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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q/A [Amendment No. 1]
 (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.For the quarterly period ended August 9, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.For the transition period from  to.
 Commission file number 1-11313   CKE RESTAURANTS, INC. (Exact name of registrant as specified in its charter)
 Delaware
    
    33-0602639(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)6307 Carpinteria Avenue, Ste. A, Carpinteria, CA
    
    93013(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (805) 745-7500 Former Name, Former Address and Former Fiscal Year, if changed since last report.   Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o As of September 8, 2004, 57,707,543 shares of the Registrants Common
Stock were outstanding.




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Explanatory Note The purpose of this amendment on Form 10-Q/A to the Quarterly Report on Form
10-Q of CKE Restaurants, Inc. for the quarterly period ended August 9, 2004 is
to restate our consolidated financial statements for the twelve and
twenty-eight weeks ended August 9, 2004 and August 11, 2003, and as of January
31, 2004, and related disclosures, as described in Note 2 of the Notes to
Condensed Consolidated Financial Statements. Additional information about the
decision to restate these financial statements can be found in our Current
Report on Form 8-K, filed with the Securities and Exchange Commission (SEC) on
November 23, 2004. Generally, no attempt has been made in this Form 10-Q/A to modify or update
other disclosures presented in the original report on Form 10-Q, except as
required to reflect the effects of the restatement. The Form 10-Q/A generally
does not reflect events occurring after the filing of the Form 10-Q or modify
or update those disclosures, including the exhibits to the Form 10-Q affected
by subsequent events. Information not affected by the restatement is unchanged
and reflects the disclosures made at the time of the original filing of the
Form 10-Q on September 13, 2004. Accordingly, this Form 10-Q/A should be read
in conjunction with our filings made with the SEC subsequent to the filing of
the original Form 10-Q, including any amendments to those filings. The
following items have been amended as a result of the restatement:  
    
    Part IItem 1Financial Information  
    
    Part IItem 2Managements Discussion and Analysis of Financial Condition and Results of Operations In previous reports, we have presented in our Managements Discussion and
Analysis of Financial Condition and Results of Operations a detailed, tabular
sensitivity analysis to illustrate our critical accounting policy discussed
under the heading Impairment of Property and Equipment and Other Amortizable
Long-Lived Assets Held and Used, Held for Sale or to be Disposed of Other than
by Sale. In this Amendment No. 1 to Form 10-Q, we have decided to omit the
detailed tabular sensitivity analysis in favor of a more general discussion of
this accounting policy, because the financial information being restated in
this amendment is such that the tabular presentation would have to be entirely
recalculated to reflect the restated results. Because the tabular presentation
serves only to illustrate the general point, management decided our resources
would be better directed towards other activities required in connection with
the restatement. In previous reports, we have also presented in our note under the heading
Facility Action Charges, Net in the Notes to Condensed Consolidated Financial
Statements (Note 6 in this amendment) a table summarizing average annual sales
per restaurant and total operating losses related to restaurants we decided to
close. In this Amendment No. 1 to Form 10-Q, management decided its resources
would be better directed towards other activities required in connection with
the restatement, and we have decided to omit the detailed tabular analysis of
closed restaurant operating data in favor of a more general discussion.  
    
    Part IItem 4Controls and Procedures We have included in this Amendment No. 1 to Form 10-Q substantially the same
discussion of our controls and procedures as we have included in our Quarterly
Report on Form 10-Q for the fiscal quarter ended November 1, 2004, which is
being filed concurrently herewith. While the discussion consequently speaks as
of a date later than August 9, 2004, the end of our second quarter of the 2005
fiscal year that is the subject of this amendment, we concluded that an updated
disclosure is appropriate under the circumstances of the restatement reflected
in this amendment.  
    
    Part IIItem 6Exhibits and Reports on Form 8-K In October 2004, we identified accounting errors that occurred in fiscal 2000
and 1999 which had resulted in an understatement of our deferred rent liability
related to operating leases with fixed rent escalations over the lease 2




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terms. As a result, we concluded that our rent expense, net, had been
understated through fiscal 2004 in the cumulative amount of $2,103. In the
twelve and twenty-eight weeks ended August 9, 2004, and twelve and twenty-eight
weeks ended August 11, 2003, rent expense, net, had been understated by $60,
$138, $232 and $543, respectively. As a result, our deferred rent liability as
of August 9, 2004, and January 31, 2004, had been understated by $2,241 and
$2,103, respectively. We have corrected these errors through restatement of our
consolidated financial statements. In November 2004, after identifying this error, we commenced an extensive
internal review of our consolidated financial statements (the November
Review) in order to identify any other potential accounting errors. Through
the November Review, we identified the following additional accounting errors: (i) Understated Depreciation and Amortization Expense We are party to a substantial number of real property leases and have
significant investments in related buildings, leasehold improvements and
certain intangible assets. In fiscal 1998, we extended the depreciable life we
applied to our owned buildings to the new expected economic life of the assets.
In addition, in certain cases the longer depreciable life exceeded the
duration of the applicable underlying land lease, including option periods,
resulting in an understatement of depreciation expense beginning in fiscal
1999. In determining whether each of our real property leases is an operating
lease or a capital lease and in calculating our straight-line rent expense, we
generally utilize the initial term of the lease, excluding option periods.
Capitalized lease assets and liabilities are generally recorded and amortized
based upon the corresponding initial lease term. Historically, we depreciated
or amortized our investment in the related buildings, leasehold improvements
and certain intangible assets over a period that included both the initial term
of the lease and all option periods provided for in the lease (or the useful
life of the asset if shorter than the lease term plus option periods). During the November Review, we evaluated the propriety of the above accounting
treatment, and determined that we should use one consistent definition of lease
term, typically the initial lease term, for purposes of determining lease
classification, straight-line rent expense, and the depreciation or
amortization period for the related asset. As a result, we concluded that our
depreciation and amortization expense had been understated through fiscal 2004
in the cumulative amount of $30,222. In the twelve and twenty-eight weeks
ended August 9, 2004, and twelve and twenty-eight weeks ended August 11, 2003,
depreciation and amortization expense had been understated by $1,383, $3,223,
$1,342 and $3,138, respectively. As a result, our property and equipment, net,
and certain intangible assets as of August 9, 2004, and January 31, 2004, were
overstated by $33,445 and $30,222, respectively, with respect to this matter.
We have corrected these errors through our restatement. Our historical practices for determining depreciable life and amortization
periods also resulted in errors in the timing and classification of expense
recognition for fixed assets subjected to facility action charges in prior
fiscal periods. Generally, restaurants subject to facility action charges were
over-impaired in the fiscal year of the facility action charge to the extent
that such assets had been under-depreciated or under-amortized leading up to
the impairment date. Through fiscal 2004, these errors resulted in a
cumulative net understated expense of $1,014. This was comprised of a
cumulative understatement of depreciation and amortization expense of $17,300,
partially offset by a cumulative overstatement of facility action charges of
$16,286. In the twelve and twenty-eight
weeks ended August 9, 2004, and twelve
and twenty-eight weeks ended August 11, 2003, we overstated facility action
charges by $182, $803, $421 and $696, respectively, and understated
depreciation and amortization expense by $22, $52, $98 and $229, respectively.
As a result, in the twelve and twenty-eight weeks ended August 9, 2004, and
twelve and twenty-eight weeks ended August 11, 2003, these errors resulted in a
net overstatement of expenses by $160, $751, $323 and $467, respectively. Also
as a result, our property and equipment, net, as of August 9, 2004, and January
31, 2004, was overstated by $263 and $1,014, respectively, with respect to this
matter. We have corrected these errors through our restatement. 3




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(ii) Unretired Property and Equipment We identified instances in which property and equipment was not retired in a
timely manner or in which certain expenditures were incorrectly capitalized. During fiscal 2001, we sold many company-operated restaurants to franchisees.
In one of these transactions, we sold 19 restaurant properties, of which eight
were fee-owned properties and eleven were leased properties. We sold the eight
fee-owned properties and subleased the eleven leased properties to the buyer.
In recording the transaction, we did not retire the net book value of the eight
fee-owned properties. Through fiscal 2004, this error resulted in a cumulative
net understated expense of $5,333. As a result of this error, for the twelve
and twenty-eight weeks ended August 9, 2004, and twelve and twenty-eight weeks
ended August 11, 2003, we overstated depreciation expense by $31, $72, $34 and
$79, respectively. Also as a result, as of August 9, 2004, and January 31,
2004, our property and equipment was overstated by approximately $5,261 and
$5,333, respectively. We have corrected these errors through our restatement. We also identified $1,315 of other property and equipment that was not timely
retired when the assets were removed from service, primarily in fiscal 2001 and
2003. Through fiscal 2004, this resulted in a cumulative understatement of
general and administrative expenses, net of subsequent over-depreciation, of
$1,175. As a result of these errors, for the twelve and twenty-eight weeks
ended August 9, 2004, and twelve and twenty-eight weeks ended August 11, 2003,
we understated general and administrative expenses by $99 and $83 and
overstated general and administrative expenses by $9 and $20, respectively.
Also as a result of these errors, as of August 9, 2004, and January 31, 2004,
our property and equipment was overstated by $1,258 and $1,175, respectively.
We have corrected these errors through our restatement. Additionally, the we did not timely retire certain software development
expenditures when the software applications were taken out of service. We also
did not properly expense certain software development costs when incurred, in
accordance with Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. These accounting
errors occurred primarily in fiscal 2001 and 2003. Through fiscal 2004, this
resulted in a cumulative understatement of expenses of $2,267. As a result of
these errors, for the twelve and twenty-eight weeks ended August 9, 2004, and
twelve and twenty-eight weeks ended August 11, 2003, we overstated depreciation
expense by $148, $311, $140 and $50, respectively. Also as a result of these
errors, as of August 9, 2004, and January 31, 2004, our property and equipment
was overstated by $1,956 and $2,267, respectively. We have corrected these
errors through our restatement. (iii) Overstated Property Tax Expense We determined that we had misstated its property tax expense and accrued
property taxes in prior fiscal periods. These errors resulted from imprecise
metrics used to calculate our property tax accrual. Through fiscal 2004, this
resulted in a cumulative overstatement of property tax expenses of $1,198. As
a result of these errors, for the twelve and twenty-eight weeks ended August 9,
2004, and twelve and twenty-eight weeks ended August 11, 2003, we understated
property tax expenses by $108 and $250 and overstated property tax expenses by
$142 and $333, respectively. Also as a result, as of August 9, 2004, and
January 31, 2004, accrued property taxes were overstated by $948 and $1,198,
respectively. We have corrected these errors through our restatement. (iv) Understated Deferred Tax Liability In September 2004, we determined that, when we adopted SFAS No. 142, Goodwill
and Other Intangible Assets, at the beginning of fiscal 2003, as a result of
temporary differences relating to the treatment of goodwill relating to our
Carls Jr. brand, we should have recorded income tax expense to increase our
deferred tax valuation allowance, which would have resulted in a deferred tax
liability. We had not previously recorded this deferred tax liability.
Through fiscal 2004, this resulted in a cumulative understatement of income tax
expense of $1,413. As a result of these errors, for the twelve and
twenty-eight weeks ended August 9, 2004, and twelve and twenty-eight weeks
ended August 11, 2003, our income tax expense was understated by $62, $144,
$144 and $288, respectively. Also as a result, as of August 9, 2004, and
January 31, 2004, our deferred tax liability was understated by $1,557 and
$1,413, respectively. We determined in September 2004 that the error was
immaterial and did not record an adjustment. In 4




