---




SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q





---




(Mark One)


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




For the quarterly period ended August 12, 2002





OR





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




For the transition period from
                             to
                         .





Commission file number 1-11313





CKE RESTAURANTS, INC.


(Exact name of registrant as specified in its charter)





DELAWARE (State or Other
Jurisdiction of Incorporation or Organization)

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





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

93105 (Zip Code)





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





Former Name, Former Address and Former Fiscal Year, if changed since
last report.





Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.  Yes  x  No  ̈





As of September 3, 2002, 57,271,988 shares of the Registrants Common Stock were outstanding.





---



---

CKE RESTAURANTS, INC. AND SUBSIDIARIES





INDEX





PagePart I.    Financial InformationItem 1.

Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of August 12, 2002 and January 31, 2002

1Condensed Consolidated Statements of Operations for the twelve and twenty-eight weeks ended August 12, 2002 and August 13, 2001

2Condensed Consolidated Statements of Cash Flows for the twenty-eight weeks ended August 12, 2002 and August 13, 2001

3Notes to the Condensed Consolidated Financial Statements

4Item 2.

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

12Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31Part II.    Other InformationItem 4.

Submission of Matters to a Vote of Security Holders

32Item 6.

Exhibits and Reports on Form 8-K

33




---

PART 1.    FINANCIAL INFORMATION





ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





CKE RESTAURANTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(Dollars in thousands)





(Unaudited)August 12, 2002


January 31, 2002ASSETSCurrent assets:Cash and cash equivalents

$
41,248


$
24,642Accounts receivable, net


31,925



38,942Related party receivables


4,379



5,404Inventories


18,506



17,365Prepaid expenses


12,377



8,318Other current assets


1,662



1,703Total current assets


110,097



96,374Property and equipment, net


560,974



542,193Property under capital leases, net


61,608



64,834Notes receivable


7,528



7,352Costs in excess of assets acquired, net


52,818



186,868Other assets


53,495



33,968Total assets

$
846,520


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

$
10,663


$
10,266Accounts payable


52,697



47,471Other current liabilities


101,957



91,110Total current liabilities


165,317



148,847Senior subordinated notes


200,000



200,000Convertible subordinated notes


142,000



159,205Capital lease obligations, less current portion


65,048



70,107Other long-term liabilities


82,744



91,764Total liabilities


655,109



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






Common stock, $.01 par value; authorized 100,000,000 shares; issued and outstanding 57,270,000 shares at
August 12, 2002 (unaudited) and 52,162,000 shares at January 31, 2002


588



522Additional paid-in capital


463,278



383,319Non-employee director and officer notes receivable


(2,685
)


(4,239
)Accumulated deficit


(259,364
)


(107,530
)Treasury stock at cost, 1,585,000 shares


(10,406
)


(10,406
)Total stockholders equity


191,411



261,666Total liabilities and stockholders equity

$
846,520


$
931,589





See Accompanying Notes to Condensed Consolidated Financial Statements




1




---

CKE RESTAURANTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands except per share amounts)


(Unaudited)





Twelve Weeks Ended


Twenty-eight Weeks EndedAugust 12, 2002


August 13, 2001


August 12, 2002


August 13, 2001Revenue:Company-operated restaurants

$
277,062


$
277,217


$
630,978


$
672,331Franchised and licensed restaurants and other


60,159



62,079



140,724



137,819Total revenue


337,221



339,296



771,702



810,150Operating costs and expenses:Restaurant operations:Food and packaging


79,458



85,908



182,891



204,763Payroll and other employee benefit expenses


88,803



92,738



202,434



221,156Occupancy and other operating expenses


59,611



61,666



136,574



152,960227,872



240,312



521,899



578,879Franchised and licensed restaurants and other


45,803



48,169



107,456



106,390Advertising expenses


17,223



18,616



39,606



43,325General and administrative expenses


26,925



24,401



60,986



59,680Facility action charges, net


1,462



30,487



3,633



58,707Total operating costs and expenses


319,285



361,985



733,580



846,981Operating income (expense)


17,936



(22,689
)


38,122



(36,831
)Interest expense


(10,304
)


(12,487
)


(24,222
)


(35,031
)Other income (loss), net


3,702



(638
)


7,922



(186
)Income (loss) before income taxes and cumulative effect of accounting change for goodwill


11,334



(35,814
)


21,822



(72,048
)Income tax expense (benefit)


561



955



(2,124
)


1,866Income (loss) before cumulative effect of accounting change for goodwill


10,773



(36,769
)


23,946



(73,914
)Cumulative effect of accounting change for goodwill










(175,780
)


Net income (loss)

$
10,773


$
(36,769
)

$
(151,834
)

$
(73,914
)Basic income (loss) per common share:Income (loss) before cumulative effect of accounting change for goodwill

$
0.19


$
(0.73
)

$
0.43


$
(1.46
)Cumulative effect of accounting change for goodwill










(3.13
)


Net income (loss)

$
0.19


$
(0.73
)

$
(2.70
)

$
(1.46
)Diluted income (loss) per common share:Income (loss) before cumulative effect of accounting change for goodwill

$
0.18


$
(0.73
)

$
0.41


$
(1.46
)Cumulative effect of accounting change for goodwill










(3.02
)


Net income (loss)

$
0.18


$
(0.73
)

$
(2.61
)

$
(1.46
)Weighted-average commons shares outstanding:Basic


57,240



50,505



56,275



50,503Dilutive effect of stock options


1,895







1,971



Diluted


59,135



50,505



58,246



50,503





See Accompanying Notes to Condensed Consolidated Financial
Statements




2




---




CKE RESTAURANTS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


(Unaudited)





Twenty-eight Weeks EndedAugust 12, 2002


August 13, 2001Net cash flow from operating activities:Net loss

$
(151,834
)

$
(73,914
)Adjustments to reconcile net loss to net cash provided by operating activities:Cumulative effect of accounting change


175,780



Depreciation and amortization


38,012



45,525Net change in accounts payable and other current liabilities, net of business acquired


12,269



(5,574
)Change in estimated liability for closing restaurants, self-insurance reserves, and other long-term
liabilities


(10,316
)


8,607Income tax refund received


7,021



32,313(Gains) losses on investments, sale of property and equipment and extinguishment of debt


(6,497
)


4,406Income tax refund accrued


(3,721
)


Facility action charges, net


3,633



58,707Net change in all other receivables, inventories, prepaid expenses and other current assets, net of business
acquired


764



1,983Provision for (recovery of) losses on accounts and notes receivable


(239
)


4,025Other non-cash items


386



(1,858
)Net cash provided by operating activities


65,258



74,220Cash flow from investing activities:Cash received from acquisition, net of payments made to acquire Santa Barbara Restaurant Group, Inc.


1,711



Disposition of Taco Bueno, net of cash surrendered






61,224Purchases of property and equipment


(29,124
)


(10,040
)Proceeds from sale of:Property and equipment


12,441



51,007Long-term investments


5,760



1,871Increase in notes receivable and related party receivables






(878
)Collections on notes receivable and related party receivables


1,908



2,475Net change in other assets


(650
)


2,278Net cash provided by (used in) investing activities


(7,954
)


107,937Cash flow from financing activities:Net change in bank overdraft


(11,050
)


(2,121
)Repurchases of convertible debt


(15,699
)


Net repayments of bank indebtedness


(7,997
)


(149,252
)Repayments of capital lease obligations


(4,662
)


(5,345
)Payment of deferred financing costs


(5,159
)


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


1,022



(13,748
)Repayment of non-employee director and officer notes receivable, including accrued interest


1,554



Exercise of stock options


1,293



100Net cash used by financing activities


(40,698
)


(171,968
)Net increase in cash and cash equivalents


16,606



10,189Cash and cash equivalents at beginning of period


24,642



16,860Cash and cash equivalents at end of period

$
41,248


$
27,049Supplemental disclosures of cash flow information:Cash (paid)/received during the period for:Interest

$
(19,301
)

$
(25,620
)Income taxes

$
7,021


$
32,313Non-cash investing and financing activities:Deferred gain on sale leaseback transactions

$
66


$
10,840





See Accompanying Notes to Condensed Consolidated Financial
Statements




3




---




CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Dollars in thousands)





NOTE (1) BASIS OF PRESENTATION





CKE Restaurants, Inc. (CKE or the Company), through its wholly owned subsidiaries, owns, operates, franchises and licenses the Carls Jr. ® , Hardees ® and The Green Burrito ® (Green Burrito) quick-service
restaurant concepts, as well as the La Salsa Fresh Mexican Grill ® (La Salsa) and Timber
Lodge Steakhouse ® (Timber Lodge) restaurant concepts. Carls Jr. restaurants are
primarily located in the Western United States, predominantly in California. Hardees restaurants are located throughout the Southeastern and Midwestern United States. Green Burrito restaurants are located in California, primarily in dual-brand
Carls Jr. restaurants. La Salsa restaurants are primarily located in California and Timber Lodge restaurants are primarily located in the upper Midwestern United States. As of August 12, 2002, the Companys system-wide restaurant
portfolio consisted of:





Carls Jr.

Hardees

La Salsa

Other

TotalCompany

438

734

57

31

1,260Franchise/license

539

1,579

43

30

2,191Total

977

2,313

100

61

3,451





The accompanying unaudited condensed consolidated financial
statements include the accounts of CKE and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America, the instructions to Form 10-Q, and Article 10 of Regulation
S-X. These statements should be read in conjunction with the audited consolidated financial statements presented in the Companys Annual Report on Form 10-K for the fiscal year ended January 28, 2002. In the opinion of management, all
adjustments consisting of normal recurring accruals necessary for a fair presentation of financial position and results of operations for the interim periods presented have been reflected herein. The results of operations for such interim periods
are not necessarily indicative of results for the full year or for any future period. Certain reclassifications have been made to the fiscal 2002 condensed consolidated financial statements to conform with the fiscal 2003 presentation.





