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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One)  x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934.  For the quarterly period ended August 9, 2004 OR  o
    
    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.)6307 Carpinteria Avenue, Ste. A, Carpinteria, CA
(Address of Principal Executive Offices)
    
    93013
(Zip Code)
 Registrants telephone number, including area code: (805) 745-7500 Former Name, Former Address and Former Fiscal Year, if changed since last report.   Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o As
of September 8, 2004,
 57,707,543 shares of the Registrants Common
Stock were outstanding.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES INDEX PagePart I. Financial InformationItem 1
    
    Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of August 9, 2004 and January 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the twelve weeks and twenty-eight weeks ended August 9, 2004 and August 11, 2003
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the twenty-eight weeks ended August 9, 2004
    
    
    5Condensed Consolidated Statements of Cash Flows for the twenty-eight weeks ended August 9, 2004 and August 11, 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    44Item 4
    
    Controls and Procedures
    
    
    44Part II. Other InformationItem 1
    
    Legal Proceedings
    
    
    45Item 2
    
    Changes in Securities and Use of Proceeds
    
    
    45Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    45Item 6
    
    Exhibits
    
    
    46Signatures
    
    
    47EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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##### Table of Contents



PART 1. FINANCIAL INFORMATION 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands, except par values)
(Unaudited) August 9, 2004
    
    January 31, 2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    36,578
    
    
    $
    54,355Accounts receivable, net
    
    
    24,408
    
    
    
    26,729Related party trade receivables
    
    
    7,100
    
    
    
    7,991Inventories
    
    
    19,719
    
    
    
    18,492Prepaid expenses
    
    
    10,346
    
    
    
    15,589Assets held for sale
    
    
    17,000
    
    
    
    18,760Advertising fund assets, restricted
    
    
    21,448
    
    
    
    Other current assets
    
    
    1,739
    
    
    
    1,656Total current assets
    
    
    138,338
    
    
    
    143,572Notes receivable, net
    
    
    3,086
    
    
    
    2,317Property and equipment, net
    
    
    507,678
    
    
    
    518,881Property under capital leases, net
    
    
    41,352
    
    
    
    46,382Goodwill
    
    
    22,649
    
    
    
    22,649Other assets
    
    
    37,383
    
    
    
    39,522Total assets
    
    $
    750,486
    
    
    $
    773,323LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of bank indebtedness and other long-term debt
    
    $
    2,551
    
    
    $
    26,843Current portion of capital lease obligations
    
    
    5,430
    
    
    
    7,042Accounts payable
    
    
    53,957
    
    
    
    47,592Advertising fund liabilities
    
    
    21,448
    
    
    
    Other current liabilities
    
    
    106,175
    
    
    
    107,439Total current liabilities
    
    
    189,561
    
    
    
    188,916Bank indebtedness and other long-term debt, less current portion
    
    
    200,433
    
    
    
    22,428Senior subordinated notes
    
    
    
    
    
    
    200,000Convertible subordinated notes due 2023
    
    
    105,000
    
    
    
    105,000Capital lease obligations, less current portion
    
    
    53,485
    
    
    
    57,111Other long-term liabilities
    
    
    54,983
    
    
    
    53,636Total liabilities
    
    
    603,462
    
    
    
    627,091Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 100,000,000 shares authorized;
59,587,000 shares issued and 57,683,000 shares outstanding at
August 9, 2004; 59,216,000 shares issued and 57,631,000 shares
outstanding at January 31, 2004
    
    
    596
    
    
    
    592Additional paid-in capital
    
    
    466,632
    
    
    
    464,689Officer and non-employee director notes receivable
    
    
    (576
    )
    
    
    (2,530
    )Accumulated deficit
    
    
    (305,868
    )
    
    
    (306,113
    )Treasury stock at cost, 1,904,000 and 1,585,000 shares at
August 9, 2004 and January 31, 2004, respectively
    
    
    (13,760
    )
    
    
    (10,406
    )Total stockholders equity
    
    
    147,024
    
    
    
    146,232Total liabilities and stockholders equity
    
    $
    750,486
    
    
    $
    773,323
 See Accompanying Notes to Condensed Consolidated Financial Statements 3




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
(Unaudited) Twelve Weeks Ended
    
    Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003
    
    August 9, 2004
    
    August 11, 2003Revenue:Company-operated restaurants
    
    $
    281,802
    
    
    $
    271,168
    
    
    $
    647,674
    
    
    $
    610,210Franchised and licensed restaurants and other
    
    
    71,938
    
    
    
    62,551
    
    
    
    161,386
    
    
    
    143,067Total revenue
    
    
    353,740
    
    
    
    333,719
    
    
    
    809,060
    
    
    
    753,277Operating costs and expenses:Restaurant operations:Food and packaging
    
    
    83,897
    
    
    
    80,852
    
    
    
    189,621
    
    
    
    180,949Payroll and other employee benefit expenses
    
    
    89,213
    
    
    
    84,909
    
    
    
    201,808
    
    
    
    197,544Occupancy and other operating expenses
    
    
    61,034
    
    
    
    61,870
    
    
    
    140,337
    
    
    
    140,891234,144
    
    
    
    227,631
    
    
    
    531,766
    
    
    
    519,384Franchised and licensed restaurants and other
    
    
    52,557
    
    
    
    48,507
    
    
    
    119,544
    
    
    
    113,416Advertising expenses
    
    
    17,410
    
    
    
    16,571
    
    
    
    39,674
    
    
    
    37,584General and administrative expenses
    
    
    39,273
    
    
    
    24,963
    
    
    
    77,058
    
    
    
    56,455Facility action charges, net
    
    
    1,955
    
    
    
    831
    
    
    
    9,392
    
    
    
    1,893Total operating costs and expenses
    
    
    345,339
    
    
    
    318,503
    
    
    
    777,434
    
    
    
    728,732Operating income
    
    
    8,401
    
    
    
    15,216
    
    
    
    31,626
    
    
    
    24,545Interest expense
    
    
    (11,971
    )
    
    
    (9,024
    )
    
    
    (23,699
    )
    
    
    (21,202
    )Other income (expense), net
    
    
    (7,377
    )
    
    
    228
    
    
    
    (6,764
    )
    
    
    (407
    )Income (loss) before income taxes and
discontinued operations
    
    
    (10,947
    )
    
    
    6,420
    
    
    
    1,163
    
    
    
    2,936Income tax expense
    
    
    182
    
    
    
    211
    
    
    
    451
    
    
    
    430Income (loss) from continuing operations
    
    
    (11,129
    )
    
    
    6,209
    
    
    
    712
    
    
    
    2,506Income (loss) from operations of discontinued
segment (net of income tax expense (benefit)
of $0, $(25), $0 and $(26) for the twelve-week
periods ended August 9, 2004 and August 11,
2003, and the twenty-eight week periods ended
August 9, 2004 and August 11, 2003,
respectively)
    
    
    (304
    )
    
    
    46
    
    
    
    (467
    )
    
    
    (2,067
    )Net income (loss)
    
    $
    (11,433
    )
    
    $
    6,255
    
    
    $
    245
    
    
    $
    439Basic income (loss) per common share:Continuing operations
    
    $
    (0.19
    )
    
    $
    0.11
    
    
    $
    0.01
    
    
    $
    0.04Discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.03
    )Net income (loss)
    
    $
    (0.20
    )
    
    $
    0.11
    
    
    $
    0.00
    
    
    $
    0.01Diluted income (loss) per common share:Continuing operations
    
    $
    (0.19
    )
    
    $
    0.11
    
    
    $
    0.01
    
    
    $
    0.04Discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.03
    )Net income (loss)
    
    $
    (0.20
    )
    
    $
    0.11
    
    
    $
    0.00
    
    
    $
    0.01Weighted-average common shares outstanding:Basic
    
    
    57,575
    
    
    
    57,567
    
    
    
    57,590
    
    
    
    57,474Dilutive effect of stock options, warrants
and convertible notes
    
    
    
    
    
    
    1,105
    
    
    
    1,938
    
    
    
    942Diluted
    
    
    57,575
    
    
    
    58,672
    
    
    
    59,528
    
    
    
    58,416
 See Accompanying Notes to Condensed Consolidated Financial Statements 4




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 (In thousands)
(Unaudited) Twenty-eight Weeks Ended August 9, 2004Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    Treasury StockOfficer andNumber of
    
    
    
    
    
    Additional
    
    Non-Employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalShares
    
    
    
    
    
    Paid-In
    
    Director Notes
    
    Accumulated
    
    Number of
    
    
    
    
    
    StockholdersIssued
    
    Amount
    
    Capital
    
    Receivable
    
    Deficit
    
    Shares
    
    Amount
    
    EquityBalance at January 31,
2004
    
    
    59,216
    
    
    $
    592
    
    
    $
    464,689
    
    
    $
    (2,530
    )
    
    $
    (306,113
    )
    
    
    (1,585
    )
    
    $
    (10,406
    )
    
    $
    146,232Exercise of stock options
    
    
    371
    
    
    
    4
    
    
    
    1,943
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,947Collections on officer
and non-employee
director notes
receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,954
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,954Repurchase of common
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (319
    )
    
    
    (3,354
    )
    
    
    (3,354
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    
    
    
    
    245Balance at August 9, 2004
    
    
    59,587
    
    
    $
    596
    
    
    $
    466,632
    
    
    $
    (576
    )
    
    $
    (305,868
    )
    
    
    (1,904
    )
    
    $
    (13,760
    )
    
    $
    147,024
 See Accompanying Notes to Condensed Consolidated Financial Statements 5




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003Cash flow from operating activities:Net income
    
    $
    245
    
    
    $
    439Adjustments
to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    34,253
    
    
    
    34,068Amortization of loan fees
    
    
    1,994
    
    
    
    2,536(Recovery of) provision for losses on accounts and notes receivable
    
    
    (1,792
    )
    
    
    2,192Loss on sale of property and equipment, capital leases and
extinguishment of debts
    
    
    6,341
    
    
    
    89Facility action charges, net
    
    
    9,392
    
    
    
    1,893Other non-cash credits
    
    
    (483
    )
    
    
    (167
    )Net change in refundable income taxes
    
    
    (421
    )
    
    
    639Change in estimated liability for closing restaurants and estimated
liability for self-insurance
    
    
    (3,298
    )
    
    
    (4,956
    )Net change in accounts receivable, inventories, prepaid expenses and
other current assets
    
    
    6,709
    
    
    
    5,722Net change in accounts payable and other current and long-term liabilities
    
    
    14,456
    
    
    
    436Loss from operations of discontinued segment
    
    
    467
    
    
    
    2,067Cash provided to discontinued segment
    
    
    (252
    )
    
    
    (216
    )Net cash provided by operating activities
    
    
    67,611
    
    
    
    44,742Cash flow from investing activities:Purchases of property and equipment
    
    
    (28,727
    )
    
    
    (23,157
    )Proceeds from sale of property and equipment
    
    
    7,722
    
    
    
    9,243Collections on notes receivable
    
    
    1,968
    
    
    
    1,203Increase in cash upon consolidation of variable interest entity
    
    
    100
    
    
    
    Net change in other assets
    
    
    (192
    )
    
    
    939Net cash used in investing activities
    
    
    (19,129
    )
    
    
    (11,772
    )Cash flow from financing activities:Net change in bank overdraft
    
    
    (9,293
    )
    
    
    (8,661
    )Repayments of borrowings under credit facility
    
    
    (54,588
    )
    
    
    Long-term borrowings
    
    
    230,000
    
    
    
    149,500Repayments of long-term debt
    
    
    (222,466
    )
    
    
    (165,395
    )Repayments of capital lease obligations
    
    
    (4,459
    )
    
    
    (5,477
    )Collections on officer and non-employee director notes receivable
    
    
    1,954
    
    
    
    Payment of
deferred loan fees
    
    
    (6,000
    )
    
    
    (42
    )Repurchase of common stock
    
    
    (3,354
    )
    
    
    Proceeds from exercise of stock options
    
    
    1,947
    
    
    
    1,061Net cash used in financing activities
    
    
    (66,259
    )
    
    
    (29,014
    )Net (decrease) increase in cash and cash equivalents
    
    
    (17,777
    )
    
    
    3,956Cash and cash equivalents at beginning of period
    
    
    54,355
    
    
    
    18,440Cash and cash equivalents at end of period
    
    $
    36,578
    
    
    $
    22,396Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    (22,336
    )
    
    $
    (17,973
    )Income
taxes, net of refunds received
    
    $
    (402
    )
    
    $
    (282
    )Non-cash investing and financing activities:Gain recognized on sale and leaseback transactions
    
    $
    162
    
    
    $
    162Consolidation of advertising funds assets and liabilities
    
    $
    21,448
    
    
    $
    
 See Accompanying Notes
to Condensed Consolidated Financial Statements 6




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 NOTE (1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS CKE Restaurants, Inc. (CKE or the Company), through its wholly-owned
subsidiaries, owns, operates, franchises and licenses the Carls Jr.®,
Hardees®, The Green Burrito® (Green Burrito) and La Salsa Fresh Mexican
Grill® (La Salsa) concepts. Carls Jr. restaurants are primarily located in
the Western United States. Hardees restaurants are located throughout the
Southeastern and Midwestern United States. Green Burrito restaurants are
located in California, primarily in dual-brand Carls Jr. restaurants. La Salsa
restaurants are primarily located in California. As of August 9, 2004, the
Companys system-wide restaurant portfolio consisted of: Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalCompany-operated
    
    
    429
    
    
    
    690
    
    
    
    62
    
    
    
    3
    
    
    
    1,184Franchised and licensed
    
    
    587
    
    
    
    1,377
    
    
    
    43
    
    
    
    15
    
    
    
    2,022Total
    
    
    1,016
    
    
    
    2,067
    
    
    
    105
    
    
    
    18
    
    
    
    3,206
 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 26, 2004. In the opinion of management, all
adjustments consisting of normal recurring accruals necessary for a fair
presentation of financial position and results of operations for the interim
periods presented have been reflected herein. The results of operations for
such interim periods are not necessarily indicative of results for the full
year or for any future period. For clarity of presentation, the Company generally labels all fiscal year ends
as fiscal year ended January 31. Prior year amounts in the condensed consolidated financial statements have been
reclassified to conform with current year presentation. Stock-Based Compensation The Company has various stock-based compensation plans that provide options for
certain employees and outside directors to purchase common shares of the
Company. The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure(SFAS 148). SFAS 148
amended the disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation(SFAS 123), to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Disclosures required by this standard are included in the notes to these
condensed consolidated financial statements. For purposes of the following pro forma disclosures required by SFAS 148 and
SFAS 123, the fair value of each option has been estimated on the date of grant
using the Black-Scholes option-pricing model. The Black-Scholes option-pricing
model was developed for use in estimating the fair value of traded options that
do not have vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Companys stock
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the value of an estimate, in managements opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of its
stock options. 7




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 The assumptions used for grants in the twelve weeks ended August 9, 2004, and
August 11, 2003, are as follows: August 9, 2004
    
    August 11, 2003Annual dividends
    
    $
    
    
    
    $
    Expected volatility
    
    
    72.6
    %
    
    
    55.2
    %Risk-free interest rate (matched to the expected
term of the outstanding option)
    
    
    3.45
    %
    
    
    3.88
    %Expected life of all options outstanding (years)
    
    
    5.43
    
    
    
    5.46Weighted-average fair value of each option grantedTwelve weeks ended
    
    $
    7.19
    
    
    $
    3.07
 The assumptions used to determine the fair value of each option granted are
highly subjective. Changes in the assumptions used would affect the fair value
of the options granted as follows: Increase (Decrease) in Fair Value of Options GrantedTwelve Weeks Ended
    
    Twelve Weeks EndedChange in Assumption
    
    August 9, 2004
    
    August 11, 200310% increase in expected volatility
    
    $
    0.63
    
    
    $
    0.371% increase in risk-free interest rate
    
    
    0.11
    
    
    
    0.081 year increase in expected life of all options outstanding
    
    
    0.48
    
    
    
    0.2410% decrease in expected volatility
    
    
    (0.70
    )
    
    
    (0.40
    )1% decrease in risk-free interest rate
    
    
    (0.12
    )
    
    
    (0.08
    )1 year decrease in expected life of all options outstanding
    
    
    (0.57
    )
    
    
    (0.27
    )
 The following tables reconcile reported net income (loss) to pro forma net
income (loss) assuming compensation expense for stock-based compensation had
been recognized in accordance with SFAS 123: Twelve Weeks EndedAugust 9, 2004
    
    August 11, 2003Net income (loss), as reported
    
    $
    (11,433
    )
    
    $
    6,255Add: Stock-based employee
compensation expense included in
reported net income (loss)
    
    
    
    
    
    
    Deduct: Total stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects
    
    
    (1,096
    )
    
    
    (598
    )Net income (loss)  pro forma
    
    $
    (12,529
    )
    
    $
    5,657Net income (loss) per common share:Basic  as reported
    
    $
    (0.20
    )
    
    $
    0.11Basic  pro forma
    
    
    (0.22
    )
    
    
    0.10Diluted  as reported
    
    
    (0.20
    )
    
    
    0.11Diluted  pro forma
    
    
    (0.22
    )
    
    
    0.10
 Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003Net income, as reported
    
    $
    245
    
    
    $
    439Add: Stock-based employee
compensation expense included in
reported net income
    
    
    
    
    
    
    Deduct: Total stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects
    
    
    (2,208
    )
    
    
    (1,232
    )Net loss  pro forma
    
    $
    (1,963
    )
    
    $
    (793
    )Net income (loss) per common share:Basic  as reported
    
    $
    0.00
    
    
    $
    0.01Basic  pro forma
    
    
    (0.03
    )
    
    
    (0.01
    )Diluted  as reported
    
    
    0.00
    
    
    
    0.01Diluted  pro forma
    
    
    (0.03
    )
    
    
    (0.01
    )
 NOTE (2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS On May 17, 2004, the Company completed adoption of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities  an interpretation of Accounting
Research Bulletin (ARB) No. 51(FIN 46). The FASB issued FIN 46 in January 2003. This interpretation is intended to
clarify the application of the majority 8




