letters of credit under the revolving portion
of the Facility of $62,728, and (iii) availability under the revolving portion of the Facility of
$79,772. The terms of the Facility include certain restrictive covenants. Among other things, these
covenants restrict our ability to incur debt or liens on our assets, make any significant change in
our corporate structure or the nature of our business, dispose of assets in the collateral pool
securing the Facility, prepay certain debt, engage in a change of control transaction without the
member banks consents and make investments or acquisitions. The Facility
is collateralized by a lien on all of our personal property assets and liens on certain restaurant
properties. As of May 23, 2005, the applicable interest rate on the term loan was LIBOR plus 2.00%, or
5.125%, per annum. For the revolving loan portion of the Facility, the applicable interest rate on
$2,500 was LIBOR plus 2.25%, or 5.31%, per annum and the applicable rate on the remaining $5,000
was Prime plus 1.00%, or 7.00%, per annum. We also incur fees on outstanding letters of credit
under the Facility at a rate of 2.25% per annum. The Facility required us to enter into interest rate protection agreements in an aggregate
notional amount of at least $70,000 for a term of at least three years. Pursuant to this
requirement, on July 26, 2004, we entered into two interest rate cap agreements in an aggregate
notional amount of $70,000. Under the terms of each agreement, if LIBOR exceeds 5.375% on the
measurement date for any quarterly period, we will receive payments equal to the amount LIBOR
exceeds 5.375%, multiplied by (i) the notional amount of the agreement and (ii) the fraction of a
year represented by the quarterly period. The agreements expire on July 28, 2007. The agreements
were not designated as cash flow hedges under the terms of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. Accordingly, the change in the fair value of the $371 of
interest rate cap premiums is recognized quarterly in interest expense in the Condensed
Consolidated Statements of Operations. During the quarter ended May 23, 2005, we recorded $47 of
interest expense to reduce the carrying value of the interest rate cap premiums to their fair value
of $61 at May 23, 2005. As a matter of policy, we do not use derivative instruments unless there is
an underlying exposure. Subject to the terms of the Facility, we may make annual capital expenditures in the amount of
$45,000, plus 80% of the amount of actual EBITDA (as defined) in excess of $110,000. We may also
carry forward any unused capital expenditure amounts to the following year. Based on these terms,
the Facility permits us to make capital expenditures of at least $63,836 in fiscal 2006, which
could increase further based on our performance versus the EBITDA formula described above. 11




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) The Facility also permits us to repurchase our common stock in an amount up to approximately
$68,000 as of May 23, 2005. In addition, the dollar amount of common stock that we may purchase is
increased each year by a portion of excess cash flow (as defined) during the term of the Facility.
Our Board of Directors has authorized a program to allow us to repurchase up to $20,000 of our
common stock. Based on the Board of Directors authorization and the amount of repurchase of our
common stock that we have already made thereunder, as of May 23, 2005, we are permitted to make
additional repurchases of our common stock up to $14,441. Until recently, the Facility prohibited us from paying cash dividends. On April 21, 2005, we
amended the Facility to permit us to pay cash dividends on substantially the same terms as we have
been and are permitted to repurchase shares of our common stock. This amendment to the Facility
also resulted in a 0.50% decrease in the borrowing rate under our term loan, a 0.25% decrease in
the borrowing rate on revolving loans and a 0.25% decrease in our
letter of credit fee rate. On April 25, 2005, we announced our Board of
Directors declaration of a cash dividend of $0.04 per share of our common stock, or a total of
$2,361, which was paid on June 13, 2005, to our stockholders of record on May 23, 2005, and we
further announced our intention to pay a regular quarterly cash dividend. The Facility contains financial performance covenants, which include a minimum EBITDA
requirement, a minimum fixed charge coverage ratio, and maximum leverage ratios. We were in
compliance with these covenants and all other requirements of the Facility as of May 23, 2005. The full text of the contractual requirements imposed by the Facility is set forth in the
Sixth Amended and Restated Credit Agreement, dated as of June 2, 2004, and the amendments thereto,
which we have filed with the Securities and Exchange Commission, and in the ancillary loan
documents described therein. Subject to cure periods in certain instances, the lenders under our
Facility may demand repayment of borrowings prior to stated maturity upon certain events, including
if we breach the terms of the agreement, suffer a material adverse change, engage in a change of
control transaction, suffer certain adverse legal judgments, in the event of specified events of
insolvency or if we default on other significant obligations. In the event the Facility is declared
accelerated by the lenders (which can occur only if we are in default under the Facility), the
Companys 2023 Convertible Notes (described below) may also become accelerated under certain
circumstances and after all cure periods have expired. On September 29, 2003, we completed an offering of $105,000 of our 4% Convertible Subordinated
Notes due 2023 (2023 Convertible Notes), and used nearly all of the net proceeds of the offering
to repurchase $100,000 of our then-outstanding 4.25% Convertible Subordinated Notes due 2004 (the
2004 Convertible Notes). The 2023 Convertible Notes bear interest at 4.0% annually, payable in
semiannual installments due April 1 and October 1 each year, are unsecured general obligations of
ours, and are contractually subordinate in right of payment to certain other of our obligations,
including the Facility. On October 1 of 2008, 2013 and 2018, the holders of the 2023 Convertible
Notes have the right to require us to repurchase all or a portion of the notes at 100% of the face
value plus accrued interest. On October 1, 2008 and thereafter, we have the right to call all or a
portion of the notes at 100% of the face value plus accrued interest. Under the terms of the 2023
Convertible Notes, such notes become convertible into our common stock at a conversion price of
approximately $8.89 per share at any time after our common stock has a closing sale price of at
least $9.78 per share, which is 110% of the conversion price per share, for at least 20 days in a
period of 30 consecutive trading days ending on the last trading day of a calendar quarter. As a
result of the daily closing sales price levels on our common stock during the second calendar
quarter of 2004, the 2023 Convertible Notes became convertible into our common stock effective July
1, 2004, and will remain convertible throughout the remainder of their term. 12




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) Interest expense consisted of the following: Sixteen Weeks EndedMay 23, 2005
    
    
    May 17, 2004Facility
    
    $
    2,401
    
    
    $
    426Senior subordinated notes due 2009
    
    
    
    
    
    
    5,615Capital lease obligations
    
    
    1,931
    
    
    
    2,2042004 Convertible Notes
    
    
    
    
    
    
    732023 Convertible Notes
    
    
    1,292
    
    
    
    1,292Amortization of loan fees
    
    
    1,090
    
    
    
    1,042Write-off of
unamortized loan fees upon term loan prepayments
    
    
    225
    
    
    
    393Letter of credit fees and other
    
    
    434
    
    
    
    675$
    7,373
    
    
    $
    11,720
 NOTE (6) FACILITY ACTION CHARGES, NET The following transactions have been recorded in the accompanying Condensed Consolidated
Statements of Operations as facility action charges, net:  (i)
    
    impairment of long-lived assets for under-performing restaurants;(ii)
    
    store closure costs;(iii)
    
    gains (losses) on the sale of restaurants; and(iv)
    
    amortization of discount related to estimated liability for closing restaurants. 13




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) The components of facility action charges, net, are as follows: Sixteen Weeks EndedMay 23, 2005
    
    
    May 17, 2004HardeesNew decisions regarding closing restaurants
    
    $
    177
    
    
    $
    4,078(Favorable) unfavorable dispositions of leased and fee surplus properties, net
    
    
    (199
    )
    
    
    154Impairment of assets to be disposed of
    
    
    8
    
    
    
    61Impairment of assets to be held and used
    
    
    104
    
    
    
    770Gain on sales of restaurants and surplus properties, net
    
    
    (199
    )
    
    
    (1,035
    )Amortization of discount related to estimated liability for closing restaurants
    
    
    256
    
    
    
    336147
    
    
    
    4,364Carls Jr.(Favorable) unfavorable dispositions of leased and fee surplus properties, net
    
    
    76
    
    
    
    (24
    )Impairment of assets to be held and used
    
    
    381
    
    
    
    1,426Gain on sales of restaurants and surplus properties, net
    
    
    (506
    )
    
    
    (315
    )Amortization of discount related to estimated liability for closing restaurants
    
    
    73
    
    
    
    11524
    
    
    
    1,202La Salsa and OtherNew decisions regarding closing restaurants
    
    
    157
    
    
    
    800Unfavorable dispositions of leased and fee surplus properties, net
    
    
    68
    
    
    
    39Impairment of assets to be held and used
    
    
    75
    
    
    
    405Loss on sales of restaurants and surplus properties, net
    
    
    83
    
    
    
    6Amortization of discount related to estimated liability for closing restaurants
    
    
    6
    
    
    
    1389
    
    
    
    1,251TotalNew decisions regarding closing restaurants
    
    
    334
    
    
    
    4,878(Favorable) unfavorable dispositions of leased and fee surplus properties, net
    
    
    (55
    )
    
    
    169Impairment of assets to be disposed of
    
    
    8
    
    
    
    61Impairment of assets to be held and used
    
    
    560
    
    
    
    2,601Gain on sales of restaurants and surplus properties, net
    
    
    (622
    )
    
    
    (1,344
    )Amortization of discount related to estimated liability for closing restaurants
    
    
    335
    
    
    
    452$
    560
    
    
    $
    6,817
 The following table summarizes the activity in the estimated liability for closing
restaurants: La SalsaHardees
    
    
    Carls Jr.
    
    
    and Other
    
    
    TotalBalance at January 31, 2005
    
    $
    13,075
    
    
    $
    4,214
    
    
    $
    586
    
    
    $
    17,875New decisions regarding closing restaurants
    
    
    177
    
    
    
    
    
    
    
    157
    
    
    
    334Usage
    
    
    (1,281
    )
    
    
    (564
    )
    
    
    (239
    )
    
    
    (2,084
    )(Favorable) unfavorable dispositions of leased and fee
surplus properties, net
    
    
    (199
    )
    
    
    76
    
    
    
    68
    
    
    
    (55
    )Amortization of discount
    
    
    256
    
    
    
    73
    
    
    
    6
    
    
    
    335Balance at May 23, 2005
    
    
    12,028
    
    
    
    3,799
    
    
    
    578
    
    
    
    16,405Less current portion, included in other current liabilities
    
    
    3,876
    
    
    
    1,115
    
    
    
    227
    
    
    
    5,218Long-term portion, included in other long-term liabilities
    
    $
    8,152
    
    
    $
    2,684
    
    
    $
    351
    
    
    $
    11,187
 NOTE (7) INCOME PER SHARE We present basic and diluted income per share. Basic income per share represents net
income divided by weighted-average shares outstanding. Diluted income per share represents net
income divided by weighted-average shares outstanding, including all potentially dilutive
securities and excluding all potentially anti-dilutive securities. 14




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) The dilutive effect of stock options and warrants is determined using the treasury stock
method, whereby exercise is assumed at the beginning of the reporting period and proceeds from such
exercise, including tax benefits therefrom, are assumed to be used to purchase our common stock at
the average market price during the period. The dilutive effect of convertible debt is determined
using the if-converted method, whereby interest charges and amortization of debt issuance costs,
net of taxes, applicable to the convertible debt are added back to income and the convertible debt
is assumed to have been converted at the beginning of the reporting period, with the resulting
common shares being included in weighted-average shares. In conjunction with the acquisition of Santa Barbara Restaurant Group (SBRG), we assumed the
options outstanding under various SBRG stock plans. We also assumed warrants to purchase
approximately 982,000 shares of the Companys common stock. Approximately 491,000 of the warrants
were exercisable at $14.26 per share, the remaining approximately 491,000 of the warrants were
exercisable at $15.28 per share. During the sixteen weeks ended May 23, 2005, approximately 86,000
warrants were exercised. The remaining warrants expired on May 1, 2005. The table below presents the computation of basic and diluted earnings per share for the
sixteen-week periods ended May 23, 2005, and May 17, 2004. Sixteen Weeks EndedMay 23, 2005
    
    
    May 17, 2004(in thousands, except per share amounts)Net income for computation of basic earnings per share
    
    $
    15,999
    
    
    $
    10,504Weighted average shares for computation of basic earnings per share
    
    
    58,696
    
    
    