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





NOTE (2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS





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





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





Along with the adoption of SFAS 142, the Company ceased amortization of goodwill effective February 1, 2002. The following table provides a reconciliation of the reported net loss for the twelve and twenty-eight weeks ended August
13, 2001 to the pro forma net loss for the twelve and twenty-eight weeks ended August 13, 2001 as though SFAS 142 had been effective for fiscal 2002:




4




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Dollars in thousands)







Twelve Weeks Ended August 13, 2001


Twenty-eight Weeks Ended
August 13, 2001Basic and Diluted
Loss


Basic and Diluted
LossAmount


Per Share


Amount


Per ShareReported net loss

$
(36,769
)

$
(0.73
)

$
(73,914
)

$
(1.46
)Add back goodwill amortization expense (reported in General and Administrative Expense)


1,349



0.03



2,964



0.06Adjusted net loss

$
(35,420
)

$
(0.70
)

$
(70,950
)

$
(1.40
)





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





Goodwill, which is
recorded on the balance sheet as Costs in Excess of Assets Acquired, Net totaled $52,818 as of August 12, 2002. The Company has determined that $11,100 of the goodwill associated with the acquisition of SBRG should be properly allocated to
Carls Jr. as the acquisition was made, in part, to enhance future dual branding opportunities. As such, for the same period, goodwill for the Companys Carls Jr. operating segment totaled $22,188. The remaining $30,630 relates to
the acquisition of SBRG and has not yet been fully allocated due to the fact that the allocation of the purchase price is not yet final.





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





NOTE (3) ACQUISITION





On March 1, 2002, the Company acquired SBRG. SBRG owns, operates and franchises The Green Burrito, La Salsa
and Timber Lodge restaurant chains. Through the Companys dual-branding relationship with The Green Burrito, Carls Jr. was SBRGs largest franchisee. The Company acquired SBRG for strategic purposes, which included gaining control of
the Green Burrito brand, eliminating the payment of royalties on 100 franchised restaurants and any future dual-brand restaurants developed or converted, and providing the Company with a growth opportunity in the Fresh Mex segment with
La Salsa. The results of operations of SBRG are included in the operating results for the periods May 21, 2002 through August 12, 2002 and March 1, 2002 through August 12, 2002. The allocation of the resulting purchase price of $79,815 has not been
finalized as the Company has not received the final valuation of the net assets acquired.





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




5




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Dollars in thousands)







Preliminary Allocation As of May 20, 2002

Adjustments


Preliminary Allocation As of August 12, 2002Current assets

$
5,173

$



$
5,173Property and equipment


33,722


(3,000
)


30,722Costs in excess of net assets acquired


32,225


9,505



41,730Other assets


30,566


(6,505
)


24,061Total assets acquired


101,686






101,686Current liabilities


13,141






13,141Long-term debt, excluding current portion


6,500






6,500Other long-term liabilities


2,230






2,230Total liabilities assumed


21,871






21,871Net assets acquired

$
79,815

$



$
79,815





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





Decrease in Property and Equipment due to an updated valuation of the fixed assets of SBRG

$
(3,000
)Decrease in Other Assets due to the elimination of favorable leases on Timber Lodge restaurants scheduled for
closure


(6,505
)Increase in Costs in Excess of Net Assets Acquired due to adjustments listed above


9,505Net increase (decrease) in purchase price

$






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





Intangible Asset

Amortization Period

Preliminary Allocation As of May 20, 2002

Adjustments


Preliminary Allocation As of August 12, 2002Trademarks

20 years

$
17,000

$



$
17,000Franchise agreements

20 years


1,700






1,700Favorable leases

6 to 15 years


9,600


(6,505
)


3,095Other intangible assets

20 years


46






46Total intangible assets acquired



$
28,346

$
(6,505
)

$
21,841





Amortization expense related to identifiable intangible assets
acquired as a result of the acquisition of SBRG was immaterial for the periods May 21, 2002 through August 12, 2002 and March 1, 2002 (the date of acquisition) through August 12, 2002.





Selected unaudited pro forma combined results of operations for the twenty-eight weeks ended August 12, 2002 and the twelve and twenty-eight weeks ended
August 13, 2001, assuming the SBRG acquisition occurred on January 30, 2001, using actual restaurant-level margins and general and administrative expenses prior to the acquisition, are as follows:




6




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Dollars in thousands)







Twelve Weeks EndedAugust 13,2001


Twenty-eight Weeks EndedAugust 12, 2002


August 13, 2001Total revenue

$
362,162


$
780,785


$
861,324Income (loss) before cumulative effect of accounting change for goodwill


(36,221
)


22,907



(72,411
)Cumulative effect of accounting change for goodwill






(175,780
)


Net loss

$
(36,221
)

$
(152,873
)

$
(72,411
)Basic loss per common share:Income (loss) before cumulative effect of accounting change for goodwill

$
(0.64
)

$
0.40


$
(1.27
)Cumulative effect of accounting change for goodwill






(3.09
)


Net loss

$
(0.64
)

$
(2.69
)

$
(1.27
)Diluted loss per common share:Income (loss) before cumulative effect of accounting change for goodwill

$
(0.64
)

$
0.39


$
(1.27
)Cumulative effect of accounting change for goodwill






(2.98
)


Net loss

$
(0.64
)

$
(2.59
)

$
(1.27
)Weighted-average common shares outstanding:Basic


56,857



56,926



56,855Dilutive effect of stock options and awards






1,971



Diluted


56,857



58,897



56,855





As Timber Lodge does not fit its other core concepts of
quick-service restaurants and fast casual dining, the Company is considering the sale of Timber Lodge. However, because a sale is not probable at this time, Timber Lodge continues to be classified as an asset to be held and used as prescribed by
SFAS 144.





NOTE (4) BANK INDEBTEDNESS AND CONVERTIBLE NOTES





The Companys senior credit facility, as amended, consists of a $100,000 revolving credit facility, which includes a letter of credit sub-facility. The senior credit
facility has a maturity date of December 14, 2003, extendable to November 15, 2006, provided the Company is able to refinance its convertible subordinated notes that are due in March 2004. As of August 12, 2002, the total amount outstanding under
the senior credit facility was $0, outstanding letters of credit were $53,949 and the availability was $46,051. On July 8, 2002, the Company further amended the credit facility to, among other things, allow it to use the proceeds received from the
sale of the common stock of Checkers Drive-In Restaurants, Inc. (Checkers) to repurchase convertible subordinated notes. Prior to that amendment, the credit facility allowed the Company to spend up to $10,000 to repurchase convertible
subordinated notes. During the first and second quarters of fiscal 2003, the Company repurchased convertible notes under the terms provided in its amended senior credit facility. Through August 12, 2002, the Company has repurchased $17,196 (face
value) of convertible notes for $15,699 at various prices ranging from $87.25 to $92.50. Those transactions resulted in the recognition of a gain on the retirement of debt of $1,506, which is recorded as Other Income (Expense), Net in the
accompanying Condensed Consolidated Statement of Operations for the twenty-eight weeks ended August 12, 2002.





NOTE (5) FACILITY
ACTION CHARGES (GAINS), NET





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




7




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Dollars in thousands)




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




| | (ii) |  | restaurant closure costs;
| | ---- |  | -------------------------




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




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




The activity recorded in the first and second quarters of fiscal 2003 primarily relates to the sale of surplus property, the termination or modification of leases on vacant
property and impairments of assets to be closed due to lease terminations.





On a quarterly basis, the Company
evaluates the adequacy of its estimated liability for closing restaurants and subsidizing restaurant lease payments to franchisees and modifies the assumptions used based on actual results from selling surplus properties and terminating leases, as
well as utilizing estimated property values obtained from third-party real estate brokers. The Company closed two Carls Jr. and 10 Hardees company-operated restaurants during the second quarter of fiscal 2003. For the twenty-eight weeks
ended August 12, 2002, the Company closed three Carls Jr. and 14 Hardees company-operated restaurants. During the period, the Company identified two restaurants that it believed it should continue operating, but whose cash flow from
operations did not support the related net asset values and, accordingly, an impairment charge was recorded.





The
components of these facility action charges are as follows:





Twelve Weeks Ended


Twenty-eight Weeks EndedAugust 12, 2002


August 13, 2001


August 12, 2002


August 13, 2001HardeesIncrease (decrease) in estimated liability for closing restaurants and subsidizing lease payments for
franchisees

$
311


$
(8,641
)

$
602


$
8,064Impairment of assets to be disposed of


1,082



31,190



1,826



36,684Impairment of assets to be held and used


534



1,882



2,864



1,882(Gains) losses on sales of restaurants, net


(936
)


3,600



(2,695
)


5,699991



28,031



2,597



52,329Carls Jr.Increase (decrease) in estimated liability for closing restaurants and subsidizing lease payments for
franchisees


173



(41
)


186



548Impairment of assets to be disposed of


478



2,981



478



5,217Impairment of assets to be held and used


344



7,670



641



7,670Gains on sales of restaurants, net


(524
)


(8,361
)


(269
)


(11,764
)471



2,249



1,036



1,671Rallys and Taco Bueno loss on divestiture






207







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



484



(8,682
)


788



8,612Impairment of assets to be disposed of


1,560



34,171



2,304



41,902Impairment of assets to be held and used


878



9,552



3,505



9,552Gains on sales of restaurants, net


(1,460
)


(4,554
)


(2,964
)


(1,358
)$
1,462


$
30,487


$
3,633


$
58,707




8




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Dollars in thousands)




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





Balance at January 31, 2002

$
49,258New decisions


911Usage


(8,788
)Favorable dispositions of leased surplus properties


(124
)Discount amortization


1,471Balance at August 12, 2002


42,728Less: current portion, included in Other Liabilities


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

$
31,356





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





Twelve Weeks Ended


Twenty-eight Weeks EndedAugust 12, 2002


August 13, 2001


August 12, 2002


August 13, 2001Sales per restaurantHardees

$
633


$
621


$
633


$
621Carls Jr.