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light of the conclusion to restate our financial statements for the other
matters discussed herein, we determined it was appropriate to also include this
adjustment in the restatement. (v) Other Items We identified several other items that we have corrected through our
restatement. For the twelve and twenty-eight weeks ended August 9, 2004, and
twelve and twenty-eight weeks ended August 11, 2003, these additional items
aggregate to reduction to expense upon restatement of $117, $274, $38 and $102,
respectively. Also as a result, prior to the restatement, as of August 9,
2004, and January 31, 2004, our accumulated deficit had been understated by
$591 and $865, respectively, with respect to these items. 5




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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
    
    
    7Condensed Consolidated Statements of Operations for the twelve weeks and
twenty-eight weeks ended August 9, 2004 and August 11, 2003
    
    
    8Condensed Consolidated Statement of Stockholders Equity for the twenty-eight
weeks ended August 9, 2004
    
    
    9Condensed Consolidated Statements of Cash Flows for the twenty-eight weeks
ended August 9, 2004 and August 11, 2003
    
    
    10Notes to Condensed Consolidated Financial Statements
    
    
    11Item 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    28Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    57Item 4 Controls and Procedures
    
    
    57Part II. Other InformationItem 1 Legal Proceedings
    
    
    60Item 2 Changes in Securities and Use of Proceeds
    
    
    60Item 4 Submission of Matters to a Vote of Security Holders
    
    
    61Item 6 Exhibits
    
    
    61Signatures
    
    
    62EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  6




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PART 1. FINANCIAL INFORMATION 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands, except par values)
(Unaudited) August 9, 2004
    
    January 31, 2004(as restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    36,578
    
    
    $
    54,355Accounts receivable, net of allowance for doubtful accounts of $2,592 as of
August 9, 2004 and $5,580 as of January 31, 2004
    
    
    24,241
    
    
    
    26,562Related party trade receivables
    
    
    7,100
    
    
    
    7,991Inventories
    
    
    19,199
    
    
    
    17,972Prepaid expenses
    
    
    10,849
    
    
    
    16,053Assets held for sale
    
    
    17,000
    
    
    
    18,760Advertising fund assets, restricted
    
    
    21,448
    
    
    
    Other current assets
    
    
    1,739
    
    
    
    1,656Total current assets
    
    
    138,154
    
    
    
    143,349Notes receivable, net of allowance for doubtful accounts of $7,126 as of
August 9, 2004 and $6,186 as of January 31, 2004
    
    
    3,086
    
    
    
    2,317Property and equipment, net
    
    
    466,413
    
    
    
    479,660Property under capital leases, net
    
    
    39,872
    
    
    
    44,895Goodwill
    
    
    22,649
    
    
    
    22,649Other assets
    
    
    35,419
    
    
    
    37,433Total assets
    
    $
    705,593
    
    
    $
    730,303LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of bank indebtedness and other long-term debt
    
    $
    2,551
    
    
    $
    26,843Current portion of capital lease obligations
    
    
    5,416
    
    
    
    7,028Accounts payable
    
    
    53,957
    
    
    
    47,592Advertising fund liabilities
    
    
    21,448
    
    
    
    Other current liabilities
    
    
    104,405
    
    
    
    105,419Total current liabilities
    
    
    187,777
    
    
    
    186,882Bank 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
    
    
    53,259
    
    
    
    56,877Other long-term liabilities
    
    
    57,723
    
    
    
    56,077Total liabilities
    
    
    604,192
    
    
    
    627,264Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 100,000,000 shares authorized; 59,587,000 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
    
    
    (351,491
    )
    
    
    (349,306
    )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
    
    
    101,401
    
    
    
    103,039Total liabilities and stockholders equity
    
    $
    705,593
    
    
    $
    730,303
 See Accompanying Notes to Condensed Consolidated Financial Statements 7




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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, 2003(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Revenue:Company-operated restaurants
    
    $
    281,802
    
    
    $
    271,168
    
    
    $
    647,674
    
    
    $
    610,210Franchised and licensed restaurants
and other
    
    
    71,932
    
    
    
    62,547
    
    
    
    161,372
    
    
    
    143,058Total revenue
    
    
    353,734
    
    
    
    333,715
    
    
    
    809,046
    
    
    
    753,268Operating 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
    
    
    62,503
    
    
    
    63,140
    
    
    
    143,758
    
    
    
    143,859235,613
    
    
    
    228,901
    
    
    
    535,187
    
    
    
    522,352Franchised and licensed restaurants
and other
    
    
    52,564
    
    
    
    48,514
    
    
    
    119,556
    
    
    
    113,435Advertising expenses
    
    
    17,410
    
    
    
    16,571
    
    
    
    39,674
    
    
    
    37,584General and administrative expenses
    
    
    39,153
    
    
    
    24,846
    
    
    
    76,810
    
    
    
    56,455Facility action charges, net
    
    
    1,883
    
    
    
    410
    
    
    
    8,699
    
    
    
    1,197Total operating costs and expenses
    
    
    346,623
    
    
    
    319,242
    
    
    
    779,926
    
    
    
    731,023Operating income
    
    
    7,111
    
    
    
    14,473
    
    
    
    29,120
    
    
    
    22,245Interest expense
    
    
    (11,963
    )
    
    
    (9,017
    )
    
    
    (23,683
    )
    
    
    (21,186
    )Other income (expense), net
    
    
    (7,289
    )
    
    
    76
    
    
    
    (6,560
    )
    
    
    (753
    )Income (loss) before income taxes and
discontinued operations
    
    
    (12,141
    )
    
    
    5,532
    
    
    
    (1,123
    )
    
    
    306Income tax expense
    
    
    244
    
    
    
    355
    
    
    
    595
    
    
    
    718Income (loss) from continuing operations
    
    
    (12,385
    )
    
    
    5,177
    
    
    
    (1,718
    )
    
    
    (412
    )Income (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)
    
    $
    (12,689
    )
    
    $
    5,223
    
    
    $
    (2,185
    )
    
    $
    (2,479
    )Basic income (loss) per common share:Continuing operations
    
    $

    (0.21
    )
    
    $
    0.09
    
    
    $
    (0.03
    )
    
    $
    (0.01
    )Discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.03
    )Net income (loss)
    
    $
    (0.22
    )
    
    $
    0.09
    
    
    $
    (0.04
    )
    
    $
    (0.04
    )Diluted income (loss) per common share:Continuing operations
    
    $
    (0.21
    )
    
    $
    0.09
    
    
    $
    (0.03
    )
    
    $
    (0.01
    )Discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.03
    )Net income (loss)
    
    $
    (0.22
    )
    
    $
    0.09
    
    
    $
    (0.04
    )
    
    $
    (0.04
    )Weighted-average common shares
outstanding:Basic
    
    
    57,575
    
    
    
    57,567
    
    
    
    57,590
    
    
    
    57,474Dilutive effect of stock options,
warrants and convertible notes
    
    
    
    
    
    
    1,105
    
    
    
    
    
    
    
    Diluted
    
    
    57,575
    
    
    
    58,672
    
    
    
    57,590
    
    
    
    57,474
 See Accompanying Notes to Condensed Consolidated Financial Statements 8




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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
    
    
    
    
    
    Officer and
    
    
    
    
    
    Treasury StockNumber of
    
    
    
    
    
    Additional
    
    Non-Employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalShares
    
    
    
    
    
    Paid-In
    
    Director Notes
    
    Accumulated
    
    Number of
    
    
    
    
    
    StockholdersIssued
    
    Amount
    
    Capital
    
    Receivable
    
    Deficit
    
    Shares
    
    Amount
    
    EquityBalance at January 31,
2004 (as previously
reported)
    
    
    59,216
    
    
    $
    592
    
    
    $
    464,689
    
    
    $
    (2,530
    )
    
    $
    (306,113
    )
    
    
    (1,585
    )
    
    $
    (10,406
    )
    
    $
    146,232Restatement adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,193
    )
    
    
    
    
    
    
    
    
    
    
    (43,193
    )Balance at January 31,
2004 (as restated)
    
    
    59,216
    
    
    
    592
    
    
    
    464,689
    
    
    
    (2,530
    )
    
    
    (349,306
    )
    
    
    (1,585
    )
    
    
    (10,406
    )
    
    
    103,039Exercise of stock
options
    
    
    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 loss (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,185
    )
    
    
    
    
    
    
    
    
    
    
    (2,185
    )Balance at August 9,
2004 (as restated)
    
    
    59,587
    
    
    $
    596
    
    
    $
    466,632
    
    
    $
    (576
    )
    
    $
    (351,491
    )
    
    
    (1,904
    )
    
    $
    (13,760
    )
    
    $
    101,401
 See Accompanying Notes to Condensed Consolidated Financial Statements 9




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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, 2003(as restated)
    
    (as restated)Cash flow from operating activities:Net loss
    
    $
    (2,185
    )
    
    $
    (2,479
    )Adjustments to reconcile net loss to net cash provided by operating
activities:Depreciation and amortization
    
    
    36,818
    
    
    
    36,920Amortization 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
    
    
    6,316
    
    
    
    78Facility action charges, net
    
    
    8,699
    
    
    
    1,197Other non-cash credits
    
    
    (483
    )
    
    
    (167
    )Deferred income taxes
    
    
    144
    
    
    
    288Net 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
    
    
    6,670
    
    
    
    6,030Net change in accounts payable and other current and long-term liabilities
    
    
    14,926
    
    
    
    346Loss from operations of discontinued segment
    
    
    467
    
    
    
    2,067Net cash provided to discontinued segment
    
    
    (252
    )
    
    
    (216
    )Net cash provided by operating activities
    
    
    67,603
    
    
    
    44,475Cash flow from investing activities:Purchases of property and equipment
    
    
    (28,727
    )
    
    
    (22,897
    )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
    )
    
    
    (11,512
    )Cash flow from financing activities:Net change in bank overdraft
    
    
    (9,293
    )
    