    57,605Basic net income per share
    
    $
    0.27
    
    
    $
    0.18Net income for computation of basic earnings per share
    
    $
    15,999
    
    
    $
    10,504Add: Interest and amortization costs for Convertible Notes due 2023
    
    
    1,500
    
    
    
    1,542Net income for computation of diluted earnings per share
    
    $
    17,499
    
    
    $
    12,046Weighted average shares for computation of basic earnings per share
    
    
    58,696
    
    
    
    57,605Dilutive effect of 2023 Convertible Notes
    
    
    11,811
    
    
    
    11,811Dilutive effect of stock options and warrants
    
    
    3,186
    
    
    
    1,770Weighted average shares for computation of diluted earnings per share
    
    
    73,693
    
    
    
    71,186Diluted net income per share
    
    $
    0.24
    
    
    $
    0.17
 The following table presents the number of potentially dilutive shares, in thousands, of our
common stock excluded from the computation of diluted earnings per share because their effect would
have been anti-dilutive: Sixteen Weeks EndedMay 23, 2005
    
    
    
    May 17, 2004Stock Options
    
    
    2,151
    
    
    
    3,654Warrants
    
    
    
    
    
    
    982
 NOTE (8) SEGMENT INFORMATION We are principally engaged in developing, operating and franchising our Carls Jr. and
Hardees quick-service restaurants and La Salsa fast-casual restaurants, each of which is
considered an operating segment that is managed and evaluated separately. We evaluate the
performance of our segments and allocate resources to them based on several factors, of which the
primary financial measure is segment operating income or loss. General and 15




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) administrative expenses are allocated to each segment based on managements analysis of the
resources applied to each segment. Interest expense related to the Facility, Senior Notes, 2004
Convertible Notes and 2023 Convertible Notes has been allocated to Hardees based on the use of
funds. Certain 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 and the operating
results of consolidated variable interest entities). The accounting policies of the segments are
the same as those described in the summary of significant accounting policies (see Note 1 of Notes
to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended
January 31, 2005). Carls Jr.
    
    
    Hardees
    
    
    La Salsa
    
    
    Other
    
    
    TotalSixteen Weeks Ended May 23, 2005Revenue
    
    $
    246,039
    
    
    $
    203,146
    
    
    $
    15,132
    
    
    $
    1,592
    
    
    $
    465,909Operating income (loss)
    
    
    21,265
    
    
    
    4,168
    
    
    
    (2,233
    )
    
    
    (52
    )
    
    
    23,148Income (loss) before income taxes
    
    
    20,233
    
    
    
    (1,429
    )
    
    
    (2,219
    )
    
    
    53
    
    
    
    16,638Goodwill (as of May 23, 2005)
    
    
    22,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,649
 Carls Jr.
    
    
    Hardees
    
    
    La Salsa
    
    
    Other
    
    
    TotalSixteen Weeks Ended May 17, 2004Revenue
    
    $
    237,085
    
    
    $
    202,920
    
    
    $
    14,759
    
    
    $
    547
    
    
    $
    455,311Operating income (loss)
    
    
    21,049
    
    
    
    3,295
    
    
    
    (2,491
    )
    
    
    156
    
    
    
    22,009Income (loss) before income taxes
and discontinued operations
    
    
    19,845
    
    
    
    (6,489
    )
    
    
    (2,531
    )
    
    
    193
    
    
    
    11,018Goodwill (as of May 17, 2004)
    
    
    22,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,649
 NOTE (9) NET ASSETS HELD FOR SALE In conjunction with the acquisition of SBRG in fiscal 2003, we made the decision to divest
Timber Lodge as the concept did not fit with our core concepts of quick-service and fast-casual
restaurants. The sale of Timber Lodge was completed on September 3, 2004. The results of Timber Lodge included in the accompanying Condensed Consolidated Statement of
Operations as discontinued operations for the sixteen-week period ended May 17, 2004, are as
follows: Revenue
    
    $
    13,369Operating loss
    
    
    (157
    )Interest expense
    
    
    6Net loss
    
    $
    (163
    )
 The operating loss for Timber Lodge for the sixteen weeks ended May 17, 2004, includes
impairment charges of $617 to reduce the carrying value of Timber Lodge to fair value. As of May 23, 2005, assets held for sale consisted of surplus restaurant properties. NOTE (10) COMMITMENTS AND CONTINGENT LIABILITIES In
prior years, as part of our refranchising program, we sold existing restaurants to franchisees. In
some cases, these restaurants were on leased sites. We entered into sublease agreements with these
franchisees but remained principally liable for the lease obligations. We account for the sublease
payments received as franchising rental income and the payments on the leases as rental expense in
franchising expense. As of May 23, 2005, the present value of our lease obligations under the
remaining master leases primary terms is $130,020. Franchisees may, from 16




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) time to time, experience financial hardship and may cease payment on the sublease obligation
to us. The present value of our exposure from franchisees characterized as under financial hardship
is $21,725, net of $1,165 of accruals within our closed store reserves included in other current
liabilities and other long-term liabilities within the accompanying Condensed Consolidated Balance
Sheets as of May 23, 2005. Pursuant to the Facility, a letter of credit sub-facility in the amount of $85,000 was
established (see Note 5). Several standby letters of credit are outstanding under this
sub-facility, which secure our potential workers compensation obligations and general, auto and
health liability obligations. We are required to provide letters of credit each year, or set aside
a comparable amount of cash or investment securities in a trust account, based on our existing
claims experience. As of May 23, 2005, we had outstanding letters of credit of $62,728 under the
revolving portion of the Facility. As
of May 23, 2005, we had unconditional purchase obligations in the
amount of $71,568, which primarily include contracts for goods and
services related to restaurant operations and contractual commitments
for marketing and sponsorship arrangements. We have employment agreements with certain key executives (the Agreements). These Agreements
include provisions for lump sum payments to the executives that may be triggered by the termination
of employment under certain conditions, as defined in each Agreement. If the Agreements were
triggered, each affected executive would receive an amount ranging from one to three times his base
salary for the remainder of his employment term plus, in some instances, a pro-rata portion of the
bonus in effect for the year in which the termination occurs. Additionally, all options granted to
the affected executives which have not vested as of the date of termination would vest immediately.
The Agreements have terms of three years. If all of these Agreements had been triggered as of May
23, 2005, the Company would have made payments of approximately $6,932. We are, from time to time, the subject of complaints or litigation from customers alleging
illness, injury or other food quality, health or operational concerns. Adverse publicity resulting
from such allegations may materially adversely affect us and our restaurants, regardless of whether
such allegations are valid or whether we are liable. We are also, at times, the subject of
complaints or allegations from employees, former employees, franchisees, vendors and landlords. As of May 23, 2005, we had recorded an accrued liability for contingencies related to
litigation in the amount of $3,700,which relates to certain employment, real estate or other
business disputes. Certain of the matters for which we maintain an accrued liability for litigation
pose risk of loss significantly above the accrued amounts. In addition, as of January 31, 2005, we
estimated the liability for those losses related to other litigation claims that, in accordance
with SFAS 5, Accounting for Contingencies, are not accrued, but that we believe are reasonably
possible to result in an adverse outcome, to be in the range of $95 to $190. For several years, we offered a program whereby we guaranteed the loan obligations of certain
franchisees to independent lending institutions. Franchisees have used the proceeds from such loans
to acquire certain equipment and pay the costs of remodeling Carls Jr. restaurants. In the event a
franchisee defaults under the terms of a program loan, we are obligated, within 15 days following
written demand by the lending institution, to purchase such loan or assume the franchisees
obligation thereunder by executing an assumption agreement and seeking a replacement franchisee for
the franchisee in default. By purchasing such loan, we may seek recovery against the defaulting
franchisee. As of May 23, 2005, the principal outstanding under program loans guaranteed by us
totaled approximately $1,380, with maturity dates ranging from 2005 through 2009. As of May 23,
2005, we had no accrued liability for expected losses under this program and were not aware of any
outstanding loans being in default. We also guarantee an obligation of a former subsidiary to a related party lending institution
associated with an equipment leasing transaction. As of May 23, 2005, the remaining amount due to
the lender under the equipment lease is approximately $44. We maintain an accrual for the estimated
fair value of our guarantee, which is equal to 50% of the remaining obligation. 17




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) NOTE (11) SUBSEQUENT EVENT In June 2003, the Superior Court in Orange County, California (the Court) ruled that we were
entitled to reimbursement from DeltaKor Investments, Inc. (DeltaKor) for legal fees we incurred
to defend a claim DeltaKor had brought against us. After subsequent negotiations, DeltaKors
principal shareholder and an affiliate company and we entered into a binding, verbal settlement on
the record before the Court on June 14, 2005, pursuant to which they would reimburse us for $600 of
legal fees incurred via three equal installments of $200, plus interest, payable in July, September
and December of 2005. We will record the benefits of this contingent gain as offsets to our
general and administrative expenses upon collection of each installment. 18




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Introduction and Safe Harbor Disclosure CKE Restaurants, Inc. and its subsidiaries (collectively referred to as the Company) is
comprised of the operations of Carls Jr., Hardees, La Salsa, and Green Burrito, which is
primarily operated as a dual-brand concept with Carls Jr. quick-service restaurants. The following
Managements Discussion and Analysis should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements contained herein, and our Annual Report on Form 10-K for the
fiscal year ended January 31, 2005. All Note references herein refer to the accompanying Notes to
Condensed Consolidated 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 our current
beliefs and assumptions. Such statements are subject to risks and uncertainties. Factors that could
cause our results to differ materially from those described include, but are not limited to,
whether or not restaurants will be closed and the number of restaurant closures, consumers
concerns or adverse publicity regarding our products, the effectiveness of operating initiatives
and advertising and promotional efforts (particularly at the Hardees brand), changes in economic
conditions or prevailing interest rates, changes in the price or availability of commodities,
availability and cost of energy, workers compensation and general liability premiums and claims
experience, changes in our suppliers ability to provide quality and timely products, delays in
opening new restaurants or completing remodels, severe weather conditions, the operational and
financial success of our franchisees, our franchisees willingness to participate in our strategy,
the availability of financing for us and our franchisees, unfavorable outcomes in litigation,
changes in accounting policies and practices, effectiveness of internal controls over financial
reporting, new legislation or government regulation (including environmental laws), the
availability of suitable locations and terms for the sites designed for development, and other
factors as discussed in our filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. 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 2 of Notes to Condensed Consolidated Financial Statements. Adoption of New Accounting Pronouncements See Note 3 of Notes to Condensed Consolidated Financial Statements. Critical Accounting Policies Our reported results are impacted by the application of certain accounting policies that
require us to make subjective or complex judgments. These judgments involve making estimates about
the effect of matters that are inherently uncertain and may significantly impact our quarterly or
annual results of operations and financial condition. Specific risks associated with these critical
accounting policies are described in the following paragraphs. For all of these policies, we caution that future events rarely develop exactly as expected,
and the best estimates routinely require adjustment. Our most significant accounting policies
require:  
    
    estimation of future cash flows used to assess the recoverability of long-lived assets, including goodwill, and to
establish the estimated liability for closing restaurants and subsidizing lease payments of franchisees;  
    
    estimation, using actuarially determined methods, of our self-insured claim losses under our workers compensation, general
and auto liability insurance programs;  
    
    determination of appropriate estimated liabilities for loss contingencies; 19




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands)  
    
    determination of lease terms for purposes of evaluating leases for capital versus operating lease treatment, establishing
depreciable lives for leasehold improvements and establishing straight-line rent expense periods;  
    
    estimation of the appropriate allowances associated with franchise and license receivables and liabilities for franchise
subleases;  
    
    determination of the appropriate assumptions to use to estimate the fair value of stock-based compensation for purposes of
disclosures of pro forma net income; and  
    