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 voting interest requirement of ARB No. 51, Consolidated Financial Statements,
to certain entities in which equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 requires the consolidation of
these entities, known as variable interest entities (VIEs), by the primary
beneficiary of the entity. The primary beneficiary is the entity, if any, that
is subject to a majority of the risk of loss from the VIEs activities,
entitled to receive a majority of the VIEs residual returns, or both. FIN 46
may be applied prospectively with a cumulative-effect adjustment as of the date
on which it is first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect adjustment as of the
beginning of the first year restated. FIN 46 was applicable immediately to
variable interests in a VIE created after January 31, 2003. During the course of 2003, the FASB proposed modifications to FIN 46 and issued
FASB Staff Positions (FSPs) that changed and clarified FIN 46. These
modifications and FSPs were subsequently incorporated into FIN 46 (revised)
(FIN 46R), which was issued on December 23, 2003, and replaced FIN 46. FIN
46R excludes operating businesses, as defined, from its scope subject to four
conditions, and states the provisions of FIN 46R need not be applied to
interests in VIEs created or obtained prior to December 31, 2003, if a company
is unable, subject to making and continuing to make an exhaustive effort, to
obtain the information necessary to determine whether the entity is a VIE,
determine whether the Company is the VIEs primary beneficiary or perform the
accounting required to consolidate the VIE. The principal entities in which the Company possesses a variable interest
include franchise entities, which operate its franchised restaurants. The
Company does not possess any ownership interests in its franchisees.
Additionally, the Company generally does not provide financial support to its
franchisees in a typical franchise relationship. Also, the Companys franchise
agreements do not require its franchisees to provide the timely financial
information necessary to apply the provisions of FIN 46R to its franchisees. Upon the final adoption of
FIN 46R on May 17, 2004, the Company consolidated one franchise entity
that operates six Hardees restaurants. The Company subleases to this franchise
entity all of its six operating locations and substantially all of its
operating equipment, and this franchise entity received no equity contribution
from its principals upon its inception. Because the principals did not invest a
significant amount of equity, the legal entity within which this franchise
operates is considered to be inadequately capitalized and, as a result, is a
VIE. Because of the relatively significant financial support it provides to
this franchise, the Company determined it is the primary beneficiary of this
VIE. The assets and liabilities of this entity included in the accompanying
condensed consolidated balance sheet  as of August 9, 2004, are as
follows: ASSETS:Cash
    
    $
    134Inventories
    
    
    46Property and equipment, net
    
    
    5Other assets
    
    
    30$
    215LIABILITIES:Other current liabilities
    
    $
    159Other long-term debt
    
    
    33Other long-term liabilities
    
    
    23$
    215
 The operating results of this franchise entity are included within the
Companys condensed consolidated statement of operations and are not
significant. The minority interest in the income of this franchise entity is
classified in other expense in the Companys condensed
consolidated statements
of operations and in other long-term liabilities in the Companys condensed
consolidated balance sheets and also is not significant. Although this franchise entity has been included in the condensed consolidated
financial statements, the Company has no rights to the assets, nor does it have
any obligation with respect to the liabilities, of this franchise entity. None
of the Companys assets serve as collateral for the creditors of this
franchisee or any of the Companys other franchisees. 9




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 There is also a portion of franchised restaurants that are VIEs for which the
Company holds a significant variable interest, but for which the Company is not
the primary beneficiary. The Companys significant exposures related to these
VIEs and other franchisees relate to the collection of amounts due the Company,
which are collected weekly or monthly, guarantees of franchisee debt provided
to third party lenders by the Company (see Note 9) and primary lease
obligations or fee property ownership underlying sublease and lease
arrangements the Company has with several of its franchisees, as more fully
described in Note 9 herein and in Note 8 to the Companys condensed
consolidated financial statements presented in the Companys Annual Report on
Form 10-K for the fiscal year ended January 31, 2004. The Company utilizes various advertising funds to administer its advertising
programs. The Carls Jr. National Advertising Fund (CJNAF) is Carls Jr.s
sole cooperative advertising program. The Company has historically consolidated
CJNAF into its financial statements on a net basis, whereby contributions from
franchisees are recorded as offsets to the Companys reported advertising
expenses. The Hardees cooperative advertising funds consist of the Hardees National
Advertising Fund (HNAF) and many local advertising cooperative funds (Co-op
Funds). Each of these funds is a separate non-profit association with all
proceeds segregated and managed by a third-party accounting service company.
Upon final adoption of FIN 46R, the Company consolidated all of the Hardees
cooperative advertising funds. The Company has included $21,448 of advertising
fund assets, restricted, and advertising fund liabilities in its
accompanying condensed consolidated
balance sheet as of August 9, 2004. Beginning in the second quarter of fiscal
2005, the Hardees cooperative advertising funds have been reported in the
Companys condensed consolidated statements of operations on a net basis, whereby contributions from
franchisees have been recorded as offsets to the Companys reported advertising
expenses. The Company elected to apply FIN 46R prospectively and, upon final
adoption thereof, had no cumulative-effect adjustment. Advertising fund assets, restricted, and advertising fund liabilities as of
June 30, 2004, the most recent date through which financial statements are
available, are included in the Companys accompanying condensed
consolidated balance sheet as of August 9, 2004, and consisted of the following: ADVERTISING
FUND ASSETS, RESTRICTED:Cash
    
    $
    15,105Accounts and notes receivable, net
    
    
    5,705Other assets
    
    
    638$
    21,448ADVERTISING
FUND LIABILITIES:Accounts payable and other liabilities
    
    $
    8,145Deferred obligations
    
    
    13,303$
    21,448
 NOTE (3) INTANGIBLE ASSETS The table below presents identifiable, definite-lived intangible assets as of
August 9, 2004, and August 11, 2003: August 9, 2004
    
    August 11, 2003Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetIntangible
    
    Carrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingAsset
    
    Amount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountTrademarks
    
    $
    17,159
    
    
    $
    (2,078
    )
    
    $
    15,081
    
    
    $
    17,159
    
    
    $
    (1,220
    )
    
    $
    15,939Franchises
    
    
    1,780
    
    
    
    (217
    )
    
    
    1,563
    
    
    
    1,780
    
    
    
    (128
    )
    
    
    1,652Favorable lease agreements
    
    
    8,929
    
    
    
    (3,830
    )
    
    
    5,099
    
    
    
    17,326
    
    
    
    (9,793
    )
    
    
    7,533$
    27,868
    
    
    $
    (6,125
    )
    
    $
    21,743
    
    
    $
    36,265
    
    
    $
    (11,141
    )
    
    $
    25,124
 Amortization expense related to identifiable definite-lived intangible assets
was $710 and $1,412 for the twelve and twenty-eight week periods ended August
9, 2004, and $486 and $1,054 for the twelve and twenty-eight week periods ended
August 11, 2003, respectively. These intangible assets are amortized over
periods of 6-20 years and are included in other assets in the condensed
consolidated balance sheets. 10




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 NOTE (4) INDEBTEDNESS AND INTEREST EXPENSE On June 2, 2004, the Company amended and restated its senior credit facility
(the Facility) to provide for a $380,000 senior secured credit facility
consisting of a $150,000 revolving credit facility and a $230,000 term loan.
The revolving credit facility matures on May 1, 2007, and includes an $85,000
letter of credit sub-facility. The principal amount of the term loan is
scheduled to be repaid in quarterly installments, with a balloon payment of the
remaining principal balance at maturity on July 2, 2008. The Facility also
requires term loan prepayments based upon an annual excess cash flow formula,
as defined therein. Subject to certain conditions as defined in the Facility,
the maturity of the term loan may be extended to May 1, 2010. The Company used
a portion of the proceeds from the $230,000 term loan to repay the $10,137
remaining balance of the prior Facility term loan. On July 2, 2004, the Company
used additional proceeds from the $230,000 term loan to redeem  $200,000 of
its 9.125% Senior Subordinated Notes due 2009 (Senior Notes) and pay the related
optional redemption premium of $9,126 (which was recorded in other income
(expense) during the second  quarter of fiscal 2005) and accrued
interest. The Company also incurred a charge of approximately $3,400
during the
second  quarter of fiscal 2005 to write-off unamortized loan fees  primarily
associated with the Senior Notes and the Facility, which was recorded
in interest expense in the accompanying condensed consolidated
financial statements. During the quarter ended August 9, 2004, the Company voluntarily prepaid
$30,000 of the $230,000 term loan in addition to the $525 regularly scheduled
payment. As of August 9, 2004, the Company had cash borrowings outstanding
under the term loan portion of the Facility of $199,475, outstanding letters of
credit under the revolving portion of the Facility of $64,697 and availability
under the revolving portion of the Facility of $85,303. Subsequent to
quarter-end, the Company voluntarily prepaid an additional $34,500 of the term
loan, reducing the term loan balance to $164,975. The terms of the Facility include certain restrictive covenants. Among other
things, these covenants restrict the Companys ability to incur debt, incur
liens on its assets, make any significant change in its corporate structure or
the nature of its business, dispose of assets in the collateral pool securing
the Facility, prepay certain debt, engage in a change of control transaction
without the member banks consents, pay dividends and make investments or
acquisitions. The Facility is collateralized by a lien on all of the Companys
personal property assets and by certain restaurant property deeds of trust. As
of August 9, 2004, the applicable interest rate on the term loan
was LIBOR plus
3.0%, or 4.56%  per annum, and the applicable interest rate on the revolving loan portion of the
Facility was LIBOR plus 2.75%. The Company also incurs fees on outstanding
letters of credit under the Facility at a rate equal to the applicable margin
for revolving loans, which is currently 2.75% per annum. The Facility also required the Company to enter into interest rate protection
agreements in an aggregate notional amount of at least $70,000 for a term of at
least three years. Pursuant to this requirement, on July 26, 2004, the Company
entered into two interest rate cap agreements in an aggregate notional amount
of $70,000. Under the terms of each agreement, if LIBOR exceeds 5.375% on the
measurement date for any quarterly period, the Company will receive payments
equal to the amount LIBOR exceeds 5.375% multiplied by (i) the notional amount
of the agreement and (ii) the fraction of a year represented by the quarterly
period. The agreements expire on July 28, 2007. The agreements were not
designated as cash flow hedges under the terms of
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. Accordingly, the change in the fair value of the $371 of interest
rate cap premiums will be recognized quarterly in interest expense in the
consolidated statement of operations. During the quarter ended August
9, 2004, the Company recorded $49 of interest expense to reduce the
carrying value of the interest rate cap premium to its fair value of
$322.
As a matter of policy, the Company does
not use derivative instruments unless there is an underlying exposure. Subject to the terms of the Facility, the Company may make capital expenditures
in the amount of $50,000, plus 80% of the amount of actual EBITDA (as defined)
in excess of $110,000 during the current fiscal year and $45,000, plus 80% of
the amount of actual EBITDA (as defined) in excess of $110,000 during each
subsequent fiscal year. In fiscal 2005 and thereafter, the Company may carry
forward any unused capital expenditure amounts to the following year. The
Facility also permits the Company to repurchase its common stock in the amount
of $27,000 plus a portion of excess cash flow and certain net asset sale
proceeds (as defined) during the term of the Facility. The Company did not
repurchase any shares of its common stock during the second quarter of fiscal
2005. The Facility contains financial performance covenants, which include a minimum
EBITDA requirement, minimum fixed charge coverage ratio, and maximum leverage
ratios and capital expenditures, and precludes the Company 11




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 from paying dividends. The Company was in compliance with all covenants under
the Facility as of August 9, 2004. On September 29, 2003, the Company completed an offering of $105,000 of its 4%
Convertible Subordinated Notes due 2023 (2023 Convertible Notes), and used
nearly all of the net proceeds of the offering to repurchase $100,000 of its
then-outstanding 4.25% Convertible Subordinated Notes due 2004 (the 2004
Convertible Notes). The 2023 Convertible Notes bear interest at 4.0% annually,
are payable in semiannual installments due April 1 and October 1 each year, and
are unsecured general obligations of the Company, contractually subordinate in
right of payment to certain other Company obligations including the Facility.
On October 1 of 2008, 2013 and 2018, the holders of the 2023 Convertible Notes
have the right to require the Company to repurchase all or a portion of the
notes at 100% of the face value plus accrued interest.

On October 1, 2008 and thereafter, the Company has the right to call
all or a portion of the notes at 100% of the face value plus accrued
interest.

Under the terms of the
2023 Convertible Notes, such notes become convertible into the Companys common
stock at a conversion rate of 112.4859 shares per $1,000 principal amount of
the notes at any time after the Companys common stock has a closing sale price
of at least $9.78 per share, which is 110% of the conversion price per share,
for at least 20 days in a period of 30 consecutive trading days ending on the
last trading day of the calendar quarter. As a result of the daily closing
sales price levels on the Companys common stock during the second calendar
quarter of 2004, the 2023 Convertible Notes became convertible into the
Companys common stock effective July 1, 2004, and will remain convertible
throughout the remainder of their term. Interest expense consisted of the following: Twelve Weeks Ended
    
    Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003
    
    August 9, 2004
    
    August 11, 2003Facility
    
    $
    1,936
    
    
    $
    233
    
    
    $
    2,362
    
    
    $
    715Senior subordinated notes due 2009
    
    
    2,240
    
    
    
    4,212
    
    
    
    7,855
    
    
    
    9,827Capital lease obligations
    
    
    1,603
    
    
    
    1,812
    
    
    
    3,814
    
    
    
    4,2282004 Convertible Notes
    
    
    
    
    
    
    1,200
    
    
    
    73
    
    
    
    2,8002023 Convertible Notes
    
    
    969
    
    
    
    
    
    
    
    2,262
    
    
    
    Amortization of loan fees
    
    
    903
    
    
    
    1,091
    
    
    
    1,945
    
    
    
    2,504Write-off of unamortized loan fees
    
    
    3,817
    
    
    
    
    
    
    
    4,210
    
    
    
    Letter of credit fees and other
    
    
    503
    
    
    
    476
    
    
    
    1,178
    
    
    
    1,128Total interest expense
    
    $
    11,971
    
    
    $
    9,024
    
    
    $
    23,699
    
    
    $
    21,202
 NOTE (5) FACILITY ACTION CHARGES, NET The following transactions have been recorded in the accompanying condensed
consolidated statements of operations as facility action charges, net:  (i)
    
    impairment of long-lived assets for restaurants the Company closes;(ii)
    
    impairment of long-lived assets for restaurants with net asset values in excess of estimated fair values;(iii)
    
    restaurant closure costs (primarily reflecting the estimated liability to terminate leases);(iv)
    
    gains (losses) on the sale of restaurants and surplus properties; and(v)
    
    amortization of discount related to estimated liability for closing
restaurants. Quarterly, the Company evaluates the adequacy of its estimated liability for
closing restaurants and subsidizing restaurant lease payments for franchisees,
and modifies the assumptions used based on actual results from selling surplus
properties and terminating leases. The Company also assesses the carrying value
of closed restaurant properties each quarter based on estimated property values
obtained from a related party real estate broker. The Company closed two
Hardees, one Carls Jr. and one La Salsa company-operated restaurants during
the twelve weeks ended August 9, 2004. The Company closed 32 Hardees, one
Carls Jr. and one La Salsa company-operated restaurants during the
twenty-eight weeks ended August 9, 2004. During the twelve weeks ended August
9, 2004, the Company identified four Hardees, four Carls Jr. and three La
Salsa company-operated restaurants that are still in operation, but whose
estimated fair values did not support the related net asset values and,
accordingly, an impairment charge was recorded. During the twenty-eight weeks
ended August 9, 2004, the Company identified ten Hardees, seven Carls Jr. and
six La Salsa company-operated restaurants that are still in operation, but
whose 12




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 estimated fair values did not support the related net asset values and,
accordingly, an impairment charge was recorded. The components of facility action charges (gains), net are as follows: Twelve Weeks Ended
    
    Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003
    
    August 9, 2004
    
    August 11, 2003HardeesNew decisions regarding closing restaurants
    
    $
    227
    
    
    $
    266
    
    
    $
    4,305
    
    
    $
    435Favorable dispositions of leased and fee
surplus properties, net
    
    
    (576
    )
    
    
    (1,418
    )
    
    
    (422
    )
    
    
    (2,479
    )Impairment of assets to be disposed of
    
    
    393
    
    
    
    2,085
    
    
    
    458
    
    
    
    3,315Impairment of assets to be held and used
    
    
    1,004
    
    
    
    732
    
    
    
    1,830
    
    
    
    854Gain on sales of restaurants and surplus
properties, net
    
    
    (112
    )
    
    
    (920
    )
    
    
    (923
    )
    
    
    (655
    )Amortization of discount related to
estimated liability for closing
restaurants
    
    
    259
    
    
    
    548
    
    
    
    595
    
    
    
    1,2791,195
    
    
    
    1,293
    
    
    
    5,843
    
    
    
    2,749Carls Jr.New decisions regarding closing restaurants
    
    
    7
    
    
    
    
    
    
    
    7
    
    
    
    14Favorable dispositions of leased and fee
surplus properties, net
    
    
    (130
    )
    
    
    (245
    )
    
    
    (155
    )
    
    
    (245
    )Impairment of assets to be disposed of
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    Impairment of assets to be held and used
    
    
    225
    
    
    
    
    
    
    
    1,848
    
    
    
    562(Gain) loss on sales of restaurants and
surplus properties, net
    
    
    15
    
    
    
    (461
    )
    
    
    (160
    )
    
    
    (829
    )Amortization of discount related to
estimated liability for closing
restaurants
    
    
    67
    
    
    
    73
    
    
    
    182
    
    
    
    195188
    
    
    
    (633
    )
    
    
    1,726
    
    
    
    (303
    )La Salsa and OtherNew decisions regarding closing restaurants
    
    
    
    
    
    
    
    
    
    
    800
    
    
    
    (Favorable)/unfavorable dispositions of
leased and fee surplus properties, net
    
    
    (15
    )
    
    
    (191
    )
    
    
    25
    
    
    
    (846
    )Impairment of assets to be held and used
    
    
    588
    
    
    
    429
    
    
    
    992
    
    
    
    429(Gain) loss on sales of restaurants and
surplus properties, net
    
    
    (2
    )
    
    
    (67
    )
    
    
    3
    
    
    
    (136
    )Amortization of discount related to
estimated liability for closing
restaurants
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    572
    
    
    
    171
    
    
    
    1,823
    
    
    
    (553
    )TotalNew decisions regarding closing restaurants
    
    
    234
    
    
    
    266
    
    
    
    5,112
    
    
    
    449Favorable dispositions of leased and fee
surplus properties, net
    
    
    (721
    )
    
    
    (1,854
    )
    
    
    (552
    )
    
    
    (3,570
    )Impairment of assets to be disposed of
    
    
    397
    
    
    
    2,085
    
    
    
    462
    
    
    
    3,315Impairment of assets to be held and used
    
    
    1,817
    
    
    
    1,161
    
    
    
    4,670
    
    
    
    1,845Gain on sales of restaurants and surplus
properties, net
    
    
    (99
    )
    
    
    (1,448
    )
    
    
    (1,080
    )
    
    
    (1,620
    )Amortization of discount related to
estimated liability for closing
restaurants
    
    
    327
    
    
    
    621
    
    
    
    780
    
    
    
    1,474$
    1,955
    
    
    $
    831
    
    
    $
    9,392
    
    
    $
    1,893
 Facility action charges for new decisions regarding closing restaurants during
the twenty-eight weeks ended August 9, 2004, include (i) $2,628 of provisions
associated with 28 Hardees restaurants the Company closed during the first
fiscal quarter, for which the Company had made the decision to close during the
fourth quarter of fiscal 2004; and (ii) $1,043 recorded during the first fiscal
quarter for six lease obligations, for which the Company remained liable,
associated with the bankruptcy filing of a Hardees franchisee during December
2003. 13




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 The following table summarizes the activity in the estimated liability for
closing restaurants: Balance at January 31, 2004
    
    $
    22,325New decisions regarding closing restaurants
    
    
    5,112Usage
    
    
    (6,317
    )Favorable dispositions of leased and fee surplus properties, net
    
    
    (552
    )Amortization of discount
    
    
    780Balance at August 9, 2004
    
    
    21,348Less current portion, included in other current liabilities
    
    
    8,487Long-term portion, included in other long-term liabilities
    
    $
    12,861
 The following table summarizes trailing 13-period sales per restaurant as of
August 9, 2004 and August 11, 2003, and the total fiscal quarter and
year-to-date operating income (loss), for the one Carls Jr., 32 Hardees and one La
Salsa restaurants the Company
closed during the twenty-eight weeks ending August 9, 2004: Twelve Weeks Ended
    
    Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003
    
    August 9, 2004
    
    August 11, 2003SalesCarls Jr.
    