$
525


$
508


$
525


$
508Operating lossHardees

$
(307
)

$
(2,450
)

$
(754
)

$
(8,808
)Carls Jr.

$
(13
)

$
(332
)

$
(86
)

$
(1,058
)





NOTE (6) LOSS PER SHARE





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





For the
twelve weeks ended August 12, 2002 and August 13, 2001, 3,400,000 and 3,600,000 shares, respectively, relating to the possible conversion of convertible subordinated notes, were not included in the computation of diluted income or loss per share as
their effect would have been anti-dilutive. For the twelve weeks ended August 12, 2002 and August 13, 2001, 3,600,000 and 3,400,000 options, respectively, relating to the possible exercise of stock options granted, were not included in the
computation of diluted loss per share as their effect would have been anti-dilutive.





For the twenty-eight weeks
ended August 12, 2002 and August 13, 2001, 3,400,000 and 3,500,000 shares, respectively, relating to the possible conversion of convertible subordinated notes, were not included in the computation of diluted loss per share as their effect would have
been anti-dilutive. For the twenty-eight weeks ended August 12, 2002 and August 13, 2001, 3,600,000 and 6,100,000 options, respectively, relating to the possible exercise of stock options granted, were not included in the computation of diluted loss
per share as their effect would have been anti-dilutive.





NOTE (7) SEGMENT INFORMATION





The Company principally is engaged in developing, operating and franchising its Carls Jr., Hardees and La Salsa
restaurants, each of which is considered an operating segment that is managed and evaluated separately. Additionally, during the second quarter of fiscal 2002, the Company operated one chain that was held for sale, Taco Bueno, which was sold during
that quarter. The activity of the Taco Bueno chain is included in the Other segment, as are the Timber Lodge restaurants and those Green Burrito restaurants not dual-branded with Carls Jr. restaurants. Management evaluates the
performance of its segments and allocates resources to them based on several factors, of which the primary financial measure is segment operating income or loss. General and administrative expenses are attributed to each segment based on
managements analysis of the resources applied to each segment. Beginning in fiscal 2003, management determined that it would allocate all general and administrative costs to the segments, whereas in the past, the portion of these costs
relating to the management of the overall corporation was included in the operating loss in Other. The general and administrative expenses included in




9




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Dollars in thousands)




Other in fiscal 2002 have been reclassified to conform to the current fiscal years presentation. Additionally,
amounts that the Company does not believe would be proper to allocate to the operating segments are included on Other (i.e., gains or losses on sales of long-term investments).





Twelve Weeks EndedCarls Jr.

Hardees


La Salsa

Other


TotalAugust 12, 2002Revenue

$
162,589

$
153,711


$
10,809

$
10,112


$
337,221Segment operating income (loss)


16,279


1,747



232


(322
)


17,936Interest expense


1,529


8,740



4


31



10,304Total assets


196,746


457,003



46,592


146,179



846,520Capital expenditures


5,302


8,705



307


202



14,516Depreciation and amortization


2,563


5,095



839


8,167



16,664August 13, 2001Revenue

$
164,732

$
166,824





$
7,969


$
339,917Segment operating income (loss)


7,203


(31,030
)





1,138



(22,689
)Interest expense


2,229


10,246






12



12,487Total assets (as of January 31, 2002)


285,134


638,193






8,262



931,589Capital expenditures


1,867


2,066






576



4,509Depreciation and amortization


4,554


9,897






2,344



17,265Twenty-eight weeks EndedCarls Jr.

Hardees


La Salsa

Other


TotalAugust 12, 2002Revenue

$
379,973

$
351,177


$
19,849

$
20,703


$
771,702Segment operating income (loss)


35,135


2,518



524


(55
)


38,122Interest expense


3,759


20,399



4


60



24,222Total assets


196,746


457,003



46,592


146,179



846,520Capital expenditures


8,486


18,512



833


1,293



29,124Depreciation and amortization


9,147


17,910



1,279


9,676



38,012August 13, 2001Revenue

$
379,920

$
385,759





$
44,471


$
810,150Segment operating income (loss)


22,929


(59,461
)





(73
)


(36,831
)Interest expense


7,252


27,048






731



35,031Total assets (as of January 31, 2002)


285,134


638,193






8,262



931,589Capital expenditures


3,910


4,629






1,501



10,040Depreciation and amortization


10,893


23,993






10,639



45,525





NOTE (8) SALE OF TACO BUENO





On June 10, 2001, the Company completed the sale of its Taco Bueno concept to an affiliate of Jacobson Partners (Jacobson) for $62,412. Taco Bueno was
written down to its estimated sales value at January 31, 2001, and another $4,500 of loss was recorded in the first quarter of fiscal 2002 based on the final sales price. The net proceeds from this sale were used to reduce the Companys
bank indebtedness. Taco Buenos results included in the Companys accompanying Condensed Consolidated Statements of Operations are as follows:





Twelve Weeks Ended August 13, 2001

Twenty-eight Weeks Ended August 13, 2001Revenue

$
6,370

$
37,538Operating income

$
1,293

$
4,204




10




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(Dollars in thousands)







NOTE (9) RELATED PARTY TRANSACTIONS





During the twelve and twenty-eight weeks ended August 12, 2002, the Company sold 314,000 and 530,000 shares, respectively, of Checkers
common stock and recognized a gain of $3,159 and $5,825, respectively, which was included in Other Income (Loss), Net. As of August 12, 2002, the Company owns 446,000 shares of Checkerss common stock, representing approximately 3.6% of the
outstanding shares of Checkers common stock.





During the second quarter of fiscal year 2003, the Chairman of the
Companys Board of Directors (Chairman) and the Companys Chief Financial Officer (CFO) fully repaid with cash, loans made to them in accordance with CKE Restaurants, Inc. Employee Stock Purchase Loan Plan and the
Non-Employee Director Stock Purchase Loan Program (collectively the Programs). The Companys Board of Directors approved the Programs during July 2001. The amounts repaid by the Chairman and the CFO were $1,441 and $114,
respectively.





During the second quarter of fiscal year 2003, the Company sold two Carls Jr. restaurants for
$1,100 to an entity whose Chairman of the Board of Directors is a member of the Companys Board of Directors. Those restaurants had total sales of $2,114 and operating income of $117 for the trailing 13 periods ended August 12, 2002. The
Company recorded a gain on the transaction of $442.





As disclosed in the Companys proxy statement, we
occasionally make relocation loans to officers of the Company. Relocation loans are forgiven over time if the officer remains an employee of the Company for a specific term, typically three to five years. As of August 12, 2002, there were six
relocation loans outstanding with an aggregate balance of $425. For the 28 weeks ended August 12, 2002, the amount forgiven, including interest, for all such officers is approximately $141.





NOTE (10) INCOME TAXES





Income taxes for the
interim periods were computed using the effective tax rate estimated for the full fiscal year. During the twelve weeks and twenty-eight weeks ended August 12, 2002, the Company recorded income tax expense of $561 and an income tax benefit of $2,124,
respectively. During the twelve weeks and twenty-eight weeks ended August 13, 2001, the Company recorded income tax expense of $955 and $1,866, respectively. The year-to-date income tax benefit is a result of changes in existing tax laws whereby the
Company was allowed to carry back certain operating losses for prior years in which the Company had taxable income.





NOTE (11) NEW
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED





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





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





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




11




---




CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS


(Dollars in thousands)





Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations





Introduction and Safe Harbor Disclosure





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





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





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





New Accounting Pronouncements Not Yet Adopted





See Note (11) of Notes to Condensed Consolidated Financial Statements.





Critical Accounting Policies





Our reported results
are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact
our quarterly or annual results of operations and financial condition. Specific risks associated with these critical accounting policies are described in the following paragraphs.





For all of these policies, we caution that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. We believe our most
significant accounting policies require:





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




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




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




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




Descriptions of these critical accounting policies follow.




12




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)







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





Each quarter we evaluate the carrying value of
individual restaurants when the operating results of a restaurant have reasonably progressed to a point to demonstrate continuing losses or a current expectation that a restaurant will be sold or otherwise disposed of before the end of its
previously estimated useful life. In making this judgment, we consider the period of time since the restaurant was opened, or remodeled, the trend of operations and expectations for future sales growth of a restaurant. For restaurants selected for
review, we estimate the future estimated cash flow from operating the restaurant over its estimated useful life. We make judgments about future same-store sales and the operating expenses and estimated useful life that we would expect with such
level of same-store sales. We employ a probability-weighted approach wherein we estimate the effectiveness of future sales and marketing efforts on same-store sales and related estimated useful life. A material accounting judgment is the estimated
useful life and, in general, in expected same-store sales scenarios where sales are not expected to increase, we assume a shorter than previously estimated useful life. On a quarterly basis, we update our model for estimating future cash flows based
upon experience gained, current intentions about refranchising restaurants and closures, expected sales trends, internal plans, and other relevant information. In prior fiscal years, because we were significantly engaged in refranchising restaurants
to generate cash to repay bank indebtedness, we had assumed estimated lives that were less than the estimated useful life that a restaurant is functional as a restaurant. As our financial position has improved such that refranchising activities are
unnecessary, more restaurants assume estimated cash flows over their remaining estimated useful life. Additionally, during the current quarter, we reduced the probability weighting for the occurrence of future same-stores sales from the higher range
of our strategic business plan to the low end of the range to be conservative in light of our current same-store sales results. As restaurants opened or remodeled in recent years operations progress to the point that their profitability and
prospects for future profitability can be sufficiently evaluated, additional restaurants will become subject to review and the possibility for an impairment in value exists. Most likely, this would arise in new markets the Company expanded into in
recent years. As described above, same-store sales are the key judgment in the estimation of future cash flow for evaluating recoverability of restaurants. To provide a sensitivity analysis of the impairment charge that could arise were the actual
same-store sales increase of all restaurants we owned be only at the assumed rate of inflation, for no real growth, the aggregate additional impairment loss would be approximately $1,600. The inflation rate assumed in making this calculation is 2%
for both revenue and expenses.