    
    (8,661
    )Repayments of borrowings under credit facility
    
    
    (54,588
    )
    
    
    (166,000
    )Long-term borrowings
    
    
    230,000
    
    
    
    149,500(Repayments of) borrowings under long-term debt
    
    
    (222,466
    )
    
    
    605Repayments of capital lease obligations
    
    
    (4,451
    )
    
    
    (5,470
    )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
    
    
    (66,251
    )
    
    
    (29,007
    )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
    
    $
    187
    
    
    $
    189Consolidation of advertising funds assets and liabilities
    
    $
    21,448
    
    
    $
    
 See Accompanying Notes to Condensed Consolidated Financial Statements 10




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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/A
for the fiscal year ended January 26, 2004. In the opinion of management, all
adjustments consisting of normal recurring accruals necessary for a fair
presentation of financial position and results of operations for the interim
periods presented have been reflected herein. The results of operations for
such interim periods are not necessarily indicative of results for the full
year or for any future period. For clarity of presentation, the Company generally labels all fiscal year ends
as fiscal year ended January 31. Prior year amounts in the 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 (SFAS) No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure(SFAS 148). SFAS 148
amended the disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation(SFAS 123), to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Disclosures required by this standard are included in the notes to these
condensed consolidated financial statements. For purposes of the following pro forma disclosures required by SFAS 148 and
SFAS 123, the fair value of each option has been estimated on the date of grant
using the Black-Scholes option-pricing model. The Black-Scholes option-pricing
model was developed for use in estimating the fair value of traded options that
do not have vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Companys stock
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the value of an estimate, in managements opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of its
stock options. 11




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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 granted
    
    $
    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, 2003(as restated)
    
    (as restated)Net income (loss), as reported
    
    $
    (12,689
    )
    
    $
    5,223Add: 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
    
    $
    (13,785
    )
    
    $
    4,625Net income (loss) per common share:Basic  as reported
    
    $
    (0.22
    )
    
    $
    0.09Basic  pro forma
    
    
    (0.24
    )
    
    
    0.08Diluted  as reported
    
    
    (0.22
    )
    
    
    0.09Diluted  pro forma
    
    
    (0.24
    )
    
    
    0.08
 Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003(as restated)
    
    (as restated)Net loss, as reported
    
    $
    (2,185
    )
    
    $
    (2,479
    )Add: Stock-based employee
compensation expense
included in reported net
loss
    
    
    
    
    
    
    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
    
    $
    (4,393
    )
    
    $
    (3,711
    )Net loss per common share:Basic  as reported
    
    $
    (0.04
    )
    
    $
    (0.04
    )Basic  pro forma
    
    
    (0.08
    )
    
    
    (0.06
    )Diluted  as reported
    
    
    (0.04
    )
    
    
    (0.04
    )Diluted  pro forma
    
    
    (0.08
    )
    
    
    (0.06
    )
 12




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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 (2)  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS This Note should be read in conjunction with Note 2 of the Notes to
Consolidated Financial Statements in the Companys Annual Report on Form 10-K/A
for the fiscal year ended January 26, 2004. In October 2004, the Company identified accounting errors that occurred in
fiscal 2000 and 1999 which had resulted in an understatement of its deferred
rent liability related to operating leases with fixed rent escalations over the
lease terms. As a result, CKE concluded that its rent expense, net, had been
understated through fiscal 2004 in the cumulative amount of $2,103. In the
twelve and twenty-eight weeks ended August 9, 2004, and twelve and twenty-eight
weeks ended August 11, 2003, rent expense, net, had been understated by $60,
$138, $232 and $543, respectively. As a result, the Companys deferred rent
liability as of August 9, 2004, and January 31, 2004, had been understated by
$2,241 and $2,103, respectively. The Company has corrected these errors through
restatement of its consolidated financial statements. In November 2004, after identifying this error, the Company commenced an
extensive internal review of its consolidated financial statements (the
November Review) in order to identify any other potential accounting errors.
Through the November Review, the Company identified the following additional
accounting errors: (i) Understated Depreciation and Amortization Expense The Company is party to a substantial number of real property leases and has
significant investments in related buildings, leasehold improvements and
certain intangible assets. In fiscal 1998, the Company extended the
depreciable life it applied to its owned buildings to the new expected economic
life of the assets. In addition, in certain cases the longer depreciable life
exceeded the duration of the applicable underlying land lease, including option
periods, resulting in an understatement of depreciation expense beginning in
fiscal 1999. In determining whether each of its real property leases is an operating
lease or a capital lease and in calculating its straight-line rent expense, the
Company generally utilizes the initial term of the lease, excluding option
periods. Capitalized lease assets and liabilities are generally recorded and
amortized based upon the corresponding initial lease term. Historically, the
Company depreciated or amortized its investment in the related buildings,
leasehold improvements and certain intangible assets over a period that
included both the initial term of the lease and all option periods provided for
in the lease (or the useful life of the asset if shorter than the lease term
plus option periods). During the November Review, the Company evaluated the propriety of the above
accounting treatment, and determined that it should use one consistent
definition of lease term, typically the initial lease term, for purposes of
determining lease classification, straight-line rent expense, and the
depreciation or amortization period for the related asset. As a result, CKE
concluded that its depreciation and amortization expense had been understated
through fiscal 2004 in the cumulative amount of $30,222. In the twelve and
twenty-eight weeks ended August 9, 2004, and twelve and twenty-eight weeks
ended August 11, 2003, depreciation and amortization expense had been
understated by $1,383, $3,223, $1,342 and $3,138, respectively. As a result,
the Companys property and equipment, net, and certain intangible assets as of
August 9, 2004, and January 31, 2004, were overstated by $33,445 and $30,222,
respectively, with respect to this matter. The Company has corrected these
errors through its restatement. The Companys historical practices for determining depreciable life and
amortization periods also resulted in errors in the timing and classification
of expense recognition for fixed assets subjected to facility action charges in
prior fiscal periods. Generally, restaurants subject to facility action
charges were over-impaired in the fiscal year of the facility action charge to
the extent that such assets had been under-depreciated or under-amortized
leading up to the impairment date. Through fiscal 2004, these errors resulted
in a cumulative net understated expense of $1,014. This was comprised of a
cumulative understatement of depreciation and amortization expense of $17,300,
partially offset by a cumulative overstatement of facility action charges of
$16,286. In the twelve and twenty-eight weeks ended August 9, 2004, and twelve
and twenty-eight weeks ended August 11, 2003, the Company overstated facility
action charges by $182, $803, $421 and $696, respectively, and understated
depreciation and amortization expense by $22, 13




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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) $52, $98 and $229, respectively. As a result, in the twelve and twenty-eight
weeks ended August 9, 2004, and twelve and twenty-eight weeks ended August 11,
2003, these errors resulted in a net overstatement of expenses by $160, $751,
$323 and $467, respectively. Also as a result, the Companys property and
equipment, net, as of August 9, 2004, and January 31, 2004, was overstated by
$263 and $1,014, respectively, with respect to this matter. The Company has
corrected these errors through its restatement. (ii) Unretired Property and Equipment The Company identified instances in which property and equipment was not
retired in a timely manner or in which certain expenditures were incorrectly
capitalized. During fiscal 2001, the Company sold many company-operated restaurants to
franchisees. In one of these transactions, the Company sold 19 restaurant
properties, of which eight were fee-owned properties and eleven were leased
properties. The Company sold the eight fee-owned properties and subleased the
eleven leased properties to the buyer. In recording the transaction, the
Company did not retire the net book value of the eight fee-owned properties.
Through fiscal 2004, this error resulted in a cumulative net understated
expense of $5,333. As a result of this error, for the twelve and twenty-eight
weeks ended August 9, 2004, and twelve and twenty-eight weeks ended August 11,
2003, the Company overstated depreciation expense by $31, $72, $34 and $79,
respectively. Also as a result, as of August 9, 2004, and January 31, 2004,
the Companys property and equipment was overstated by approximately $5,261 and
$5,333, respectively. The Company has corrected these errors through its
restatement. The Company also identified $1,315 of other property and equipment that was not
timely retired when the assets were removed from service, primarily in fiscal
2001 and 2003. Through fiscal 2004, this resulted in a cumulative
understatement of general and administrative expenses, net of subsequent
over-depreciation, of $1,175. As a result of these errors, for the twelve and
twenty-eight weeks ended August 9, 2004, and twelve and twenty-eight weeks
ended August 11, 2003, the Company understated general and administrative
expenses by $99 and $83 and overstated general and administrative expenses by
$9 and $20, respectively. Also as a result of these errors, as of August 9,
2004, and January 31, 2004, the Companys property and equipment was overstated
by $1,258 and $1,175, respectively. The Company has corrected these errors
through its restatement. Additionally, the Company did not timely retire certain software development
expenditures when the software applications were taken out of service. The
Company also did not properly expense certain software development costs when
incurred, in accordance with Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. These
accounting errors occurred primarily in fiscal 2001 and 2003. Through fiscal
2004, this resulted in a cumulative understatement of expenses of $2,267. As a
result of these errors, for the twelve and twenty-eight weeks ended August 9,
2004, and twelve and twenty-eight weeks ended August 11, 2003, the Company
overstated depreciation expense by $148, $311, $140 and $50, respectively.
Also as a result of these errors, as of August 9, 2004, and January 31, 2004,
the Companys property and equipment was overstated by $1,956 and $2,267,
respectively. The Company has corrected these errors through its restatement. (iii) Overstated Property Tax Expense The Company determined that it had misstated its property tax expense and
accrued property taxes in prior fiscal periods. These errors resulted from
imprecise metrics used to calculate the Companys property tax accrual.
Through fiscal 2004, this resulted in a cumulative overstatement of property
tax expenses of $1,198. As a result of these errors, for the twelve and
twenty-eight weeks ended August 9, 2004, and twelve and twenty-eight weeks
ended August 11, 2003, the Company understated property tax expenses by $108
and $250 and overstated property tax expenses by $142 and $333, respectively.
Also as a result, as of August 9, 2004, and January 31, 2004, accrued property
taxes were overstated by $948 and $1,198, respectively. The Company has
corrected these errors through its restatement. 14