    estimation of our net deferred income tax asset valuation allowance. Descriptions of these critical accounting policies follow. Impairment of Property and Equipment and Other Amortizable Long-Lived Assets Held and Used, Held
for Sale or To Be Disposed of Other Than By Sale We evaluate the carrying value of individual restaurants when the operating results have
reasonably progressed to a point to adequately evaluate the probability of continuing operating
losses or upon expectation that a restaurant will be sold or otherwise disposed of before the end
of its previously estimated useful life. We generally estimate the
useful life of restaurants on owned property  to be 20 to 35 years and estimate the remaining useful life of restaurants subject to
leases to range from the end of the lease term then in effect to the end of such lease term
including all option periods. We then estimate the future estimated cash flows from operating the
restaurant over its estimated useful life. In making these judgments, we consider the period of
time since the restaurant was opened or remodeled, and the trend of operations and expectations for
future sales growth. We also 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 and
related estimated useful life. We employ a probability-weighted approach wherein we estimate the
effectiveness of future sales and marketing efforts on same-store sales. If an estimate of the fair
value of our assets becomes necessary, we typically base such estimate on forecasted cash flows
discounted at the applicable restaurant concepts weighted average cost of capital. During the second and fourth quarter of each fiscal year, we perform an asset recoverability
analysis through which we estimate future cash flows for each of our restaurants based upon
experience gained, current intentions about refranchising restaurants and closures, expected sales
trends, internal plans and other relevant information. As the operations of restaurants opened or
remodeled in recent years progress to the point that their profitability and future prospects can
adequately be evaluated, additional restaurants will become subject to review and to the
possibility that impairments exist. Same-store sales are the key indicator used to estimate future cash flow for evaluating
recoverability. For each of our restaurant concepts, to evaluate recoverability of restaurant
assets we estimate same-store sales will increase at an annual average rate of approximately 3.0%
over the remaining useful life of the restaurant. The inflation rate assumed in making this
calculation is 2.0%. If our same-store sales do not perform at or above our forecasted level, or
cost inflation exceeds our forecast and we are unable to recover such costs through price
increases, the carrying value of certain of our restaurants may prove to be unrecoverable and we
may incur additional impairment charges in the future. Typically, restaurants are operated for three years before we test them for impairment. Also,
restaurants typically are not tested for two years following a remodel. We believe this provides
the restaurant sufficient time to establish its presence in the market and build a customer base.
If we were to test all restaurants for impairment without regard to the amount of time the
restaurants were operating, the total asset impairment would increase substantially. In addition,
if recently opened or remodeled restaurants do not eventually establish stronger market 20




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) presence
and build a customer base, the carrying value of certain of these restaurants may prove to be
unrecoverable and we may incur additional impairment charges in the future. As of May 23, 2005, we had a total of 166 restaurants among our three major restaurant
concepts that generated negative cash flows on a trailing one-year basis. These restaurants had
combined net book values of $32,540. Included within these totals are 28 restaurants with combined
net book values of $11,376 that have not been tested for impairment because they had not yet been
operated for a sufficient period of time as of our most recent comprehensive semi-annual asset
quality review in the fourth quarter of fiscal 2005. If these negative cash flow restaurants were
not to begin generating positive cash flows within a reasonable period of time, the carrying value
of these restaurants may prove to be unrecoverable and we may
recognize additional impairment charges
in the future. Impairment of Goodwill At the reporting unit level, goodwill is tested for impairment at least annually during the
first quarter of our fiscal year, and on an interim basis if an event or circumstance indicates
that it is more likely than not impairment may have occurred. We consider the reporting unit level
to be the brand level since the components (e.g., restaurants) within each brand have similar
economic characteristics, including products and services, production processes, types or classes
of customers and distribution methods. The impairment, if any, is measured based on the estimated
fair value of the brand. Fair value can be determined based on discounted cash flows, comparable
sales or valuations of other restaurant brands. Impairment occurs when the carrying amount of
goodwill exceeds its estimated fair value. The most significant assumptions we use in this analysis are those made in estimating future
cash flows. In estimating future cash flows, we use the assumptions in our strategic plan for items
such as same-store sales, store count growth rates, and the discount rate we consider to be the
market discount rate for acquisitions of restaurant companies and brands. If our assumptions used in performing the impairment test prove inaccurate, the fair value of
the brands may ultimately prove to be significantly lower, thereby causing the carrying value to
exceed the fair value and indicating an impairment has occurred. During the first quarter of fiscal
year 2006, we evaluated the Carls Jr. brand, the only one of our brands for which we currently
carry goodwill, through which we concluded that the fair value of the net assets of Carls Jr.
exceeded the carrying value, and thus no impairment charge was required. As of May 23, 2005, we
have $22,649 in goodwill recorded on the Condensed Consolidated Balance Sheet, which relates to
Carls Jr. Estimated Liability for Closing Restaurants We make decisions to close restaurants based on prospects for estimated future profitability,
and sometimes we are forced to close restaurants due to circumstances beyond our control (e.g., a
landlords refusal to negotiate a new lease). Our restaurant operators evaluate each restaurants
performance no less frequently than the second and fourth quarter of each fiscal year. When
restaurants continue to perform poorly, we consider the demographics of the location, as well as
the likelihood of being able to improve an unprofitable restaurant. Based on the operators
judgment and a financial review, we estimate the future cash flows. If we determine that the
restaurant will not, within a reasonable period of time, operate at break-even cash flow or be
profitable, and we are not contractually obligated to continue operating the restaurant, we may
close the restaurant. The estimated liability for closing restaurants on properties vacated is 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 the present value of these estimated future payments. The interest rate
used to calculate the present value of these liabilities is based on our incremental borrowing rate
at the time the liability is established. The related discount is amortized and shown in facility
action charges, net, in our Condensed Consolidated Statements of Operations. 21




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) A significant assumption used in determining the amount of the estimated liability for closing
restaurants is the amount of the estimated liability for future lease payments on vacant
restaurants, which we determine based on our brokers assessment of its ability to either
successfully negotiate early terminations of our lease agreements with the lessors or sublease the
properties. Additionally, we estimate the cost to maintain leased and owned vacant properties until
the lease has been abated or the owned property has been sold. If the costs to maintain properties
increase, or it takes longer than anticipated to sell properties or sublease or terminate leases,
we may need to record additional
estimated liabilities. If the leases on the vacant restaurants are not terminated or subleased
on the terms we used to estimate the liabilities, we may be required to record losses in future
periods. Conversely, if the leases on the vacant restaurants are terminated or subleased on more
favorable terms than we used to estimate the liabilities, we reverse previously established
estimated liabilities, resulting in an increase in operating income. The present value of our
operating lease payment obligations on all closed restaurants is approximately $10,021, which
represents the discounted amount we would be required to pay if we are unable to enter into
sublease agreements or terminate the leases prior to the terms required in the lease agreements.
However, it is our experience that we can often terminate those leases for less than that amount,
or sublease the property and, accordingly, we have recorded an estimated liability for operating
lease obligations of $6,415 as of May 23, 2005. Estimated Liability for Self-Insurance We are self-insured for a portion of our current and prior years losses related to workers
compensation, general and auto liability insurance programs. We have obtained stop loss insurance
for individual workers compensation, general and auto liability claims over $500. Insurance
accrued liabilities are accounted for based on the present value of actuarial estimates of the
amount of incurred and unpaid losses, based approximately on a risk-free interest rate, which we
estimate to be 4.5% as of May 23, 2005. These estimates rely on actuarial observations of
historical claim loss development. The actuary, in determining the estimated liability, bases the
assumptions on the average historical losses on claims we have incurred. The actual loss
development may be better or worse than the development we estimated in conjunction with the
actuary. In that event, we will modify the reserve. As such, if we experience a higher than
expected number of claims or the costs of claims rise more than expected, then we may, in
conjunction with the actuary, adjust the expected losses upward and our future self-insurance
expenses will rise. Within our semi-annual actuary reports, our actuary provides a range of estimated unpaid
losses for each insurance category. Using these estimates, we record adjustments to our insurance
accrued liabilities, if necessary, to bring each accrual balance within the actuarys related
range. If our accrued liability exceeds the high end of the range, we reduce the insurance accrued
liability to the high end of the range. If our accrued liability is below the low end of the range,
we record a charge to increase the insurance accrued liability to the low end of the range. Then,
based upon projected future self-insurance expenses and adjusted insurance accrual balances
relative to the midpoint of the actuarys range, we adjust our accrual rates for each insurance
category prospectively to bring the respective accrued liabilities toward the midpoints of the
actuarys respective ranges. Loss Contingencies We maintain accrued liabilities for contingencies related to litigation. We account for
contingent obligations in accordance with SFAS 5, Accounting for Contingencies(SFAS 5), which
requires that we assess each contingency to determine estimates of the degree of probability and
range of possible settlement. Those contingencies that are deemed to be probable and where the
amount of such settlement is reasonably estimable are accrued in our Condensed Consolidated
Financial Statements. If only a range of loss can be determined, with
no amount in the range representing a better estimate than any other
amount within the range, we accrue to the low end of the
range. In accordance with SFAS 5, as of May 23, 2005, we have recorded an accrued liability for
contingencies related to litigation in the amount of $3,700 (see Note 10 of Notes to Condensed
Consolidated Financial Statements herein for further information). The assessment of contingencies
is highly subjective and requires judgments about future events. Contingencies are reviewed at
least quarterly to determine the adequacy of the accruals and related Condensed Consolidated
Financial Statement disclosure. The ultimate settlement of contingencies may differ materially from
amounts we have accrued in our Condensed Consolidated Financial Statements. 22




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) In addition, as of May 23, 2005, we estimated the liability for those losses related to other
litigation claims that we believe are reasonably possible to result in an adverse outcome, to be in
the range of $95 to $190. In accordance with SFAS 5, we have not recorded a liability for those
losses. Accounting for Lease Obligations We lease a substantial portion of our restaurant properties. At the inception of the lease,
each property is evaluated to determine whether the lease will be accounted for as an operating or
capital lease. The lease accounting
evaluation may require significant exercise of judgment in estimating the fair value and
useful life of the leased property and to establish the appropriate lease term. The lease term used
for this evaluation includes renewal option periods only in instances in which the exercise of the
renewal option can be reasonably assured because failure to exercise such option would result in an
economic penalty. Such economic penalty would typically result from our having to abandon buildings
and other non-detachable improvements upon vacating the property. The lease term used for this
evaluation also provides the basis for establishing depreciable lives for buildings subject to
lease and leasehold improvements, as well as the period over which we
recognize straight-line rent
expense. In addition, the lease term is calculated from the date we take possession of the leased
premises through the lease termination date. There is potential for variability in the rent
holiday period, which begins on the possession date and typically ends upon restaurant opening.
Factors that may affect the length of the rent holiday period generally include
construction-related delays. Extension of the rent holiday period due to such delays would result
in greater rent expense recognized during the rent holiday period. Franchised and Licensed Operations We monitor the financial condition of certain franchisees and record provisions for estimated
losses on receivables when we believe that our franchisees are unable to make their required
payments to us. Each quarter we perform an analysis to develop estimated bad debts for each
franchisee. We then compare the aggregate result of that analysis to the amount recorded in our
Condensed Consolidated Financial Statements as the allowance for doubtful accounts and adjust the
allowance as appropriate. Additionally, we cease accruing royalties and rental income from
franchisees that are materially delinquent in paying or in default for other reasons and reverse
any royalties and rent income accrued during the fiscal quarter in which such delinquency or
default occurs. Over time our assessment of individual franchisees may change. For instance, we
have had some franchisees, who in the past we had determined required an estimated loss equal to
the total amount of the receivable, who have paid us in full or established a consistent record of
payments (generally one year) such that we determined an allowance was no longer required. Depending on the facts and circumstances, there are a number of different actions we and/or
our franchisees may take to resolve franchise collections issues. These actions may include the
purchase of franchise restaurants by us or by other franchisees, a modification to the franchise
agreement, which may include a provision to defer certain royalty payments or reduce royalty rates
in the future (if royalty rates are not sufficient to cover our costs of service over the life of
the franchise agreement, we record an estimated loss at the time we modify the agreements), a
restructuring of the franchisees business and/or finances (including the restructuring of leases
for which we are the primary obligee  see further discussion below) or, if necessary, the
termination of the franchise agreement. The allowance established is based on our assessment of the
most probable course of action that will occur. Many of the restaurants that we sold to Hardees and Carls Jr. franchisees as part of our
refranchising program were on leased sites. Generally, we remain principally liable for the lease
and have entered into a sublease with the franchisee on the same terms as the primary lease. In
such cases, we account for the sublease payments received as franchising rental income and the
lease payments we make as rental expense in franchised and licensed restaurants and other expense
in our Condensed Consolidated Statements of Operations. As of May 23, 2005, the present value of
our total obligation on lease arrangements with Hardees and Carls Jr. franchisees, including
subsidized leases discussed further below, was $34,962 and $95,058, respectively. We do not expect
Carls Jr. franchisees to 23