Additionally, restaurants operate for three years before we test them for
impairment (the Three Year Rule). We believe this provides the restaurant sufficient time to establish its presence in the market and build a customer base. If we were to test all restaurants for impairment without regard to the amount
of time the restaurants were operating, the total amount of asset impairment would increase substantially. Assuming all restaurants were tested under the same assumptions described above, we would be required to record additional impairment losses
of approximately $5,700.





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





Carls Jr.





Net Book Value

Number of Stores

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

$
79,897

349

$
Negative cash flow this quarter


6,716

41


86,613

390


Not tested based on Three Year RulePositive cash flow this quarter


33,813

36


Negative cash flow this quarter


5,947

12


3,19239,760

48


3,192TotalPositive cash flow this quarter


113,710

385


Negative cash flow this quarter


12,663

53


3,192$
126,373

438

$
3,192




13




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)







Hardees





Net Book Value

Number of Stores

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

$
145,087

341

$
Negative cash flow this quarter


28,327

110


1,638173,414

451


1,638Not tested based on Three Year RulePositive cash flow this quarter


83,616

190


Negative cash flow this quarter


35,440

94


2,500119,056

284


2,500TotalPositive cash flow this quarter


228,703

531


Negative cash flow this quarter


63,767

204


4,138$
292,470

735

$
4,138Combined Carls Jr. and HardeesNet Book Value

Number of Stores

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

$
224,984

690

$
Negative cash flow this quarter


35,043

151


1,638260,027

841


1,638Not tested based on Three Year RulePositive cash flow this quarter


117,429

226


Negative cash flow this quarter


41,387

106


5,692158,816

332


5,692TotalPositive cash flow this quarter


342,413

916


Negative cash flow this quarter


76,430

257


7,330$
418,843

1,173

$
7,330





Impairment of Goodwill





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





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





If our assumptions used in performing the impairment test prove insufficient, the fair value estimate of the brands may be significantly lower, thereby causing the carrying value to
exceed the fair value and indicating impairment is required. During the first quarter of fiscal year 2003, we engaged an outside party to perform a valuation of the Hardees brand, in accordance with SFAS 142. That valuation concluded that the
current value of the goodwill associated with the acquisition of Hardees is $0. Accordingly, we recorded a transitional impairment charge requiring us to write-off all of the goodwill related to the Hardees brand (see Note 2 of Notes to
the Condensed Consolidated Financial Statements). Currently, we have $52,818 in goodwill classified on the balance sheet as Costs in Excess of Assets Acquired, Net, which primarily relates to our recent acquisition of SBRG on March 1, 2002.




14




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)




During the first quarter of fiscal year 2003, the Company completed its initial SFAS 142 transitional
impairment test of goodwill including an assessment of a valuation of the Hardees brand provided by an outside party and recorded an impairment charge of $175,780, representing the write-off of all of the goodwill related to the Hardees
brand.





Self-insurance





We are self-insured for a portion of our current and prior years losses related to workers compensation, fire and general liability insurance programs. We have
obtained stop loss insurance for individual workers compensation claims over $250 and individual general liability claims over $500. Insurance liabilities and reserves are accounted for based on the net present value of independent actuarial
estimates of the amount of loss expected. These estimates rely on actuarial observations of historical claim loss development for similar events. In the past, the actuary, in estimating the liability for self-insurance claims for Hardees, had
used the actual exposures or claims that arose at Hardees, but projected their development based on the historical development pattern of claims at Carls Jr. The logic in this approach was that the Company had not owned Hardees
long enough to develop a claims record upon which to project future claims. At the end of fiscal year 2002, we embarked upon a project to separately develop estimated self-insurance claims based solely on Hardees historical claims data. As a
result of this study, we increased the amount of self-insurance expense recorded for Hardees by approximately $700 during the second quarter of fiscal 2003. The actuary has characterized this expense as a one-time adjustment. The actuary
reduced the estimated liability for Carls Jr. self-insurance claims. Workers compensation liability increased however, consistent with the trends the industry has experienced in recent years, particularly in California. Claim cost trends
in California are among the highest in the country, contributing to increases in workers compensation insurance rates.





The assumptions used by the independent actuary to determine the estimated liability are based on the average historical losses on claims we have incurred. If the actual loss development is better or worse than the development
estimated by the actuary, we will modify the reserve and it will be reflected in future operating performance. Additionally, if we experience a higher than expected number of claims or the costs of claims rise more than we expected, then the actuary
may adjust expected losses upward and our future self-insurance costs will rise.





Estimated Liability for
Closing Restaurants





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





The estimated liability for closing restaurants on properties to be vacated is generally based on the term of the lease and the lease termination fee we expect to pay, as
well as maintenance costs. The amount of the estimated liability established is generally the net present value of these estimated future payments. The interest rate used to calculate the net present value of these liabilities is based on our
incremental borrowing rate at the time the liability is established. The related discount is amortized and shown as Interest Expense in our Condensed Consolidated Statement of Operations.





A significant assumption used in determining the amount of estimated liability for closing restaurants is the estimated cost to maintain leased and owned vacant properties.
Additionally, the amount of the estimated liability established for future lease payments on vacant restaurants is based upon our third-party brokers (a related party) assessment of its ability to successfully negotiate early termination of
our lease agreements with the lessors. If the costs to maintain properties increase, or it takes longer than anticipated to sell properties or terminate leases, we may need to record additional estimated liabilities. If the leases on the vacant
restaurants are not terminated on the terms we used to estimate the liabilities, we may be required to record losses in future periods. Conversely, if the leases on the vacant restaurants are terminated on more favorable terms than we used to
estimate the liabilities, we may recover previously established estimated liabilities. The net present value of lease payments on closed restaurants is $90,000, which represents the discounted amount we would be required to pay if we are unable to
terminate the leases prior to the terms required in the lease agreements. However, it is our experience that we can terminate those leases for less than that amount and, accordingly, we have recorded an estimated liability for lease obligations of
$42,728, as of August 12, 2002.




15




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)




Franchise and Licensed Operations





We monitor the financial condition of franchisees and record provisions for estimated losses on receivables when we believe that our franchisees are unable to make their
required payments to us. Each quarter we establish the allowance for bad debts for franchisee accounts and notes receivable on a franchisee-by-franchisee basis. We compare this computed total amount to what is recorded in our financial statements
and make adjustments as appropriate. Additionally, we cease recording royalty income from franchisees that are materially delinquent in paying or in default until such time as we have a history of receiving timely payments.





Depending on the facts and circumstances, there are a number of different actions we may take to resolve collections issues. These may
include the purchase of franchise restaurants by us or by other franchisees; a modification to the franchise agreement which may include a provision to defer certain royalty payments or reduce royalty rates in the future (if royalty rates are not
sufficient 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 action that will
occur. If we believe we will operate the restaurants as company-operated restaurants, the allowance for loss is recorded net of the estimated fair value of the related restaurant assets.





As part of our re-franchising program, many of the restaurants that we sold to franchisees were on leased sites. Generally, we remained principally liable for the lease and
entered into a sublease with the franchisee on the same terms as the primary lease. We account for the sublease payments received as franchising rental income and our payments on the leases as rental expense in Franchised and Licensed Restaurants
and Other Income (Expense), Net in our Condensed Consolidated Statement of Operations. As of August 12, 2002, the net present value of the total obligation on such lease arrangements was $47,800.





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





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




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




The amount of the estimated liability is established using the methodology described in the
Estimated Liability for Closing Restaurants section above. We have not been notified that any troubled franchisee (i.e., those franchisees that are materially in default or delinquent or for which we have entered into a workout
arrangement) has closed any restaurant for which we are primarily liable. However, troubled franchisees may have liquidity problems in the future. Consistent with current generally accepted accounting principles, we have not established an
additional estimated liability for this eventuality. The net present value of the related lease obligation with all troubled franchisees in these circumstances is approximately $21,000 (three franchisees represent 95% of this amount). However, we do
not anticipate that even the majority of such franchisees will be involved in future situations wherein we will have to record an additional liability for such subleases. However, no assurances can be given. As of August 12, 2002, we have recorded
an estimated liability for future lease obligations related to agreed upon subsidies for these franchise restaurants of $6,200. If sales trends/economic conditions worsen for our franchisees, their financial health may worsen, our collection rates
may decline and we may be required to assume the responsibility for additional lease payments on franchised restaurants. Entering into restructured franchise agreements may result in reduced franchise royalty rates in the future (see discussion
below). The likelihood of needing to increase the estimated liability for future lease obligations is related to the success of our Hardees concept (if our Hardees concept results improve from the execution of our comprehensive plan, we
would reasonably expect that the financial performance of our franchisees would improve).





Valuation Allowance
for Net Deferred Tax Asset





As disclosed in Note 1 of Notes to the Consolidated Financial Statements on our
Form 10-K for the fiscal year ended January 31, 2002, we record net deferred tax assets. As circumstances warrant, but not less than annually, we assess the likelihood that our net deferred tax assets will more likely than not be recovered from
future projected taxable income. During fiscal 2001, because we had experienced two years of net operating losses, we established, and have since maintained, a 100% valuation allowance for our net deferred tax asset. As of August 12, 2002, our
valuation allowance aggregated approximately $200,000.




16




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)




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





The factors discussed below impact comparability of operating performance for the quarter and
year-to-date ended August 12, 2002 to the quarter and year-to-date ended August 13, 2001, or could impact comparisons for the remainder of fiscal 2003.





Acquisition of Santa Barbara Restaurant Group, Inc.