    $
    378
    
    
    $
    403
    
    
    $
    378
    
    
    $
    403Hardees
    
    
    492
    
    
    
    526
    
    
    
    492
    
    
    
    526La Salsa
    
    
    724
    
    
    
    733
    
    
    
    724
    
    
    
    733Operating
income (loss)Carls Jr.
    
    $
    (7
    )
    
    $
    4
    
    
    $
    (7
    )
    
    $
    4Hardees
    
    
    (172
    )
    
    
    (720
    )
    
    
    (798
    )
    
    
    (1,874
    )La Salsa
    
    
    (3
    )
    
    
    (6
    )
    
    
    (3
    )
    
    
    (6
    )
 NOTE (6) INCOME (LOSS) PER SHARE The Company presents basic and diluted income (loss) per share. Basic
income (loss) per share represents net income (loss) divided by
weighted-average shares outstanding. Diluted income (loss) per share represents
net income (loss) divided by weighted-average shares outstanding, including all
potentially dilutive securities and excluding all potentially anti-dilutive
securities. The dilutive effect of stock options and warrants is determined using the
treasury stock method, whereby exercise is assumed at the beginning of the
reporting period and proceeds from such exercise, including tax benefits
therefrom, are assumed to be used to purchase the Companys common stock at the
average market price during the period. The dilutive effect of convertible debt
is determined using the if-converted method, whereby interest charges, net of
taxes, applicable to the convertible debt are added back to income and the
convertible debt is assumed to have been converted at the beginning of the
reporting period, with the resulting common shares being included in
weighted-average shares. The following table presents the number of potentially dilutive shares, in
thousands, of the Companys common stock excluded from the computation of
diluted earnings per share because their effect would have been anti-dilutive: Twelve Weeks Ended
    
    Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003
    
    August 9, 2004
    
    August 11, 20032004 Convertible Notes
    
    
    N/A
    
    
    
    2,791
    
    
    
    125
    
    
    
    2,7912023 Convertible Notes
    
    
    11,811
    
    
    
    
    
    
    
    11,811
    
    
    
    Stock Options
    
    
    5,017
    
    
    
    4,870
    
    
    
    3,487
    
    
    
    4,901Warrants
    
    
    982
    
    
    
    982
    
    
    
    982
    
    
    
    982
 NOTE (7) SEGMENT INFORMATION The Company is principally engaged in developing, operating and franchising its
Carls Jr., Hardees and La Salsa quick-service restaurants, each of which is
considered an operating segment that is managed and evaluated separately.
Management evaluates the performance of its segments and allocates resources to
them based on several factors, of which the primary financial measure is
segment operating income or loss. General and administrative expenses are
allocated to each segment based on managements analysis of the resources
applied to each segment. Interest expense related to the Facility, Senior
Notes, 2004 Convertible Notes and 2023 Convertible Notes has been allocated to
Hardees based on the use of funds. Certain amounts that the Company does not
believe would be proper to allocate to the operating segments are included in
Other (i.e., gains or losses on sales of long-term investments and the
operating results of consolidated variable interest entities). The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies (see Note 1 of notes to 14




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 the condensed consolidated financial statements in our Annual Report on Form
10-K for the fiscal year ended January 31, 2004). Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalTwelve Weeks Ended August 9, 2004Revenue
    
    $
    181,346
    
    
    $
    158,611
    
    
    $
    11,898
    
    
    $
    1,885
    
    
    $
    353,740Operating income (loss)
    
    
    7,190
    
    
    
    3,092
    
    
    
    (1,914
    )
    
    
    33
    
    
    
    8,401Income (loss) before income taxes and
discontinued operations
    
    
    6,344
    
    
    
    (15,845
    )
    
    
    (1,943
    )
    
    
    497
    
    
    
    (10,947
    )Goodwill (as of August 9, 2004)
    
    
    22,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,649Twelve Weeks Ended August 11, 2003Revenue
    
    $
    168,301
    
    
    $
    154,198
    
    
    $
    10,832
    
    
    $
    388
    
    
    $
    333,719Operating income (loss)
    
    
    15,548
    
    
    
    (326
    )
    
    
    27
    
    
    
    (33
    )
    
    
    15,216Income (loss) before income taxes and
discontinued operations
    
    
    14,477
    
    
    
    (8,229
    )
    
    
    33
    
    
    
    139
    
    
    
    6,420Goodwill (as of August 11, 2003)
    
    
    22,649
    
    
    
    
    
    
    
    34,059
    
    
    
    
    
    
    
    56,708
 Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalTwenty-eight Weeks Ended August 9, 2004Revenue
    
    $
    418,439
    
    
    $
    361,532
    
    
    $
    26,657
    
    
    $
    2,432
    
    
    $
    809,060Operating income (loss)
    
    
    28,695
    
    
    
    7,069
    
    
    
    (4,327
    )
    
    
    189
    
    
    
    31,626Income (loss) before income taxes and
discontinued operations
    
    
    26,539
    
    
    
    (21,669
    )
    
    
    (4,397
    )
    
    
    690
    
    
    
    1,163Goodwill (as of August 9, 2004)
    
    
    22,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,649Twenty-eight Weeks Ended August 11, 2003Revenue
    
    $
    387,024
    
    
    $
    341,335
    
    
    $
    23,971
    
    
    $
    947
    
    
    $
    753,277Operating income (loss)
    
    
    33,873
    
    
    
    (9,657
    )
    
    
    (161
    )
    
    
    490
    
    
    
    24,545Income (loss) before income taxes and
discontinued operations
    
    
    31,547
    
    
    
    (29,143
    )
    
    
    (159
    )
    
    
    691
    
    
    
    2,936Goodwill (as of August 11, 2003)
    
    
    22,649
    
    
    
    
    
    
    
    34,059
    
    
    
    
    
    
    
    56,708
 NOTE (8) NET ASSETS HELD FOR SALE In conjunction with the acquisition of Santa Barbara Restaurant Group, Inc.
(SBRG) in fiscal 2003, the Company made the decision to divest Timber Lodge
as the concept does not fit with the Companys core concepts of quick-service
and fast-casual restaurants. The sale of Timber Lodge
was completed on September 3, 2004, during the third quarter of fiscal 2005, as
discussed below. Assets held for sale as of August 9, 2004, consisted of the following: Assets held for sale:Total assets of Timber Lodge
    
    $
    15,708Other surplus property
    
    
    1,292$
    17,000
 Net assets of Timber Lodge as of August 9, 2004, consisted of the following: ASSETS:Current assets
    
    $
    934Property and equipment, net
    
    
    8,378Other assets
    
    
    6,396Total assets
    
    
    15,708LIABILITIES:Current liabilities
    
    
    5,259Other long-term liabilities
    
    
    1,735Total liabilities
    
    
    6,994NET ASSETS
    
    $
    8,714
 15




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 Total liabilities of Timber Lodge are included in other current liabilities in
the accompanying condensed consolidated balance sheets.
The results of Timber
Lodge included in the accompanying condensed consolidated statements of
operations as discontinued operations for the twelve and twenty-eight week
periods ended August 9, 2004, and August 11, 2003, are as follows: Twelve Weeks Ended
    
    Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003
    
    August 9, 2004
    
    August 11, 2003Revenue
    
    $
    8,061
    
    
    $
    9,059
    
    
    $
    21,429
    
    
    $
    23,297Operating income (loss)
    
    
    (387
    )
    
    
    15
    
    
    
    (545
    )
    
    
    (2,343
    )Interest expense
    
    
    4
    
    
    
    12
    
    
    
    10
    
    
    
    24Other income, net
    
    
    87
    
    
    
    18
    
    
    
    88
    
    
    
    274Income tax benefit
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    (26
    )Net income (loss)
    
    $
    (304
    )
    
    $
    46
    
    
    $
    (467
    )
    
    $
    (2,067
    )
 The operating income (loss) for Timber Lodge for the twelve and twenty-eight
weeks ended August 9, 2004 and August 11, 2003,
include impairment charges of $281, $898, $0 and $1,566, respectively, to reduce
the carrying value of Timber Lodge to fair value. On September 3, 2004, the Company sold Timber Lodge to T-Lodge Acquisition
Corp. for $8,816. The Company received $6,954 in cash and accepted two secured
notes aggregating approximately $1,862 from the buyer.

The two secured notes are comprised of a $1,000 note maturing on January 1,
2008 and bearing interest of 8.0% and an $862 note maturing on
September 3, 2005 and bearing interest of 9.0%.

T-Lodge Acquisition
Corp. is a privately-held corporation whose owners include certain members of
the management team of Timber Lodge and other investors. NOTE (9) COMMITMENTS AND CONTINGENT LIABILITIES Pursuant to the Facility, a
letter of credit sub-facility in the amount of $85,000 was established (see
Note 4). Several standby letters of credit are outstanding under this
sub-facility, which secure the Companys potential workers compensation
obligations and general and health liability obligations. The Company is
required to provide letters of credit each year, or set aside a comparable
amount of cash or investment securities in a trust account, based on its
existing claims experience. As of August 9, 2004, the Company had outstanding
letters of credit of $64,697 under the revolving portion of the Facility. As of
August 9, 2004, the Company had recorded an accrued liability for contingencies
related to litigation in the amount of $11,755,which includes $9,000
pertaining to the Carls Jr. purported class action matter discussed below in
this Note 9. Certain of the matters for which the Company maintains an accrued
liability for litigation pose risk of loss significantly above the accrued
amounts. In addition, as of August 9, 2004, the Company
estimated the liability
for those losses related to other litigation claims that, in accordance with
SFAS No. 5, Accounting for
Contingencies, are not accrued, but that the Company believes are reasonably possible to
result in an adverse outcome, to be in the range of $535 to $895. For several
years, the Company offered a program whereby it guaranteed the loan obligations
of certain franchisees to independent lending institutions. Franchisees have
used the proceeds from such loans to acquire certain equipment and pay the
costs of remodeling Carls Jr. restaurants. In the event a franchisee defaults
under the terms of a program loan, the Company is obligated, within 15 days
following written demand by the lending institution, to purchase such loan or
assume the franchisees obligation thereunder by executing an assumption
agreement and seeking a replacement franchisee for the franchisee in default.
By purchasing such loan, the Company may seek recovery against the defaulting
franchisee. As of August 9, 2004, the principal outstanding under program loans
guaranteed by the Company totaled approximately $2.0 million, with maturity
dates ranging from 2004 through 2009. As of August 9, 2004, the
Company had no
accrued liability for expected losses under this program and was not aware of
any outstanding loans being in default. The Company also guarantees a $214
obligation of a former subsidiary to a related party lending institution
associated with an equipment leasing transaction. The Company maintains an
accrual equal to 50% of this obligation based upon its estimated loss under the
guarantee. 16




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CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 As of August 9, 2004, the Company had unconditional purchase obligations in the
amount of $58,335, which include contracts for goods and services primarily
related to restaurant operations. In prior years, as part of its refranchising
program, the Company sold restaurants to franchisees. In some cases, these
restaurants were on leased sites. The Company entered into agreements with
these franchisees but remained principally liable for the lease obligations.
The Company accounts for the sublease payments received as franchising rental
income and the payments on the leases as rental expense in franchising expense.
As of August 9, 2004, the present value of the lease obligations under the
remaining master leases primary terms is $128,548. Franchisees may, from time
to time, experience financial hardship and may cease payment on the sublease
obligation to the Company. The present value of the exposure to the Company
from franchisees characterized as under financial hardship is $22,232. The
Company is, from time to time, the subject of complaints or litigation from
customers alleging illness, injury or other food quality, health or operational
concerns. Adverse publicity resulting from such allegations may materially
adversely affect the Company and its restaurants, regardless of whether such
allegations are valid or whether the Company is liable. The Company is also, at
times, the subject of complaints or allegations from employees, former
employees and franchisees. On October 3, 2001, an action was filed by Adam
Huizar and Michael Bolden, individually and on behalf of all others similarly
situated, in the Superior Court of the State of California, Los Angeles County,
seeking class action status and alleging violations of California wage and hour
laws. Similar actions were filed by Mary Jane Amberson and James Bolin,
individually and on behalf of others similarly situated, in the Superior Court
of the State of California, Los Angeles County, on April 5, 2002 and November
26, 2002, respectively. The complaints allege that salaried restaurant
management personnel at the Companys Carls Jr. restaurants in California were
improperly classified as exempt from California overtime laws, thereby
depriving them of overtime pay. The complaints seek damages in an unspecified
amount, injunctive relief, prejudgment interest, costs and attorneys fees.
During the quarter ended August 9, 2004, the Company announced that it had
reached a preliminary agreement to settle these three lawsuits and fully
resolve all complaints contained therein, under which the Company will make a
cash payment of up to $9,000 to cover claims by eligible class members,
plaintiff attorneys fees and costs, payments to the named plaintiffs, and
costs of a third-party administrator. A charge of $7,000 was recorded in
general and administrative expense during the quarter ended August 9, 2004, to
increase the accrued liability for this matter to the estimated settlement
amount. 17




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Introduction and Safe Harbor Disclosure CKE Restaurants,
Inc. and its subsidiaries (collectively referred to as the Company) is
comprised of the operations of Carls Jr., Hardees, La Salsa, and Green
Burrito, which is primarily operated as a dual-brand concept with Carls Jr.
quick-service restaurants. The following Managements Discussion and Analysis
should be read in conjunction with the unaudited condensed consolidated
financial statements contained herein, and our Annual Report on Form 10-K for
the fiscal year ended January 31, 2004. All Note references herein refer to the
accompanying Notes to condensed consolidated financial statements. Matters
discussed in this Form 10-Q contain forward-looking statements relating to
future plans and developments, financial goals, and operating performance that
are based on our current beliefs and assumptions. Such statements are subject
to risks and uncertainties. Factors that could cause our results to differ
materially from those described include, but are not limited to, whether or not
restaurants will be closed and the number of restaurant closures, consumers
concerns or adverse publicity regarding our products, the effectiveness of
operating initiatives and advertising and promotional efforts (particularly at
the Hardees brand), changes in economic conditions or prevailing interest
rates, changes in the price or availability of commodities, availability and
cost of energy, workers compensation and general liability premiums and claims
experience, changes in our suppliers ability to provide quality and timely
products, delays in opening new restaurants or completing remodels, severe
weather conditions, the operational and financial success of our franchisees,
our franchisees willingness to participate in our strategy, the availability
of financing for us and our franchisees, unfavorable outcomes in litigation,
changes in accounting policies and practices, new legislation or government
regulation (including environmental laws), the availability of suitable
locations and terms for the sites designed for development, and other factors
as discussed in our filings with the Securities and Exchange Commission. 18




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Forward-looking statements speak only as of the date they are made. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise,
except as required by law or the rules of the New York Stock Exchange. Adoption
of New Accounting Pronouncements See Note (2) of notes to condensed consolidated
financial statements. Critical Accounting Policies Our reported results are
impacted by the application of certain accounting policies that require us to
make subjective or complex judgments. These judgments involve making estimates
about the effect of matters that are inherently uncertain and may significantly
impact our quarterly or annual results of operations and financial condition.
Specific risks associated with these critical accounting policies are described
in the following paragraphs. For all of these policies, we caution that future events rarely develop exactly
as expected, and the best estimates routinely require adjustment. Our most
significant accounting policies require:  
    
    estimation of future cash flows used to assess the recoverability of long-lived assets, including goodwill, and
establish the estimated liability for closing restaurants and subsidizing lease payments of franchisees;
    
    estimation, using actuarially determined methods, of our self-insured claim losses under our workers compensation,
property and general liability insurance programs;
    
    determination of appropriate estimated liabilities for loss contingencies related to litigation;
    
    determination of the appropriate allowances associated with franchise and license receivables and estimated liabilities for
franchise subleases;
    
    determination of the appropriate assumptions to use to estimate the fair value of stock-based compensation for purposes of
disclosures of pro forma net income or loss; and
    
    estimation of our net deferred income tax asset valuation allowance. Descriptions of these critical accounting policies follow. Impairment of
Property and Equipment and Other Amortizable Long-Lived Assets Held and Used,
Held for Sale or To Be Disposed of Other Than By Sale Each quarter we evaluate
the carrying value of individual restaurants when the operating results have
reasonably progressed to a point to adequately evaluate the probability of
continuing operating losses or a current expectation that a restaurant will be
sold or otherwise disposed of before the end of its previously estimated useful
life. In making these judgments, we consider the period of time since the
restaurant was opened or remodeled and the trend of operations and expectations
for future sales growth. For restaurants selected for review, we estimate the
future estimated cash flows from operating the restaurant over its estimated
useful life. We make judgments about future same-store sales and the operating
expenses and estimated useful life that we would expect with such level of
same-store sales. We employ a probability-weighted approach wherein we estimate
the restaurants remaining useful life and the effectiveness of future sales
and marketing efforts on same-store sales. In scenarios where same-store sales
are not expected to increase, we generally assume a shorter than previously
estimated useful life. Quarterly, we update our model for estimating future cash
flows based upon experience gained, current intentions about refranchising
restaurants and closures, expected sales trends, internal plans and other
relevant information. As the operations of restaurants opened or remodeled in
recent years progress to the point that their profitability and future
prospects can adequately be evaluated, additional restaurants will become
subject to review and to the possibility that impairments exist. 19




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Same-store sales are the key indicator used to estimate future cash flow for
evaluating recoverability. To provide a sensitivity analysis of the impairment
that could arise were the actual same-store sales of all mature restaurants we
own to grow at only the assumed rate of inflation (same-store sales
sensitivity), the aggregate additional impairment loss would be approximately
$26,967. The inflation rate assumed in making this calculation generally is
2.0% for both revenue and expenses. Typically, restaurants are operated for
three years before we test them for impairment. Also, restaurants typically are
not tested for either two or three years following a major remodel (contingent
upon the extent of the remodel). We believe this provides the restaurant
sufficient time to establish its presence in the market and build a customer
base. If we were to test all restaurants for impairment without regard to the
amount of time the restaurants were operating, the total asset impairment would
increase substantially. Assuming all restaurants were tested under the same
assumptions used in the same-store sales sensitivity analysis, and without
regard to the length of time open (time open sensitivity), we would be required
to record additional impairment losses of approximately $11,944. The following
tables summarize the sensitivity analyses, as classified by restaurants with
positive or negative cash flow during the trailing thirteen periods, for both
same-store sales sensitivity and time open sensitivity:Carls Jr. Net Book
    
    Number of
    
    Impairment UnderValue
    
    Restaurants
    
    Sensitivity TestSame-store sales sensitivityRestaurants with positive cash flow
    
    $
    99,540
    
    
    
    366
    
    
    $
    1,730Restaurants with negative cash flow
    
    
    11,850
    
    
    
    32
    
    
    
    7,488111,390
    
    
    
    398
    
    
    
    9,218Time open sensitivityRestaurants with positive cash flow.
    