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) experience the same level of financial difficulties as Hardees
franchisees have encountered in the past, however, we can provide no assurance that this will not
occur. In addition to the sublease arrangements with franchisees described above, we also lease land
and buildings to franchisees. As of May 23, 2005, the net book value of property under lease to
Hardees and Carls Jr. franchisees was $19,102 and $5,733, respectively. Financially troubled
franchisees are those with whom we have entered into workout agreements and who may have liquidity
problems in the future. In the event that a financially troubled franchisee closes a restaurant for
which we own the property, our options are to operate the restaurant as a company-operated
restaurant, lease the property to another tenant or sell the property. These circumstances would
cause us to consider whether the carrying value of the land and building was impaired. If we
determined the property value was impaired, we would record a charge to operations for the amount
the carrying value of the property exceeds its fair value. As of May 23, 2005, the net book value
of property under lease to Hardees franchisees that are considered to
be financially troubled franchisees was approximately $18,006 and is included in the amount
above. During fiscal 2006 or thereafter, some of these franchisees may close restaurants and,
accordingly, we may record an impairment loss in connection with some of these closures. In accordance with SFAS 146, which we adopted on January 1, 2003, an estimated liability for
future lease obligations on restaurants operated by franchisees for which we are the primary
obligee is established on the date the franchisee closes the restaurant. Also, we record an
estimated liability for subsidized lease payments when we sign a sublease agreement committing us
to the subsidy. The liability includes an estimation related to the risk that certain lease
payments from the franchisee may ultimately be uncollectible. The amount of the estimated liability is established using the methodology described in
Estimated Liability for Closing Restaurants above. Because losses are typically not probable
and/or able to be reasonably estimated, we have not established an additional estimated liability
for potential losses not yet incurred under a significant portion of our franchise sublease
arrangements. The present value of the lease obligations for which we remain principally liable and
have entered into subleases with financially troubled franchisees is approximately $21,725 (five
financially troubled franchisees represent approximately 96.4% of this amount). If sales
trends/economic conditions worsen for our franchisees, their financial health may worsen, our
collection rates may decline and we may be required to assume the responsibility for additional
lease payments on franchised restaurants. Entering into restructured franchise agreements may
result in reduced franchise royalty rates in the future (see discussion above). The likelihood of
needing to increase the estimated liability for future lease obligations is primarily related to
the success of our Hardees concept (i.e., if our Hardees concept results continue to improve from
the execution of our comprehensive plan, we would reasonably expect that the financial performance
of our franchisees would improve). Stock-Based Compensation As discussed in Note 1 of Notes to Condensed Consolidated Financial Statements, we have
various stock-based compensation plans that provide options for certain employees and non-employee
directors to purchase shares of our common stock. We have elected to account for stock-based
compensation in accordance with Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees,which utilizes the intrinsic value method of accounting for stock-based
compensation, as opposed to using the fair-value method prescribed in SFAS 123, Accounting for
Stock-Based Compensation(SFAS 123). Because of this election, we are required to make certain
disclosures of pro forma net income assuming we had adopted SFAS 123. We determine the estimated
fair value of stock-based compensation on the date of the grant using the Black-Scholes
option-pricing model. The Black-Scholes option-pricing model requires the input of highly
subjective assumptions, including the historical stock price volatility, expected life of the
option and the risk-free interest rate. A change in one or more of the assumptions used in the
Black-Scholes option-pricing model may result in a material change to the estimated fair value of
the stock-based compensation (see Note 1 of Notes to Condensed Consolidated Financial Statements
for analysis of the effect of certain changes in assumptions used to determine the fair value of
stock-based compensation). 24




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) As
discussed in Note 2 of Notes to Condensed Consolidated Financial Statements, we will be
required to adopt SFAS 123 (Revised 2004), Share-Based Payment,as of the beginning of fiscal 2007. Valuation Allowance for Net Deferred Tax Asset As disclosed in Note 20 of Notes to Consolidated Financial Statements of our Annual Report on
Form 10-K for the fiscal year ended January 31, 2005, we have recorded a 100% valuation allowance
against our deferred tax assets, net of deferred tax liabilities that may offset our deferred tax
assets for income tax accounting purposes. If our business turnaround is successful, we have been
profitable for a number of years and our prospects for the realization of our deferred tax assets
are more likely than not, we would then reverse our valuation allowance and credit income tax
expense. In assessing the prospects for future profitability, many of the assessments of same-store
sales and cash flows mentioned above become relevant. When circumstances warrant, we assess the
likelihood that our net deferred tax assets will more likely than not be realized from future
taxable income. As of May 23, 2005, our net deferred tax assets and related valuation allowance
result in a net deferred tax liability of $1,758, of which $228 is included in other current
liabilities and $1,530 is included in other long-term liabilities in our Condensed Consolidated
Balance Sheet. Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal 2006 Comparisons with
Fiscal 2005 The factors discussed below impact comparability of operating performance for the sixteen
weeks ended May 23, 2005, and May 17, 2004, or could impact comparisons for the remainder of fiscal
2006. Divestiture of Timber Lodge As discussed in Note 9 of Notes to Condensed Consolidated Financial Statements in this Form
10-Q, Timber Lodge was accounted for as a discontinued operation, and we completed the sale of
Timber Lodge on September 3, 2004. The results of Timber Lodge included in our Condensed
Consolidated Statement of Operations as discontinued operations for the sixteen-week period ended
May 17, 2004, are as follows: Revenue
    
    $
    13,369Operating loss
    
    
    (157
    )Interest expense
    
    
    6Net loss
    
    $
    (163
    )
 The operating loss for Timber Lodge for the sixteen weeks ended May 17, 2004, includes
impairment charges of $617 to reduce the carrying value of Timber Lodge to fair value. New Accounting Pronouncements See Note 3 of Notes to Condensed Consolidated Financial Statements. 25




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) Seasonality We operate on a retail accounting calendar. Our fiscal year has 13 four-week accounting
periods and ends the last Monday in January. The first quarter of our fiscal year has four periods,
or 16 weeks. All other quarters have three periods, or 12 weeks. Fiscal 2006 will be a 52-week
year. Fiscal 2005 was a 53-week fiscal year. The fourth quarter of fiscal 2005 had two accounting
periods of four weeks and one accounting period of five weeks. Our restaurant sales, and therefore our profitability, are subject to seasonal fluctuations
and are traditionally higher during the spring and summer months because of factors such as
increased travel upon school vacations and improved weather conditions, which affect the publics
dining habits. Business Strategy We remain focused on vigorously pursuing our comprehensive business strategy. The main
components of our strategy are as follows:  
    
    remain focused on restaurant fundamentals  quality, service and cleanliness;  
    
    offer premium products that compete on quality and taste  not price;  
    
    build on the strength of the Carls Jr. brand, including dual-branding opportunities with Green Burrito;  
    
    continue to execute and refine the Hardees turnaround program;  
    
    control costs while increasing revenues;  
    
    leverage our infrastructure and marketing presence to build out existing core markets; and  
    
    strengthen our franchise system and pursue further franchising opportunities. Franchise Operations Like others in the quick-service restaurant industry, some of our franchisees experience
financial difficulties from time to time with respect to their operations. Our approach to dealing
with financial and operational issues that arise from these situations is described under Critical
Accounting Policies above, under the heading Franchised and Licensed Operations. Some franchisees
in the Hardees system have experienced significant financial problems and, as discussed above,
there are a number of potential resolutions of these financial issues. We continue to work with franchisees in an attempt to maximize our future franchising income.
Our franchising income is dependent on both the number of restaurants operated by franchisees and
their operational and financial success, such that they can make their royalty and lease payments
to us. Although we quarterly review the allowance for doubtful accounts and the estimated liability
for closed franchise restaurants (see discussion under Critical Accounting Policies  Franchised
and Licensed Operations), there can be no assurance that the number of franchisees or franchised
restaurants experiencing financial difficulties will not increase from our current assessments, nor
can there be any assurance that we will be successful in resolving financial issues relating to any
specific franchisee. As of May 23, 2005, our consolidated allowance for doubtful accounts on notes
receivable was 61.6% of the gross balance of notes receivable and our consolidated allowance for
doubtful accounts on accounts receivable was 3.0% of the gross balance of accounts receivable.
During fiscal 2004 and to a lesser extent during fiscal 2005, we established several notes
receivable pursuant to completing workout agreements with several troubled franchisees. As of May
23, 2005, we have not recognized $6,571 in accounts receivable and $6,845 in notes receivable, nor
the royalty and rent revenue associated with these accounts and notes receivable, due from
franchisees that are in default under the terms of their franchise agreements. We still experience
specific problems 26




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) with troubled franchisees (see Critical Accounting Policies  Franchise and
Licensed Operations) and may be required to increase the amount of our allowances for doubtful
accounts and/or increase the amount of our estimated
liability for future lease obligations. The result of increasing the allowance for doubtful
accounts is an effective royalty rate lower than our standard contractual royalty rate. Effective royalty rate reflects royalties deemed collectible as a percent of
franchise-generated revenue for all franchisees for which we are recognizing revenue. For the
trailing thirteen periods ended May 23, 2005, the effective royalty rates for domestic Carls Jr.
and Hardees were 3.8% and 3.7%, respectively. For the trailing thirteen periods ended May 17,
2004, the effective royalty rates for domestic Carls Jr. and Hardees were 3.8% and 3.6%,
respectively. 27




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) Operating Review The following tables are presented to facilitate Managements Discussion and Analysis and are
presented in the same format in which we present segment information (see Note 8 of Notes to
Condensed Consolidated Financial Statements). Sixteen Weeks Ended May 23, 2005Carls Jr.
    
    
    Hardees
    
    
    La Salsa
    
    
    Other(A)
    
    
    Elimination(B)
    
    
    TotalCompany-operated revenue
    
    $
    176,956
    
    
    $
    179,771
    
    
    $
    14,573
    
    
    $
    188
    
    
    $
    
    
    
    $
    371,488Company-operated average
weekly unit volume (actual $
- not in thousands)
    
    
    25,811
    
    
    
    16,648
    
    
    
    14,754Company-operated average unit
volume (trailing-13 periods)
    
    
    1,315
    
    
    
    868
    
    
    
    753Franchise-operated average
unit volume (trailing-13
periods)
    
    
    1,149
    
    
    
    891
    
    
    
    842Average
check (actual $ - not
in thousands)
    
    
    6.16
    
    
    
    4.70
    
    
    
    10.11Company-operated same-store
sales increase (decrease)
    
    
    2.4
    %
    
    
    (0.1
    )%
    
    
    2.0
    %Company-operated same-store
transaction decrease
    
    
    (3.4
    )%
    
    
    (2.9
    )%
    
    
    (2.8
    )%Franchise-operated same-store
sales increase (decrease)
    
    
    0.3
    %
    
    
    (3.1
    )%
    
    
    2.9
    %Operating costs as a % of
company-operated revenue:Food and packaging
    
    
    28.7
    %
    
    
    29.6
    %
    
    
    26.2
    %Payroll and employee benefits
    
    
    27.6
    %
    
    
    33.1
    %
    
    
    33.1
    %Occupancy and other
operating costs
    
    
    21.8
    %
    
    
    23.1
    %
    
    
    34.5
    %Restaurant-level margin
    
    
    21.9
    %
    
    
    14.2
    %
    
    
    6.2
    %Advertising as a percentage
of company-operated revenue
    
    
    6.7
    %
    
    
    6.0
    %
    
    
    2.5
    %Franchising revenue:Royalties
    
    $
    7,763
    
    
    $
    12,766
    
    
    $
    559
    
    
    $
    122
    
    
    $
    (26
    )
    
    $
    21,184Distribution centers
    
    
    54,912
    
    
    
    7,496
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,408Rent
    
    
    6,130
    
    
    
    2,840
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,970Retail sales of variable
interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,308
    
    
    
    
    
    
    
    1,308Other
    
    
    278
    
    
    
    273
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    551Total franchising revenue
    
    
    69,083
    
    
    
    23,375
    
    
    
    559
    
    
    
    1,430
    
    
    
    (26
    )
    
    
    94,421Franchising expense:Administrative expense
(including provision for bad
debts)
    
    
    1,447
    
    
    
    1,458
    
    
    
    377
    
    
    
    
    
    
    
    
    
    
    
    3,282Distribution centers
    
    
    53,324
    
    
    
    7,592
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,916Rent and other occupancy
    
    
    5,476
    
    
    
    1,861
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,337Operating costs of variable
interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,324
    
    
    
    (26
    )
    
    
    1,298Total franchising expense
    
    
    60,247
    
    
    
    10,911
    
    
    
    377
    
    
    
    1,324
    
    
    
    (26
    )
    
    
    72,833Net franchising income
    
    $
    8,836
    
    
    $
    12,464
    
    
    $
    182
    
    
    $
    106
    
    
    $
    
    
    
    $
    21,588Facility action charges, net
    
    $
    24
    
    
    $
    147
    
    
    $
    361
    
    
    $
    28
    
    
    $
    
    
    
    $
    560Operating income (loss)
    
    $
    21,265
    
    
    $
    4,168
    
    
    $
    (2,233
    )
    
    $
    (52
    )
    
    $
    
    
    
    $
    23,148
 28




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) Sixteen Weeks Ended May 17, 2004Carls Jr.
    