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





Adoption of New Accounting Pronouncements





See Note 2 of Notes to Condensed Consolidated Financial Statements.





Seasonality





Our restaurant
sales and profitability are subject to seasonal fluctuations and are traditionally higher during the spring and summer months because of factors such as increased travel and improved weather conditions, which affect the publics dining habits.
This seasonality will likely result in the Company operating at break-even to a small loss during the fourth quarter of fiscal year 2003.





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.





Business Turnaround





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





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




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




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




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




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




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




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




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




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




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





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




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




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




| |  |  | Continue to focus on cost controls
| | - |  | ----------------------------------




| |  |  | Remodel the Hardees restaurants
| | - |  | --------------------------------



17




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CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)




| |  |  | Integrate SBRG
| | - |  | --------------




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




| |  |  | Grow the La Salsa brand
| | - |  | -----------------------




| |  |  | Leverage dual brand opportunities with Green Burrito
| | - |  | ----------------------------------------------------




Although we have reported net income (during the second quarter of fiscal year 2003) for the first time in over two years, if we are unable to further improve Hardees sales and operating margins,
it may significantly affect our future profitability and cash flows, which, in turn, would affect our ability to access financing in the future, both in terms of the amount of financing available to us and the terms of such financing. See additional
discussion in the Financial Condition and Liquidity section below.





As shown in the table on page 21,
although our principal brands same-store sales rose in most of the recent quarters, it has been achieved by our strategy that emphasized premium products, as well as routine price increases prompted by increases in labor, food or utility costs. The
impact of this strategy is evidenced by the increase in average guest check as shown in the same table. However, a possible consequence of this strategy has been a decrease in transaction counts, also shown in the same table, as some customers show
a preference for lower priced fare. Many of our competitors strategies are to offer lower price or discounted fare and have recently increased their efforts in this regard, which has possibly affected our transaction counts. Although difficult
to quantify, we have generally experienced negative transaction counts at Hardees at least since our acquisition of the brand and nearly 2 years at Carls Jr., which we believe is, in part, due to increased competition, from fast casual
dining and other quick-service restaurant (QSR) companies offering products at discounted prices. Further, we note that others in the industry also are experiencing negative same-store sales trends. Accordingly, we cannot quantify how
much of our declines are related to our business segment and how much are related to circumstances involving our own company. Nonetheless, we can make the observations below.





For the current year, Carls Jr. same-store sales results are impacted by the fact that in the prior year, our restaurant sales benefited significantly from the
introduction of The Six Dollar Burger ® . We recently offered new products, chiefly the Grilled Onion
Cheeseburger and the Jalapeno Cheeseburger, along with advertising and media, to maintain and continue to grow same-store sales. The new product and advertising did not produce the intended results. As a result, we anticipate our same-store sales
for Carls Jr. will be negative to flat each remaining periods for this fiscal year, resulting in overall flat to positive 1% same-store sales for the entire year. Individual periods will vary considerably as we compare over the prior
years successful introduction of The Six Dollar Burger ® .





The Six Dollar Burger ® was not introduced at Hardees until the third and fourth quarters of last fiscal year. We anticipate similar difficulties as described above for our Hardees concept. At the beginning of the fiscal
year, we had devised a comprehensive plan to revitalize Hardees involving a repositioning of the brand with its customer base, menu adjustments (including new products and deletions of old products) and associated advertising and media
strategies. We initially believed the comprehensive plan could be introduced during the summer of 2002, and we based our estimates of same-store sales upon that belief. Implementation of the comprehensive plan to revitalize Hardees has taken
longer than we originally intended. This, and the other factors described above, contributed to the current same-store sales declines at Hardees. Because we currently believe that the comprehensive plan will not be executed until the first
quarter of next fiscal year, we believe we will continue to experience negative same-store sales at Hardees for the balance of this fiscal year.





Also shown in the tables on pages 21 and 22, the margins for each brand have improved over the prior year periods. For each brand, a material component of the increase in comparative margins is the
impact of lower food commodity prices and the change in menu mix to premium products, which have higher margins than discounted food offerings, as described above. Although we believe food costs will not materially increase for the balance of the
fiscal year, if food costs increase, or any of our production costs increase such as labor and utilities, we would have to increase the prices of our products to preserve the operating margin. We have been successful at passing on such price
increases in the past, but it has likely had an impact on transaction counts as described above. The sensitivity analysis for the recoverability of restaurants (see Impairment of Property, Equipment, Property Held and Used and Property Held for Sale
or To Be Disposed of Other Than By Sale) assumes that our same-store sales in the future grow at the same rate of inflation (our costs for delivering our products of food, labor, utilities, etc). If we were unable to pass along such price increases,
and at the same time cannot increase our transaction counts, the recoverability of our restaurants would be impacted.




18




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)




Franchisees Operations





Like others in the quick-service restaurant industry, some of our franchise operators experience financial difficulties from time to time with respect to their franchise
operations. Our approach to dealing with financial and operational issues that arise from these situations is described in the Critical Accounting Policies section, under the heading Franchise and Licensed Operations. A number of
franchise operators in the Hardees system have experienced significant financial problems. As discussed in that section, 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. Although the Company quarterly reviews the allowance for bad debts and the estimated liability for closed franchise restaurants, there can be no assurance
that the number of franchise operators or restaurants experiencing financial difficulties will not increase from our current estimates, nor can there be any assurance that we will be successful in resolving financial issues relating to any specific
franchise operator. During the prior fiscal year, we increased our allowance for doubtful accounts at Hardees from 38% of the gross balance of accounts and notes receivable to 49%. During the current year, our allowance for doubtful accounts
increased to 56% of the gross balance of accounts and notes receivable. The increase in the ratio is the result of collections reducing the gross amount of receivables outstanding while the dollar amount of the allowance has remained relatively
static. During the first two quarters of fiscal year 2003, we have seen collections stabilize and the required allowance decrease. However, we still experience specific problems with certain franchisees and continue to enter into what we refer to as
workout agreements with those franchisees (see Critical Accounting Policies  Franchised and Licensed Operations above). The result is an effective royalty rate lower than our contractual royalty rate. Our effective
royalty rate has decreased from fiscal year 2002 to fiscal year 2003. The following table is a reconciliation of our contractual royalty rate to our effective royalty rate:





Standard royalty rate

4.00
%Contractual reductions

(0.35
%)Non-paying franchisees

(0.27
%)Effective royalty rate

3.38
%





Restaurant Portfolio Strategy





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




19




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)







Financial Comparison





Our results reflect the substantial changes we have made in executing our business turnaround including the sale and closure of
restaurants, efforts to contain corporate overhead, improve margins and repay down bank indebtedness. The table below is a condensed presentation of those activities, and other changes in the components of income, designed to facilitate the
discussion of results in this Form 10-Q.





(All amounts are approximate and in millions)








Quarter


Year-to-DateCurrent Period:Reported net income (loss) under generally accepted accounting principles

$
10.8


$
(151.8
)Repositioning activities (facility action charges, net)


1.5



3.6Adoption of accounting rule change for goodwill






175.8Current period results, net of repositioning activities and adoption of accounting rule change (A)

$
12.3


$
27.6Prior Period:Reported net loss under generally accepted accounting principles

$
(36.8
)

$
(73.9
)Repositioning activities:Facility action charges, net


30.5



58.7Write-off of deferred financing charges


0.3



4.1Severance


1.0



1.0Repositioning subtotal


31.8



63.8Amortization of goodwill, no longer recorded in fiscal year 2003


1.3



3.0Prior period results, net of repositioning activities (B)

$
(3.7
)

$
(7.1
)








Second Quarter Fiscal Year 2003 vs. Second QuarterFiscal Year 2002


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

$
16.0


$
34.7Items causing earnings to increase (decrease) from the prior period to the current period:Approximate restaurant margin improvement in restaurants operated (other than SBRG brands) at August 12, 2002 and
August 13, 2001

$
5.1


$
7.2Gains on sales of investments and repurchases of convertible subordinated notes


3.7



7.4Decrease in the provision for doubtful accounts


2.8



4.0Increase in estimated liability for litigation


(2.0
)


(1.4
)Reduction in interest expense excluding write-off of deferred financing fees


1.9



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


0.9



(0.1
)Increase in net franchising income and distribution centers


0.6



0.8Approximate operating (income) loss of restaurants (including Taco Bueno) involved in facility actions, including
related field general and administrative expenses and advertising costs


(0.6
)


6.4(Increase) decrease in corporate overhead


0.2



(1.3
)One-time income tax benefit






3.8Approximate operating income of SBRG restaurants






0.5All other, net


3.4



0.7Increase in earnings without repositioning charges and effect of adoption of accounting rule change

$
16.0


$
34.7




20




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands, except average check)







Operating Review





The following tables are presented to facilitate Managements Discussion and Analysis and is presented in the same format we present
segment information (See Note 7 of Notes to Condensed Consolidated Financial Statements).





Second Quarter FY 2003Carls Jr.