    
    1,371
    
    
    
    4
    
    
    
    Restaurants with negative cash flow
    
    
    1,242
    
    
    
    27
    
    
    
    1222,613
    
    
    
    31
    
    
    
    122TotalRestaurants with positive cash flow
    
    
    100,911
    
    
    
    370
    
    
    
    1,730Restaurants with negative cash flow
    
    
    13,092
    
    
    
    59
    
    
    
    7,610$
    114,003
    
    
    
    429
    
    
    $
    9,340
 Hardees Net Book
    
    Number of
    
    Impairment UnderValue
    
    Restaurants
    
    Sensitivity TestSame-store sales sensitivityRestaurants with positive cash flow
    
    $
    150,364
    
    
    
    344
    
    
    $
    4,735Restaurants with negative cash flow
    
    
    18,387
    
    
    
    60
    
    
    
    12,238168,751
    
    
    
    404
    
    
    
    16,973Time open sensitivityRestaurants with positive cash flow
    
    
    117,320
    
    
    
    239
    
    
    
    2,495Restaurants with negative cash flow
    
    
    4,572
    
    
    
    47
    
    
    
    3,646121,892
    
    
    
    286
    
    
    
    6,141TotalRestaurants with positive cash flow
    
    
    267,684
    
    
    
    583
    
    
    
    7,230Restaurants with negative cash flow
    
    
    22,959
    
    
    
    107
    
    
    
    15,884$
    290,643
    
    
    
    690
    
    
    $
    23,114
 20




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 La Salsa Net Book
    
    Number of
    
    Impairment UnderValue
    
    Restaurants
    
    Sensitivity TestSame-store sales sensitivityRestaurants with positive cash flow
    
    $
    7,813
    
    
    
    39
    
    
    $
    284Restaurants with negative cash flow
    
    
    492
    
    
    
    3
    
    
    
    4928,305
    
    
    
    42
    
    
    
    776Time open sensitivityRestaurants with positive cash flow
    
    
    712
    
    
    
    4
    
    
    
    Restaurants with negative cash flow
    
    
    7,774
    
    
    
    16
    
    
    
    5,6818,486
    
    
    
    20
    
    
    
    5,681TotalRestaurants with positive cash flow
    
    
    8,525
    
    
    
    43
    
    
    
    284Restaurants with negative cash flow
    
    
    8,266
    
    
    
    19
    
    
    
    6,173$
    16,791
    
    
    
    62
    
    
    $
    6,457
 Core Concepts Combined Net Book
    
    Number of
    
    Impairment UnderValue
    
    Restaurants
    
    Sensitivity TestSame-store sales sensitivityRestaurants with positive cash flow
    
    $
    257,717
    
    
    
    749
    
    
    $
    6,749Restaurants with negative cash flow
    
    
    30,729
    
    
    
    95
    
    
    
    20,218288,446
    
    
    
    844
    
    
    
    26,967Time open sensitivityRestaurants with positive cash flow
    
    
    119,403
    
    
    
    247
    
    
    
    2,495Restaurants with negative cash flow
    
    
    13,588
    
    
    
    90
    
    
    
    9,449132,991
    
    
    
    337
    
    
    
    11,944TotalRestaurants with positive cash flow
    
    
    377,120
    
    
    
    996
    
    
    
    9,244Restaurants with negative cash flow
    
    
    44,317
    
    
    
    185
    
    
    
    29,667$
    421,437
    
    
    
    1,181
    
    
    $
    38,911
 Impairment of Goodwill At the reporting unit level, goodwill is tested for
impairment at least annually during the first quarter of our fiscal year, and
on an interim basis if an event or circumstance indicates that it is more
likely than not impairment may have occurred. We consider the reporting unit
level to be the brand level since the components (e.g., restaurants) within
each brand have similar economic characteristics, including products and
services, production processes, types or classes of customers and distribution
methods. The impairment, if any, is measured based on the estimated fair value
of the brand. Fair value can be determined based on discounted cash flows,
comparable sales or valuations of other restaurant brands. Impairment occurs
when the carrying amount of goodwill exceeds its estimated fair value. The most
significant assumptions we use in this analysis are those made in estimating
future cash flows. In estimating future cash flows, we use the assumptions in
our strategic plan for items such as same-store sales, store count growth
rates, and the discount rate we consider to be the market discount rate for
acquisitions of restaurant companies and brands. If our assumptions used in
performing the impairment test prove inaccurate, the fair value of the brands
may ultimately prove to be significantly lower, thereby causing the carrying
value to exceed the fair value and indicating an impairment has occurred.
During the first quarter of fiscal year 2005, we performed a valuation of the
Carls Jr. brand. We concluded that the fair value of the net assets of Carls
Jr. exceeded the carrying value, and thus no impairment charge was required. As
of August 9, 2004, we had $22,649 in goodwill recorded on our
consolidated balance sheet,
all of which relates to Carls Jr. 21




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Estimated Liability for Closing Restaurants We make decisions to close
restaurants based on prospects for estimated future profitability, and
sometimes we are forced to close restaurants due to circumstances beyond our
control (e.g., a landlords refusal to negotiate a new lease). Our restaurant
operators evaluate each restaurants performance every quarter. When
restaurants continue to perform poorly, we consider the demographics of the
location, as well as the likelihood of being able to improve an unprofitable
restaurant. Based on the operators judgment, we estimate the future cash
flows. If we determine that the restaurant will not, within a reasonable period
of time, operate at break-even cash flow or be profitable, and we are not
contractually obligated to continue operating the restaurant, we may close the
restaurant. Additionally, franchisees may close restaurants for which we are
the primary lessee. If the franchisee cannot make payments on the lease, we
continue making the lease payments and establish an estimated liability for the
closed restaurant if we decide not to operate it as a company-operated
restaurant. The estimated liability for closing restaurants on properties
vacated is generally based on the term of the lease and the lease termination
fee we expect to pay, as well as estimated maintenance costs until the lease
has been abated. The amount of the estimated liability established is generally
the present value of these estimated future payments. The interest rate used to
calculate the present value of these liabilities is based on our incremental
borrowing rate at the time the liability is established. The related discount
is amortized and shown in facility action charges, net in our Condensed
Consolidated Statements of Operations. A significant assumption used in
determining the amount of the estimated liability for closing restaurants is
the amount of the estimated liability for future lease payments on vacant
restaurants, which we determine based on our brokers (a related party)
assessment of its ability to successfully negotiate early terminations of our
lease agreements with the lessors or sublease the property. Additionally, we
estimate the cost to maintain leased and owned vacant properties until the
lease has been abated or the owned property has been sold. If the costs to
maintain properties increase, or it takes longer than anticipated to sell
properties or sublease or terminate leases, we may need to record additional
estimated liabilities. If the leases on the vacant restaurants are not
terminated or subleased on the terms we used to estimate the liabilities, we
may be required to record losses in future periods. Conversely, if the leases
on the vacant restaurants are terminated or subleased on more favorable terms
than we used to estimate the liabilities, we reverse previously established
estimated liabilities, resulting in an increase in operating income. The
present value of our operating lease payment obligations on all closed
restaurants is approximately $35,514, which represents the discounted amount we
would be required to pay if we are unable to terminate the leases prior to the
terms required in the lease agreements or enter into sublease agreements.
However, it is our experience that we can often terminate those leases for less
than that amount, or sublease the property and, accordingly, we have recorded
an estimated liability for operating lease obligations of $16,489 as of August
9, 2004. Estimated Liability for Self-Insurance We are self-insured for a portion
of our current and prior years losses related to workers compensation,
property and general liability insurance programs. We have obtained stop loss
insurance for individual workers compensation, property and general liability
claims over $500. Insurance liabilities and reserves are accounted for based on
the present value of actuarial estimates of the amount of incurred and unpaid
losses, based approximately on a risk-free interest rate. During the fourth
quarter of fiscal 2004, we adjusted the rate to 4.5% due to prolonged changes
in the interest rate environment. These estimates rely on actuarial
observations of historical claim loss development. The actuary, in determining
the estimated liability, bases the assumptions on the average historical losses
on claims we have incurred. The actual loss development may be better or worse
than the development we estimated in conjunction with the actuary. In that
event, we will modify the reserve. As such, if we experience a higher than
expected number of claims or the costs of claims rise more than expected, then
we may, in conjunction with the actuary, adjust the expected losses upward and
our future self-insurance expenses will rise.

As a result mainly of increases in actuarial estimates of claims
costs for prior periods, during the second quarter of fiscal 2005 we
recorded additional expense of approximately $2,700 to increase our
insurance reserves.

Consistent with trends the
restaurant industry has experienced in recent years, particularly in California
where claim cost trends are among the highest in the country, workers
compensation liability premiums and claim costs continue to increase.
Additionally, after several years of increases, our property and general
liability insurance premiums have leveled. Loss Contingencies We maintain accrued
liabilities for contingencies related to litigation. We account for contingent
obligations in 22




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 accordance with Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies(SFAS 5),which requires that we assess each
contingency to determine estimates of the degree of probability and range of
possible settlement. Those contingencies that are deemed to be probable and
where the amount of such settlement is reasonably estimable are accrued in our
consolidated financial statements. If only a range of loss can be determined,
we accrue to the low end of the range. In accordance with SFAS 5, as of August
9, 2004, we have recorded an accrued liability for contingencies
related to litigation in the amount of $11,755 (See note 9 of notes
to condensed consolidated financial statements herein for further
information).

The assessment of contingencies is highly
subjective and requires judgments about future events. Contingencies are
reviewed at least quarterly to determine the adequacy of the accruals and
related consolidated financial statement disclosure. The ultimate settlement of
contingencies may differ materially from amounts we have accrued in
our condensed
consolidated financial statements. In addition, as of August 9,
2004, we estimated the liability for
those losses related to other litigation claims that we believe are reasonably
possible to result in an adverse outcome, to be in the range of $535 to $895.
In accordance with SFAS 5, we have not recorded a liability for those
losses. Franchised and Licensed Operations We monitor the financial condition of
certain franchisees and record provisions for estimated losses on receivables
when we believe that our franchisees are unable to make their required payments
to us. Each quarter we perform an analysis to develop estimated bad debts for
each franchisee. We then compare the aggregate result of that analysis to the
amount recorded in our consolidated financial statements as the allowance for
doubtful accounts and adjust the allowance as appropriate. Additionally, we
cease accruing royalties and rent income from franchisees that are materially
delinquent in paying or in default for other reasons and reverse any royalties
and rent income accrued during the last 90 days. Over time our assessment of
individual franchisees may change. For instance, we have had some franchisees
who, in the past, we had determined required an estimated loss equal to the
total amount of the receivable, who have paid us in full or established a
consistent record of payments (generally one year) such that we determined an
allowance was no longer required. Depending on the facts and circumstances,
there are a number of different actions we and/or our franchisees may take to
resolve franchise collections issues. These actions may include the purchase of
franchise restaurants by us or by other franchisees, a modification to the
franchise agreement, which may include a provision to defer certain royalty
payments or reduce royalty rates in the future (if royalty rates are not
sufficient to cover our costs of service over the life of the franchise
agreement, we record an estimated loss at the time we modify the agreements), a
restructuring of the franchisees business and/or finances (including the
restructuring of leases for which we are the primary obligee  see further
discussion below) or, if necessary, the termination of the franchise agreement.
The allowance established is based on our assessment of the most probable
course of action that will occur. Many of the restaurants that we sold to Hardees and Carls Jr. franchisees as
part of our refranchising program were on leased sites. Generally, we remain
principally liable for the lease and have entered into a sublease with the
franchisee on the same terms as the primary lease. We account for the sublease
payments received as franchising income. Our payments on the leases are
included within franchised and licensed restaurants and other expense in our
consolidated statements of operations. As of August 9, 2004, the present value
of our total obligation on such lease arrangements with Hardees and Carls Jr.
franchisees was $37,569 and $90,979, respectively. We do not expect Carls Jr.
franchisees to experience the same level of financial difficulties as Hardees
franchisees have encountered in the past or may encounter in the future.
However, we can provide no assurance that this will not occur. In addition to
the sublease arrangements with franchisees described above, we also lease land
and buildings to franchisees. As of August 9, 2004, the net book value of
property under lease to Hardees and Carls Jr. franchisees was $25,345 and
$10,041, respectively. Troubled franchisees are those with whom we have entered
into workout agreements and who may have liquidity problems in the future. In
the event that a troubled franchisee closes a restaurant for which we own the
property, our options are to operate the restaurant as a company-owned
restaurant, lease the property to another tenant or sell the property. These
circumstances would cause us to consider whether the carrying value of the land
and building was impaired. If we determined the property value was impaired, we
would record a charge to operations for the amount the carrying value of the
property exceeds its fair value. As of August 9, 2004, the net book value of
land and buildings under lease to Hardees franchisees that are considered to
be troubled franchisees was approximately $22,804 and is included in the amount
above. During fiscal 2005 or 23




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 thereafter, some of these franchisees may close restaurants and, accordingly,
we may record an impairment loss in connection with some of these closures. In
accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities(SFAS 146), which we adopted on January 1, 2003, an
estimated liability for future lease obligations on restaurants operated by
franchisees for which we are the primary obligee is established on the date the
franchisee closes the restaurant. Also, we record an estimated liability for
subsidized lease payments when we sign a sublease agreement committing us to
the subsidy. The amount of the estimated liability is established using the
methodology described in Estimated Liability for Closing Restaurants above.
Consistent with SFAS 146, we have not established an additional estimated
liability for potential losses not yet incurred. The present value of the lease
obligations for which we remain principally liable and have entered into
subleases with troubled franchisees was approximately $22,232 as of
August 9, 2004 (five troubled
franchisees represent all of this amount). If sales trends/economic conditions
worsen for our franchisees, their financial health may worsen, our collection
rates may decline and we may be required to assume the responsibility for
additional lease payments on franchised restaurants. Entering into restructured
franchise agreements may result in reduced franchise royalty rates in the
future (see discussion above). The likelihood of needing to increase the
estimated liability for future lease obligations is related to the success of
our Hardees concept (i.e., if our Hardees concept results continue to improve
from the execution of our comprehensive plan, we would reasonably expect that
the financial performance of our franchisees would improve). Stock-Based
Compensation As discussed in Notes 1 and 23 of notes to condensed consolidated
financial statements of our Annual Report on Form 10-K for the fiscal year
ended January 31, 2004, we have various stock-based compensation plans that
provide options for certain employees and outside directors to purchase common
shares of stock. We have elected to account for stock-based compensation in
accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,which utilizes the intrinsic value method of
accounting for stock-based compensation, as opposed to using the fair-value
method prescribed in SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS 123). Because of this election, we are required to make certain
disclosures of pro forma net income or loss assuming we had adopted SFAS 123.
We determine the estimated fair value of stock-based compensation on the date
of the grant using the Black-Scholes option-pricing model. The Black-Scholes
option-pricing model requires the input of highly subjective assumptions,
including the historical stock price volatility, expected life of the option
and the risk-free interest rate. A change in one or more of the assumptions
used in the Black-Scholes option-pricing model may result in a material change
to the estimated fair value of the stock-based compensation (see Note 1 of
notes to condensed consolidated financial statements for analysis of the effect
of certain changes in assumptions used to determine the fair value of
stock-based compensation). Valuation Allowance for Net Deferred Tax Assets As
disclosed in Note 20 of notes to consolidated financial statements of our
Annual Report on Form 10-K for the fiscal year ended January 31, 2004, we have
recorded a 100% valuation allowance against our net deferred tax assets. If our
business turnaround is successful, we have been profitable for a number of
years, and our prospects for the realization of our deferred tax assets are
more likely than not, we would reverse our valuation allowance and credit
income tax expense. In assessing the prospects for future profitability, many
of the assessments of same-store sales and cash flows mentioned above become
relevant. When circumstances warrant, we assess the likelihood that our net
deferred tax assets will more likely than not be realized from future taxable
income. As of January 31, 2004, our net deferred tax assets net
to zero due to our  related
valuation allowance of approximately $171,000. Significant Known Events,
Trends, or Uncertainties Expected to Impact Fiscal 2005 Comparisons with Fiscal
2004 The factors discussed below impact comparability of operating performance
for the twelve and twenty-eight weeks ended August 9, 2004, to the twelve and
twenty-eight weeks ended August 11, 2003, or could impact comparisons for the
remainder of fiscal 2005. 24




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Divestiture of Timber Lodge As discussed in Note 8 of notes to condensed
consolidated financial statements, Timber Lodge is accounted for as a
discontinued operation, and we completed the sale of Timber Lodge on
September 3, 2004. The results of Timber Lodge included in our Condensed
Consolidated Statements of Operations as discontinued operations for the twelve
and twenty-eight week periods ended August 9, 2004 and August 11, 2003, are as
follows: Twelve Weeks Ended
    
    Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003
    
    August 9, 2004
    
    August 11, 2003Revenue
    
    $
    8,061
    
    
    $
    9,059
    
    
    $
    21,429
    
    
    $
    23,297Operating income (loss)
    
    
    (387
    )
    
    
    15
    
    
    
    (545
    )
    
    
    (2,343
    )Interest expense
    
    
    4
    
    
    
    12
    
    
    
    10
    
    
    
    24Other income, net
    
    
    87
    
    
    
    18
    
    
    
    88
    
    
    
    274Income tax benefit
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    (26
    )Net income (loss)
    
    $
    (304
    )
    
    $
    46
    
    
    $
    (467
    )
    
    $
    (2,067
    )
 The operating income (loss) for Timber Lodge for the twelve and
twenty-eight weeks ended August 9, 2004 and August
11, 2003, include impairment charges of $281, $898, $0 and $1,566, respectively, to
reduce the carrying value of Timber Lodge to fair value. New Accounting Pronouncements See Note 2 of notes to condensed consolidated
financial statements. Seasonality We operate on a retail accounting calendar.
Our fiscal year has 13 four-week accounting periods and ends the last Monday in
January. The first quarter of our fiscal year has four periods, or 16 weeks.
All other quarters have three periods, or 12 weeks. Fiscal 2005 will be a
53-week fiscal year. The fourth quarter of this fiscal year will have two
accounting periods of four weeks and one accounting period of five weeks. Our
restaurant sales, and therefore our profitability, are subject to seasonal
fluctuations and are traditionally higher during the spring and summer months
because of factors such as increased travel upon school vacations and improved
weather conditions, which affect the publics dining habits.Business Strategy
We
remain focused on vigorously pursuing a comprehensive business strategy. The
main components of our strategy are as follows:  
    
    remain focused on restaurant fundamentals  quality, service and cleanliness;  
    
    offer premium products that compete on quality and taste  not price;  
    
    build on the strength of the Carls Jr. brand, including dual branding opportunities with Green Burrito;  
    
    continue to execute and refine the Hardees Revolution;  
    
    continue to control costs while increasing revenues;  
    
    leverage our infrastructure and marketing presence to build out existing core markets; and  
    
    strengthen our franchise system and pursue further franchising opportunities. Hardees Revolution We completed a comprehensive plan to revitalize
Hardees involving a repositioning of the brand as a premium 25