    
    Hardees
    
    
    La Salsa
    
    
    Other (A)
    
    
    TotalCompany-operated revenue
    
    $
    170,209
    
    
    $
    181,017
    
    
    $
    14,202
    
    
    $
    443
    
    
    $
    365,871Company-operated average weekly unit
volume (actual $ - not in thousands)
    
    
    24,912
    
    
    
    16,279
    
    
    
    14,462Company-operated average unit volume
(trailing 13 periods)
    
    
    1,228
    
    
    
    823
    
    
    
    732Franchise-operated average unit volume
(trailing 13 periods)
    
    
    1,102
    
    
    
    888
    
    
    
    759Average
check (actual $ - not in thousands)
    
    
    5.80
    
    
    
    4.57
    
    
    
    9.51Company-operated same-store sales increase
    
    
    9.8
    %
    
    
    11.9
    %
    
    
    6.0
    %Company-operated same-store transactions
increase
    
    
    1.8
    %
    
    
    1.5
    %
    
    
    2.6
    %Franchise-operated same-store sales
increase
    
    
    8.2
    %
    
    
    10.8
    %
    
    
    4.3
    %Operating costs as a % of company-operated
revenue:Food and packaging
    
    
    28.4
    %
    
    
    29.4
    %
    
    
    27.8
    %Payroll and employee benefits
    
    
    28.0
    %
    
    
    33.1
    %
    
    
    33.3
    %Occupancy and other operating costs
    
    
    21.7
    %
    
    
    21.9
    %
    
    
    33.7
    %Restaurant level margin
    
    
    21.9
    %
    
    
    15.6
    %
    
    
    5.2
    %Advertising as a percentage of
company-operated revenue
    
    
    6.5
    %
    
    
    5.9
    %
    
    
    2.9
    %Franchising revenue:Royalties
    
    $
    7,581
    
    
    $
    13,338
    
    
    $
    524
    
    
    $
    104
    
    
    $
    21,547Distribution centers
    
    
    52,257
    
    
    
    5,237
    
    
    
    
    
    
    
    
    
    
    
    57,494Rent
    
    
    6,672
    
    
    
    3,212
    
    
    
    
    
    
    
    
    
    
    
    9,884Other
    
    
    366
    
    
    
    116
    
    
    
    33
    
    
    
    
    
    
    
    515Total franchising revenue
    
    
    66,876
    
    
    
    21,903
    
    
    
    557
    
    
    
    104
    
    
    
    89,440Franchising expense:Administrative expense (including
provision for bad debts)
    
    
    1,352
    
    
    
    1,034
    
    
    
    451
    
    
    
    
    
    
    
    2,837Distribution centers
    
    
    50,987
    
    
    
    5,410
    
    
    
    
    
    
    
    
    
    
    
    56,397Rent and other occupancy
    
    
    5,335
    
    
    
    2,422
    
    
    
    
    
    
    
    
    
    
    
    7,757Total franchising expense
    
    
    57,674
    
    
    
    8,866
    
    
    
    451
    
    
    
    
    
    
    
    66,991Net franchising income
    
    $
    9,202
    
    
    $
    13,037
    
    
    $
    106
    
    
    $
    104
    
    
    $
    22,449Facility action charges, net
    
    $
    1,202
    
    
    $
    4,364
    
    
    $
    1,198
    
    
    $
    53
    
    
    $
    6,817Operating income (loss)
    
    $
    21,049
    
    
    $
    3,295
    
    
    $
    (2,491
    )
    
    $
    156
    
    
    $
    22,009
 
 (A)
    
    Other consists of one company-operated and 15 franchised and licensed Green Burrito restaurants that are not dual-branded and a
consolidated variable interest Hardees franchise entity over which we do not exercise
decision-making authority. Additionally, amounts that we do not believe would be proper to
allocate to the operating segments are included in Other.(B)
    
    Eliminations consists of the elimination of royalty revenues and expenses generated between
Hardees and a variable interest entity franchisee included in our Condensed Consolidated
Financial Statements. Presentation of Non-GAAP Measures EBITDA EBITDA is a typical non-GAAP measurement for companies that issue public debt and a measure
used by the lenders under our bank credit facility. We believe EBITDA is useful to our investors as
an indicator of earnings available to service debt. EBITDA is not a recognized term under GAAP and
does not purport to be an alternative to income from operations, an indicator of cash flow from
operations or a measure of liquidity. As shown in the table below, we calculate EBITDA as earnings
before cumulative effect of accounting changes, discontinued operations, 29




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) interest expense, income taxes, depreciation and amortization, facility action charges,
impairment of goodwill and impairment of assets held for sale. Because not all companies calculate
EBITDA identically, this presentation of EBITDA may not be comparable to similarly titled measures
of other companies. Additionally, we believe EBITDA is a more meaningful indicator of earnings
available to service debt when certain charges, such as impairment of goodwill and facility action
charges, are excluded from income (loss) from continuing operations. EBITDA is not intended to be a
measure of free cash flow for managements discretionary use, as it does not consider certain cash
requirements such as interest expense, income taxes, debt service payments and cash costs arising
from facility actions. Sixteen Weeks Ended May 23, 2005Carls Jr.
    
    
    Hardees
    
    
    La Salsa
    
    
    Other
    
    
    TotalNet income (loss)
    
    $
    19,733
    
    
    $
    (1,404
    )
    
    $
    (2,175
    )
    
    $
    (155
    )
    
    $
    15,999Interest expense
    
    
    1,329
    
    
    
    5,943
    
    
    
    10
    
    
    
    91
    
    
    
    7,373Income tax expense (benefit)
    
    
    500
    
    
    
    (25
    )
    
    
    (44
    )
    
    
    208
    
    
    
    639Depreciation and amortization
    
    
    7,819
    
    
    
    11,597
    
    
    
    1,138
    
    
    
    51
    
    
    
    20,605Facility action charges, net
    
    
    24
    
    
    
    147
    
    
    
    361
    
    
    
    28
    
    
    
    560EBITDA
    
    $
    29,405
    
    
    $
    16,258
    
    
    $
    (710
    )
    
    $
    223
    
    
    $
    45,176
 Sixteen Weeks Ended May 17, 2004Carls Jr.
    
    
    Hardees
    
    
    La Salsa
    
    
    Other
    
    
    TotalNet income (loss)
    
    $
    19,704
    
    
    $
    (6,513
    )
    
    $
    (2,532
    )
    
    $
    (155
    )
    
    $
    10,504Income from operations of
discontinued segment,
excluding impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (454
    )
    
    
    (454
    )Interest expense
    
    
    1,673
    
    
    
    10,071
    
    
    
    (24
    )
    
    
    
    
    
    
    11,720Income tax expense
    
    
    141
    
    
    
    24
    
    
    
    1
    
    
    
    185
    
    
    
    351Depreciation and amortization
    
    
    7,430
    
    
    
    12,217
    
    
    
    1,344
    
    
    
    55
    
    
    
    21,046Facility action charges, net
    
    
    1,202
    
    
    
    4,364
    
    
    
    1,198
    
    
    
    53
    
    
    
    6,817Impairment of Timber Lodge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    617
    
    
    
    617EBITDA
    
    $
    30,150
    
    
    $
    20,163
    
    
    $
    (13
    )
    
    $
    301
    
    
    $
    50,601
 30




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) The following table reconciles EBITDA (a non-GAAP measure) to cash flow provided by operating
activities (a GAAP measure): Sixteen Weeks EndedMay 23, 2005
    
    
    May 17, 2004Net cash provided by operating activities
    
    $
    39,686
    
    
    $
    47,441Interest expense
    
    
    7,373
    
    
    
    11,720Income tax expense
    
    
    639
    
    
    
    351Amortization of loan fees
    
    
    (1,090
    )
    
    
    (1,042
    )Recovery of losses on accounts and notes receivable
    
    
    386
    
    
    
    242Loss on sales of property and equipment, capital leases and
extinguishment of debts
    
    
    (1,057
    )
    
    
    (1,284
    )Deferred income taxes
    
    
    (50
    )
    
    
    (82
    )Other non-cash items
    
    
    86
    
    
    
    (33
    )Net change in refundable income taxes
    
    
    (261
    )
    
    
    (4
    )Change in estimated liability for closing restaurants and estimated
liability for self-insurance
    
    
    (138
    )
    
    
    3,508Net change in receivables, inventories, prepaid expenses and other
current assets
    
    
    5,388
    
    
    
    (9,991
    )Net change in accounts payable and other current and long-term liabilities
    
    
    (5,786
    )
    
    
    (197
    )EBITDA from discontinued operations
    
    
    
    
    
    
    460Net cash provided to discontinued operations
    
    
    
    
    
    
    (28
    )EBITDA, including discontinued operations
    
    
    45,176
    
    
    
    51,061Less: EBITDA from discontinued operations
    
    
    
    
    
    
    (460
    )EBITDA
    
    $
    45,176
    
    
    $
    50,601
 Carls Jr. During the sixteen weeks ended May 23, 2005, we opened two and closed two Carls Jr.
restaurants. Carls Jr. franchisees and licensees opened eight and closed two restaurants. The
following tables show the change in the Carls Jr. restaurant portfolio, as well as the change in
revenue for the current quarter: Restaurant Portfolio
    
    
    RevenueFirst Fiscal Quarter
    
    
    First Fiscal Quarter2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeCompany
    
    
    428
    
    
    
    428
    
    
    
    
    
    
    $
    176,956
    
    
    $
    170,209
    
    
    $
    6,747Franchised and licensed(a)
    
    
    592
    
    
    
    588
    
    
    
    4
    
    
    
    69,083
    
    
    
    66,876
    
    
    
    2,207Total
    
    
    1,020
    
    
    
    1,016
    
    
    
    4
    
    
    $
    246,039
    
    
    $
    237,085
    
    
    $
    8,954
 
 (a)
    
    Includes $54,912 and $52,257 of revenues from distribution of food, packaging and supplies to
franchised and licensed restaurants during the sixteen weeks ended May 23, 2005, and May 17, 2004,
respectively. Company-Operated Restaurants Revenue from company-operated restaurants increased $6,747, or 4.0%, to $176,956 during the
sixteen weeks ended May 23, 2005 as compared to the sixteen weeks ended May 17, 2004. This increase
resulted primarily from a 2.4% increase in same-store sales that resulted from increases in the
average guest check, slightly offset by decreased transaction counts. We believe the launch of the
Spicy BBQ Six Dollar Burger and a unique breakfast offering, the Breakfast Burger, contributed to
the growth in same-store sales. 31