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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) (iv) Understated Deferred Tax Liability In September 2004, the Company determined that, when it adopted SFAS No. 142,
Goodwill and Other Intangible Assets, at the beginning of fiscal 2003, as a
result of temporary differences relating to the treatment of goodwill relating
to its Carls Jr. brand, the Company should have recorded income tax expense to
increase its deferred tax valuation allowance, which would have resulted in a
deferred tax liability. The Company had not previously recorded this deferred
tax liability. Through fiscal 2004, this resulted in a cumulative
understatement of income tax expense of $1,413. As a result of these errors,
for the twelve and twenty-eight weeks ended August 9, 2004, and twelve and
twenty-eight weeks ended August 11, 2003, the Companys income tax expense was
understated by $62, $144, $144 and $288, respectively. Also as a result, as of
August 9, 2004, and January 31, 2004, the Companys deferred tax liability was
understated by $1,557 and $1,413, respectively. The Company determined in
September 2004 that the error was immaterial and did not record an adjustment.
In light of the conclusion to restate the Companys financial statements for
the other matters discussed herein, the Company determined it was appropriate
to also include this adjustment in the restatement. (v) Other Items The Company identified several other items that it has corrected through its
restatement. For the twelve and twenty-eight weeks ended August 9, 2004, and
twelve and twenty-eight weeks ended August 11, 2003, these additional items
aggregate to reduction to expense upon restatement of $117, $274, $38 and $102,
respectively. Also as a result, prior to the restatement, as of August 9,
2004, and January 31, 2004, the Companys accumulated deficit had been
understated by $591 and $865, respectively, with respect to these items. The impacts of these restatements on the condensed consolidated financial
statements are summarized below: PreviouslyReported
    
    Adjustments
    
    As RestatedAugust 9, 2004Balance Sheet DataAccounts receivable, net
    
    $
    24,408
    
    
    $
    (167
    )
    
    $
    24,241Inventories
    
    
    19,719
    
    
    
    (520
    )
    
    
    19,199Prepaid expenses
    
    
    10,346
    
    
    
    503
    
    
    
    10,849Total current assets
    
    
    138,338
    
    
    
    (184
    )
    
    
    138,154Property and equipment, net
    
    
    507,678
    
    
    
    (41,265
    )
    
    
    466,413Property under capital leases, net
    
    
    41,352
    
    
    
    (1,480
    )
    
    
    39,872Other assets
    
    
    37,383
    
    
    
    (1,964
    )
    
    
    35,419Total assets
    
    
    750,486
    
    
    
    (44,893
    )
    
    
    705,593Current portion of capital lease obligations
    
    
    5,430
    
    
    
    (14
    )
    
    
    5,416Other current liabilities
    
    
    106,175
    
    
    
    (1,770
    )
    
    
    104,405Total current liabilities
    
    
    189,561
    
    
    
    (1,784
    )
    
    
    187,777Capital lease obligations, less current portion
    
    
    53,485
    
    
    
    (226
    )
    
    
    53,259Other long-term liabilities
    
    
    54,983
    
    
    
    2,740
    
    
    
    57,723Total liabilities
    
    
    603,462
    
    
    
    730
    
    
    
    604,192Accumulated deficit
    
    
    (305,868
    )
    
    
    (45,623
    )
    
    
    (351,491
    )Total stockholders equity
    
    
    147,024
    
    
    
    (45,623
    )
    
    
    101,401Total liabilities and stockholders equity
    
    
    750,486
    
    
    
    (44,893
    )
    
    
    705,593
 PreviouslyReported
    
    Adjustments
    
    As RestatedTwelve Weeks Ended August 9, 2004Statement of Operations DataFranchised and licensed restaurants and other revenue
    
    $
    71,938
    
    
    $
    (6
    )
    
    $
    71,932Total revenue
    
    
    353,740
    
    
    
    (6
    )
    
    
    353,734Occupancy and other operating expenses
    
    
    61,034
    
    
    
    1,469
    
    
    
    62,503Franchised and licensed restaurants and other expenses
    
    
    52,557
    
    
    
    7
    
    
    
    52,564General and administrative expenses
    
    
    39,273
    
    
    
    (120
    )
    
    
    39,153Facility action charges, net
    
    
    1,955
    
    
    
    (72
    )
    
    
    1,883Total operating costs and expenses
    
    
    345,339
    
    
    
    1,284
    
    
    
    346,623
 15




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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) Operating income
    
    
    8,401
    
    
    
    (1,290
    )
    
    
    7,111Interest expense
    
    
    (11,971
    )
    
    
    8
    
    
    
    (11,963
    )Other expense, net
    
    
    (7,377
    )
    
    
    88
    
    
    
    (7,289
    )Loss before income taxes and discontinued operations
    
    
    (10,947
    )
    
    
    (1,194
    )
    
    
    (12,141
    )Income tax expense
    
    
    182
    
    
    
    62
    
    
    
    244Loss from continuing operations
    
    
    (11,129
    )
    
    
    (1,256
    )
    
    
    (12,385
    )Net loss
    
    
    (11,433
    )
    
    
    (1,256
    )
    
    
    (12,689
    )Basic loss per common share:Continuing operations
    
    
    (0.19
    )
    
    
    (0.02
    )
    
    
    (0.21
    )Net loss
    
    
    (0.20
    )
    
    
    (0.02
    )
    
    
    (0.22
    )Diluted loss per common share:Continuing operations
    
    
    (0.19
    )
    
    
    (0.02
    )
    
    
    (0.21
    )Net loss
    
    
    (0.20
    )
    
    
    (0.02
    )
    
    
    (0.22
    )
 PreviouslyReported
    
    Adjustments
    
    As RestatedTwelve Weeks Ended August 11, 2003Statement of Operations DataFranchised and licensed restaurants and other revenue
    
    $
    62,551
    
    
    $
    (4
    )
    
    $
    62,547Total revenue
    
    
    333,719
    
    
    
    (4
    )
    
    
    333,715Occupancy and other operating expenses
    
    
    61,870
    
    
    
    1,270
    
    
    
    63,140Franchised and licensed restaurants and other expenses
    
    
    48,507
    
    
    
    7
    
    
    
    48,514General and administrative expenses
    
    
    24,963
    
    
    
    (117
    )
    
    
    24,846Facility action charges, net
    
    
    831
    
    
    
    (421
    )
    
    
    410Total operating costs and expenses
    
    
    318,503
    
    
    
    739
    
    
    
    319,242Operating income
    
    
    15,216
    
    
    
    (743
    )
    
    
    14,473Interest expense
    
    
    (9,024
    )
    
    
    7
    
    
    
    (9,017
    )Other income, net
    
    
    228
    
    
    
    (152
    )
    
    
    76Income before income taxes and discontinued operations
    
    
    6,420
    
    
    
    (888
    )
    
    
    5,532Income tax expense
    
    
    211
    
    
    
    144
    
    
    
    355Income from continuing operations
    
    
    6,209
    
    
    
    (1,032
    )
    
    
    5,177Net income
    
    
    6,255
    
    
    
    (1,032
    )
    
    
    5,223Basic income per common share:Continuing operations
    
    
    0.11
    
    
    
    (0.02
    )
    
    
    0.09Net income
    
    
    0.11
    
    
    
    (0.02
    )
    
    
    0.09Diluted income per common share:Continuing operations
    
    
    0.11
    
    
    
    (0.02
    )
    
    
    0.09Net income
    
    
    0.11
    
    
    
    (0.02
    )
    
    
    0.09
 PreviouslyReported
    
    Adjustments
    
    As RestatedTwenty-Eight Weeks Ended August 9, 2004Statement of Operations DataFranchised and licensed restaurants and other revenue
    
    $
    161,386
    
    
    $
    (14
    )
    
    $
    161,372Total revenue
    
    
    809,060
    
    
    
    (14
    )
    
    
    809,046Occupancy and other operating expenses
    
    
    140,337
    
    
    
    3,421
    
    
    
    143,758Franchised and licensed restaurants and other expenses
    
    
    119,544
    
    
    
    12
    
    
    
    119,556General and administrative expenses
    
    
    77,058
    
    
    
    (248
    )
    
    
    76,810Facility action charges, net
    
    
    9,392
    
    
    
    (693
    )
    
    
    8,699Total operating costs and expenses
    
    
    777,434
    
    
    
    2,492
    
    
    
    779,926Operating income
    
    
    31,626
    
    
    
    (2,506
    )
    
    
    29,120Interest expense
    
    
    (23,699
    )
    
    
    16
    
    
    
    (23,683
    )Other expense, net
    
    
    (6,764
    )
    
    
    204
    
    
    
    (6,560
    )Income (loss) before income taxes and discontinued
operations
    
    
    1,163
    
    
    
    (2,286
    )
    
    
    (1,123
    )Income tax expense
    
    
    451
    
    
    
    144
    
    
    
    595Income (loss) from continuing operations
    
    
    712
    
    
    
    (2,430
    )
    
    
    (1,718
    )
 16




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) Net income (loss)
    
    
    245
    
    
    
    (2,430
    )
    
    
    (2,185
    )Basic income (loss) per common share:Continuing operations
    
    
    0.01
    
    
    
    (0.04
    )
    
    
    (0.03
    )Net income (loss)
    
    
    0.00
    
    
    
    (0.04
    )
    
    
    (0.04
    )Diluted income (loss) per common share:Continuing operations
    
    
    0.01
    
    
    
    (0.04
    )
    
    
    (0.03
    )Net income (loss)
    
    
    0.00
    
    
    
    (0.04
    )
    
    
    (0.04
    )Statement of Cash Flows DataNet cash provided by operating activities
    
    
    67,611
    
    
    
    (8
    )
    
    
    67,603Net cash used in investing activities
    
    
    (19,129
    )
    
    
    
    
    
    
    (19,129
    )Net cash used in financing activities
    
    
    (66,259
    )
    
    
    8
    
    
    
    (66,251
    )Net decrease in cash and cash equivalents
    
    
    (17,777
    )
    
    
    
    
    
    
    (17,777
    )
 PreviouslyReported
    
    
    
    
    
    Adjustments
    
    As RestatedTwenty-Eight Weeks Ended August 11, 2003Statement of Operations DataFranchised and licensed restaurants and other revenue
    
    $
    143,067
    
    
    
    
    
    
    $
    (9
    )
    
    $
    143,058Total revenue
    
    
    753,277
    
    
    
    
    
    
    
    (9
    )
    
    
    753,268Occupancy and other operating expenses
    
    
    140,891
    
    
    
    
    
    
    
    2,968
    
    
    
    143,859Franchised and licensed restaurants and other expenses
    
    
    113,416
    
    
    
    
    
    
    
    19
    
    
    
    113,435General and administrative expenses
    
    
    56,455
    
    
    
    
    
    
    
    
    
    
    
    56,455Facility action charges, net
    
    
    1,893
    
    
    
    
    
    
    
    (696
    )
    
    
    1,197Total operating costs and expenses
    
    
    728,732
    
    
    
    
    
    
    
    2,291
    
    
    
    731,023Operating income
    
    
    24,545
    
    
    
    
    
    
    
    (2,300
    )
    
    
    22,245Interest expense
    
    
    (21,202
    )
    
    
    
    
    
    
    16
    
    
    
    (21,186
    )Other expense, net
    
    
    (407
    )
    
    
    
    
    