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 burger restaurant (the
Hardees Revolution) during fiscal 2004. The plan included
menu adjustments and associated advertising and media strategies. This menu,
featuring Angus beef Thickburgers, along with related media, seeks to
distinguish Hardees as a premium burger specialist. Franchise Operations Like
others in the quick-service restaurant industry, some of our franchise
operators experience financial difficulties from time to time with respect to
their operations. Our approach to dealing with financial and operational issues
that arise from these situations is described under Critical Accounting
Policies above, under the heading Franchised and Licensed Operations. Some
franchise operators in the Hardees system have experienced significant
financial problems and, as discussed above, there are a number of potential
resolutions of these financial issues. We continue to work with franchisees in
an attempt to maximize our future franchising income. Our franchising income is
dependent on both the number of restaurants operated by franchisees and their
operational and financial success, such that they can make their royalty and
lease payments to us. Although we quarterly review the allowance for doubtful
accounts and the estimated liability for closed franchise restaurants (see
discussion under Critical Accounting Policies  Franchised and Licensed
Operations), there can be no assurance that the number of franchisees or
franchised restaurants experiencing financial difficulties will not increase
from our current assessments, nor can there be any assurance that we will be
successful in resolving financial issues relating to any specific franchisee.
As of August 9, 2004, our consolidated provision for doubtful accounts of notes
receivable was 68% of the gross balance of notes receivable and our
consolidated provision for doubtful accounts on accounts receivable was 5% of
the gross balance of accounts receivable. During fiscal 2004, we accepted
several notes receivable pursuant to completing workout agreements with several
troubled franchisees. Also, as of August 9, 2004, we have not recognized $4,312
in accounts receivable and $6,422 in notes receivable pertaining to royalty and
rent revenue due from franchisees that are in default under the terms of their
franchise agreements. We still experience specific problems with troubled
franchisees (see Critical Accounting Policies  Franchise and Licensed
Operations) and may be required to increase the amount of our provisions for
doubtful accounts and/or increase the amount of our estimated liability for
future lease obligations. The result of increasing the allowances for doubtful
accounts is an effective royalty rate lower than our standard contractual
royalty rate. The effective royalty rate reflects royalties deemed collectible
as a percent of franchise-generated revenue for all franchisees for which we
are recognizing revenue. For the trailing thirteen periods ended August 9,
2004, the effective royalty rates for domestic Carls Jr. and Hardees
franchised and licensed restaurants were 3.8% and 3.7%, respectively.
For the trailing thirteen periods ended August 11, 2003, the
effective royalty rates for domestic Carls Jr. and
Hardees franchised and licensed restaurants were 3.7% and
3.6%, respectively. 26




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Financial Comparison The table below is a condensed presentation of certain
changes in the components of income (loss), and is designed to facilitate the
discussion of results in this Form 10-Q. (All amounts are approximate and in millions)Second Fiscal Quarter
    
    Year-To_DateCurrent Year:Net income (loss)
    
    $
    (11.4
    )
    
    $
    0.2Prior Year:Net income
    
    $
    6.3
    
    
    $
    0.4Decrease in net income
    
    $
    (17.7
    )
    
    $
    (0.2
    )
 (All amounts are approximate and in millions)Second Quarter
    
    Year-To-DateFiscal Year 2005 vs.
    
    Fiscal Year 2005 vs.Second Quarter
    
    Year-To-DateFiscal Year 2004
    
    Fiscal Year 2004Items causing net income to decrease from the prior year
to the current year:Approximate store margin improvement in Hardees
restaurants owned at August 9, 2004
    
    $
    4.1
    
    
    $
    19.9Approximate store margin improvement in Carls Jr.
restaurants owned at August 9, 2004
    
    
    0.8
    
    
    
    6.2Increase in Hardees and Carls Jr. net franchising
income, excluding provisions for doubtful accounts
    
    
    3.6
    
    
    
    9.9Increase in provision for litigation settlements
    
    
    (8.4
    )
    
    
    (8.2
    )Provision for disposal of interest in corporate aircraft
    
    
    (1.5
    )
    
    
    (1.5
    )Increase in corporate overhead
    
    
    (4.2
    )
    
    
    (10.8
    )Increase in facility action charges
    
    
    (1.1
    )
    
    
    (7.5
    )(Increase) decrease in loss from discontinued operations
    
    
    (0.4
    )
    
    
    1.6Decrease in provisions for doubtful accounts
    
    
    1.7
    
    
    
    4.0Increase in advertising expense, excluding La Salsa and
Green Burrito
    
    
    (0.6
    )
    
    
    (1.8
    )Decrease in interest expense, excluding write-off of
unamortized loan fees
    
    
    0.8
    
    
    
    1.7Increase in
operating losses of La Salsa and Green
Burrito, excluding facility action charges and
provisions for doubtful accounts
    
    
    (1.5
    )
    
    
    (2.0
    )Increase in
write-off of unamortized loan fees
    
    
    (3.8
    )
    
    
    (4.2
    )Premium paid upon redemption of Senior Notes
    
    
    (9.1
    )
    
    
    (9.1
    )Increase in other income, net, excluding premium paid
upon redemption of Senior Notes
    
    
    1.5
    
    
    
    2.8All other, net
    
    
    0.4
    
    
    
    (1.2
    )Decrease in net income
    
    $
    (17.7
    )
    
    $
    (0.2
    )
 27




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Operating Review The following tables are presented to facilitate Managements
Discussion and Analysis and are presented in the same format in which we
present segment information (see Note 7 of notes to condensed consolidated
financial statements). Twelve Weeks Ended August 9, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other (A)
    
    TotalCompany-operated revenue
    
    $
    129,412
    
    
    $
    140,569
    
    
    $
    11,498
    
    
    $
    323
    
    
    $
    281,802Company-operated average weekly unit volume
(actual $- not in thousands)
    
    
    25,195
    
    
    
    17,089
    
    
    
    15,257Company-operated average unit volume (trailing 13
periods)
    
    
    1,255
    
    
    
    838
    
    
    
    736Franchise-operated average unit volume (trailing
13 periods)
    
    
    1,120
    
    
    
    887
    
    
    
    798Average check (actual $- not in thousands)(B)
    
    
    5.92
    
    
    
    4.68
    
    
    
    9.76Company-operated same-store sales increase (C)
    
    
    8.1
    %
    
    
    6.2
    %
    
    
    4.6
    %Company-operated same-store transactions increase
(decrease) (D)
    
    
    1.6
    %
    
    
    (0.7
    )%
    
    
    0.8
    %Franchise-operated same-store sales increase (C)
    
    
    7.6
    %
    
    
    4.8
    %
    
    
    3.2
    %Operating costs as a % of company-operated revenue:Food and packaging
    
    
    29.5
    %
    
    
    30.2
    %
    
    
    27.0
    %Payroll and employee benefits
    
    
    28.9
    %
    
    
    33.7
    %
    
    
    37.2
    %Occupancy and other operating costs
    
    
    20.7
    %
    
    
    21.6
    %
    
    
    33.7
    %Restaurant level margin
    
    
    20.9
    %
    
    
    14.5
    %
    
    
    2.1
    %Advertising as a percentage of company-operated
revenue
    
    
    6.8
    %
    
    
    5.9
    %
    
    
    2.7
    %Franchising revenue:Royalties
    
    $
    5,764
    
    
    $
    10,833
    
    
    $
    400
    
    
    $
    79
    
    
    $
    17,076Distribution centers
    
    
    41,129
    
    
    
    4,416
    
    
    
    
    
    
    
    
    
    
    
    45,545Rent
    
    
    4,824
    
    
    
    2,640
    
    
    
    
    
    
    
    
    
    
    
    7,464Retail sales of variable interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,483
    
    
    
    1,483Other
    
    
    217
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    370Total franchising revenue
    
    
    51,934
    
    
    
    18,042
    
    
    
    400
    
    
    
    1,562
    
    
    
    71,938Franchising expense:Administrative expense (including provision for
bad debts)
    
    
    644
    
    
    
    418
    
    
    
    202
    
    
    
    
    
    
    
    1,264Distribution centers
    
    
    39,778
    
    
    
    4,318
    
    
    
    
    
    
    
    
    
    
    
    44,096Rent & other occupancy
    
    
    4,114
    
    
    
    1,620
    
    
    
    
    
    
    
    
    
    
    
    5,734Operating costs of variable interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,463
    
    
    
    1,463Total franchising expense
    
    
    44,536
    
    
    
    6,356
    
    
    
    202
    
    
    
    1,463
    
    
    
    52,557Net franchising income
    
    $
    7,398
    
    
    $
    11,686
    
    
    $
    198
    
    
    $
    99
    
    
    $
    19,381Facility action charges, net
    
    $
    188
    
    
    $
    1,195
    
    
    $
    567
    
    
    $
    5
    
    
    $
    1,955Operating income (loss)
    
    $
    7,190
    
    
    $
    3,092
    
    
    $
    (1,914
    )
    
    $
    33
    
    
    $
    8,401
 28




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Twelve Weeks Ended August 11, 2003Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other (A)
    
    TotalCompany-operated revenue
    
    $
    121,792
    
    
    $
    138,611
    
    
    $
    10,439
    
    
    $
    326
    
    
    $
    271,168Company-operated average weekly unit volume
(actual $- not in thousands)
    
    
    22,940
    
    
    
    15,838
    
    
    
    14,944Company-operated average unit volume
(trailing 13 periods)
    
    
    1,158
    
    
    
    758
    
    
    
    726Franchise-operated average unit volume
(trailing 13 periods)
    
    
    1,060
    
    
    
    808
    
    
    
    640Average check (actual $- not in thousands)(B)
    
    
    5.55
    
    
    
    4.38
    
    
    
    9.20Company-operated same-store sales increase
(decrease) (C)
    
    
    2.3
    %
    
    
    1.0
    %
    
    
    (2.0
    )%Company-operated same-store transactions
decrease (D)
    
    
    (1.0
    )%
    
    
    (7.0
    )%
    
    
    (3.0
    )%Franchise-operated same-store sales increase
(decrease) (C)
    
    
    (1.3
    )%
    
    
    (1.8
    )%
    
    
    4.5
    %Operating costs as a % of company-operated
revenue:Food and packaging
    
    
    28.5
    %
    
    
    31.3
    %
    
    
    25.9
    %Payroll and employee benefits
    
    
    28.5
    %
    
    
    33.8
    %
    
    
    30.2
    %Occupancy and other operating costs
    
    
    21.2
    %
    
    
    23.4
    %
    
    
    33.1
    %Restaurant level margin
    
    
    21.8
    %
    
    
    11.5
    %
    
    
    10.8
    %Advertising as a percentage of
company-operated revenue
    
    
    6.4
    %
    
    
    6.2
    %
    
    
    1.0
    %Franchising revenue:Royalties
    
    $
    5,078
    
    
    $
    9,192
    
    
    $
    393
    
    
    $
    62
    
    
    $
    14,725Distribution centers
    
    
    36,342
    
    
    
    4,209
    
    
    
    
    
    
    
    
    
    
    
    40,551Rent
    
    
    4,927
    
    
    
    2,080
    
    
    
    
    
    
    
    
    
    
    
    7,007Other
    
    
    162
    
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    268Total franchising revenue
    
    
    46,509
    
    
    
    15,587
    
    
    
    393
    
    
    
    62
    
    
    
    62,551Franchising expense:Administrative expense (including provision
for bad debts)
    
    
    977
    
    
    
    1,511
    
    
    
    128
    
    
    
    
    
    
    
    2,616Distribution centers
    
    
    35,341
    
    
    
    3,891
    
    
    
    
    
    
    
    
    
    
    
    39,232Rent & other occupancy
    
    
    4,882
    
    
    
    1,777
    
    
    
    
    
    
    
    
    
    
    
    6,659Total franchising expense
    
    
    41,200
    
    
    
    7,179
    
    
    
    128
    
    
    
    
    
    
    
    48,507Net franchising income
    
    $
    5,309
    
    
    $
    8,408
    
    
    $
    265
    
    
    $
    62
    
    
    $
    14,044Facility action charges (gains), net
    
    $
    (633
    )
    
    $
    1,293
    
    
    $
    192
    
    
    $
    (21
    )
    
    $
    831Operating income (loss)
    
    $
    15,548
    
    
    $
    (326
    )
    
    $
    27
    
    
    $
    (33
    )
    
    $
    15,216
 29




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Twenty-eight Weeks Ended August 9, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other (A)
    
    TotalCompany-operated revenue
    
    $
    299,621
    
    
    $
    321,587
    
    
    $
    25,700
    
    
    $
    766
    
    
    $
    647,674Company-operated average weekly unit volume
(actual $- not in thousands)
    
    
    25,033
    
    
    
    16,625
    
    
    
    14,803Average check (actual $- not in thousands)(B)
    
    
    5.85
    
    
    
    4.62
    
    
    
    9.62Company-operated same-store sales increase (C)
    
    
    9.0
    %
    
    
    9.3
    %
    
    
    5.3
    %Company-operated same-store transactions increase
(D)
    
    
    1.7
    %
    
    
    0.6
    %
    
    
    1.8
    %Franchise-operated same-store sales increase (C)
    
    
    8.0
    %
    
    
    7.7
    %
    
    
    3.8
    %Operating costs as a % of company-operated revenue:Food and packaging
    
    
    28.9
    %
    
    
    29.7
    %
    
    
    27.4
    %Payroll and employee benefits
    
    
    28.4
    %
    
    
    33.4
    %
    
    
    35.0
    %Occupancy and other operating costs
    
    
    21.0
    %
    
    
    21.4
    %
    
    
    33.4
    %Restaurant level margin
    
    
    21.7
    %
    
    
    15.5
    %
    
    
    4.2
    %Advertising as a percentage of company- operated
revenue
    
    
    6.6
    %
    
    
    5.9
    %
    
    
    2.7
    %Franchising revenue:Royalties
    
    $
    13,345
    
    
    $
    24,171
    
    
    $
    924
    
    
    $
    183
    
    
    $
    38,623Distribution centers
    
    
    93,386
    
    
    
    9,653
    
    
    
    
    
    
    
    
    
    
    
    103,039Rent
    
    
    11,505
    
    
    
    5,852
    
    
    
    
    
    
    
    
    
    
    
    17,357Retail sales of variable interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,483
    
    
    
    1,483Other
    
    
    582
    
    
    
    269
    
    
    
    33
    
    
    
    
    
    
    
    884Total franchising revenue
    
    
    118,818
    
    
    
    39,945
    
    
    
    957
    
    
    
    1,666
    
    
    
    161,386Franchising expense:Administrative expense (including provision for
bad debts)
    
    
    1,996
    
    
    
    1,701
    
    
    
    653
    
    
    
    
    
    
    
    4,350Distribution centers
    
    
    90,765
    
    
    
    9,728
    
    
    
    
    
    
    
    
    
    
    
    100,493Rent & other occupancy
    
    
    9,411
    
    
    
    3,827
    
    
    
    
    
    
    
    
    
    
    
    13,238Operating costs of variable interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,463
    
    
    
    1,463Total franchising expense
    
    
    102,172
    
    
    
    15,256
    
    
    
    653
    
    
    
    1,463
    
    
    
    119,544Net franchising income
    
    $
    16,646
    
    
    $
    24,689
    
    
    $
    304
    
    
    $
    203
    
    
    $
    41,842Facility action charges, net
    
    $
    1,726
    
    
    $
    5,843
    
    
    $
    1,766
    
    
    $
    57
    
    
    $
    9,392Operating income (loss)
    
    $
    28,695
    
    
    $
    7,069
    
    
    $
    (4,327
    )
    
    $
    189
    
    
    $
    31,626
 30




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Twenty-eight Weeks Ended August 11, 2003Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other (A)
    
    TotalCompany-operated revenue
    
    $
    280,076
    
    
    $
    306,224
    
    
    $
    23,135
    
    
    $
    775
    
    
    $
    610,210Company-operated average weekly unit volume
(actual $- not in thousands)
    
    
    22,618
    
    
    
    14,980
    
    
    
    14,341Average check (actual $- not in thousands)(B)
    
    
    5.44
    
    
    
    4.25
    
    
    
    9.10Company-operated same-store sales increase
(decrease) (C)
    
    
    0.8
    %
    
    
    (1.7
    )%
    
    
    (2.0
    )%Company-operated same-store transactions
decrease (D)
    
    
    (1.7
    )%
    
    
    (8.7
    )%
    
    
    (4.2
    )%Franchise-operated same-store sales increase
(decrease) (C)
    
    
    (1.5
    )%
    
    
    (4.1
    )%
    
    
    1.9
    %Operating costs as a % of company-operated
revenue:Food and packaging
    
    
    28.4
    %
    
    
    31.1
    %
    
    
    26.1
    %Payroll and employee benefits
    
    
    28.8
    %
    
    
    35.8
    %
    
    
    30.9
    %Occupancy and other operating costs
    
    
    21.6
    %
    
    
    23.8
    %
    
    
    32.2
    %Restaurant level margin
    
    
    21.2
    %
    
    
    9.3
    %
    
    
    10.8
    %Advertising as a percentage of
company-operated revenue
    
    
    6.4
    %
    
    
    6.3
    %
    
    
    2.1
    %Franchising revenue:Royalties
    
    $
    11,647
    
    
    $
    19,665
    
    
    $
    836
    
    
    $
    172
    
    
    $
    32,320Distribution centers
    
    
    82,921
    
    
    
    11,067
    
    
    
    
    
    
    
    
    
    
    
    93,988Rent
    
    
    12,023
    
    
    
    4,199
    
    
    
    
    
    
    
    
    
    
    
    16,222Other
    
    
    357
    
    
    
    180
    
    
    
    
    
    
    
    
    
    
    
    537Total franchising revenue
    
    
    106,948
    
    
    
    35,111
    
    
    
    836
    
    
    
    172
    
    
    
    143,067Franchising expense:Administrative expense (including provision
for bad debts)
    
    
    2,334
    
    
    
    3,066
    
    
    
    264
    
    
    
    
    
    
    
    5,664Distribution centers
    
    
    80,770
    
    
    
    11,257
    
    
    
    
    
    
    
    
    
    
    
    92,027Rent & other occupancy
    
    
    11,654
    
    
    
    4,071
    
    
    