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) The changes in the restaurant-level margin are explained as follows: SixteenWeeksRestaurant-level margin for the period ended May 17, 2004
    
    
    21.9
    %Decrease in workers compensation expense
    
    
    0.3Increase in food and packaging costs
    
    
    (0.3
    )Decrease in equipment lease expense
    
    
    0.2Increase in asset retirement expense
    
    
    (0.2
    )Increase in write-down of promotional items
    
    
    (0.2
    )Decrease in labor costs, excluding workers compensation
    
    
    0.1Decrease in repair and maintenance expense
    
    
    0.1Increase in depreciation
    
    
    (0.1
    )Other, net
    
    
    0.1Restaurant-level margin for the period ended May 23, 2005
    
    
    21.9
    %
 Workers compensation expense as a percent of sales decreased during the sixteen weeks ended
May 23, 2005, as compared to the prior year period, due mainly to a decrease in anticipated
ultimate losses and a reduction in our accrual rate to bring the accrued liability toward the
midpoint of our actuarially-determined range of estimated ultimate losses for prior policy years. Food and packaging costs as a percent of sales increased during the sixteen weeks ended May
23, 2005, as compared to the prior year period, due primarily to increased prices for certain
commodities including beef, cheese and tomatoes. Equipment lease expense as a percent of sales decreased during the sixteen weeks ended May 23,
2005, mainly due to the expiration of certain operating leases on point-of-sale equipment, which is
being replaced by purchased equipment. Asset retirement expense as a percent of sales increased during the sixteen weeks ended May
23, 2005, mostly due the retirement of certain point-of-sale equipment upon the required buyout of
such equipment at the end of the related lease term. Write-down of promotional items, as a percent of sales, increased during the sixteen weeks
ended May 23, 2005, due to the impairment of certain promotional bobbleheads that did not sell as
well as expected. Franchised and Licensed Restaurants Total franchising revenue increased $2,207, or 3.3%, to $69,083 during the sixteen weeks ended
May 23, 2005, as compared to the sixteen weeks ended May 17, 2004. The increase is comprised mainly
of an increase of $2,655, or 5.1%, in food, paper and supplies sales to franchisees, resulting from
the increase in the franchise store base over the comparable prior year period, overall commodity
cost increases passed through to franchisees and, to a lesser extent, the food purchasing volume
impact of the 0.3% increase in franchise same-store sales. For similar reasons, franchise royalties
also grew $182, or 2.4%, during the sixteen weeks ended May 23, 2005, as compared to the sixteen
weeks ended May 17, 2004. Franchise rent revenue decreased $542, or 8.1% during the same period due
to the expiration of certain leases on property we previously sublet to franchisees. For most of
these leases, the franchisees directly negotiated lease renewals with the landlord. Net franchising income decreased $366, or 4.0%, during the sixteen weeks ended May 23, 2005,
as compared to the sixteen weeks ended May 17, 2004, primarily due to reduced profits from
subleasing facilities to franchisees due to the expiration of certain leases on property we
previously sublet to franchisees, partially offset by an increase 32




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) in franchise distribution income and increased royalty income due to an increased number of
franchise restaurants open during the first quarter of fiscal 2006 as compared to the first quarter
of fiscal 2005. Although not required to do so, approximately 89.7% of Carls Jr. franchised and licensed
restaurants purchase food, paper and other supplies from us. Hardees During the sixteen weeks ended May 23, 2005, we opened two, acquired one and closed four
Hardees restaurants. During the same period, Hardees franchisees and licensees opened ten, sold
one and closed 13 restaurants. The following table shows the change in the Hardees restaurant
portfolio, as well as the change in revenue for the current quarter: Restaurant Portfolio
    
    
    RevenueFirst Fiscal Quarter
    
    
    First Fiscal Quarter2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeCompany
    
    
    676
    
    
    
    692
    
    
    
    (16
    )
    
    $
    179,771
    
    
    $
    181,017
    
    
    $
    (1,246
    )Franchised and licensed
    
    
    1,353
    
    
    
    1,389
    
    
    
    (36
    )
    
    
    23,375
    
    
    
    21,903
    
    
    
    1,472Total
    
    
    2,029
    
    
    
    2,081
    
    
    
    (52
    )
    
    $
    203,146
    
    
    $
    202,920
    
    
    $
    226
 Company-Operated Restaurants Revenue from company-operated Hardees restaurants decreased $1,246, or 0.7%, to $179,771
during the sixteen weeks ended May 23, 2005, as compared to the sixteen weeks ended May 17, 2004.
This slight decrease is due to the 0.1% decrease in same-store sales and a reduction in average
restaurant count. The average check during the sixteen weeks ended May 23, 2005 was $4.70, as
compared to $4.57 during the sixteen weeks ended May 17, 2004. We believe the increase in average
check is primarily due to the continued strength of the Monster Thickburger and the introduction
of the Loaded Breakfast Burrito and the Frisco Thickburger. The changes in restaurant-level margins are explained as follows: SixteenWeeksRestaurant-level margin for the period ended May 17, 2004
    
    
    15.6
    %Increase in food and packaging costs
    
    
    (0.6
    )Increase in repair and maintenance expenses
    
    
    (0.5
    )Rebate received from major supplier
    
    
    0.4Increase in equipment lease expense
    
    
    (0.3
    )Decrease in depreciation expense
    
    
    0.2Increase in rent, property taxes and licenses
    
    
    (0.2
    )Increase in uniform expense
    
    
    (0.2
    )Decrease in labor costs, excluding workers compensation
    
    
    0.1Increase in workers compensation insurance expense
    
    
    (0.1
    )Increase in banking fees
    
    
    (0.1
    )Other, net
    
    
    (0.1
    )Restaurant-level margin for the period ended May 23, 2005
    
    
    14.2
    %
 Food and packaging costs as a percent of sales increased during the sixteen weeks ended May
23, 2005, as compared to the prior year period, due primarily to increases in the cost of beef. Repair and maintenance expense as a percent of sales increased during the sixteen weeks ended
May 23, 2005, as compared to the prior year period, due mainly to increased maintenance to
restaurant buildings and kitchen equipment. 33




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) We recorded a rebate of food costs from our major supplier that resulted from a reconciliation
of pricing differences in prior periods. Equipment lease expense as a percent of sales increased during the sixteen weeks ended May 23,
2005, as compared to the prior year period due mainly to the transition of certain point of sale
equipment from capital to operating leases that occurred in late fiscal 2005. Depreciation expense as a percent of sales decreased during the sixteen weeks ended May 23,
2005, as compared to the prior year period mostly due to the expiration of certain point-of-sale
equipment capital leases during fiscal 2005 as well as the closure of 30 restaurants with low sales
volume during the first quarter of fiscal 2005, partially offset by increased depreciation expense
on five newly opened stores. Rent, property taxes and license expense as a percent of sales increased during the sixteen
weeks ended May 23, 2005, due mostly to an adjustment to deferred rent in the first quarter of
fiscal 2005 with no corresponding credit in the first quarter of fiscal 2006 (0.4% margin impact),
partially offset by the closure of 30 restaurants as discussed above. Uniform expense increased due to the rollout of new uniforms during the first quarter of
fiscal 2006. We expect the rollout to be completed during the second quarter of fiscal 2006. Labor costs, excluding workers compensation, decreased due to the continuing implementation
of a revised labor management system that is designed to use labor more efficiently. Workers
compensation expense increased mostly due to an adjustment to the accrual rate based on recent
claims experience. Banking fees increased due to the continued increase in the use of credit cards by Hardees
customers. Franchised and Licensed Restaurants Total franchising revenue increased $1,472, or 6.7%, to $23,375 during the sixteen weeks ended
May 23, 2005, as compared to the sixteen weeks ended May 17, 2004. The increase is primarily due to
a $2,259, or 43.1%, increase in distribution center revenues related to equipment sales to
franchisees, partially offset by franchise royalties and rental revenue, which decreased by $572,
or 4.3%, and $372, or 11.6%, respectively. The increase in distribution revenues is a result of
equipment sales related to new franchise store development activity and to increased franchise
remodel activity. The decrease in franchise royalties is due mainly
to increased payment delinquencies primarily associated with two
significant franchisees, resulting in non-recognition of royalty
revenues from them; the
decrease in rental revenue is primarily due to the receipt in the first quarter of fiscal 2005 of
prior year payments that previously had not been recognized as revenues, which recurred to a lesser
degree in the first quarter of fiscal 2006, as well as the 3.1% decrease in franchise same-store
sales. Net franchising income decreased $573, or 4.4%, during the sixteen weeks ended May 23, 2005,
as compared to the sixteen weeks ended May 17, 2004, primarily due to the reduced royalty and
rental revenue discussed above. 34




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) La Salsa During the sixteen weeks ended May 23, 2005, we closed one La Salsa restaurant. During the
same period, La Salsa franchisees and licensees did not open or close any restaurants. The
following table shows the change in the La Salsa restaurant portfolio, as well as the change in
revenue at La Salsa for the current quarter: Restaurant Portfolio
    
    
    RevenueFirst Fiscal Quarter
    
    
    First Fiscal Quarter2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeCompany
    
    
    61
    
    
    
    63
    
    
    
    (2
    )
    
    $
    14,573
    
    
    $
    14,202
    
    
    $
    371Franchised and licensed
    
    
    39
    
    
    
    43
    
    
    
    (4
    )
    
    
    559
    
    
    
    557
    
    
    
    2Total
    
    
    100
    
    
    
    106
    
    
    
    (6
    )
    
    $
    15,132
    
    
    $
    14,759
    
    
    $
    373
 Same-store sales for company-operated La Salsa restaurants increased 2.0% during the sixteen
weeks ended May 23, 2005. Revenue from company-operated La Salsa restaurants increased $371, or
2.6%, when compared to the sixteen weeks ended May 17, 2004, primarily due to the 6.2% increase in
same-store sales. Restaurant-level margins were 6.2% and 5.2% as a percent of company-operated restaurant
revenues for the sixteen-week periods ended May 23, 2005, and May 17, 2004, respectively. Margins
were favorably impacted by approximately 160 basis points due to a decrease in food and packaging
costs as a percent of sales, resulting primarily from a favorable adjustment to manufacturer
rebates received on soft drink purchases, as well as decreases in depreciation expense
(approximately 170 basis points) due to the impairment of 14 La Salsa units during the second
through fourth quarters of fiscal 2005 and the first quarter of fiscal 2006, and decreases in labor
costs excluding workers compensation (approximately 60 basis points). Margins were negatively
impacted by approximately 160 basis points due to increases in rent, property taxes, licenses and
utilities as a percent of sales, increased workers compensation costs (approximately 40 basis
points) and increases in repair and maintenance expense (approximately 60 basis points). Consolidated Variable Interest Entities We consolidate the results of one franchise variable interest entity (VIE), which operates
six Hardees restaurants, and approximately 85 Hardees cooperative advertising funds, which are
also VIEs. We do not possess any ownership interest in the VIE franchise. Retail sales and
operating expenses of the VIE franchise are included within franchise and licensed restaurants and
other and the resulting minority interest in the income of the VIE franchisee is included in other
income, net, in our Condensed Consolidated Statement of Operations for the sixteen weeks ended May
23, 2005. (See Note 1 of Notes to Condensed Consolidated Financial Statements for further
discussion of the VIE franchise.) The Hardees cooperative advertising funds consist of the
Hardees National Advertising Fund and many local advertising cooperative funds. Each of these
funds is a separate non-profit association with all the proceeds segregated and managed by a
third-party accounting service company. The group of funds has been reported in our Condensed
Consolidated Balance Sheet as of May 23, 2005, on a net basis, and is included within advertising
fund assets, restricted, and advertising fund liabilities within current assets and current
liabilities, respectively. The funds are reported as of the latest practicable date, which is March
31, 2005. Beginning in the second quarter of fiscal 2005, the group of funds has been reported in
our Condensed Consolidated Statements of Operations on a net basis, whereby contributions from
franchisees have been recorded as offsets to our reported advertising expenses. (See Note 1 of
Notes to Condensed Consolidated Financial Statements for further discussion of the Hardees
cooperative advertising funds.) Advertising Expense Advertising expenses increased $727, or 3.3%, to $22,991 during the sixteen weeks ended May
23, 2005, as compared to the sixteen weeks ended May 17, 2004. Advertising expenses as a percentage
of company-operated 35