    
    (346
    )
    
    
    (753
    )Income before income taxes and discontinued operations
    
    
    2,936
    
    
    
    
    
    
    
    (2,630
    )
    
    
    306Income tax expense
    
    
    430
    
    
    
    
    
    
    
    288
    
    
    
    718Income (loss) from continuing operations
    
    
    2,506
    
    
    
    
    
    
    
    (2,918
    )
    
    
    (412
    )Net income (loss)
    
    
    439
    
    
    
    
    
    
    
    (2,918
    )
    
    
    (2,479
    )Basic income (loss) per common share:Continuing operations
    
    
    0.04
    
    
    
    
    
    
    
    (0.05
    )
    
    
    (0.01
    )Net income (loss)
    
    
    0.01
    
    
    
    
    
    
    
    (0.05
    )
    
    
    (0.04
    )Diluted income (loss) per common share:Continuing operations
    
    
    0.04
    
    
    
    
    
    
    
    (0.05
    )
    
    
    (0.01
    )Net income (loss)
    
    
    0.01
    
    
    
    
    
    
    
    (0.05
    )
    
    
    (0.04
    )Statement of Cash Flows DataNet cash provided by operating activities
    
    
    44,742
    
    
    
    
    
    
    
    (267
    )
    
    
    44,475Net cash used in investing activities
    
    
    (11,772
    )
    
    
    
    
    
    
    260
    
    
    
    (11,512
    )Net cash used in financing activities
    
    
    (29,014
    )
    
    
    
    
    
    
    7
    
    
    
    (29,007
    )Net increase in cash and cash equivalents
    
    
    3,956
    
    
    
    
    
    
    
    
    
    
    
    3,956
 Certain amounts in Notes 1, 4, 5, 6 and 8 have been restated to reflect the
restatement adjustments described above. NOTE (3) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS On May 17, 2004, the Company completed adoption of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities  an interpretation of Accounting
Research Bulletin (ARB) No. 51(FIN 46). The FASB issued FIN 46 in January 2003. This interpretation is intended to
clarify the application of the majority voting interest requirement of ARB No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 17




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) 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 accompanying Condensed Consolidated Statement of Operations for the
twelve and twenty-eight weeks ended August 9, 2004, 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
for the twelve and twenty-eight weeks ended August 9, 2004, and in Other
Long-Term Liabilities in the accompanying Condensed Consolidated Balance Sheet
as of August 9, 2004, and also is not significant. Although this franchise entity has been included in the accompanying Condensed
Consolidated Financial Statements as of and for the twelve and twenty-eight
weeks ended August 9, 2004, the Company has no rights to the assets, nor 18




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) does it have any obligation with respect to the liabilities, of this franchise
entity. None of the Companys assets serve as collateral for the creditors of
this franchisee or any of the Companys other franchisees. There is also a portion of franchised restaurants that are VIEs for which the
Company holds a significant variable interest, but for which the Company is not
the primary beneficiary. The Companys significant exposures related to these
VIEs and other franchisees relate to the collection of amounts due the Company,
which are collected weekly or monthly, guarantees of franchisee debt provided
to third party lenders by the Company (see Note 10) 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 10 herein and in Note 9 to the Companys Consolidated
Financial Statements presented in the Companys Annual Report on Form 10-K/A
for the fiscal year ended January 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 (4) INTANGIBLE ASSETS The table below presents identifiable, definite-lived intangible assets as of
August 9, 2004, and January 31, 2004: August 9, 2004
    
    January 31, 2004Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingIntangible
    
    Amount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountAsset
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Trademarks
    
    $
    17,159
    
    
    $
    (2,078
    )
    
    $
    15,081
    
    
    $
    17,159
    
    
    $
    (1,616
    )
    
    $
    15,543Franchise agreements
    
    
    1,780
    
    
    
    (217
    )
    
    
    1,563
    
    
    
    1,780
    
    
    
    (169
    )
    
    
    1,611Favorable lease agreements
    
    
    9,006
    
    
    
    (5,661
    )
    
    
    3,345
    
    
    
    16,149
    
    
    
    (12,004
    )
    
    
    4,145$
    27,945
    
    
    $
    (7,956
    )
    
    $
    19,989
    
    
    $
    35,088
    
    
    $
    (13,789
    )
    
    $
    21,299
 19




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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) Amortization expense related to identifiable definite-lived intangible assets
was $744 and $1,492 for the twelve and twenty-eight week periods ended August
9, 2004, and $533 and $1,165 for the twelve and twenty-eight week periods ended
August 11, 2003, respectively. These intangible assets are amortized over
periods of six to 20 years and are included in Other Assets in the accompanying
Condensed Consolidated Balance Sheets. NOTE (5) INDEBTEDNESS AND INTEREST EXPENSE 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 Statement of Operations. 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. 20




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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) 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 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, 2003(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Facility
    
    $
    1,936
    
    
    $
    233
    
    
    $
    2,362
    
    
    $
    715Senior subordinated notes due 2009
    
    
    2,240
    
    
    
    4,212
    
    
    
    7,855
    
    
    
    9,827Capital lease obligations
    
    
    1,595
    
    
    
    1,805
    
    
    
    3,798
    
    
    
    4,2122004 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
    
    
    
    1,128$
    11,963
    
    
    $
    9,017
    
    
    $
    23,683
    
    
    $
    21,186
 NOTE (6) FACILITY ACTION CHARGES, NET The following transactions have been recorded in the accompanying condensed
consolidated statements of operations as facility action charges, net:  (i)
    
    impairment of long-lived assets for 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); 21




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)  (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 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, 2003(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Hardee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
    
    
    366
    
    
    
    1,966
    
    
    
    427
    
    
    
    3,126Impairment of assets to be held and used
    
    
    935
    
    
    
    690
    
    
    
    1,705
    
    
    
    805Gain on sales of restaurants and surplus
properties, net
    
    
    (169
    )
    
    
    (1,076
    )
    
    
    (1,203
    )
    
    
    (931
    )Amortization of discount related to
estimated liability for closing
restaurants
    
    
    259
    
    
    
    548
    
    
    
    595
    
    
    
    1,2791,042
    
    
    
    976
    
    
    
    5,407
    
    
    
    2,235Carl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
    
    
    198
    
    
    
    
    
    
    
    1,624
    
    
    
    503(Gain) loss on sales of restaurants and
surplus properties, net
    
    
    123
    
    
    
    (565
    )
    
    
    (193
    )
    
    
    (952
    )Amortization of discount related to
estimated liability for closing
restaurants
    
    
    67
    
    
    
    73
    
    
    
    182
    
    
    
    195269
    
    
    
    (737
    )
    
    
    1,469
    
    
    
    (485
    )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
    )
 22




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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) Twelve Weeks Ended
    
    Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003
    
    August 9, 2004
    
    August 11, 2003(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)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
    
    
    370
    
    
    
    1,966
    
    
    
    431
    
    
    
    3,126Impairment of assets to be held and used
    
    
    1,721
    
    
    
    1,119
    
    
    
    4,321
    
    
    
    1,737Gain on sales of restaurants and surplus
properties, net
    
    
    (48
    )
    
    
    (1,708
    )
    
    
    (1,393
    )
    
    
    (2,019
    )Amortization of discount related to
estimated liability for closing
restaurants
    
    
    327
    
    
    
    621
    
    
    
    780
    
    
    
    1,474$
    1,883
    
    
    $
    410
    
    
    $
    8,699
    
    
    $
    1,197
 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. 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
 NOTE (7) INCOME (LOSS) PER SHARE The Company presents basic and diluted income (loss) per share. Basic
income (loss) per share represents net income (loss) divided by
weighted-average shares outstanding. Diluted income (loss) per share represents
net income (loss) divided by weighted-average shares outstanding, including all
potentially dilutive securities and excluding all potentially anti-dilutive
securities. The dilutive effect of stock options and warrants is determined using the
treasury stock method, whereby exercise is assumed at the beginning of the
reporting period and proceeds from such exercise, 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, 2003(as restated)
    
    (as restated)2004 Convertible Notes
    
    
    N/A
    
    
    
    2,791
    
    
    
    125
    
    
    
    2,7912023 Convertible Notes
    
    
    11,811
    
    
    
    
    
    
    
    11,811
    
    
    
    Stock Options
    
    
    5,017
    
    
    
    4,870
    
    
    
    5,425
    
    
    
    5,843Warrants
    
    
    982
    
    
    
    982
    
    
    
    982
    
    
    
    982
 23




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) NOTE (8) 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 Consolidated Financial
Statements in our Annual Report on Form 10-K/A for the fiscal year ended
January 31, 2004). Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Twelve Weeks Ended August 9, 2004Revenue
    
    $
    181,340
    
    
    $
    158,611
    
    
    $
    11,898
    
    
    $
    1,885
    
    
    $
    353,734Operating income (loss)
    
    
    6,516
    
    
    
    2,535
    
    
    
    (1,973
    )
    
    
    33
    
    
    
    7,111Income (loss) before income taxes and
discontinued operations
    
    
    5,753
    
    
    
    (16,389
    )
    
    
    (2,002
    )
    
    
    497
    
    
    
    (12,141
    )Goodwill (as of August 9, 2004)
    
    
    22,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,649Twelve Weeks Ended August 11, 2003Revenue
    
    $
    168,296
    
    
    $
    154,199
    
    
    $
    10,832
    
    
    $
    388
    
    
    $
    333,715Operating income (loss)
    
    
    15,210
    
    
    
    (679
    )
    
    
    (25
    )
    
    
    (33
    )
    
    
    14,473Income (loss) before income taxes and
discontinued operations
    
    
    14,139
    
    
    
    (8,717
    )
    
    
    (19
    )
    
    
    129
    
    
    
    5,532Goodwill (as of August 11, 2003)
    
    
    22,649
    
    
    
    
    
    
    
    34,059
    
    
    
    
    
    
    
    56,708
 Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Twenty-eight Weeks Ended August 9, 2004Revenue
    
    $
    418,425
    
    
    $
    361,532
    
    
    $
    26,657
    
    
    $
    2,432
    
    
    $
    809,046Operating income (loss)
    
    
    27,565
    
    
    
    5,829
    
    
    
    (4,463
    )
    
    
    189
    
    
    
    29,120Income (loss) before income taxes and
discontinued operations
    
    
    25,598
    
    
    
    (22,877
    )
    
    
    (4,533
    )
    
    
    689
    
    
    
    (1,123
    )Goodwill (as of August 9, 2004)
    
    
    22,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,649Twenty-eight Weeks Ended August 11, 2003Revenue
    
    $
    387,013
    
    
    $
    341,337
    
    
    $
    23,971
    
    
    $
    947
    
    
    $
    753,268Operating income (loss)
    
    
    32,968
    
    
    