    
    
    
    
    
    
    
    
    15,725Total franchising expense
    
    
    94,758
    
    
    
    18,394
    
    
    
    264
    
    
    
    
    
    
    
    113,416Net franchising income
    
    $
    12,190
    
    
    $
    16,717
    
    
    $
    572
    
    
    $
    172
    
    
    $
    29,651Facility action charges (gains), net
    
    $
    (303
    )
    
    $
    2,749
    
    
    $
    192
    
    
    $
    (745
    )
    
    $
    1,893Operating income (loss)
    
    $
    33,873
    
    
    $
    (9,657
    )
    
    $
    (161
    )
    
    $
    490
    
    
    $
    24,545
 (A) Other consists of a few Green Burrito stores that are not dual-branded
and a consolidated variable interest Hardees franchise entity over which we do
not exercise decision-making authority. Additionally, amounts that we do not
believe would be proper to allocate to the operating segments are included in
Other. (B) Average check represents total restaurant sales divided by total
transactions for any given period. The average check is viewed in conjunction
with same-store sales and same-store transactions, as defined below. This
indicator, when viewed with other measures, may illustrate revenue growth or
decline resulting from a change in menu or price offering. When we introduce
menu items or pricing initiatives with higher or lower price points than the
existing menu base, the average check may reflect the benefit or impact from
these new items or pricing on the average price paid by the consumer. (C)
Same-store sales is a widely used performance indicator in our industry. This
indicator is a measure of revenue growth on the existing comparable store base
of a multi-unit chain company such as ours and is measured as a percentage
variance over the same fiscal period in the prior year. Same-store sales can
help illustrate how competitive forces and external economic conditions benefit
or impact us, as well as any benefit from the diverse value propositions and
marketing initiatives undertaken by us. However, same-store sales must be
viewed in light of numerous factors which may have occurred in either the prior
or current fiscal period and can make same-store sales comparisons less
indicative of actual performance. Such factors can include, among other
things, weather conditions, successful or unsuccessful
promotions, successful or unsuccessful advertising campaigns, new product
introductions, competitive activity, and/or holiday alignments. In calculating
same-store sales, we include restaurants open for 14 full accounting periods,
which allows for a year-over-year comparison. 31




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 (D) Same-store transactions represent the number of individual sales recorded
at each of our restaurants but are not a measure of the number of customers or
products sold at any such restaurants as any given transaction may involve one
or more individuals or products. Same-store transactions is viewed on the same basis as
same-store sales above and is another widely used performance indicator in our
industry. This indicator is a measure of the number of sales recorded in the
existing comparable store base and is measured as a percentage variance over
the same fiscal period in the prior year. Same-store transactions is another
measure of the effects of competitive forces and economic conditions on
consumer behavior and resulting benefit, or impact, to us. Same-store transactions also
reflect any benefit or detriment from the diverse value propositions and
marketing initiatives undertaken by us. However, same-store transactions also
must be viewed in light of numerous factors which may have occurred in either
the prior or current fiscal period and can make same-store transaction
comparisons less indicative of actual performance. Such factors can include,
among other things, weather conditions, successful or
unsuccessful promotions, successful or unsuccessful advertising campaigns, new
product introductions, competitive activity, and/or holiday alignments.
Premium product pricing may also have a negative impact on transactions while
positively impacting sales and/or profits. Conversely, value product pricing
or discounting may have a negative impact on profits but a positive impact on
transactions. Presentation of Non-GAAP Measures EBITDA EBITDA is a typical
non-GAAP measure (i.e., a measure calculated and presented on the basis of
methodologies other than in accordance with accounting principles generally
accepted in the United States of America, or GAAP) for companies that issue
public debt and a measure used by the lenders under our bank credit facility.
We believe EBITDA is useful to our investors as an indicator of earnings
available to service debt. EBITDA is not a recognized term under GAAP and does
not purport to be an alternative to income from operations, an indicator of
cash flow from operations or a measure of liquidity. We calculate EBITDA as
earnings before operations of discontinued segment, interest expense, income taxes,
depreciation and amortization, facility action charges, premiums on early
redemption of debt, impairment of goodwill and impairment of assets held for
sale. Because not all companies calculate EBITDA identically, this presentation
of EBITDA may not be comparable to similarly titled measures of other
companies. Additionally, we believe EBITDA is a more meaningful indicator of
earnings available to service debt when certain charges, such as impairment of
goodwill and facility action charges, are excluded from income (loss) from
continuing operations. EBITDA is not intended to be a measure of free cash flow
for managements discretionary use, as it does not consider certain cash
requirements such as interest expense, income taxes and debt service payments
and cash costs arising from facility actions. Twelve Weeks Ended August 9, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalNet income (loss)
    
    $
    6,301
    
    
    $
    (15,859
    )
    
    $
    (1,943
    )
    
    $
    68
    
    
    $
    (11,433
    )Loss from
operations of discontinued segment, excluding impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    23Interest expense
    
    
    1,102
    
    
    
    10,857
    
    
    
    (1
    )
    
    
    13
    
    
    
    11,971Income tax expense
    
    
    44
    
    
    
    14
    
    
    
    
    
    
    
    124
    
    
    
    182Depreciation and amortization
    
    
    5,314
    
    
    
    8,389
    
    
    
    927
    
    
    
    41
    
    
    
    14,671Facility action charges, net
    
    
    188
    
    
    
    1,195
    
    
    
    567
    
    
    
    5
    
    
    
    1,955Premium on early redemption of Senior Notes
    
    
    
    
    
    
    9,126
    
    
    
    
    
    
    
    
    
    
    
    9,126Impairment of Timber Lodge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281
    
    
    
    281EBITDA
    
    $
    12,949
    
    
    $
    13,722
    
    
    $
    (450
    )
    
    $
    555
    
    
    $
    26,776
 Twelve Weeks Ended August 11, 2003Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalNet income (loss)
    
    $
    14,475
    
    
    $
    (8,256
    )
    
    $
    33
    
    
    $
    3
    
    
    $
    6,255Income from
operations of discontinued segment, excluding impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    (46
    )Interest expense
    
    
    1,345
    
    
    
    7,726
    
    
    
    (32
    )
    
    
    (15
    )
    
    
    9,024Income tax expense
    
    
    2
    
    
    
    27
    
    
    
    
    
    
    
    182
    
    
    
    211Depreciation and amortization
    
    
    5,824
    
    
    
    8,294
    
    
    
    863
    
    
    
    42
    
    
    
    15,023Facility action charges, net
    
    
    (633
    )
    
    
    1,293
    
    
    
    192
    
    
    
    (21
    )
    
    
    831EBITDA
    
    $
    21,013
    
    
    $
    9,084
    
    
    $
    1,056
    
    
    $
    145
    
    
    $
    31,298
 32




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Twenty-eight Weeks
Ended August 9, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalNet income (loss)
    
    $
    26,436
    
    
    $
    (21,707
    )
    
    $
    (4,398
    )
    
    $
    (86
    )
    
    $
    245Income from
operations of discontinued segment, excluding
impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (431
    )
    
    
    (431
    )Interest expense
    
    
    2,783
    
    
    
    20,927
    
    
    
    (25
    )
    
    
    14
    
    
    
    23,699Income tax expense
    
    
    103
    
    
    
    39
    
    
    
    1
    
    
    
    308
    
    
    
    451Depreciation and amortization
    
    
    12,244
    
    
    
    19,722
    
    
    
    2,192
    
    
    
    95
    
    
    
    34,253Facility action charges, net
    
    
    1,726
    
    
    
    5,843
    
    
    
    1,766
    
    
    
    57
    
    
    
    9,392Premium on early redemption of Senior Notes
    
    
    
    
    
    
    9,126
    
    
    
    
    
    
    
    
    
    
    
    9,126Impairment of Timber Lodge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    898
    
    
    
    898EBITDA
    
    $
    43,292
    
    
    $
    33,950
    
    
    $
    (464
    )
    
    $
    855
    
    
    $
    77,633
 Twenty-eight Weeks Ended August 11, 2003Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalNet income (loss)
    
    $
    31,490
    
    
    $
    (29,204
    )
    
    $
    (159
    )
    
    $
    (1,688
    )
    
    $
    439Loss from
operations of discontinued segment, excluding impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501
    
    
    
    501Interest expense
    
    
    2,880
    
    
    
    18,357
    
    
    
    (27
    )
    
    
    (8
    )
    
    
    21,202Income tax expense
    
    
    57
    
    
    
    61
    
    
    
    
    
    
    
    312
    
    
    
    430Depreciation and amortization
    
    
    13,377
    
    
    
    18,680
    
    
    
    1,913
    
    
    
    98
    
    
    
    34,068Facility action charges, net
    
    
    (303
    )
    
    
    2,749
    
    
    
    192
    
    
    
    (745
    )
    
    
    1,893Impairment of Timber Lodge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,566
    
    
    
    1,566EBITDA
    
    $
    47,501
    
    
    $
    10,643
    
    
    $
    1,919
    
    
    $
    36
    
    
    $
    60,099
 The following table reconciles EBITDA (a non-GAAP measure) to cash flow
provided by operating activities (a GAAP measure): Twelve Weeks Ended
    
    Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003
    
    August 9, 2004
    
    August 11, 2003Net cash provided by operating activities
    
    $
    20,165
    
    
    $
    26,314
    
    
    $
    67,611
    
    
    $
    44,742Interest expense
    
    
    11,971
    
    
    
    9,024
    
    
    
    23,699
    
    
    
    21,202Income tax expense
    
    
    182
    
    
    
    211
    
    
    
    451
    
    
    
    430Premium on early redemption of Senior Notes
    
    
    9,126
    
    
    
    
    
    
    
    9,126
    
    
    
    Amortization of loan fees
    
    
    (952
    )
    
    
    (1,123
    )
    
    
    (1,994
    )
    
    
    (2,536
    )Recovery of (provision for) losses on
accounts and notes receivable
    
    
    1,550
    
    
    
    (128
    )
    
    
    1,792
    
    
    
    (2,192
    )Loss on
sales of property and
equipment, capital leases and
extinguishment of debts
    
    
    (5,043
    )
    
    
    (306
    )
    
    
    (6,341
    )
    
    
    (89
    )Other non-cash credits
    
    
    (182
    )
    
    
    150
    
    
    
    483
    
    
    
    167Net change in refundable income taxes
    
    
    425
    
    
    
    (497
    )
    
    
    421
    
    
    
    (639
    )Change in estimated liability for closing
restaurants and estimated liability for
self-insurance
    
    
    (210
    )
    
    
    1,720
    
    
    
    3,298
    
    
    
    4,956Net change
in accounts receivable, inventories,
prepaid expenses and other current assets
    
    
    3,306
    
    
    
    5,280
    
    
    
    (6,709
    )
    
    
    (5,722
    )Net change in accounts payable and other
current and long term liabilities
    
    
    (13,842
    )
    
    
    (9,398
    )
    
    
    (14,456
    )
    
    
    (436
    )EBITDA from
operations of discontinued segment
    
    
    (19
    )
    
    
    32
    
    
    
    441
    
    
    
    (503
    )Cash  provided to
discontinued segment
    
    
    280
    
    
    
    51
    
    
    
    252
    
    
    
    216EBITDA,
including operations of discontinued segment
    
    
    26,757
    
    
    
    31,330
    
    
    
    78,074
    
    
    
    59,596Less: EBITDA
from operations of discontinued segment
    
    
    19
    
    
    
    (32
    )
    
    
    (441
    )
    
    
    503EBITDA
    
    $
    26,776
    
    
    $
    31,298
    
    
    $
    77,633
    
    
    $
    60,099
 Carls Jr. During the twelve weeks ended August 9, 2004, we opened two Carls
Jr. restaurants. Carls Jr. franchisees and licensees opened four restaurants.
During the twenty-eight weeks ended August 9, 2004, we opened four Carls Jr.
restaurants. Carls Jr. franchisees and licensees opened nine restaurants. The
following tables show the change in the 33




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Carls Jr. restaurant portfolio, as well as the change in revenue for the
current quarter and year-to-date: Restaurant Portfolio
    
    RevenueSecond Fiscal Quarter
    
    Second Fiscal Quarter
    
    Year-To-Date2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeCompany
    
    
    429
    
    
    
    442
    
    
    
    (13
    )
    
    $
    129,412
    
    
    $
    121,792
    
    
    $
    7,620
    
    
    $
    299,621
    
    
    $
    280,076
    
    
    $
    19,545Franchised and
licensed(a)
    
    
    587
    
    
    
    558
    
    
    
    29
    
    
    
    51,934
    
    
    
    46,509
    
    
    
    5,425
    
    
    
    118,818
    
    
    
    106,948
    
    
    
    11,870Total
    
    
    1,016
    
    
    
    1,000
    
    
    
    16
    
    
    $
    181,346
    
    
    $
    168,301
    
    
    $
    13,045
    
    
    $
    418,439
    
    
    $
    387,024
    
    
    $
    31,415
 (a) Includes $41,129, $36,342, $93,386 and $82,921 of revenues from
distribution of food, packaging and supplies to franchised and licensed
restaurants during the twelve weeks ended August 9, 2004, and August 11, 2003,
and the twenty-eight weeks ended August 9, 2004, and August 11, 2003,
respectively. Company-Operated Restaurants Revenue from company-operated Carls
Jr. restaurants increased $7,620, or 6.3%, to $129,412 during the twelve weeks
ended August 9, 2004, as compared to the twelve weeks ended August 11, 2003.
This increase resulted primarily from an 8.1% increase in same-store sales,
partially offset by the impact of selling 15 company stores located in Arizona
to a franchisee in the fourth quarter of fiscal 2004. During the twenty-eight
week period ended August 9, 2004, revenue from company-operated Carls Jr.
restaurants increased $19,545, or 7.0%, to $299,621. We believe the launch of
several new products during the current fiscal year, including The Low Carb Six
Dollar Burger, the Low Carb Breakfast Bowl, the Low Carb Charbroiled Chicken
Club and two new entrée salads, as well as conversion to 100 percent Angus
beef in The Six Dollar Burger , contributed to the growth in same-store sales.
Promotional item sales also increased $1,375 during the twenty-eight weeks
ended August 9, 2004, as compared to the prior year comparable period,
primarily due to a current year bobblehead promotion featuring members of the
National Basketball Associations (NBA) Los Angeles Lakers, which was broader
than a similar promotion featuring members of the NBAs Sacramento Kings in the
prior year. The changes in the restaurant-level margin are explained as follows: Twelve
    
    Twenty-eightWeeks Ended
    
    Weeks EndedAugust 9, 2004
    
    August 9, 2004Restaurant-level margin for the period ended August 11, 2003
    
    
    21.8
    %
    
    
    21.2
    %Increase in food and packaging costs
    
    
    (1.0
    )
    
    
    (0.5
    )Increase in workers compensation expense
    
    
    (0.9
    )
    
    
    (0.4
    )Decrease in labor costs, excluding workers compensation
    
    
    0.5
    
    
    
    0.7Increase in general liability insurance expense
    
    
    (0.4
    )
    
    
    Decrease in utilities expense
    
    
    0.3
    
    
    
    0.2Decrease in depreciation, rent, property taxes and licenses
    
    
    0.3
    
    
    
    0.2Decrease in repair and maintenance expense
    
    
    0.2
    
    
    
    0.2Increase in cost of promotional items
    
    
    
    
    
    
    (0.3
    )Other, net
    
    
    0.1
    
    
    
    0.4Restaurant-level margin for the period ended August 9, 2004
    
    
    20.9
    %
    
    
    21.7
    %
 Food and packaging costs as a percent of sales increased during the twelve and
twenty-eight weeks ended August 9, 2004, as compared to the prior year periods,
due primarily to increases in the cost of several commodities, primarily beef,
during the second quarter of fiscal 2005. Workers compensation expense as a percent of sales increased during the twelve
and twenty-eight weeks ended August 9, 2004, as compared to the prior year
periods, mainly as a result of an approximate $1,100 charge recorded in the
current year second fiscal quarter to reflect an increase in the actuarial
estimate of claims losses in prior policy periods. Labor costs, excluding workers compensation, as a percent of sales decreased
during the twelve and twenty-eight weeks ended August 9, 2004, as compared to
the twelve and twenty-eight weeks ended August 11, 2003, due mainly to benefits
of sales leverage. 34




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 General liability insurance expense increased during the twelve weeks ended
August 9, 2004, from the comparable prior year period, primarily due to an
approximate $500 credit recorded in the prior year as a result of actuarial
analysis of our general liability insurance accrual. The current year
actuarial analysis yielded an insignificant change. Since the beginning of
fiscal 2004, loss development on general liability claims for recent fiscal
years has been less than previously estimated. Utilities expense as a percent of sales decreased during the twelve and
twenty-eight weeks ended August 9, 2004, as compared to the prior year, due
mainly to benefits of sales leverage, partially offset by recording a decrease
to estimated utility costs in the prior year first fiscal quarter upon
finalizing contract terms with a new fixed-rate energy provider. Depreciation, rent, property taxes and licenses expenses, as well as repair and
maintenance expense, as percents of sales, decreased during the twelve and
twenty-eight weeks ended August 9, 2004, from the comparable prior year period,
due mainly to sales leverage. Promotional items costs as a percent of sales increased during the twenty-eight
weeks ended August 9, 2004, due to the promotional items sales increase noted
above. On October 5, 2003, the Governor of California signed Senate Bill 2, known as
the Health Insurance Act of 2003 (SB2), which will require certain
California businesses either to pay at least 80% of the premiums for a basic
individual health insurance package for its employees who work over 100 hours
per month and their dependents, or to pay a fee into a state pool for the
purchase of health insurance for uninsured, low-income workers. California
businesses that employ 200 or more employees must comply with the new law
beginning on January 1, 2006. We currently do not offer health insurance
benefits to our hourly employees. SB2 is currently being challenged on several
fronts. In particular, Proposition 72, a measure that will be included in the
State of California election ballot on November 2, 2004, will allow a majority
of California voters to halt the implementation of SB2. If SB2 is halted by
Proposition 72, employers would be allowed to continue to choose whether to
provide health insurance for their employees and dependents. We continue to
evaluate the status and impact of this legislation, which could be material to
our results of operations. Franchised and Licensed Restaurants Franchised and licensed restaurant revenues increased $5,425, or 11.7%, to
$51,934 during the twelve weeks ended August 9, 2004, as compared to the twelve
weeks ended August 11, 2003. The increase is comprised mainly of an increase of
$4,787, or 13.2%, in food, paper and supplies sales to franchisees, resulting
from the increase in the franchise store base over the comparable prior year
period, overall commodity cost increases passed through to franchisees and the
food purchasing volume impact of the 7.6% increase in franchise same-store
sales. For similar reasons, franchise royalties also grew $686, or 13.5%,
during the twelve weeks ended August 9, 2004, as compared to the twelve weeks
ended August 11, 2003. Franchised and licensed restaurant revenues increased $11,870, or 11.1%, to
$118,818 during the twenty-eight weeks ended August 9, 2004, as compared to the
twenty-eight weeks ended August 11, 2003. The increase is comprised mainly of
an increase of $10,465, or 12.6%, in food, paper and supplies sales to
franchisees and an increase of $1,698, or 14.6%, in franchise royalties, both
for reasons similar to those noted in the second fiscal quarter discussion
above. Net franchising income increased $2,089, or 39.3%, during the twelve weeks
ended August 9, 2004, as compared to the twelve weeks ended August 11, 2003,
and increased $4,456, or 36.6%, during the twenty-eight weeks ended August 9,
2004, as compared to the twenty-eight weeks ended August 11, 2003. These
increases are primarily due to increased profits from subleasing facilities to
franchisees and the increase in franchise royalties. Although not required to do so, approximately 89% of Carls Jr. franchised and
licensed restaurants purchase food, paper and other supplies from us. 35