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) restaurant revenue increased marginally from 6.1% to 6.2% during the same period. Advertising
expense increased primarily due to an increase in planned advertising for fiscal 2006. General and Administrative Expense General and administrative expenses increased $2,315, or 6.1%, to $39,971 during the sixteen
weeks ended May 23, 2005, as compared to the sixteen weeks ended May 17, 2004. General and
administrative expenses were 8.6% of total revenue in the sixteen weeks ended May 23, 2005, as
compared to 8.3% in the sixteen weeks ended May 17, 2004. The increase, both in dollar and
percentage terms, is due in part to increased salaries and benefits due to increased staffing
levels in certain functions, including accounting and finance, human resources and real estate
management. In addition, legal and consulting expenses increased, primarily due to an increase in
litigation activity and compliance work associated with the Sarbanes-Oxley Act of 2002. We also
incurred increased costs in the current year pertaining to management and franchise conferences
versus such costs for similar conferences in the prior year. The increases were partially offset by
a reduction in management bonus expense based on our performance relative to executive management
bonus criteria. Facility Action Charges Facility action charges arise from closure of company-operated restaurants, sublease of closed
facilities at amounts below our primary lease obligation, impairments of long-lived assets to be
disposed of or held and used, gains or losses upon disposal of surplus property, and accretion of
accruals for obligations related to closed or subleased facilities to their future costs. Facility action charges decreased $6,257, or 91.8%, to $560 during the sixteen weeks ended May
23, 2005, as compared to the sixteen weeks ended May 17, 2004. The decrease is primarily due to the
closure of 30 restaurants and the impairment of several additional restaurants in the first quarter
of fiscal 2005 that was repeated to a much lesser extent in the first quarter of fiscal 2006. See Note 6 of Notes to Condensed Consolidated Financial Statements included herein for
additional detail of the components of facility action charges. Interest Expense During the sixteen weeks ended May 23, 2005, interest expense decreased $4,347, or 37.1%, to
$7,373, as compared to the sixteen weeks ended May 17, 2004, primarily as a result of lower average
borrowings, lower interest rates upon refinancing our Senior Notes with a lower cost bank term loan
and further amortization of our capital lease obligations since the prior year comparable period. Other Income, Net Other income, net, typically consists of lease and sublease income from non-franchisee
tenants, provisions for bad debts on certain notes receivable from franchisees, and other
non-operating charges. Other income, net increased by $134, to $863, during the sixteen weeks ended
May 23, 2005, over the comparable prior year period due mainly to certain expenses related to
non-franchisee tenants in the first quarter of fiscal 2005 that were not repeated in the first
quarter of fiscal 2006. Income Taxes We recorded income tax expense for the sixteen weeks ended May 23, 2005 of $639, comprised of
foreign income taxes of $254 and federal and state income taxes of $385, which relate to provisions
for certain matters under audit and deferred taxes associated with a difference in amortization of
goodwill for financial reporting versus income tax reporting purposes. 36




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) We maintained a deferred tax liability of $1,708 as of January 31, 2005, which results from
our net deferred tax assets and tax valuation allowance of approximately $188,471 and $190,179,
respectively. As of May 23, 2005, our net deferred tax assets and related valuation allowance
result in a net deferred tax liability of $1,758. We have recorded a 100% valuation allowance
against our deferred tax assets, net of deferred tax liabilities that may offset our deferred tax
assets for income tax accounting purposes, because we believe it is more likely than not that we
will not realize the benefits of these deductible differences. When circumstances warrant, we
assess the likelihood that our net deferred tax assets will more likely than not be realized from
future taxable income. At January 31, 2005, we had federal net operating loss (NOL) carryforwards of approximately
$99,608, expiring in varying amounts in the years 2014 through 2025, and state NOL carryforwards in
the amount of approximately $331,754, which expire in varying amounts in the years 2006 through
2025. We have federal NOL carryforwards for alternative minimum tax purposes of approximately
$91,142. Additionally, we have an alternative minimum tax (AMT) credit carryforward of
approximately $11,465. We also have generated general business credit carryforwards in the amount
of $11,181, which expire in varying amounts in the years 2020 through 2025, and foreign tax credits
in the amount of $3,598 which expire in varying amounts in the years 2006 through 2010. As a result of our NOL, credit carryforwards and expected favorable book/tax differences from
depreciation and amortization, we expect that our cash requirements for U.S. federal and state
income taxes will not exceed 2.0% of our taxable earnings in fiscal 2006. The 2.0% rate results
primarily from AMT, under which 10% of taxable earnings cannot be offset by NOL carryforwards and
is subject to the AMT rate of 20%. The actual cash requirements for taxes could vary significantly
from our expectations for a number of reasons, including, but not limited to, unanticipated
fluctuations in our deferred tax assets and liabilities, unexpected gains from significant
transactions, unexpected outcomes of income tax audits, and changes in tax law. We expect to
continue to incur foreign taxes on our income earned outside the U.S. Liquidity and Capital Resources We currently finance our business through cash flow from operations and borrowings under our
credit facility. We believe our most significant cash use during the next 12 months will be for
capital expenditures. We amended and restated our senior credit facility (Facility) on June 2,
2004, and amended the Facility again on November 4, 2004 and April 21, 2005 (see below). We
anticipate that existing cash balances, borrowing capacity under the Facility, and cash generated
from operations will be sufficient to service existing debt and to meet our operating and capital
requirements for at least the next 12 months. Additionally, we are able to sell restaurants as a
source of liquidity, although we have no intention to do so significantly at this time. We have no
potential mandatory payments of principal on our $105,000 of 4% Convertible Subordinated Notes due
2023 until October 1, 2008. We, and the restaurant industry in general, maintain relatively low levels of accounts
receivable and inventories, and vendors grant trade credit for purchases such as food and supplies.
We also continually invest in our business through the addition of new sites and the refurbishment
of existing sites, which are reflected as long-term assets and not as part of working capital. As a
result, we typically maintain current liabilities in excess of current assets, resulting in a
working capital deficit. As of May 23, 2005, our current ratio
was 0.63 to 1. The Facility provides for a $380,000 senior secured credit facility consisting of a $150,000
revolving credit facility and a $230,000 term loan. The revolving credit facility matures on May 1,
2007, and includes an $85,000 letter of credit sub-facility. The principal amount of the term loan
is scheduled to be repaid in quarterly installments, with a balloon payment of the remaining
principal balance that is scheduled to mature on July 2, 2008. Subject to certain conditions as
defined in the Facility, the maturity of the term loan may be extended to May 1, 2010. We used a
portion of the proceeds from the $230,000 term loan to repay the $10,137 remaining balance of a
prior Facility term loan. On July 2, 2004, we used additional proceeds from the $230,000 term loan
to redeem our $200,000 of 9.125% Senior Subordinated Notes due 2009
(Senior Notes). 37




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) During the sixteen weeks ended May 23, 2005, we voluntarily prepaid $15,500 of the $230,000
term loan, in addition to the $329 regularly scheduled quarterly payment. As of May 23,
2005, we had (i) borrowings outstanding under the term loan and revolving portions of the
Facility of $122,822 and $7,500, respectively, (ii) outstanding letters of credit under the
revolving portion of the Facility of $62,728, and (iii) availability under the revolving portion of
the Facility of $79,772. The terms of the Facility include certain restrictive covenants. Among other things, these
covenants restrict our ability to incur debt, incur liens on our assets, make any significant
change in our corporate structure or the nature of our business, dispose of assets in the
collateral pool securing the Facility, prepay certain debt, engage in a change of control
transaction without the member banks consents and make investments or acquisitions. The Facility
is collateralized by a lien on all of our personal property assets and liens on certain restaurant
properties. As of May 23, 2005, the applicable interest rate on the term loan was LIBOR plus 2.00%, or
5.125% per annum. For the revolving loan portion of the Facility, the applicable rate on $2,500 was
LIBOR plus 2.25%, or 5.31% per annum, and the applicable interest rate on the remaining $5,000 was
Prime plus 1.00%, or 7.00% per annum. We also incur fees on outstanding letters of credit under the
Facility at a rate equal to the applicable margin for LIBOR revolving loans, which is currently
2.25% per annum. The Facility required us to enter into interest rate protection agreements in an aggregate
notional amount of at least $70,000 for a term of at least three years. Pursuant to this
requirement, on July 26, 2004, we entered into two interest rate cap agreements in an aggregate
notional amount of $70,000. Under the terms of each agreement, if LIBOR exceeds 5.375% on the
measurement date for any quarterly period, we will receive payments equal to the amount LIBOR
exceeds 5.375%, multiplied by (i) the notional amount of the agreement, and (ii) the fraction of a
year represented by the quarterly period. The agreements expire on July 28, 2007. The agreements
were not designated as hedges under the terms of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. Accordingly, the change in the fair value of the $371 of
interest rate cap premiums is recognized quarterly in interest expense in our Condensed
Consolidated Statement of Operations. During the sixteen weeks ended May 23, 2005, we recorded $47
of interest expense to reduce the carrying value of the interest rate cap premiums to their fair
value of $61 at May 23, 2005. As a matter of policy, we do not use derivative instruments unless
there is an underlying exposure. Subject to the terms of the Facility, we may make annual capital expenditures in the amount of
$45,000, plus 80% of the amount of actual EBITDA (as defined) in excess of $110,000. We may also
carry forward any unused capital expenditure amounts to the following year. Based on these terms,
the Facility permits us to make capital expenditures of at least $63,836 in fiscal 2006, which
could increase further based on our performance versus the EBITDA formula described above. The Facility also permits us to repurchase our common stock in an amount up to approximately
$68,000 as of May 23, 2005. In addition, the dollar amount of common stock that we may purchase is
increased each year by a portion of excess cash flow (as defined) during the term of the Facility.
Our Board of Directors has authorized a program to allow us to repurchase up to $20,000 of our
common stock. Based on the Board of Directors authorization and the amount of repurchase of our
common stock that we have already made thereunder, as of May 23, 2005, we are permitted to make
additional repurchases of our common stock up to $14,441. Until recently, the Facility prohibited us from paying cash dividends. On April 21, 2005, we
amended the Facility to permit us to pay cash dividends on
substantially the same terms as we have been
and are permitted to repurchase shares of our common stock. This amendment to the Facility also
resulted in a 0.50% decrease in the 38