Hardees


La Salsa


Other (A)


TotalCompany-operated sales

$
118,673


$
137,981


$
10,384


$
10,024


$
277,062Company-operated average unit volume (trailing 13-periods)


1,158



779



804Franchise-operated average unit volume (trailing 13-periods)


1,058



820Average check

$
5.36


$
4.02


$
9.00Company-operated same-store sales increase (decrease)


0.6
%


(1.0
)%


1.9
%Company-operated same-store transaction increase (decrease)


(4.2
)%


(7.0
)%


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


0.4
%


2.2
%


(0.9
)%Operating costs (as a % of company-operated revenue)Food and packaging


27.4
%


29.4
%


26.8
%Payroll and employee benefits


28.8
%


34.8
%


31.6
%Occupancy and other operating costs


19.7
%


22.4
%


25.5
%Gross margin


24.1
%


13.4
%


16.1
%Advertising as a percentage of company-operated revenue


6.8
%


6.0
%


3.3
%


4.4
%


6.2
%Franchising revenue:Royalties

$
4,855


$
9,642


$
425


$
88


$
15,010Distribution centers


34,719



3,681











38,400Rent


4,261



2,286











6,547Other


81



121











202Total franchising revenue


43,916



15,730



425



88



60,159Franchising expense:Administrative expense (including provision for bad debts)


386



1,443



117







1,946Distribution centers


33,703



3,611











37,314Rent & other occupancy


4,386



2,157











6,543Total franchising expense


38,475



7,211



117







45,803Net franchising income (B)

$
5,441


$
8,519


$
308


$
88


$
14,356Operating income (loss) (C)

$
16,279


$
1,747


$
232


$
(322
)

$
17,936Facility action charges, net


471



991











1,462Operating income (loss) excluding facility action charges

$
16,750


$
2,738


$
232


$
(322
)

$
19,398EBITDA (D)

$
20,266


$
9,853


$
1,547


$
4,943


$
36,609Facility action charges, net


471



991











1,462EBITDA excluding facility action charges

$
20,737


$
10,844


$
1,547


$
4,943


$
38,071




21




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands, except average check)




Second Quarter FY 2002Carls Jr.


Hardees


Other (A)


TotalCompany-operated sales

$
119,991


$
149,256


$
7,970


$
277,217Company-operated average unit volume (trailing 13-periods)


1,098



726Franchise-operated average unit volume (trailing 13-periods)


976



827Average check

$
5.12


$
3.78Company-operated same-store sales increase


2.3
%


1.0
%Company-operated same-store transaction decrease


(3.0
)%


(3.7
)%Franchise-operated same-store sales increase (decrease)


(0.5
)%


0.0
%Operating costs (as a % of company-operated revenue)Food and packaging


29.5
%


32.0
%Payroll and employee benefits


31.3
%


35.2
%Occupancy and other operating costs


21.8
%


22.8
%Gross margin


17.4
%


10.0
%Advertising as a percentage of company-operated revenue


7.4
%


6.1
%


7.0
%


6.7
%Franchising revenue:Royalties

$
4,640


$
11,284






$
15,924Distribution centers


34,864



2,975







37,839Rent


4,702



2,758







7,460Other


535



321







856Total franchising revenue


44,741



17,338







62,079Franchising expense:Administrative expense (including provision for bad debts)


602



3,425







4,027Distribution centers


34,037



2,918







36,955Rent & other occupancy


4,381



2,806







7,187Total franchising expense


39,020



9,149







48,169Net franchising income (B)

$
5,721


$
8,189






$
13,910Operating income (loss) (C)

$
7,203


$
(31,030
)

$
1,138


$
(22,689
)Facility action charges, net


2,249



28,031



207



30,487Operating income (loss) excluding facility action charges

$
9,452


$
(2,999
)

$
1,345


$
7,798EBITDA (D)

$
12,046


$
(22,825
)

$
4,713


$
(6,066
)Facility action charges, net


2,249



28,031



207



30,487EBITDA excluding facility action charges

$
14,295


$
5,206


$
4,920


$
24,421




22




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)







Year-to-Date FY 2003Carls Jr.


Hardees


La Salsa (E)


Other (E)


TotalCompany-operated sales

$
277,227


$
314,165


$
19,113


$
20,473


$
630,978Operating costs (as a % of company-operated revenue)Food and packaging


27.9
%


29.6
%


26.9
%Payroll and employee benefits


28.5
%


35.2
%


31.8
%Occupancy and other operating costs


20.3
%


22.4
%


26.0
%Gross margin


23.3
%


12.8
%


15.3
%Advertising as a percentage of company-operated revenue


6.9
%


6.1
%


3.3
%


4.2
%


6.3
%Franchising revenue:Royalties

$
11,025


$
21,497


$
737


$
230


$
33,489Distribution centers


79,840



8,895











88,735Rent


11,713



6,424











18,137Other


168



195











363Total franchising revenue


102,746



37,011



737



230



140,724Franchising expense:Administrative expense (including provision for bad debts)


931



2,517



213







3,661Distribution centers


77,772



8,601











86,373Rent & other occupancy


11,810



5,612











17,422Total franchising expense


90,513



16,730



213







107,456Net franchising income (B)

$
12,233


$
20,281


$
524


$
230


$
33,268Operating income (loss) (C)

$
35,135


$
2,518


$
524


$
(55
)

$
38,122Facility action charges, net


1,036



2,597











3,633Operating income (loss) excluding facility action charges

$
36,171


$
5,115


$
524


$
(55
)

$
41,755EBITDA (D)

$
44,947


$
21,800


$
2,655


$
10,659


$
80,061Facility action charges, net


1,036



2,597











3,633EBITDA excluding facility action charges

$
45,983


$
24,397


$
2,655


$
10,659


$
83,694




23




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)







Year-to-Date FY 2002Carls Jr.


Hardees


Other(A)


TotalCompany-operated sales

$
281,975


$
347,261


$
43,095


$
672,331Operating costs (as a % of company-operated revenue)Food and packaging


29.2
%


31.6
%Payroll and employee benefits


29.8
%


35.4
%Occupancy and other operating costs


22.1
%


23.8
%Gross margin


18.9
%


9.2
%Advertising as a percentage of company-operated revenue


6.9
%


6.0
%






6.4
%Franchising revenue:Royalties

$
10,409


$
26,069






$
36,478Distribution centers


76,159



7,430







83,589Rent


10,608



5,892







16,500Other


769



483







1,252Total franchising revenue


97,945



39,874







137,819Franchising expense:Administrative expense (including provision for bad debts)


1,404



6,458







7,862Distribution centers


74,620



7,755







82,375Rent & other occupancy


9,910



6,243







16,153Total franchising expense


85,934



20,456







106,390Net franchising income (B)

$
12,011


$
19,418






$
31,429Operating income (loss) (C)

$
22,929


$
(59,833
)

$
(73
)

$
(36,977
)Facility action charges, net


1,671



52,329



4,707



58,707Operating income (loss) excluding facility action charges

$
24,600


$
(7,504
)

$
4,634


$
21,730EBITDA (D)

$
34,764


$
(37,004
)

$
6,608


$
4,368Facility action charges, net


1,671



52,329



4,707



58,707EBITDA excluding facility action charges

$
36,435


$
15,325


$
11,315


$
63,075





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




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




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




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




|(E) |  | Includes operations of SBRG since the date of acquisition (i.e., March 1, 2002).
|--- |  | --------------------------------------------------------------------------------



24




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)




Carls Jr.





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





Restaurant Portfolio


RevenueFiscal Quarter




Fiscal Quarter




Year-to-Date2003

2002

Change


2003

2002

Change


2003

2002

ChangeCompany

438

444

(6
)

$
118,673

$
119,991

$
(1,318
)

$
277,227

$
281,975

$
(4,748
)Franchised and licensed

539

524

15



43,916


44,741


(1,217
)


102,746


97,945


4,801Total

977

968

9


$
162,589

$
164,732

$
(2,535
)

$
379,973

$
379,920

$
53





Same-store sales for company-operated Carls Jr. restaurants
increased 0.6% in the current quarter and average unit volumes were $1,158 for the trailing thirteen periods ended August 12, 2002. Revenue from company-operated Carls Jr. restaurants decreased $1,318, or 1.1%, to $118,673 for the twelve week
period ended August 12, 2002 when compared to the prior year quarter. The decrease in revenue is due primarily to asset dispositions made during the Companys repositioning program initially implemented two years ago. The average check for
the second quarter was $5.36 as compared to $5.12 in the comparable period of the prior fiscal year due to the introduction of The Six Dollar Burger ® and a small price increase. Revenue from company-operated Carls Jr. restaurants decreased $4,748, or 1.7%, to $277,227 for the twenty-eight week period ended August 12, 2002 when
compared to the same period in the prior year. The decrease in revenue is due primarily to asset dispositions made during the Companys repositioning program. Same-store sales for company-operated Carls Jr. restaurants increased 2.6%
during the 28-weeks ended August 12, 2002. However, since August 12, 2002, same-store sales have decreased by 8.1% as we comp over last years successful introduction of The Six Dollar Burger ® . This has led us to revise downward our forecasted sales for this fiscal year (see page 18).





Net franchising income decreased approximately 4.9%, or $280, in the second quarter of the current fiscal year. This is primarily
attributable to reduced rent payments received from franchisees and lower franchise fees as we sold 23 restaurants to franchisees last year compared to three this year. For the year-to-date, net franchising income increased $222, or 1.8%, primarily
due to increased royalties and product sales from the distribution center resulting from the increase in the number of franchise restaurants.





Restaurant-level margins for our company-operated Carls Jr. restaurants increased 670 basis points (bps) in the twelve week period ended August 12, 2002 from 17.4% in the
prior-year quarter to 24.1% in the current quarter, when measured as a percentage of company-operated restaurant revenue. Restaurant-level margins for our company-operated Carls Jr. restaurants increased 440 bps during the twenty-eight
weeks ended August 12, 2002 from 18.9% to 23.3%. The changes in restaurant-level margins are explained as follows:




25




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)


Twelve Weeks Ended


Twenty-eight Weeks EndedRestaurant-level margins, for the period ended August 13, 2001

17.4
%

18.9
%Increase due to lower commodity prices and emphasis on premium products

2.0
%

1.3
%Increase (decrease) due to changes in labor costs

(0.3
)%

0.2
%Increase due to reduced workers compensation claim payments

0.5
%

0.1
%Increase due to a lesser required actuarial adjustment to estimated liability for workers compensation
claims

2.4
%

0.8
%Decrease due to higher repair and maintenance expenditures

(0.4
)%

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

0.6
%

0.9
%Decrease due to increased general liability claim payments

(0.4
)%

(0.5
)%Increase due to reduced required actuarial adjustment to estimated liability for general liability insurance
claims

1.3
%

0.5
%Increase due to all other, net

1.0
%

1.4
%Restaurant-level margins, for the period ended August 12, 2002

24.1
%

23.3
%





A majority of our Carls Jr. restaurants had a contract with
Enron Corp. (Enron) to purchase electricity at a fixed cost through 2003. Enron filed for bankruptcy in December, 2002. We have been notified by Enron that the contract has been rejected. As a result, our costs will rise, possibly by as
much as $1,000 per year (see discussion of price increases under Business Turnaround).