    (10,781
    )
    
    
    (433
    )
    
    
    491
    
    
    
    22,245Income (loss) before income taxes and
discontinued operations
    
    
    30,639
    
    
    
    (30,584
    )
    
    
    (431
    )
    
    
    682
    
    
    
    306Goodwill (as of August 11, 2003)
    
    
    22,649
    
    
    
    
    
    
    
    34,059
    
    
    
    
    
    
    
    56,708
 NOTE (9) NET ASSETS HELD FOR SALE In conjunction with the acquisition of Santa Barbara Restaurant Group, Inc.
(SBRG) in fiscal 2003, the Company made the decision to divest Timber Lodge
as the concept does not fit with the Companys core concepts of quick-service
and fast-casual restaurants. The sale of Timber Lodge was completed on
September 3, 2004, during the third quarter of fiscal 2005, as discussed below. 24




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) 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
 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 (10) COMMITMENTS AND CONTINGENT LIABILITIES Pursuant to the Facility, a letter of credit sub-facility in the amount of
$85,000 was established (see Note 5). Several standby letters of credit are
outstanding under this sub-facility, which secure 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 25




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) 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 10. 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. 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, 26




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) 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 expenses during the quarter ended August 9, 2004, to
increase the accrued liability for this matter to the estimated settlement
amount. 27




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Introduction and Safe Harbor Disclosure CKE Restaurants, Inc. and its subsidiaries (collectively referred to as the
Company) is comprised of the operations of Carls Jr., Hardees, La Salsa,
and Green Burrito, which is primarily operated as a dual-brand concept with
Carls Jr. quick-service restaurants. The following Managements Discussion and
Analysis should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements contained herein, and our Annual Report on
Form 10-K/A for the fiscal year ended January 31, 2004. All Note references
herein refer to the accompanying Notes to Condensed Consolidated Financial
Statements. Matters discussed in this Form 10-Q/A contain forward-looking statements
relating to future plans and developments, financial goals, and operating
performance that are based on our current beliefs and assumptions. Such
statements are subject to risks and uncertainties. Factors that could cause our
results to differ materially from those described include, but are not limited
to, whether or not restaurants will be closed and the number of restaurant
closures, consumers concerns or adverse publicity regarding our products, the
effectiveness of operating initiatives and advertising and promotional efforts
(particularly at the Hardees brand), changes in economic conditions or
prevailing interest rates, changes in the price or availability of commodities,
availability and cost of energy, workers compensation and general liability
premiums and claims experience, changes in our suppliers ability to provide
quality and timely products, delays in opening new restaurants or completing
remodels, severe weather conditions, the operational and financial success of
our franchisees, our franchisees willingness to participate in our strategy,
the availability of financing for us and our franchisees, unfavorable outcomes
in litigation, changes in accounting policies and practices, new legislation or
government regulation (including environmental laws), the availability of
suitable locations and terms for the sites designed for development, and other
factors as discussed in our filings with the Securities and Exchange
Commission. Forward-looking statements speak only as of the date they are made. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise,
except as required by law or the rules of the New York Stock Exchange. In October 2004, we identified accounting errors that occurred in fiscal 2000
and 1999 which had resulted in an understatement of our deferred rent liability
related to operating leases with fixed rent escalations over the lease terms.
As a result, we concluded that our rent expense, net, had been understated
through fiscal 2004 in the cumulative amount of $2,103. In the twelve and
twenty-eight weeks ended August 9, 2004, and twelve and twenty-eight weeks
ended August 11, 2003, rent expense, net, had been understated by $60, $138,
$232 and $543, respectively. As a result, our deferred rent liability as of
August 9, 2004, and January 31, 2004, had been understated by $2,241 and
$2,103, respectively. We have corrected these errors through restatement of our
consolidated financial statements. In November 2004, after identifying this error, we commenced an extensive
internal review of our consolidated financial statements (the November
Review) in order to identify any other potential accounting errors. Through
the November Review, we identified the following additional accounting errors: (i) Understated Depreciation and Amortization Expense We are party to a substantial number of real property leases and have
significant investments in related buildings, leasehold improvements and
certain intangible assets. In fiscal 1998, we extended the depreciable life we
applied to our owned buildings to the new expected economic life of the assets.
In addition, in certain cases the longer depreciable life exceeded the
duration of the applicable underlying land lease, including option periods,
resulting in an understatement of depreciation expense beginning in fiscal
1999. In determining whether each of our real property leases is an operating
lease or a capital lease and in calculating our straight-line rent expense, we
generally utilize the initial term of the lease, excluding option periods.
Capitalized 28




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) lease assets and liabilities are generally recorded and amortized based upon
the corresponding initial lease term. Historically, we depreciated or
amortized our investment in the related buildings, leasehold improvements and
certain intangible assets over a period that included both the initial term of
the lease and all option periods provided for in the lease (or the useful life
of the asset if shorter than the lease term plus option periods). During the November Review, we evaluated the propriety of the above accounting
treatment, and determined that we should use one consistent definition of lease
term, typically the initial lease term, for purposes of determining lease
classification, straight-line rent expense, and the depreciation or
amortization period for the related asset. As a result, we concluded that our
depreciation and amortization expense had been understated through fiscal 2004
in the cumulative amount of $30,222. In the twelve and twenty-eight weeks
ended August 9, 2004, and twelve and twenty-eight weeks ended August 11, 2003,
depreciation and amortization expense had been understated by $1,383, $3,223,
$1,342 and $3,138, respectively. As a result, our property and equipment, net,
and certain intangible assets as of August 9, 2004, and January 31, 2004, were
overstated by $33,445 and $30,222, respectively, with respect to this matter.
We have corrected these errors through our restatement. Our historical practices for determining depreciable life and amortization
periods also resulted in errors in the timing and classification of expense
recognition for fixed assets subjected to facility action charges in prior
fiscal periods. Generally, restaurants subject to facility action charges were
over-impaired in the fiscal year of the facility action charge to the extent

that such assets had been under-depreciated or under-amortized leading up to
the impairment date. Through fiscal 2004, these errors resulted in a
cumulative net understated expense of $1,014. This was comprised of a
cumulative understatement of depreciation and amortization expense of $17,300,
partially offset by a cumulative overstatement of facility action charges of
$16,286. In the twelve and twenty-eight weeks ended August 9, 2004, and twelve
and twenty-eight weeks ended August 11, 2003, we overstated facility action
charges by $182, $803, $421 and $696, respectively, and understated
depreciation and amortization expense by $22, $52, $98 and $229, respectively.
As a result, in the twelve and twenty-eight weeks ended August 9, 2004, and
twelve and twenty-eight weeks ended August 11, 2003, these errors resulted in a
net overstatement of expenses by $160, $751, $323 and $467, respectively. Also
as a result, our property and equipment, net, as of August 9, 2004, and January
31, 2004, was overstated by $263 and $1,014, respectively, with respect to this
matter. We have corrected these errors through our restatement. (ii) Unretired Property and Equipment We identified instances in which property and equipment was not retired in a
timely manner or in which certain expenditures were incorrectly capitalized. During fiscal 2001, we sold many company-operated restaurants to franchisees.
In one of these transactions, we sold 19 restaurant properties, of which eight
were fee-owned properties and eleven were leased properties. We sold the eight
fee-owned properties and subleased the eleven leased properties to the buyer.
In recording the transaction, we did not retire the net book value of the eight
fee-owned properties. Through fiscal 2004, this error resulted in a cumulative
net understated expense of $5,333. As a result of this error, for the twelve
and twenty-eight weeks ended August 9, 2004, and twelve and twenty-eight weeks
ended August 11, 2003, we overstated depreciation expense by $31, $72, $34 and
$79, respectively. Also as a result, as of August 9, 2004, and January 31,
2004, our property and equipment was overstated by approximately $5,261 and
$5,333, respectively. We have corrected these errors through our restatement. We also identified $1,315 of other property and equipment that was not timely
retired when the assets were removed from service, primarily in fiscal 2001 and
2003. Through fiscal 2004, this resulted in a cumulative understatement of
general and administrative expenses, net of subsequent over-depreciation, of
$1,175. As a result of these errors, for the twelve and twenty-eight weeks
ended August 9, 2004, and twelve and twenty-eight weeks ended August 11, 2003,
we understated general and administrative expenses by $99 and $83 and
overstated general and administrative expenses by $9 and $20, respectively.
Also as a result of these errors, as of August 9, 2004, and January 31, 2004,
our property and equipment was overstated by $1,258 and $1,175, respectively.
We have corrected these errors through our restatement. 29




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Additionally, the we did not timely retire certain software development
expenditures when the software applications were taken out of service. We also
did not properly expense certain software development costs when incurred, in
accordance with Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. These accounting
errors occurred primarily in fiscal 2001 and 2003. Through fiscal 2004, this
resulted in a cumulative understatement of expenses of $2,267. As a result of
these errors, for the twelve and twenty-eight weeks ended August 9, 2004, and
twelve and twenty-eight weeks ended August 11, 2003, we overstated depreciation
expense by $148, $311, $140 and $50, respectively. Also as a result of these
errors, as of August 9, 2004, and January 31, 2004, our property and equipment
was overstated by $1,956 and $2,267, respectively. We have corrected these
errors through our restatement. (iii) Overstated Property Tax Expense We
determined that we had misstated our property tax expense and accrued
property taxes in prior fiscal periods. These errors resulted from imprecise
metrics used to calculate our property tax accrual. Through fiscal 2004, this
resulted in a cumulative overstatement of property tax expenses of $1,198. As
a result of these errors, for the twelve and twenty-eight weeks ended August 9,
2004, and twelve and twenty-eight weeks ended August 11, 2003, we understated
property tax expenses by $108 and $250 and overstated property tax expenses by
$142 and $333, respectively. Also as a result, as of August 9, 2004, and
January 31, 2004, accrued property taxes were overstated by $948 and $1,198,
respectively. We have corrected these errors through our restatement. (iv) Understated Deferred Tax Liability In September 2004, we determined that, when we adopted SFAS No. 142, Goodwill
and Other Intangible Assets, at the beginning of fiscal 2003, as a result of
temporary differences relating to the treatment of goodwill relating to our
Carls Jr. brand, we should have recorded income tax expense to increase our
deferred tax valuation allowance, which would have resulted in a deferred tax
liability. We had not previously recorded this deferred tax liability.
Through fiscal 2004, this resulted in a cumulative understatement of income tax
expense of $1,413. As a result of these errors, for the twelve and
twenty-eight weeks ended August 9, 2004, and twelve and twenty-eight weeks
ended August 11, 2003, our income tax expense was understated by $62, $144,
$144 and $288, respectively. Also as a result, as of August 9, 2004, and
January 31, 2004, our deferred tax liability was understated by $1,557 and
$1,413, respectively. We determined in September 2004 that the error was
immaterial and did not record an adjustment. In light of the conclusion to
restate our financial statements for the other matters discussed herein, we
determined it was appropriate to also include this adjustment in the
restatement. (v) Other Items We identified several other items that we have corrected through our
restatement. For the twelve and twenty-eight weeks ended August 9, 2004, and
twelve and twenty-eight weeks ended August 11, 2003, these additional items
aggregate to reduction to expense upon restatement of $117, $274, $38 and $102,
respectively. Also as a result, prior to the restatement, as of August 9,
2004, and January 31, 2004, our accumulated deficit had been understated by
$591 and $865, respectively, with respect to these items. Adoption of New Accounting Pronouncements See Note 3 of Notes to Condensed Consolidated Financial Statements. Critical Accounting Policies Our reported results are impacted by the application of certain accounting
policies that require us to make subjective or complex judgments. These
judgments involve making estimates about the effect of matters that are
inherently uncertain and may significantly impact our quarterly or annual
results of operations and financial condition. Specific risks associated with
these critical accounting policies are described in the following paragraphs. 30