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Hardees During the twelve weeks ended August 9, 2004, we closed two Hardees
restaurants. During the same period, Hardees franchisees and licensees opened
one restaurant and closed 17 restaurants. For the twenty-eight weeks ended
August 9, 2004, we closed 32 Hardees restaurants and opened one restaurant.
During the same period, Hardees franchisees and licensees opened three
restaurants and closed 32 restaurants. The following table shows the change in
the Hardees restaurant portfolio, as well as the change in revenue for the
current quarter and year-to-date: Restaurant Portfolio
    
    RevenueSecond Fiscal Quarter
    
    Second Fiscal Quarter
    
    Year-To-Date2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeCompany
    
    
    690
    
    
    
    729
    
    
    
    (39
    )
    
    $
    140,569
    
    
    $
    138,611
    
    
    $
    1,958
    
    
    $
    321,587
    
    
    $
    306,224
    
    
    $
    15,363Franchised and
licensed
    
    
    1,377
    
    
    
    1,425
    
    
    
    (48
    )
    
    
    18,042
    
    
    
    15,587
    
    
    
    2,455
    
    
    
    39,945
    
    
    
    35,111
    
    
    
    4,834Total
    
    
    2,067
    
    
    
    2,154
    
    
    
    (87
    )
    
    $
    158,611
    
    
    $
    154,198
    
    
    $
    4,413
    
    
    $
    361,532
    
    
    $
    341,335
    
    
    $
    20,197
 During the fourth quarter of fiscal 2003, we introduced a new menu at Hardees
pursuant to our Hardees Revolution strategy. We determined that significant
management and staff training would be required to properly execute the new
menu. We also invested in additional labor in the restaurants to ensure
outstanding customer service during the training stage of the Hardees
Revolution. These investments significantly impacted our financial results
during the twelve and twenty-eight week periods ended August 11, 2003. In
addition, the deletion of up to 40 menu items pursuant to the Hardees
Revolution strategy negatively affected sales at both company-operated and
franchised Hardees restaurants through the first half of fiscal 2004. As the
training, implementation and introduction of the Hardees Revolution were
completed in early fiscal 2004, we have adjusted our staffing levels. We have also experienced significant sales trend improvements
since the completion of Hardees Revolution rollout, including same-store sales
growth at company-operated restaurants for 14 consecutive four-week reporting
periods through August 9, 2004. Company-Operated Restaurants Same-store sales for company-operated Hardees restaurants increased 6.2%
during the twelve weeks and 9.3% during the twenty-eight weeks ended August 9,
2004. We believe this increase reflects positive consumer reception of the
Hardees Revolution menu changes. A 4% price increase implemented at the
beginning of the fourth quarter of fiscal 2004 to address cost pressures,
particularly the cost of beef, may have also contributed to our same-store sales growth. Revenue from company-operated Hardees restaurants increased $1,958, or 1.4%,
during the twelve weeks ended August 9, 2004, as compared to the twelve weeks
ended August 11, 2003. This increase is due to the increase in same-store sales
discussed above, partially offset by the closure of 30 restaurants during the
first quarter of fiscal 2005 that did not adequately respond to the Hardees
Revolution strategy and other minor store closure activity. The average check
during the twelve weeks ended August 9, 2004 was $4.68, as compared to $4.38
during the twelve weeks ended August 11, 2003. The increase in
average check is primarily due to our shift to
premium products, reductions in couponing and discounted menu items, and the price increase in the fourth quarter of fiscal 2004. Revenue from company-operated Hardees restaurants increased $15,363, or 5.0%,
during the twenty-eight weeks ended August 9, 2004, as compared to the
twenty-eight weeks ended August 11, 2003. This increase is also due to the
increase in same-store sales discussed above, partially offset by the
restaurant closures. Consistent with the second quarter of fiscal 2005, the
average check during the twenty-eight weeks ended August 9, 2004 increased to
$4.62, as compared to $4.25 during the twenty-eight weeks ended August 11,
2003. 36




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 The changes in restaurant-level margins are explained as follows: Twelve
    
    Twenty-eightWeeks Ended
    
    Weeks EndedAugust 9, 2004
    
    August 9, 2004Restaurant-level margin for the period ended August 11, 2003
    
    
    11.5
    %
    
    
    9.3
    %Decrease in labor and incentive costs, excluding workers compensation
    
    
    1.4
    
    
    
    3.0Decrease in food and packaging costs
    
    
    1.1
    
    
    
    1.3Increase in workers compensation insurance expense
    
    
    (1.0
    )
    
    
    (0.4
    )Decrease in general liability insurance expense
    
    
    0.8
    
    
    
    0.6Increase in asset retirement expense
    
    
    (0.5
    )
    
    
    (0.3
    )Decrease in repair and maintenance expenses
    
    
    0.4
    
    
    
    0.3Decrease in cost of promotional items
    
    
    0.3
    
    
    
    0.2Decrease in utilities expense
    
    
    0.2
    
    
    
    0.6Decrease in rent, depreciation, property taxes and licenses
    
    
    0.2
    
    
    
    0.3Decrease in restaurant opening costs
    
    
    
    
    
    
    0.2Other, net
    
    
    0.1
    
    
    
    0.4Restaurant-level margin for the period ended August 9, 2004
    
    
    14.5
    %
    
    
    15.5
    %
 Labor costs, excluding workers compensation, decreased significantly as a
percent of sales during the twelve and twenty-eight week periods ended August
9, 2004, from the comparable prior year period. This decrease resulted mainly
from adjusting staffing levels after completing the Hardees
Revolution rollout, the benefits of sales leverage, and certain labor cost
management improvements commencing in the fourth quarter of fiscal 2004,
slightly offset by increased restaurant manager bonuses due to improved
financial performance. Food and packaging costs as a percent of sales decreased from the comparable
prior year periods primarily due to lower discounting during the current year
versus the prior year while we were still transitioning to the Hardees
Revolution menu, as well as the price increase implemented in the fourth
quarter of fiscal 2004 discussed above, partially offset by higher prices for
beef and other commodities. Workers compensation expense as a percent of sales increased during the twelve
and twenty-eight weeks ended August 9, 2004, as compared to the prior year,
mainly as a result of an approximate $1,200 charge recorded in the current year
second fiscal quarter to reflect an increase in the actuarial estimate of
claims losses in prior policy periods, primarily the policy year ended January
31, 2004. General liability insurance expense decreased as a percent of sales
from the prior year comparable periods, primarily due to an approximate $600
charge recorded in the second quarter of fiscal 2004 versus an approximate $400
credit recorded in the second quarter of fiscal 2005 as a result of actuarial
analyses of our general liability insurance accrual. Based on current
actuarial estimates of insurance costs for fiscal 2005, Hardees combined
workers compensation and general liability insurance expenses in the second
quarter of fiscal 2005 were approximately 50 basis points higher, as a percent
of sales, than the anticipated run rate for the remainder of fiscal 2005.
However, actual loss incurrence and development may be better or worse than
that estimated in conjunction with our actuary. Asset retirement expenses are dependent upon restaurant actions that may only
occur from time to time. During the twelve weeks ended August 9, 2004, we
retired a minor amount of obsolete restaurant cooking equipment assets based on
the results of store physical inventory counts at approximately half of our
Hardees restaurants, whereas we had no significant asset retirement activity
in the prior year comparable period. Repair and maintenance expenses and utilities expense decreased as percents of
sales from the prior year comparable periods due mainly to the benefits of
sales leverage. The decrease in rent, depreciation, property taxes and licenses as a percent of
sales from the comparable prior year periods primarily resulted from an
adjustment to deferred rents based on current lease terms (no impact in the
twelve weeks ended August 9, 2004, and 0.2% margin impact in the twenty-eight
weeks ended August 9, 2004) and benefits of sales leverage, partially offset by
increased depreciation expense on point-of-sale equipment under capital lease
which, in late fiscal 2004, we determined we will replace earlier than
originally planned (0.3% margin impact in both the twelve and twenty-eight
weeks ended August 9, 2004). We do not anticipate similar deferred rent
adjustments in future periods. We expect accelerated amortization of
point-of-sale equipment to continue into the 37




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 second quarter of fiscal 2006. Restaurant opening costs are dependent upon restaurant actions that occur only
from time to time. During the twelve week periods ended August 9, 2004 and
August 11, 2003, we did not open any Hardees restaurants. During the
twenty-eight weeks ended August 9, 2004, we opened one Hardees restaurant,
while in the prior year comparable period we opened three Hardees restaurants.
In addition, we applied certain new uniform and training costs pursuant to the
Hardees Revolution conversion to opening costs in the prior year first fiscal
quarter. During the quarter ended August 9, 2004, a major lease for a significant number
of Hardees locations expired. The lease was renegotiated at significantly
improved terms, resulting in an estimated annual savings of $1,652 beginning in
the third quarter of fiscal year 2005. Franchised and Licensed Restaurants Franchised and licensed restaurant revenues increased $2,455, or 15.8%, to
$18,042 during the twelve weeks ended August 9, 2004, as compared to the twelve
weeks ended August 11, 2003. During the same period franchise royalties grew
$1,641, or 17.9%, primarily due to improved financial health of certain
franchisees, which allowed them to resume royalty payments to us, and the 4.8%
increase in franchise same-store sales, partially offset by the decrease in the
number of franchised restaurants. Similarly, rent revenues increased $560
during the twelve weeks ended August 9, 2004, as the improved financial health
of certain franchisees has allowed them to resume making lease or sublease
payments to the Company. Franchised and licensed restaurant revenues increased $4,834, or 13.8%, to
$39,945 during the twenty-eight weeks ended August 9, 2004, as compared to the
twenty-eight weeks ended August 11, 2003. During the same period franchise
royalties grew $4,506, or 22.9%, both for reasons similar to those noted in the
second fiscal quarter discussion above. Distribution revenues increased slightly by $207, or 4.9%, to $4,416 during the
twelve weeks ended August 9, 2004 from the prior year comparable period. During
the twenty-eight weeks ended August 9, 2004, distribution revenues decreased
$1,414, or 12.8%, to $9,653. Equipment sales have slowed after franchisees
made significant investments in fiscal 2003 and early fiscal 2004 pursuant to
the Star Hardees remodel program. Net franchising income increased $3,278, or 39.0%, during the twelve weeks
ended August 9, 2004 and increased $7,972, or 47.7%, during the twenty-eight
weeks ended August 9, 2004 as compared to the same periods in the prior year.
These increases are primarily due to the increases in franchise royalties and
rents noted above. The increases are also due to approximately $1,100 in
collections of franchise receivables that were previously fully reserved and
reductions in reserves for franchise bad debts due to continued improvements in
the health of certain franchisees that took place in the second fiscal quarter. La Salsa During the twelve weeks ended August 9, 2004, we closed one La Salsa
restaurant. During the twenty-eight weeks ended August 9, 2004, we opened two
La Salsa restaurants and closed one restaurant. During the same period, La
Salsa franchisees and licensees opened two restaurants. The following table
shows the change in the La Salsa restaurant portfolio, as well as the change in
revenue at La Salsa for the current quarter and year-to-date: Restaurant Portfolio
    
    RevenueSecond Fiscal Quarter
    
    Second Fiscal Quarter
    
    Year-To-Date2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeCompany
    
    
    62
    
    
    
    60
    
    
    
    2
    
    
    $
    11,498
    
    
    $
    10,439
    
    
    $
    1,059
    
    
    $
    25,700
    
    
    $
    23,135
    
    
    $
    2,565Franchised and
licensed
    
    
    43
    
    
    
    40
    
    
    
    3
    
    
    
    400
    
    
    
    393
    
    
    
    7
    
    
    
    957
    
    
    
    836
    
    
    
    121Total
    
    
    105
    
    
    
    100
    
    
    
    5
    
    
    $
    11,898
    
    
    $
    10,832
    
    
    $
    1,066
    
    
    $
    26,657
    
    
    $
    23,971
    
    
    $
    2,686
 Same-store sales for company-operated La Salsa restaurants increased 4.6%
during the twelve weeks ended August 9, 2004. Revenue from company-operated La
Salsa restaurants increased $1,059, or 10.1%, when compared to the twelve weeks
ended August 11, 2003, primarily due to the net increase in the number of
company-operated 38




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 restaurants and the increase in same-store sales. For the twenty-eight weeks
ended August 9, 2004, same-store sales for company-operated La Salsa
restaurants increased 5.3% and revenue from company-operated La Salsa
restaurants increased $2,565, or 11.1%, when compared to the same period in the
prior year, also primarily due to the company-operated restaurant count and
same-store sales growth. Restaurant-level margins were 2.1% and 10.8% as a percent of company-operated
restaurant revenues for the twelve-week periods ended August 9, 2004, and
August 11, 2003, respectively. Margins were negatively impacted by
approximately 110 basis points due to an increase in food and packaging costs
as a percent of sales, resulting primarily from higher produce and dairy costs.
Margins were also negatively impacted by approximately 700 basis points due to
an increase in payroll and employee benefit costs, primarily as a result of an
approximate $570 charge recorded in the current year to reflect an increase in
the actuarial estimate of workers compensation claims losses in prior policy
years and, to a lesser extent, the first half of fiscal 2005. Payroll and
employee benefit costs were also affected by increased hourly labor related to
higher costs associated with new restaurant openings and the fixed nature of
labor on lower sales at more labor-intensive full service locations. Occupancy
and other expenses negatively impacted margins by approximately 60 basis
points, due mainly to amortization of intangible assets (approximately 200
basis points), which had been classified as general and administrative expenses
in the prior year comparable period, and increased rent expense (approximately
190 basis points) due mainly to an adjustment to deferred rents based on
current lease terms, partially offset by a decrease in restaurant opening costs
(approximately 140 basis points). Restaurant-level margins were 4.2% and 10.8% as a percent of company-operated
restaurant revenues for the twenty-eight weeks ended August 9, 2004, and August
11, 2003, respectively. Margins were negatively impacted by approximately 130
basis points due to an increase in food and packaging costs as a percent of
sales, resulting primarily from higher produce and dairy costs. Margins were
also negatively impacted by approximately 410 basis points due to an increase
in payroll and employee benefit costs for the same reasons noted in the second
fiscal quarter discussion above. Occupancy and other expenses negatively
impacted margins by approximately 120 basis points, due mainly to amortization
of intangible assets (approximately 210 basis points), which had been
classified as general and administrative expenses in the prior year comparable
period, and increased rent expense (approximately 100 basis points) due mainly
to an adjustment to deferred rents based on current lease terms, partially
offset by a decrease in restaurant opening costs (approximately 90 basis
points). Consolidated Variable Interest Entities We consolidate the results of one variable interest entity (VIE), a franchise
that operates six Hardees restaurants, and a group of Hardees cooperative
advertising funds. We do not possess any ownership interest in the VIE
franchise. Retail sales and
operating expenses of the VIE franchise are included within Franchise and
Licensed Restaurants and Other in the condensed consolidated statement of
operations, and the resulting minority interest in the income of the VIE
franchisee is included in Other income (expense), net. (See Note 2 of the
notes to the condensed consolidated financial statements for further discussion
of the VIE franchise.) The Hardees cooperative advertising funds consist of
the Hardees National Advertising Fund and many local advertising cooperative
funds. Each of these funds is a separate non-profit association with all the
proceeds segregated and managed by a third-party accounting service company.
The group of funds has been reported in the Companys condensed consolidated
balance sheets on a net basis, and is included within advertising fund assets,
restricted, and advertising fund liabilities within current assets and current
liabilities, respectively. The funds are reported as of the latest practicable
date, which is June 30, 2004.