Because the majority of
our Carls Jr. restaurants are located in California, legislation in that state can have a significant impact on our financial results. The governor of California recently signed into law Assembly Bill No. 749 relating to workers
compensation claims. The bill requires that payments for certain benefits that occur after January 1, 2003 for injuries sustained prior to January 1, 2001 shall be made at the rate in effect at the time the payment is made. The expected impact to
our recorded estimated liability for self-insurance claim losses as of August 12, 2002 is not material, however, we estimate that the impact of this legislation could be approximately $1,000 annually in future years (see discussion of price
increases under Business Turnaround).





Hardees





During the first quarter, we opened one restaurant and closed 10 restaurants. Hardees franchisees and licensees opened six restaurants and closed 24 restaurants. The
following table shows the change in the Hardees component of our restaurant portfolio, as well as the change in revenue at Hardees for both the current quarter and the year-to-date:





Restaurant Portfolio


RevenueFiscal Quarter


Fiscal Quarter


Year-to-Date2003

2002

Change


2003

2002

Change


2003

2002

ChangeCompany

734

760

(26
)

$
137,981

$
149,256

$
(11,275
)

$
314,165

$
347,261

$
(33,096
)Franchise and licensed

1,579

1,732

(153
)


15,730


17,338


(1,608
)


37,011


39,874


(2,863
)Total

2,313

2,492

(179
)

$
153,711

$
166,594

$
(12,883
)

$
351,176

$
387,135

$
(35,959
)





Same-store sales for company-operated Hardees decreased 1.0%
in the current quarter, company-operated restaurant average unit volumes were $779 for the trailing thirteen periods ended August 12, 2002. Revenue from company-operated Hardees restaurants decreased $11,275, or 7.6%, to $137,981 for the
twelve week period ended August 12, 2002, when compared to the prior year comparable period. The decrease in revenue is due primarily to the closing of under-performing company-operated restaurants and asset dispositions made during the
Companys repositioning program initially implemented two years ago. The average check for the second quarter was $4.02 as compared to $3.78 in the comparable period of the prior fiscal year primarily due to our shift to premium products, menu
changes and a small price increase. Revenue from company-operated Hardees restaurants decreased $33,096, or 9.5%, to $314,165 for the twenty-eight week period ended August 12,




26




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)







2002 when compared to the same period in the prior year. The decrease in revenue is due
primarily to asset dispositions made during the Companys repositioning program. Same-store sales for company-operated Hardees restaurants decreased 0.3% during the 28-weeks ended August 12, 2002.





Net franchising income increased $334 or 4.1% as compared to the prior fiscal year quarter due to lower bad debt expense, offset by lower
royalties. For the twenty-eight weeks ended August 12, 2002, net franchising income increased $863, or 4.4%, as compared to the prior year also due to lower bad debt expense, offset by lower royalties. See Critical Accounting Policies 
Franchised and Licensed Operations on page 19 for discussion of the status of franchisee accounts and notes receivable. Also, our effective royalty rate, as discussed on page 19, is lower than our contractual royalty rate.





Restaurant-level margins for company-operated Hardees restaurants increased 340 bps in the twelve week period ended August 12, 2002,
from 10.0% in the prior year quarter to 13.4% in the current quarter, when measured as a percentage of company-operated restaurant revenue. Restaurant-level margins for company-operated Hardees restaurants increased 360 bps in the twenty-eight
week period ended August 12, 2002 from 9.2% in the prior year quarter to 12.8% in the current quarter, when measured as a percentage of company-operated restaurant revenue. The changes in restaurant-level margins are explained as follows:





Twelve  Weeks Ended


Twenty- eight Weeks EndedRestaurant-level margins, for the period ended August 13, 2001

10.0
%

9.2
%Increase due to lower commodity prices, emphasis on premium products and reduced use of discounting

2.6
%

1.9
%Increase due to changes in labor costs

0.1
%

0.2
%Decrease due to higher workers compensation insurance claim payments

(0.4
)%

(0.5
)%Increase due to a lesser required actuarial adjustment to estimated liability for workers compensation
claims

1.0
%

0.6
%Decrease due to higher repair and maintenance expenditures

(0.8
)%

(0.5
)%Increase due to lower natural gas and electricity costs

0.2
%

0.6
%Increase due to lower deprecation as a result of reducing the depreciable basis of assets in prior periods

0.3
%

0.4
%Decrease due to higher general liability claim payments

0.0
%

(0.2
)%Increase due to reduced required actuarial adjustment to estimated liability for general liability insurance
claims

0.6
%

0.6
%Increase (decrease) due to all other, net

(0.2
)%

0.5
%Restaurant-level margins, for the period ended August 12, 2002

13.4
%

12.8
%





La Salsa





Same-store sales for our company-operated La Salsa restaurants increased 1.9% during the current quarter and average unit volume was $804 for the trailing 13 periods ended
August 12, 2002. During the second quarter of fiscal year 2003, revenue from company-operated La Salsa restaurants was $10,384. Restaurant-level margins were 16.1% as a percentage of company-operated restaurant revenue. Food and packaging costs were
26.8%, payroll and other employee benefits were 31.6% and occupancy and other operating costs were 25.5%. La Salsa contributed $228 of net income to the Company.





Since the acquisition of SBRG on March 1, 2002, revenue from company-operated La Salsa restaurants was $19,113. Restaurant-level margins were 15.3% as a percentage of company-operated restaurant
revenue. Food and packaging costs were 26.9%, payroll and other employee benefits were 31.8% and occupancy and other operating costs were 26.0%. La Salsa has contributed $520 of net income to the Company since the acquisition of SBRG.





Other Restaurant Brands





Same-store sales for our company-operated Timber Lodge restaurants decreased 8.2% during the current quarter. During the second quarter of fiscal year 2003, revenue from company-operated Timber Lodge restaurants was $9,632.
Restaurant-level




27




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)







margins were 5.4% as a percentage of company-operated restaurant revenue. Food and packaging
costs were 35.8%, payroll and other employee benefits were 33.2% and occupancy and other operating costs were 25.6%. Timber Lodge operated at a loss of $214 during the second quarter.





Since the acquisition of SBRG on March 1, 2002, revenue from company-operated Timber Lodge restaurants has been $19,699. Restaurant-level margins were 7.3% as a percentage
of company-operated restaurant revenue. Food and packaging costs were 35.9%, payroll and other employee benefits were 31.8% and occupancy and other operating costs were 25.0%. Timber Lodge operated at a loss of $14 since the acquisition of SBRG.





Same-store sales for our company-operated Green Burrito restaurants (not including restaurants dual-branded with
Carls Jr. restaurants) decreased 13.3% during the current quarter. During the second quarter of fiscal year 2003, revenue from company-operated Green Burrito restaurants (not including restaurants dual-branded with Carls Jr. restaurants)
was $392. Restaurant-level margins were 2.3% as a percentage of company-operated restaurant revenue. Food and packaging costs were 27.3%, payroll and other employee benefits were 38.3% and occupancy and other operating costs were 32.1%. Green
Burrito (excluding those restaurants dual-branded with Carls Jr. restaurants) operated at a loss of $94 during the second quarter.





Since the acquisition of SBRG on March 1, 2002, revenue from company-operated Green Burrito restaurants (not including restaurants dual-branded with Carls Jr. restaurants) was $774. Restaurant-level margins were 6.8%
as a percentage of company-operated restaurant revenue. Food and packaging costs were 27.4%, payroll and other employee benefits were 36.8% and occupancy and other operating costs were 29.1%. Company-operated Green Burrito restaurants (excluding
those restaurants dual-branded with Carls Jr. restaurants) operated at a loss of $29 since the acquisition of SBRG.





During the second quarter of fiscal 2002, the Taco Bueno brand contributed $1,292 in operating income to the Companys results. For the twenty-eight weeks ended August 13, 2001, Taco Bueno contributed $4,204 in operating income
to the Companys results. In June 2001, we completed our sale of Taco Bueno to Jacobson Partners (See Note 8 of Notes to Condensed Consolidated Financial Statements).





Interest Expense





Interest expense for the second
quarter of fiscal 2003 decreased $2,183 or 17.5% as compared with previous year second quarter. This decrease was due to lower levels of borrowings outstanding under our senior credit facility throughout the period. Also, the prior fiscal year
included write-offs of deferred loan costs arising from our repositioning program.





For the twenty-eight week
period ended August 12, 2002, interest expense decreased $10,809, or 30.9%, as compared to the previous year due to lower levels of borrowings outstanding under our senior credit facility. Also, the prior fiscal year included write-offs of deferred
loan costs arising from our repositioning program.





Other Consolidated Expenses





Advertising expenses decreased $1,393, or 7.5%, to $17,223 for the twelve-week period ended August 12, 2002, as compared to the comparable
period in the prior year, consistent with the decrease in the number of company-operated restaurants. As a percentage of total company-operated revenue, advertising expenses decreased 50 bps to 6.2%. For the twenty-eight week period ended August 12,
2002, as compared to the comparable period in the prior year, advertising expenses decreased $3,719, or 8.6%, to $39,606 and decreased 16 bps to 6.3%, as a percentage of company-operated revenue.