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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 (as
restated) Each quarter we evaluate the carrying value of individual restaurants when the
operating results have reasonably progressed to a point to adequately evaluate
the probability of continuing operating losses or a current expectation that a
restaurant will be sold or otherwise disposed of before the end of its
previously estimated useful life. We generally estimate the useful life of land
and owned buildings to be 20 to 35 years and estimate the remaining useful life
of restaurants subject to leases to range from the end of the lease term then
in effect to the end of such lease including all option periods. In making
these judgments, we consider the period of time since the restaurant was opened
or remodeled and the trend of operations and expectations for future sales
growth. For restaurants selected for review, we estimate the future estimated
cash flows from operating the restaurant over its estimated useful life. We
make judgments about future same-store sales and the operating expenses and
estimated useful life that we would expect with such level of same-store sales.
We employ a probability-weighted approach wherein we estimate the effectiveness
of future sales and marketing efforts on same-store sales and related estimated
useful life. In general, in expected same-store sales scenarios where sales are
not expected to increase, we generally assume a shorter than previously
estimated useful life. Quarterly, we update our model for estimating future cash flows based upon
experience gained, current intentions about refranchising restaurants and
closures, expected sales trends, internal plans and other relevant information.
As the operations of restaurants opened or remodeled in recent years progress
to the point that their profitability and future prospects can adequately be
evaluated, additional restaurants will become subject to review and the
possibility that impairments exist. Same-store sales are the key indicator used to estimate future cash flow for
evaluating recoverability. For each of our restaurant concepts, to evaluate
recoverability of restaurant assets we estimate same-store sales will increase
at an annual average rate of approximately 3.0% over the remaining useful life
of the restaurant. The inflation rate assumed in making this calculation
generally is 2.0%. If our same-store sales do not perform at or above our
forecasted level, or cost inflation exceeds our forecast and we are unable to
recover such costs through price increases, the carrying value of certain of
our restaurants may prove to be unrecoverable and we may incur additional
impairment charges in the future. 31




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Additionally, typically restaurants are operated for three years before we test
them for impairment. Also, restaurants typically are not tested for either two
or three years following a major remodel (contingent upon the extent of the
remodel). We believe this provides the restaurant sufficient time to establish
its presence in the market and build a customer base. If we were to test all
restaurants for impairment without regard to the amount of time the restaurants
were operating, the total asset impairment would increase substantially. In
addition, if recently opened or remodeled restaurants do not eventually
establish stronger market presence and build a customer base, the carrying
value of certain of these restaurants may prove to be unrecoverable and we may
incur additional impairment charges in the future. Impairment of Goodwill At the reporting unit level, goodwill is tested for impairment at least
annually during the first quarter of our fiscal year, and on an interim basis
if an event or circumstance indicates that it is more likely than not
impairment may have occurred. We consider the reporting unit level to be the
brand level since the components (e.g., restaurants) within each brand have
similar economic characteristics, including products and services, production
processes, types or classes of customers and distribution methods. The
impairment, if any, is measured based on the estimated fair value of the brand.
Fair value can be determined based on discounted cash flows, comparable sales
or valuations of other restaurant brands. Impairment occurs when the carrying
amount of goodwill exceeds its estimated fair value. 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. 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. 32




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) A significant assumption used in determining the amount of the estimated
liability for closing restaurants is the amount of the estimated liability for
future lease payments on vacant restaurants, which we determine based on our
brokers (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 accordance with SFAS No. 5, Accounting
for Contingencies(SFAS 5),which requires that we assess each contingency to
determine estimates of the degree of probability and range of possible
settlement. Those contingencies that are deemed to be probable and where the

amount of such settlement is reasonably estimable are accrued in our
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 10 of Notes to Condensed
Consolidated Financial Statements herein for further information). The
assessment of contingencies is highly subjective and requires judgments about
future events. Contingencies are reviewed at least quarterly to determine the
adequacy of the accruals and related 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. 33




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Franchised and Licensed Operations (as restated) We monitor the financial condition of certain franchisees and record provisions
for estimated losses on receivables when we believe that our franchisees are
unable to make their required payments to us. Each quarter we perform an
analysis to develop estimated bad debts for each franchisee. We then compare
the aggregate result of that analysis to the amount recorded in our
consolidated financial statements as the allowance for doubtful accounts and
adjust the allowance as appropriate. Additionally, we cease accruing royalties
and rent income from franchisees that are materially delinquent in paying or in
default for other reasons and reverse any royalties and rent income accrued
during the last 90 days. Over time our assessment of individual franchisees may
change. For instance, we have had some franchisees who, in the past, we had
determined required an estimated loss equal to the total amount of the
receivable, who have paid us in full or established a consistent record of
payments (generally one year) such that we determined an allowance was no
longer required. Depending on the facts and circumstances, there are a number of different
actions we and/or our franchisees may take to resolve franchise collections
issues. These actions may include the purchase of franchise restaurants by us
or by other franchisees, a modification to the franchise agreement, which may
include a provision to defer certain royalty payments or reduce royalty rates
in the future (if royalty rates are not sufficient to cover our costs of
service over the life of the franchise agreement, we record an estimated loss
at the time we modify the agreements), a restructuring of the franchisees
business and/or finances (including the restructuring of leases for which we
are the primary obligee  see further discussion below) or, if necessary, the
termination of the franchise agreement. The allowance established is based on
our assessment of the most probable course of action that will occur. Many of the restaurants that we sold to Hardees and Carls Jr. franchisees as
part of our refranchising program were on leased sites. Generally, we remain
principally liable for the lease and have entered into a sublease with the
franchisee on the same terms as the primary lease. We account for the sublease
payments received as franchising 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
$20,118 and $9,557, 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 $17,746 and is
included in the amount above. During fiscal 2005 or thereafter, some of these
franchisees may close restaurants and, accordingly, we may record an impairment
loss in connection with some of these closures. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities(SFAS 146), which we adopted on January 1, 2003, an
estimated liability for future lease obligations on restaurants operated by
franchisees for which we are the primary obligee is established on the date the
franchisee closes the restaurant. Also, we record an estimated liability for
subsidized lease payments when we sign a sublease agreement committing us to
the subsidy. The amount of the estimated liability is established using the methodology
described in Estimated Liability for Closing Restaurants above. Consistent with
SFAS 146, we have not established an additional estimated liability for
potential losses not yet incurred. The present value of the lease obligations
for which we remain principally liable 34




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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 24 of Notes to Consolidated Financial Statements of
our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004, we
have various stock-based compensation plans that provide options for certain
employees and outside directors to purchase common shares of stock. We have
elected to account for stock-based compensation in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees,which utilizes the intrinsic value method of accounting for
stock-based compensation, as opposed to using the fair-value method prescribed
in SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123). Because
of this election, we are required to make certain disclosures of pro forma net
income 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 restated) As disclosed in Note 21 of Notes to Consolidated Financial Statements of our
Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004, we
have recorded a valuation allowance against our deferred tax assets of
$188,689. The valuation allowance provides a 100% allowance against the
Companys deferred tax assets, net of deferred tax liabilities that may be
offset by the Companys deferred tax assets for income tax accounting purposes.
If our business turnaround is successful, and we have been profitable for a
number of years, and our prospects for the realization of our deferred tax
assets are more likely than not, we would reverse our valuation allowance and
credit income tax expense. In assessing the prospects for future profitability,
many of the assessments of same-store sales and cash flows mentioned above
become relevant. When circumstances warrant, we assess the likelihood that our
net deferred tax assets will more likely than not be realized from future
taxable income. As of August 9, 2004, and January 31, 2004, we have a net deferred tax
liability of $1,557 and $1,413, respectively, that arose from a financial
versus tax reporting difference in accounting for goodwill. With goodwill no
longer amortized for financial reporting purposes, while such amortization
continues for income tax reporting purposes, the reversal timing of the
associated deferred tax liability has become indeterminable. Accordingly, such
deferred tax liability may not be offset by the Companys deferred tax assets,
which all have determinable reversal timing for purposes of reducing the
Companys deferred tax valuation allowance. Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal
2005 Comparisons with Fiscal 2004(as restated) The factors discussed below impact comparability of operating performance for
the 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. 35




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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 9 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 3 of Notes to Condensed Consolidated Financial Statements. Seasonality We operate on a retail accounting calendar. Our fiscal year has 13 four-week
accounting periods and ends the last Monday in January. The first quarter of
our fiscal year has four periods, or 16 weeks. All other quarters have three
periods, or 12 weeks. Fiscal 2005 will be a 53-week fiscal year. The fourth
quarter of this fiscal year will have two accounting periods of four weeks and
one accounting period of five weeks. Our restaurant sales, and therefore our profitability, are subject to seasonal
fluctuations and are traditionally higher during the spring and summer months
because of factors such as increased travel upon school vacations and improved
weather conditions, which affect the publics dining habits. 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. 36




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Hardees Revolution We completed a comprehensive plan to revitalize Hardees involving a
repositioning of the brand as a premium 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. Financial Comparison The table below is a condensed presentation of certain changes in the
components of net income (loss), and is designed to facilitate the discussion
of results in this Form 10-Q/A. (All amounts are approximate and in millions)Second Fiscal Quarter
    
    Year-To-Date(as restated)
    
    (as restated)Current Year:Net loss
    
    $
    (12.7
    )
    
    $
    (2.2
    )Prior Year:Net income (loss)
    
    $
    5.2
    
    
    $
    (2.5
    )(Decrease) increase in net income or loss
    
    $
    (17.9
    )
    
    $
    0.3
 37




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) (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 2004(as restated)
    