Beginning in the second quarter of fiscal 2005, the group of funds has
been reported in our statement of operations on a net basis, whereby
contributions from franchisees have been recorded as offsets to our
reported advertising expenses.
 (See Note 2 of the notes to the condensed consolidated financial
statements for further discussion of the Hardees cooperative advertising
funds.) Consolidated Advertising Expense Advertising expenses increased $839, or 5.1%, to $17,410 during the twelve
weeks ended August 9, 2004, as compared to the twelve weeks ended August 11,
2003. Advertising expenses as a percentage of company-operated restaurant
revenue increased marginally from 6.1% to 6.2% during the same period, due
mainly to the management decision to slightly increase advertising spending at
the Carls Jr. brand. 39




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 Advertising expenses increased $2,090, or 5.6%, to $39,674 during the
twenty-eight weeks ended August 9, 2004, as compared to the twenty-eight weeks
ended August 11, 2003. Advertising expenses as a percentage of company-operated
restaurant revenue decreased marginally from 6.2% to 6.1% during the same
period, due to higher advertising in the prior year first fiscal quarter during
the Hardees Revolution rollout at the Hardees brand, partially offset by the
management decision to slightly increase advertising spending at the Carls Jr.
brand. Consolidated General and Administrative Expense General and administrative expenses were 11.1% of total revenue during the
twelve weeks ended August 9, 2004, as compared to 7.5% during the twelve weeks
ended August 11, 2003. For the same period, general and administrative expenses
increased $14,310, or 57.3%, to $39,273 as compared to the prior year period.
This increase, in both dollar and percentage terms, is primarily due to charges
of $7,000 and $1,250 in the current year to increase the litigation accrual for
a pending matter to its estimated settlement amount (see Note 9 of notes to
condensed consolidated financial statements herein) and to increase the accrual
for certain other litigation contingencies, increased corporate and regional
management incentive compensation expense as a result of our improved financial
performance, a charge of approximately $1,500 for losses incurred upon disposal
of a partial interest in a corporate jet in which we shared ownership
interest with a related party, increased legal and consulting
expenses pursuant to payroll services outsourcing and compliance work
associated with the Sarbanes-Oxley Act of 2002 (and new corporate governance
requirements imposed by the New York Stock Exchange), and increased legal fees
with respect to ongoing litigation, partially offset by a decrease in
depreciation expense with respect to information systems software. General and administrative expenses were 9.5% of total revenue during the
twenty-eight weeks ended August 9, 2004, as compared to 7.5% during the
twenty-eight weeks ended August 11, 2003. For the same period, general and
administrative expenses increased $20,603, or 36.5%, to $77,058 as compared to
the prior year period. This increase, in both dollar and percentage terms, is
primarily due to the charges incurred during the current year fiscal second
quarter, as discussed above, along with the fiscal first half impact of
increased incentive compensation expense as a result of our improved financial
performance, increased legal and consulting expenses pursuant to payroll
services outsourcing and compliance work associated with the Sarbanes-Oxley Act
of 2002 (and new corporate governance requirements imposed by the New York
Stock Exchange), and increased legal fees with respect to ongoing litigation,
partially offset by a decrease in depreciation expense with respect to
information systems software. Consolidated Interest Expense During the twelve weeks ended August 9, 2004, interest expense increased
$2,947, or 32.7%, to $11,971, as compared to the twelve weeks ended August 11,
2003, primarily as a result of $3,817 of deferred financing cost write-offs
pursuant to our refinancing and debt prepayment activity during the current
year quarter (see Note 4 of notes to condensed consolidated financial
statements herein), partially offset by lower average borrowings, lower
interest rates upon refinancing our Senior Notes with a lower cost bank term
loan and further amortization of our capital lease obligations since the prior
year comparable period. During the twenty-eight weeks ended August 9, 2004,
interest expense increased $2,497, or 11.8%, to $23,699, as compared to the
twenty-eight weeks ended August 11, 2003, primarily as a result of the same
factors noted above. Consolidated Other Income (Expense), Net Other income (expense), net, typically consists of lease and sublease income
from non-franchisee tenants, provisions for bad debts on certain notes
receivable from franchisees, and other non-operating charges. Other expense,
net increased by $7,605, to $7,377, during the twelve weeks ended August 9,
2004, over the comparable prior year period due mainly to a $9,126 premium paid
upon early redemption of our Senior Notes in the current year quarter,
partially offset by receipt of a $515 lease termination make-whole payment and
approximately $300 of interest income upon collection of officer and
non-employee director notes receivable. For the twenty-eight weeks ended
August 9, 2004, other expense, net increased by $6,357, to $6,764, mainly due
to the same factors noted above. Consolidated Income Tax Expense We recorded income tax expense of $182 and $211 for the twelve week periods
ended August 9, 2004, and August 40




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 11, 2003, respectively. For the twenty-eight week periods ended August 9,
2004, and August 11, 2003, we recorded income tax expense of $451 and $430,
respectively. These amounts for both periods were comprised of foreign income
taxes. We believe that our net operating loss carryforward is such that we will
not be required to pay federal or state income taxes on this fiscal years
taxable earnings, if any, and have only provided for foreign income taxes. Our
deferred tax assets net to $0 due to our valuation allowance of approximately
$171,000 at January 31, 2004. Liquidity and Capital Resources We have historically financed our business through cash flow from operations,
borrowings under our credit facility and the sale of restaurants. Our most
significant cash uses during the next 12 months will be for capital
expenditures. We amended and restated our senior credit facility (Facility)
on June 2, 2004 (see below). We anticipate that existing cash balances,
availability under the Facility and cash generated from operations will be
sufficient to service existing debt and to meet our operating and capital
requirements for the next 12 months. Additionally, we are able to sell
restaurants as a source of liquidity, although we have no intention to do so
significantly at this time. We have no potential mandatory payments of
principal on our $105,000 of 4% Convertible Subordinated Notes due 2023 until
October 1, 2008. On July 2, 2004, we redeemed our $200,000 of Senior
Subordinated Notes due 2009 with proceeds from the  Facility. We, and the restaurant industry in general, maintain relatively low levels of
accounts receivable and inventories, and vendors grant trade credit for
purchases such as food and supplies. We also continually invest in our business
through the addition of new sites and the refurbishment of existing sites,
which are reflected as long-term assets and not as part of working capital. As
a result, we typically maintain current liabilities in excess of current
assets, resulting in a working capital deficit. As of August 9, 2004, our
current ratio was 0.7 to 1. The Facility  provides for a $380,000 senior secured credit
facility consisting of a $150,000 revolving credit facility and a $230,000 term
loan. The revolving credit facility matures on May 1, 2007, and includes an
$85,000 letter of credit sub-facility. The principal amount of the term loan is
scheduled to be repaid in quarterly installments, with a balloon payment of the
remaining principal balance at maturity on July 2, 2008. The Facility also
requires term loan prepayments based upon an annual excess cash flow formula,
as defined therein. Subject to certain conditions as defined in the Facility,
the maturity of the term loan may be extended to May 1, 2010. We used a portion
of the proceeds from the $230,000 term loan to repay the $10,137 remaining
balance of the prior Facility term loan. On July 2, 2004, we used additional
proceeds from the $230,000 term loan to redeem our $200,000 of 9.125% Senior
Subordinated Notes due 2009 (Senior Notes) and pay the related optional
redemption premium of $9,126 and accrued interest. We also incurred a charge of
approximately $3,400 during our second  quarter of fiscal 2005 to write-off unamortized
debt issuance costs primarily associated with the Senior Notes and the
Facility. During the quarter ended August 9, 2004, we voluntarily prepaid $30,000 of the
$230,000 term loan in addition to the $525 regularly scheduled payment. As of
August 9, 2004, we had cash borrowings outstanding under the term loan portion
of the Facility of $199,475, outstanding letters of credit under the revolving
portion of the Facility of $64,697 and availability under the revolving portion
of the Facility of $85,303. Subsequent to quarter-end, we voluntarily prepaid
an additional $34,500 of the term loan, reducing the term loan balance to
$164,975. The terms of the Facility include certain restrictive covenants. Among other
things, these covenants restrict our ability to incur debt, incur liens on our
assets, make any significant change in our corporate structure or the nature of
our business, dispose of assets in the collateral pool securing the Facility,
prepay certain debt, engage in a change of control transaction without the
member banks consents, pay dividends and make investments or acquisitions. The
Facility is collateralized by a lien on all of our personal property assets and
certain restaurant property deeds of trust. As of August 9, 2004, the
applicable interest rate on the term loan was LIBOR plus 3.0%, or
4.56% per annum, and the applicable
interest rate on the revolving loan portion of the Facility was  LIBOR plus
2.75%. We also incur fees on outstanding letters of credit under the Facility
at a rate equal to the applicable margin for LIBOR loans, which is currently
2.75% per annum. The Facility also required us to enter into interest rate protection agreements
in an aggregate notional amount of at least $70,000 for a term of at least
three years. Pursuant to this requirement, on July 26, 2004, we entered into
two interest rate cap agreements in an aggregate notional amount of $70,000.
Under the terms of each agreement, if 41




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 LIBOR exceeds 5.375% on the measurement date for any quarterly period, we will
receive payments equal to the amount LIBOR exceeds 5.375% multiplied by (i) the
notional amount of the agreement and (ii) the fraction of a year represented by
the quarterly period. The agreements expire on July 28, 2007. The agreements
were not designated as cash flow hedges under the terms of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. Accordingly, the change in the fair value of the $371
of interest rate cap premiums will be recognized quarterly in interest expense
in the condensed consolidated statement of operations.
During the quarter ended August 9, 2004, we recorded $49 of interest
expense to reduce the carrying value of the interest rate cap premium
to its fair value of $322. As a matter of policy,
we do not use derivative instruments unless there is an underlying exposure. Subject to the terms of the Facility, we may make capital expenditures in the
amount of $50,000 plus 80% of the amount of actual EBITDA (as defined) in
excess of $110,000 during the current fiscal year and $45,000 plus 80% of the
amount of actual EBITDA (as defined) in excess of $110,000 during each
subsequent fiscal year. In fiscal 2005 and thereafter, we may carry forward any
unused capital expenditure amounts to the following year. The Facility also
permits us to repurchase our common stock in the amount of $27,000 plus a
portion of excess cash flow and certain net asset sale proceeds (as defined)
during the term of the Facility. The Facility contains financial performance covenants, which include a minimum
EBITDA requirement, a minimum fixed charge coverage ratio and maximum leverage
ratios and capital expenditures, and precludes us from paying dividends. The full text of the contractual requirements imposed by this financing is set
forth in the Sixth Amended and Restated Credit Agreement, dated as of June 2,
2004, which we have filed with the Securities and Exchange Commission, and in
the ancillary loan documents described therein. We were in compliance with the
requirements of the Facility as of August 9, 2004. Subject in certain instances
to cure periods, the lenders under our Facility may demand repayment of
borrowings prior to stated maturity upon certain events, including if we breach
the terms of the agreement, suffer a material adverse change, engage in a
change of control transaction, suffer certain adverse legal judgments, in the
event of specified events of insolvency or if we default other significant
obligations. In the event the Facility is declared accelerated by the lenders
(which can occur only if we are in default under the Facility), our 2023
Convertible Notes (described below) may also become accelerated under certain
circumstances and after all cure periods have expired. On September 29, 2003, we completed an offering of $105,000 of our 4%
Convertible Subordinated Notes due 2023 (2023 Convertible Notes), and used
nearly all of the net proceeds of the offering to repurchase $100,000 of our
then-outstanding 4.25% Convertible Subordinated Notes due 2004 (the 2004
Convertible Notes). The 2023 Convertible Notes bear interest at 4.0% annually,
are payable in semiannual installments due April 1 and October 1 each year, are
unsecured general obligations of the Company, contractually subordinate in
right of payment to certain other Company obligations including the Facility. On October 1 of 2008, 2013 and 2018, the holders of the 2023
Convertible Notes have the right to require us to repurchase all or a portion
of the notes at 100% of the face value plus accrued interest.

On October 1, 2008 and thereafter, we have the right to call all or a
portion of the notes at 100% of the face value plus accrued interest.

Under the terms
of the 2023 Convertible Notes, such notes become convertible into our common
stock at a conversion rate of 112.4859 shares per $1,000 principal amount of
the notes at any time after our common stock has a closing sale price or at
least $9.78 per share, which is 110% of the conversion price per share, for at
least 20 days in a period of 30 consecutive trading days ending on the last
trading day of the calendar quarter. As a result of the daily closing sales
price levels on our common stock during the second calendar quarter of 2004,
the 2023 Convertible Notes became convertible into our common stock effective
July 1, 2004, and will remain convertible throughout the remainder of their
term. The terms of the Facility are not dependent on any change in our credit rating.
The 2023 Convertible Notes contain a convertibility trigger based on the credit
ratings of the notes; however, such trigger is no longer applicable since the
notes are now convertible through the remainder of their term, as discussed
above. We believe the key company-specific factors affecting our ability to
maintain our existing debt financing relationships and to access such capital
in the future are our present and expected levels of profitability and cash
flow from operations, asset collateral bases and the level of our equity
capital relative to our debt obligations. In addition, as noted above, our
existing debt agreements include significant restrictions on future financings
including, among others, limits on the amount of indebtedness we may incur or
which may be secured by any of our assets. During the twenty-eight weeks ended August 9, 2004, cash provided by operating
activities was $67,611, an increase of $22,869 over the prior year comparable
period. The increase resulted mainly from a trend change in the 42




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CKE RESTAURANTS, INC. AND SUBSIDIARIES MANAGEMENTS DISCUSSION AND ANALYSIS
 (Dollars in thousands)
 accounts payable balance fluctuation in the current year first half as compared
to the prior year first half. Such trend can  vary significantly from quarter
to quarter depending upon the timing of large vendor payments. In addition,
while net income during the twenty-eight weeks ended August 9, 2004 is slightly
lower ($194) than net income for the comparable prior year period, the current
year period includes significantly more non-cash charges, including a
significant portion of our facility action charges and the deferred financing
cost write-offs noted above. Cash used in investing activities during the twenty-eight weeks ended August 9,
2004, totaled $19,129, which principally consisted of purchases of property and
equipment, partially offset by proceeds from the sale of property and equipment
and collections on notes receivable. Cash used in financing activities during the twenty-eight weeks ended August 9,
2004, totaled $66,259, which principally consisted of redemption of $200,000 of
our Senior Notes due 2009 and $22,319 of our 2004 Convertible Notes, repayment
of $44,451 of the term loans under our bank credit facilities (of which $43,515
represented voluntary prepayment thereof), repayment of the $10,137 remaining
balance of our then-existing Facility term loan, $6,000 of financing costs
incurred in connection with our refinancing activity during the second fiscal
quarter and a $9,293 decrease in our bank overdraft position (which is
generally not a significant source or use of cash over the long term),
partially offset by the $230,000 of proceeds from the term loan component of
our Facility. Capital expenditures for the twenty-eight weeks ended August 9, 2004 were: New restaurants (including restaurants under development)Carls Jr.
    
    $
    4,679Hardees
    
    
    2,075La Salsa
    
    
    710Remodels/Dual-branding (including construction in process)Carls Jr.
    
    
    324Hardees
    
    
    3,387Other restaurant additionsCarls Jr.
    
    
    5,686Hardees
    
    
    8,192La Salsa
    
    
    1,160Corporate/other
    
    
    2,514Total
    
    $
    28,727
 As of August 9, 2004, we had remodeled 81% of the Hardees company-operated
restaurants to the Star Hardees format. Contractual Obligations We enter into purchasing contracts and pricing arrangements to control costs
for commodities and other items that are subject to price volatility. These
arrangements in addition to any unearned supplier funding and distributor
inventory obligations result in unconditional purchase obligations (see further
discussion regarding these obligations in Item 3  Quantitative and Qualitative
Disclosures About Market Risk), which totaled $58,335 as of August 9, 2004. 43




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Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Our principal exposure to financial market risks relates to the impact that
interest rate changes could have on our Facility. As of August 9, 2004, we had
$199,475 of borrowings and $64,697 of letters of credit outstanding under the
Facility. Borrowings under the Facility bear interest at the prime rate or
LIBOR plus an applicable margin. A hypothetical increase of 100 basis points in
short-term interest rates would result in a reduction in the Companys annual
pre-tax earnings of $1,995. The estimated reduction is based upon the
outstanding balance of the borrowings under the Facility and the
weighted-average interest rate for the quarter and assumes no change in the
volume, index or composition of debt as in effect on August 9, 2004. Substantially
all of our business is transacted in U.S. dollars. Accordingly, foreign
exchange rate fluctuations have not had a significant impact on us and are not
expected to in the foreseeable future. Commodity Price Risk We purchase certain products which are affected by commodity prices and are,
therefore, subject to price volatility caused by weather, market conditions and
other factors which are not considered predictable or within our control.
Although many of the products purchased are subject to changes in commodity
prices, certain purchasing contracts or pricing arrangements contain risk
management techniques designed to minimize price volatility. The purchasing
contracts and pricing arrangements we use may result in unconditional purchase
obligations, which are not reflected in the consolidated balance sheet.
Typically, we use these types of purchasing techniques to control costs as an
alternative to directly managing financial instruments to hedge commodity
prices. In many cases, we believe we will be able to address material commodity
cost increases by adjusting our menu pricing or changing our product delivery
strategy. However, increases in commodity prices, without adjustments to our
menu prices, could result in lower restaurant-level operating margins for our
restaurant concepts. Derivative
Financial Instruments On July 26, 2004, we entered into two interest rate cap agreements in
an aggregate notional amount of $70,000.
Under the terms of each agreement, if LIBOR exceeds 5.375% on the
measurement date for any quarterly period, we will receive payments
equal to the amount LIBOR exceeds 5.375% multiplied by (i) the
notional amount of the agreement and (ii) the fraction of a year
represented by the quarterly period. The agreements expire on July 28,
2007. The agreements were not designated as cash flow hedges under the
terms of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. Accordingly, the change in the fair value of
the $371 of interest rate cap premiums will be recognized quarterly in
interest expense in the consolidated statement of operations. During
the quarter ended August 9, 2004, we recorded $49 of
interest expense to reduce the carrying value of the interest rate
cap premium to its fair value of $322. As a matter of policy, we do
not use derivative instruments unless there is an underlying exposure. 
 Item 4. Controls and Procedures The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures as of the end of the period
covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures, as of the end of the
period covered by this report, were effective in timely alerting them to
material information relating to the Company required to be included in the
Companys periodic filings. There has been no change in the Companys internal control over financial
reporting during the period covered by this report that has materially
affected, or is reasonably likely to affect, the Companys internal control
over financial reporting. 44




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
OTHER INFORMATION
(In thousands, except share amounts) 
 Part II. Other Information. 
 Item 1. Legal Proceedings.  Information regarding legal proceedings is incorporated by reference from
Note 9 to the Companys condensed consolidated financial statements set forth
in Part 1 of this report. 
 Item 2. Changes in Securities and Use of Proceeds. Issuer Purchase of Equity Securities  The following table provides information as of August 9, 2004, with respect
to shares of Common Stock repurchased by the Company during the fiscal
quarter then ended: (a)
    
    (b)
    
    (c)
    
    (d)MaximumNumber (orApproximateDollarValue) ofTotal
    
    Shares (orNumber of Shares
    
    Units) thatAverage
    
    (or Units)
    
    May Yet BeTotal
    
    Price
    
    Purchased as Part
    
    PurchasedNumber of Shares
    
    Paid per
    
    of Publicly
    
    Under the(or Units)
    
    Share
    
    Announced Plans
    
    Plans orPeriod
    
    Purchased
    
    (or Unit)
    
    or Programs
    
    ProgramsMay 18, 2004  June 14, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,646June 15, 2004  July 12, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,646July 13, 2004  August 9, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,646Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,646
  In April 2004, our Board of Directors authorized a program to allow us to
repurchase up to $20,000 of our common stock through April 2005. Pursuant to
this authorization, during the sixteen weeks ended May 17, 2004, we
repurchased 319,000 shares of our common stock at an average price of $10.49
per share, for a total cost, including trading commissions, of $3,354. We
have not repurchased any additional shares in the twelve-week period ending
August 9, 2004. 
 Item 4. Submission of Matters to a Vote of Security Holders.  The Company held its Annual Meeting of Stockholders on June 28, 2004 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 WithheldByron Allumbaugh
    
    
    50,248,323
    
    
    
    1,405,499Douglas K. Ammerman
    
    
    50,191,488
    
    
    
    1,462,334Frank P. Willey
    
    
    50,394,060
    
    
    
    1,259,762Janet E. Kerr
    
    
    50,342,496
    
    
    
    1,311,326Carl L. Karcher
    
    
    50,401,549
    
    
    
    1,252,273
 45




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| |  |  | The following individuals also continue to serve on the Board of
Directors:
| |  |  | ---------------------------------------------------------------------------

Peter Churm, William P. Foley, II, Daniel D. (Ron) Lane, Ronald B.
Maggard, Sr., Daniel E. Ponder, Jr. and Andrew F. Puzder  At the annual meeting, the stockholders also voted upon and approved the
following matter:  Ratification of KPMG LLP as the Companys
independent accountants for the year ending January
31, 2005. For
    
    Against
    
    Abstain50,912,679
    
    
    442,682
    
    
    
    298,461
 
 Item 6. Exhibits. Exhibit #
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 46




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. CKE RESTAURANTS, INC.(Registrant)Date: September 13, 2004
    
    /s/ Theodore AbajianTheodore AbajianExecutive Vice PresidentChief Financial Officer
 47




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Exhibit Index Exhibit #
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 48