General and administrative expenses increased $2,524, or 10.3%, to $26,925 for the twelve-week period ended August 12, 2002, as compared to the prior year. The prior
year included amortization of goodwill in the amount of $1,349 (which is no longer amortized in accordance with SFAS 142, see Note 2 of Notes to the Condensed Consolidated Financial Statements) and a $2,100 reversal in estimated liability for legal
claims. The current year includes general and administrative expenses of the SBRG companies in the amount of $1,896 (including amortization of intangible assets). As a percentage of total revenue, general and administrative expenses increased 80 bps
from 7.2% to 8.0%. For the twenty-eight week period ended August 12, 2002, general and administrative expenses increased $1,306, or 1.6%, to $60,986, as compared to the prior year. The current year includes general and administrative expenses of the
SBRG companies in the amount of $3,211 (including the amortization of intangible assets), while the prior year includes amortization of goodwill in the amount of $2,964 (which is no longer amortized in accordance with SFAS 142, see Note 2 of Notes
to the Condensed Consolidated Financial Statements) and a $2,100 reversal in estimated liability for legal claims. As a percentage of total revenue, general and administrative expenses increased 50 bps from 7.4% to 7.9%. Included in general and
administrative expenses are regional expense for our Carls Jr. concept (approximately 1% of sales)




28




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)




and Hardees concept (approximately 2% of sales). We are attempting to benchmark our classification of such costs with others
in the industry to determine the prevalent industry practice. Revisions, if any, would not affect net income but may change the margins reported for our concepts from those previously reported.





Other Income (Expense), Net increased $4,340 during the twelve week period ended August 12, 2002, primarily due to gains on sales of Checkers Drive-In
Restaurants, Inc. (Checkers) common stock and repurchases of the Companys convertible subordinated notes. During the second quarter of fiscal 2003, we sold 314,000 shares of Checkers stock, realizing a net gain of
$3,159. We intend to sell all of the remaining 446,000 shares of Checkers stock as price and market conditions permit. Additionally, during the second quarter of fiscal 2003, we repurchased $6,143 (face value) of convertible notes for $5,700,
at various prices ranging from $90.50 to $91.50 resulting in recognition of a gain on retirement of debt of $443. During the twenty-eight week period ended August 12, 2002, Other Income (Expense), Net increased $8,109, primarily due to the sale
of Checkers common stock and the repurchase of senior convertible notes resulting in net gains of $5,825 and $1,506, respectively.





Income Taxes





We recorded income tax expense of $561 for the second quarter of
fiscal 2003. This amount consisted primarily of minimum state franchise taxes. For the twenty-eight weeks ended August 12, 2002, we recorded an income tax benefit of $2,124. This amount consisted primarily of $2,685 income tax refund due to
recent changes in the Internal Revenue Code regarding the carryback of net operating losses, allowable under the recently-enacted Job Creation and Worker Assistance Act of 2002, which was partially offset by the current quarters minimum state
franchise taxes. We believe that our net operating losses are such that we will not be required to pay federal income taxes on this fiscal years taxable earnings and have only provided for minimum state franchise taxes. We have not recorded
deferred tax expense due to the existence of our tax valuation allowance. As such, excluding the tax benefit described above, we have provided only for the minimum state taxes in our Condensed Consolidated Statement of Operations based on the
effective rate expected for the full fiscal year.





Financial Condition and Liquidity





Free cash flow  cash provided by operations less capital expenditures  for the twenty-eight weeks ended
August 12, 2002 was $36,134. During the twenty-eight weeks ended August 12, 2002, we generated cash flows from operations of $65,258, as compared to $74,220 in the corresponding period of the prior fiscal year. This decline was primarily
due to receiving a lower tax refund received in the current year quarter ($7,021) as compared to the prior year quarter ($32,313), which was partially offset by a decrease in working capital. For the twenty-eight weeks ended August 12, 2002,
investing activities used $7,954 for capital expenditures, which were partially offset by the proceeds from the sales of Checkers common stock and surplus properties. For the twenty-eight weeks ended August 12, 2002, financing activities used
$40,698 related to the repurchase of convertible subordinated notes, repayment of bank debt and capital lease obligations, and payments of fees related to the amendment of our credit facility. Our fixed charges coverage ratio was 1.5X for the
twenty-eight week period ended August 12, 2002, versus the prior year period when earnings were insufficient to cover fixed charges by $72,048 (see Exhibit 12.1).





The quick-service restaurant business generally receives simultaneous cash payments for sales. We presently use the net cash flow from operations to repay outstanding
indebtedness and to reinvest in long-term assets, primarily for the remodeling and construction of restaurants. Normal operating expenses for inventories and current liabilities generally carry longer payment terms (usually 15  30
days). As a result, we typically maintain current liabilities in excess of current assets.





We believe that cash
generated from our various restaurant concept operations, cash and cash equivalents on hand as of August 12, 2002, and amounts available under our senior credit facility, will provide the funds necessary to meet all of our capital spending and
working capital requirements for the next twelve months. We amended and restated our senior credit facility on January 31, 2002, securing a $100,000 lenders commitment under a revolving credit facility. The amended senior credit facility
includes a letter of credit sub-facility, and changed the maturity date to December 14, 2003, extendable to November 15, 2006, provided we are able to earlier refinance our convertible subordinated notes due March 2004. The senior credit
facility is collateralized by all of our personal property assets and certain restaurant property deeds of trust with an estimated sales value of $218,200. Borrowings under our senior credit facility bear interest at the LIBOR rate plus an
applicable margin. As of August 12, 2002, the applicable margin was 4.0% and our interest rate was 5.9%. Under our amended credit facility, we had $53,949 of outstanding letters of credit at August 12, 2002. As we had no borrowings outstanding
at that date, we had $46,051 of borrowings available for our use. As of September 9, 2002, we had $0 outstanding on the credit facility and approximately $22,000 invested in overnight deposits.




29




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)




We are in compliance with all covenants under our senior credit facility. However, in the event the revolving
credit facility is declared accelerated by the lenders (which can occur only if we are in default under the facility), our 91/8% senior subordinated notes due 2009 and our 41/4% convertible subordinated notes due 2004 may
also become accelerated under certain circumstances and after all cure periods have expired.





The
repurchase of convertible debt during the first and second quarters of fiscal 2003 was the first step in addressing the maturation of our $142,000 of convertible notes, due March 2004. Strategies we may consider in the future include the sale of
assets (including restaurants), a debt or equity offering, a debt swap or some combination of those items. In the event that we are unable to successfully implement one or more of those options, or turnaround Hardees, we may be required to
sell additional restaurants at a loss to raise sufficient funds to retire the debt. Those losses may be material and have a significant negative impact on our operating results.




30




---



CKE RESTAURANTS, INC. AND SUBSIDIARIES


MANAGEMENTS DISCUSSION AND ANALYSIS(Continued)


(Dollars in thousands)







Item 3.    Quantitative and Qualitative Disclosures about Market Risk





Interest Rate Risk





Our principal exposure to financial market risks relates to the impact that interest rate changes could have on our $100,000 senior credit facility, of which $0 remained
outstanding as of August 12, 2002. Borrowings under our senior credit facility bear interest at the LIBOR rate plus an applicable margin. Because we had no outstanding balance on our senior credit facility, a hypothetical increase of 100 basis
points in short-term interest rates would not result in a reduction in the Companys annual pre-tax earnings. The estimated reduction is based upon the outstanding balance of our senior credit facility and assumes no change in the volume, index
or composition of debt as in effect August 12, 2002. Substantially all of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have not had a significant impact on us and are not expected to in the foreseeable
future.





Commodity Price Risk





We purchase certain products which are affected by commodity prices and are therefore subject to price volatility caused by weather, market conditions and other factors
which are not considered predictable or within our control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to
minimize price volatility. The purchasing contracts and pricing arrangements we use typically result in unconditional purchase obligations, which are not reflected in the consolidated balance sheet. Typically, we use these types of purchasing
techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address commodity cost increases, which are significant and appear to be long-term in
nature by adjusting our menu pricing or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices (see page 20) could result in lower restaurant-level operating margins for our restaurant
concepts.




31




---




Part II.    Other Information.





Item 4.    Submission of Matters to a Vote of Security Holders





The Company held its Annual Meeting of Stockholders on June 18, 2002 for the purpose of electing certain members of the board of directors.





Managements nominees for directors, whose term expired as of the date of the Annual Meeting were elected by the following vote:





Shares Voted For

Authority to Vote WithheldPeter Churm

50,326,417

309,693Daniel D. Lane

50,390,553

245,557Andrew F. Puzder

50,066,497

569,613





The following individuals also continue to serve on the board of
directors:





William P. Foley II, Byron Allumbaugh, Carl L. Karcher, Carl N. Karcher, Dan Ponder and Frank P.
Willey.




32




---




Item 6.    Exhibits and Reports on Form 8-K





Exhibit #

Description10.47.1

Amendment No. 1 to Fourth Amended and Restated Credit Agreement, dated July 8, 2002, by and among the Registrant,
Paribas, as agent for the lenders (as defined therein) and the lenders12.1

Computation of Ratios99.1

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

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





(b)    Current Reports on Form 8-K:





None.





SIGNATURES





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





CKE RESTAURANTS, INC. (Registrant)9/20/02





/s/    DENNIS J.
LACEYDate







Executive Vice President Chief Financial
Officer




33




---

Certifications





I, Andrew F. Puzder, certify that:





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




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




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




[Items 4, 5 and 6 omitted pursuant to the transition provisions of Release No. 34-46427.]





Date:

9/23/02





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





*        
*         *





I, Dennis J. Lacey, certify that:





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




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




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




[Items 4, 5 and 6 omitted pursuant to the transition provisions of Release No. 34-46427.]





Date:

9/23/02





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




---

EXHIBIT INDEX





Exhibit #

Description10.47.1

Amendment No. 1 to Fourth Amended and Restated Credit Agreement, dated July 8, 2002, by and among the
Registrant, Paribas, as agent for the lenders (as defined therein) and the lenders12.1

Computation of Ratios99.1

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

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







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