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) borrowing rate under our term loan, a 0.25% decrease in the borrowing rate on revolving loans
and a 0.25% decrease in our letter of credit fee rate. On April 25, 2005, we announced our Board of
Directors declaration of a cash dividend of $0.04 per share of our common stock, or a total of
$2,361, which was paid on June 13, 2005, to our stockholders of record on May 23, 2005, and we
further announced our intention to pay a regular quarterly cash dividend. The Facility contains financial performance covenants, which include a minimum EBITDA
requirement, a minimum fixed charge coverage ratio and maximum leverage ratios. We were in
compliance with these covenants and all other requirements of the Facility as of May 23, 2005. The full text of the contractual requirements imposed by the Facility is set forth in the
Sixth Amended and Restated Credit Agreement, dated as of June 2,
2004, and the amendments thereto, which we have filed with the Securities and Exchange Commission, and in the ancillary loan
documents described therein. Subject to cure periods in certain instances, the lenders under our
Facility may demand repayment of borrowings prior to stated maturity upon certain events, including
if we breach the terms of the agreement, suffer a material adverse change, engage in a change of
control transaction, suffer certain adverse legal judgments, in the event of specified events of
insolvency or if we default on other significant obligations. In the event the Facility is declared
accelerated by the lenders (which can occur only if we are in default under the Facility), our 2023
Convertible Notes (described below) may also become accelerated under certain circumstances and
after all cure periods have expired. On September 29, 2003, we completed an offering of $105,000 of our 4% Convertible Subordinated
Notes due 2023 (2023 Convertible Notes), and used nearly all of the net proceeds of the offering
to repurchase $100,000 of our then-outstanding 4.25% Convertible Subordinated Notes due 2004 (the
2004 Convertible Notes). The 2023 Convertible Notes bear interest at 4.0% annually, payable in
semiannual installments due April 1 and October 1 each year, are unsecured general obligations of
ours, and are contractually subordinate in right of payment to certain of our other obligations, including
the Facility. On October 1 of 2008, 2013 and 2018, the holders of the 2023 Convertible Notes have
the right to require us to repurchase all or a portion of the notes at 100% of the face value plus
accrued interest. On October 1, 2008 and thereafter, we have the right to call all or a portion of
the notes at 100% of the face value plus accrued interest. Under the terms of the 2023 Convertible
Notes, such notes become convertible into our common stock at a conversion price of approximately
$8.89 per share at any time after our common stock has a closing sale price of at least $9.78 per
share, which is 110% of the conversion price per share, for at least 20 days in a period of 30
consecutive trading days ending on the last trading day of a calendar quarter. As a result of the
daily closing sales price levels on our common stock during the second calendar quarter of 2004,
the 2023 Convertible Notes became convertible into our common stock effective July 1, 2004, and
will remain convertible throughout the remainder of their term. The terms of the Facility are not dependent on any change in our credit rating. The 2023
Convertible Notes contain a convertibility trigger based on the credit ratings of the notes;
however, such trigger is no longer applicable since the notes are now convertible through the
remainder of their term, as discussed above. We believe the key Company-specific factors affecting
our ability to maintain our existing debt financing relationships and to access such capital in the
future are our present and expected levels of profitability and cash flow from operations, asset
collateral bases and the level of our equity capital relative to our debt obligations. In addition,
as noted above, our existing debt agreements include significant restrictions on future financings
including, among others, limits on the amount of indebtedness we may incur or which may be secured
by any of our assets. During the sixteen week period ended May 23, 2005, cash provided by operating activities was
$39,686, a decrease of $7,755 or 16.3% from the prior year comparable period. The decrease resulted
mainly from an increase in the accounts receivable and inventory balances and reduced facility
action charges, partially offset by a $5,495 increase in net income and an increase in the accounts
payable balance in the current year as compared to the prior year. Accounts receivable and accounts
payable balances can vary significantly from year to year depending upon the timing of large
customer receipts and vendor payments, but they are not anticipated to be a significant source or
use of cash in future periods. 39




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
Managements Discussion and Analysis  (Continued)
(Dollars in thousands) Cash used in investing activities during the sixteen week period ended May 23, 2005 totaled
$20,666, which principally consisted of purchases of property and equipment, partially offset by
proceeds from the sale of property and equipment, and collections on notes receivable. Capital
expenditures for the sixteen weeks ended May 23, 2005 and May 17, 2004 were as follows: May 23,
    
    
    May 17,2005
    
    
    2004New restaurants (including restaurants under development)Carls Jr.
    
    $
    3,573
    
    
    $
    1,996Hardees
    
    
    3,186
    
    
    
    1,324La Salsa
    
    
    216
    
    
    
    202Remodels/Dual-branding (including construction in process)Carls Jr.
    
    
    1,672
    
    
    
    130Hardees
    
    
    2,445
    
    
    
    1,734La Salsa
    
    
    19
    
    
    
    21Other restaurant additionsCarls Jr.
    
    
    2,710
    
    
    
    3,890Hardees
    
    
    7,192
    
    
    
    5,288La Salsa
    
    
    107
    
    
    
    697Corporate/other
    
    
    4,101
    
    
    
    1,102Total
    
    $
    25,221
    
    
    $
    16,384
 Capital expenditures for the sixteen weeks ended May 23, 2005, increased $8,837, or 53.9%,
over the comparable prior year period mainly due to ongoing upgrades to our restaurant
point-of-sale and back-office systems and our human resources and payroll systems in the first
quarter of fiscal 2006, rollout of equipment associated with a hand-dipped ice cream milkshake
program, increased spending on several new units under construction, and implementation of an image
enhancement program for Carls Jr. restaurants. Cash used in financing activities during the sixteen week period ended May 23, 2005 was
$17,429, which principally consisted of repayment of $15,829 of term loans under our Facility (of
which $15,500 represented voluntary prepayment thereof), net repayments of $7,000 under the
revolving portion of our Facility and repayment of $1,576 of capital lease obligations, partially
offset by a $1,146 increase in our bank overdraft position (which is generally not a significant
source or use of cash over the long term) and receipts from the exercise to stock options and
warrants of $5,945. Contractual Obligations We
enter into purchasing contracts and pricing arrangements to control
costs for commodities and other items that are subject to price
volatility. We also enter into contractual commitments for marketing
and sponsorship arrangements. These arrangements in addition to any
unearned supplier funding and distributor inventory obligations
result in unconditional purchase obligations (see further discussion
regarding these obligations in Item 3  Quantitative and
Qualitative Disclosures About Market Risk), which totaled $71,568 as
of May 23, 2005. 40




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##### Table of Contents



Item 3. Quantitative
and Qualitative Disclosures about Market Risk
(Dollars in thousands) Interest Rate Risk Our principal exposure to financial market risks relates to the impact that interest rate
changes could have on our Facility. As of May 23, 2005, we had $130,322 of borrowings and $62,728
of letters of credit outstanding under the Facility. Borrowings under the Facility bear interest at
the prime rate or LIBOR plus an applicable margin. A hypothetical increase of 100 basis points in
short-term interest rates would result in a reduction in the Companys annual pre-tax earnings of
$1,303. The estimated reduction is based upon the outstanding balance of the borrowings under the
Facility and the weighted-average interest rate for the quarter and assumes no change in the
volume, index or composition of debt as in effect on May 23,
2005. As of May 23, 2005, a hypothetical increase of 100 basis points
in short-term interest rates would also cause the fair value of our
convertible subordinated notes due 2005 to decrease approximately
$3,200. The decrease in fair value was
determined by discounting the projected cash flows assuming
redemption on October 1, 2008. Substantially all of our
business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have not
had a significant impact on us and are not expected to in the foreseeable future. Commodity Price Risk We purchase certain products which are affected by commodity prices and are, therefore,
subject to price volatility caused by weather, market conditions and other factors which are not
considered predictable or within our control. Although many of the products purchased are subject
to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk
management techniques designed to minimize price volatility. The purchasing contracts and pricing
arrangements we use may result in unconditional purchase obligations, which are not reflected in
the Condensed Consolidated Balance Sheets. Typically, we use these types of purchasing techniques
to control costs as an alternative to directly managing financial instruments to hedge commodity
prices. In many cases, we believe we will be able to address material commodity cost increases by
adjusting our menu pricing or changing our product delivery strategy. However, increases in
commodity prices, without adjustments to our menu prices, could result in lower restaurant-level
operating margins for our restaurant concepts. Derivative Financial Instruments On July 26, 2004, we entered into two interest rate cap agreements in an aggregate notional
amount of $70,000. Under the terms of each agreement, if LIBOR exceeds 5.375% on the measurement
date for any quarterly period, we will receive payments equal to the amount LIBOR exceeds 5.375%,
multiplied by (i) the notional amount of the agreement and (ii) the fraction of a year represented
by the quarterly period. The agreements expire on July 28, 2007. The agreements were not designated
as hedges under the terms of SFAS 133. Accordingly, the change in the fair value of the
$371 of interest rate cap premiums will be recognized quarterly in interest expense in the
consolidated statement of operations. During the sixteen weeks ended May 23, 2005, we recorded $47
of interest expense to reduce the carrying value of the interest rate cap premiums to their fair
value of $61 at May 23, 2005. As a matter of policy, we do not use derivative instruments unless
there is an underlying exposure. 
 Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the
Exchange Act), is recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure. In designing and evaluating our disclosure controls and
procedures, our management recognized that any system of controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, as ours are designed to do, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. In connection with the preparation of this Quarterly Report on Form 10-Q, as of May 23, 2005,
an evaluation was performed under the supervision and with the participation of our management,
including our Chief Executive 41




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Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the end of the period covered by this Form
10-Q report to ensure that the information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms, and to ensure that
the information required to be disclosed by us in reports that we file or submit under the Exchange
Act is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. (b) Changes in Internal Control and Remediation of Material Weakness As reported in Item 9A of our Annual Report on Form 10-K as of January 31, 2005, we had
concluded that our internal controls over financial reporting were not effective as of the end of
the period covered by that report. That conclusion resulted from the existence of deficiencies in
our internal control associated with the selection, monitoring and review of assumptions and
factors affecting certain of our depreciation and lease accounting policies and procedures. Such
deficiencies constituted a material weakness in our internal control. As of January 31, 2005, with regard to our depreciation policies and procedures, we had not
established and maintained appropriate depreciable lives for fixed assets subject to operating
leases, and, with regard to lease accounting policies and procedures, we had not properly applied
U.S. generally accepted accounting principles to so-called rent holidays  the period during
which a tenant is in possession of the leased property but the lease payments had not yet begun 
because we were not recording straight-line rent expense for the period from possession of a leased
property to the date of rent commencement. In the fiscal quarter ended May 23, 2005, we:  
    
    implemented additional staff training and management review practices with respect
to assignment of appropriate depreciable lives to fixed assets subject to operating
leases, and
    
    established internal communication and documentation procedures, and management
review practices related thereto, to ensure timely and complete accounting for
straight-line rent expense for the period from possession of leased property to the
date of rent commencement. We believe these changes effectively remediated the material weakness in our internal control
over financial reporting that had existed as of January 31, 2005. We did not make any other changes
in our internal control over financial reporting during the fiscal quarter ended May 23, 2005, that
have materially affected, or are reasonably likely to materially
affect, our internal control over
financial reporting. 42




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##### Table of Contents



Part II. Other Information. 
 Item 1. Legal Proceedings. Information regarding legal proceedings is incorporated by reference from Note 10 of Notes to
Condensed Consolidated Financial Statements set forth in Part 1 of this report. 
 Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds.
(Dollars in thousands) Issuer Purchase of Equity Securities Our senior credit facility prohibited us from paying cash dividends to our stockholders until
recently, and we did not declare any cash dividends for fiscal 2005 or fiscal 2004. On April 21,
2005, we amended our senior credit facility to permit us to pay cash dividends on substantially the
same terms as we were and are permitted to repurchase shares of our common stock. On April 25,
2005, we announced our Board of Directors declaration of a cash dividend of $0.04 per share of our
common stock, which was paid on June 13, 2005, to our stockholders of record on May 23, 2005, and
further announced our intention to pay a regular quarterly cash dividend. In April 2004, our Board of Directors authorized a program to allow us to repurchase up to
$20,000 of our common stock. Pursuant to this authorization, during fiscal 2005, we repurchased
519,000 shares of our common stock at an average price of $10.68 per share, for a total cost,
including trading commissions, of $5,559. We did not repurchase any additional shares in the
sixteen weeks ended May 23, 2005. The following table provides information as of May 23, 2005, with respect to shares of common
stock repurchased by the Company during the fiscal quarter then ended (dollars in thousands, except
per share amounts): (a)
    
    
    (b)
    
    
    (c)
    
    
    (d)MaximumDollarValue ofSharesTotal
    
    
    thatNumber of Shares
    
    
    May Yet BeAverage
    
    
    Purchased as Part
    
    
    PurchasedTotal
    
    
    Price
    
    
    of Publicly
    
    
    Under theNumber of Shares
    
    
    Paid per
    
    
    Announced Plans
    
    
    Plans orPeriod
    
    Purchased
    
    
    Share
    
    
    or Programs
    
    
    ProgramsFebruary 1, 2005  February 28, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,441March 1, 2005  March 28, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,441March 29, 2005  April 25, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,441April 26, 2005  May 23, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,441Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,441
 43




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Item 6. Exhibits. Exhibit #
    
    Description31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 44




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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)Date: June 27, 2005
    
    /s/ Theodore AbajianTheodore AbajianExecutive Vice PresidentChief Financial Officer
 45




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Exhibit Index Exhibit #
    
    Description31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 46