    (as restated)Items causing net income/loss to decrease from the prior
year to the current year:Approximate store margin improvement in Hardees
restaurants
    
    $
    4.5
    
    
    $
    20.9Approximate store margin improvement in Carls Jr.
restaurants
    
    
    0.4
    
    
    
    5.2Increase in net franchising income, excluding
provisions for doubtful accounts
    
    
    3.7
    
    
    
    8.2Increase 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
    )
    
    
    (10.7
    )Increase in facility action charges
    
    
    (1.5
    )
    
    
    (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
    
    
    0.9
    
    
    
    1.7Increase in operating losses of La Salsa and Green
Burrito, excluding facility action charges and
provisions for doubtful accounts
    
    
    (1.4
    )
    
    
    (1.4
    )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
    
    
    1.8
    
    
    
    3.3All other, net
    
    
    0.0
    
    
    
    (0.2
    )(Decrease) increase in net income or loss
    
    $
    (17.9
    )
    
    $
    0.3
 38




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Operating Review The following tables are presented to facilitate Managements Discussion and
Analysis and are presented in the same format in which we present segment
information (see Note 8 of Notes to Condensed Consolidated Financial
Statements). Twelve Weeks Ended August 9, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other (A)
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    
    
    (as restated)Company-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
    
    
    21.2
    %
    
    
    22.1
    %
    
    
    34.2
    %Restaurant level margin
    
    
    20.4
    %
    
    
    14.0
    %
    
    
    1.6
    %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
    
    
    4,818
    
    
    
    2,640
    
    
    
    
    
    
    
    
    
    
    
    7,458Retail sales of variable interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,483
    
    
    
    1,483Other
    
    
    217
    
    
    
    153
    
    
    
    
    
    
    
    
    
    
    
    370Total franchising revenue
    
    
    51,928
    
    
    
    18,042
    
    
    
    400
    
    
    
    1,562
    
    
    
    71,932Franchising expense:Administrative expense (including provision for
bad debts)
    
    
    644
    
    
    
    418
    
    
    
    202
    
    
    
    
    
    
    
    1,264Distribution centers
    
    
    39,778
    
    
    
    4,318
    
    
    
    
    
    
    
    
    
    
    
    44,096Rent and other occupancy
    
    
    4,147
    
    
    
    1,594
    
    
    
    
    
    
    
    
    
    
    
    5,741Operating costs of variable interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,463
    
    
    
    1,463Total franchising expense
    
    
    44,569
    
    
    
    6,330
    
    
    
    202
    
    
    
    1,463
    
    
    
    52,564Net franchising income
    
    $
    7,359
    
    
    $
    11,712
    
    
    $
    198
    
    
    $
    99
    
    
    $
    19,368Facility action charges, net
    
    $
    269
    
    
    $
    1,042
    
    
    $
    567
    
    
    $
    5
    
    
    $
    1,883Operating income (loss)
    
    $
    6,516
    
    
    $
    2,535
    
    
    $
    (1,973
    )
    
    $
    33
    
    
    $
    7,111
 39




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##### Table of Contents



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)
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    
    
    (as restated)Company-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
    
    
    21.6
    %
    
    
    23.9
    %
    
    
    33.6
    %Restaurant level margin
    
    
    21.4
    %
    
    
    11.0
    %
    
    
    10.3
    %Advertising as a percentage of
company-operated revenue
    
    
    6.4
    %
    
    
    6.2
    %
    
    
    1.0
    %Franchising revenue:Royalties
    
    $
    5,078
    
    
    $
    9,192
    
    
    $
    358
    
    
    $
    62
    
    
    $
    14,690Distribution centers
    
    
    36,342
    
    
    
    4,209
    
    
    
    
    
    
    
    
    
    
    
    40,551Rent
    
    
    4,922
    
    
    
    2,081
    
    
    
    
    
    
    
    
    
    
    
    7,003Other
    
    
    162
    
    
    
    106
    
    
    
    35
    
    
    
    
    
    
    
    303Total franchising revenue
    
    
    46,504
    
    
    
    15,588
    
    
    
    393
    
    
    
    62
    
    
    
    62,547Franchising expense:Administrative expense (including provision
for bad debts)
    
    
    977
    
    
    
    1,511
    
    
    
    128
    
    
    
    
    
    
    
    2,616Distribution centers
    
    
    35,341
    
    
    
    3,891
    
    
    
    
    
    
    
    
    
    
    
    39,232Rent and other occupancy
    
    
    4,911
    
    
    
    1,755
    
    
    
    
    
    
    
    
    
    
    
    6,666Total franchising expense
    
    
    41,229
    
    
    
    7,157
    
    
    
    128
    
    
    
    
    
    
    
    48,514Net franchising income
    
    $
    5,275
    
    
    $
    8,431
    
    
    $
    265
    
    
    $
    62
    
    
    $
    14,033Facility action charges (gains), net
    
    $
    (737
    )
    
    $
    976
    
    
    $
    192
    
    
    $
    (21
    )
    
    $
    410Operating income (loss)
    
    $
    15,210
    
    
    $
    (679
    )
    
    $
    (25
    )
    
    $
    (33
    )
    
    $
    14,473
 40




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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)
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    
    
    (as restated)Company-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
    
    
    21.5
    %
    
    
    22.0
    %
    
    
    34.0
    %Restaurant level margin
    
    
    21.2
    %
    
    
    14.9
    %
    
    
    3.6
    %Advertising as a percentage of company-
operated revenue
    
    
    6.6
    %
    
    
    5.9
    %
    
    
    2.8
    %Franchising revenue:Royalties
    
    $
    13,345
    
    
    $
    24,171
    
    
    $
    924
    
    
    $
    183
    
    
    $
    38,623Distribution centers
    
    
    93,386
    
    
    
    9,653
    
    
    
    
    
    
    
    
    
    
    
    103,039Rent
    
    
    11,491
    
    
    
    5,852
    
    
    
    
    
    
    
    
    
    
    
    17,343Retail sales of variable interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,483
    
    
    
    1,483Other
    
    
    582
    
    
    
    269
    
    
    
    33
    
    
    
    
    
    
    
    884Total franchising revenue
    
    
    118,804
    
    
    
    39,945
    
    
    
    957
    
    
    
    1,666
    
    
    
    161,372Franchising expense:Administrative expense (including provision for
bad debts)
    
    
    1,996
    
    
    
    1,701
    
    
    
    653
    
    
    
    
    
    
    
    4,350Distribution centers
    
    
    90,765
    
    
    
    9,728
    
    
    
    
    
    
    
    
    
    
    
    100,493Rent and other occupancy
    
    
    9,482
    
    
    
    3,768
    
    
    
    
    
    
    
    
    
    
    
    13,250Operating costs of variable interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,463
    
    
    
    1,463Total franchising expense
    
    
    102,243
    
    
    
    15,197
    
    
    
    653
    
    
    
    1,463
    
    
    
    119,556Net franchising income
    
    $
    16,561
    
    
    $
    24,748
    
    
    $
    304
    
    
    $
    203
    
    
    $
    41,816Facility action charges, net
    
    $
    1,469
    
    
    $
    5,407
    
    
    $
    1,766
    
    
    $
    57
    
    
    $
    8,699Operating income (loss)
    
    $
    27,565
    
    
    $
    5,829
    
    
    $
    (4,463
    )
    
    $
    189
    
    
    $
    29,120
 41




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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)
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Company-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
    
    
    21.9
    %
    
    
    24.3
    %
    
    
    32.7
    %Restaurant level margin
    
    
    20.9
    %
    
    
    8.8
    %
    
    
    10.3
    %Advertising as a percentage of
company-operated revenue
    
    
    6.4
    %
    
    
    6.3
    %
    
    
    2.1
    %Franchising revenue:Royalties
    
    $
    11,647
    
    
    $
    19,665
    
    
    $
    771
    
    
    $
    172
    
    
    $
    32,255Distribution centers
    
    
    82,921
    
    
    
    11,067
    
    
    
    
    
    
    
    
    
    
    
    93,988Rent
    
    
    12,012
    
    
    
    4,201
    
    
    
    
    
    
    
    
    
    
    
    16,213Other
    
    
    357
    
    
    
    180
    
    
    
    65
    
    
    
    
    
    
    
    602Total franchising revenue
    
    
    106,937
    
    
    
    35,113
    
    
    
    836
    
    
    
    172
    
    
    
    143,058Franchising expense:Administrative expense (including provision
for bad debts)
    
    
    2,334
    
    
    
    3,066
    
    
    
    264
    
    
    
    
    
    
    
    5,664Distribution centers
    
    
    80,770
    
    
    
    11,257
    
    
    
    
    
    
    
    
    
    
    
    92,027Rent and other occupancy
    
    
    11,723
    
    
    
    4,021
    
    
    
    
    
    
    
    
    
    
    
    15,744Total franchising expense
    
    
    94,827
    
    
    
    18,344
    
    
    
    264
    
    
    
    
    
    
    
    113,435Net franchising income
    
    $
    12,110
    
    
    $
    16,769
    
    
    $
    572
    
    
    $
    172
    
    
    $
    29,623Facility action charges (gains), net
    
    $
    (485
    )
    
    $
    2,235
    
    
    $
    192
    
    
    $
    (745
    )
    
    $
    1,197Operating income (loss)
    
    $
    32,968
    
    
    $
    (10,781
    )
    
    $
    (433
    )
    
    $
    491
    
    
    $
    22,245
 (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 42




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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. (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 cumulative effect of
accounting changes, 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

    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Net income (loss)
    
    $
    5,648
    
    
    $
    (16,403
    )
    
    $
    (2,002
    )
    
    $
    68
    
    
    $
    (12,689
    )Loss from operations of discontinued
segment, excluding impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    23Interest expense (income)
    
    
    1,094
    
    
    
    10,857
    
    
    
    (2
    )
    
    
    14
    
    
    
    11,963Income tax expense
    
    
    106
    
    
    
    14
    
    
    
    
    
    
    
    124
    
    
    
    244Depreciation and amortization
    
    
    5,691
    
    
    
    9,052
    
    
    
    988
    
    
    
    41
    
    
    
    15,772Facility action charges, net
    
    
    269
    
    
    
    1,042
    
    
    
    567
    
    
    
    5
    
    
    
    1,883Premium on early redemption of Senior Notes
    
    
    
    
    
    
    9,126
    
    
    
    
    
    
    
    
    
    
    
    9,126Impairment of Timber Lodge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    281
    
    
    
    281EBITDA
    
    $
    12,808
    
    
    $
    13,688
    
    
    $
    (449
    )
    
    $
    556
    
    
    $
    26,603
 43




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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
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    
    
    (as restated)Net income (loss)
    
    $
    13,993
    
    
    $
    (8,744
    )
    
    $
    (19
    )
    
    $
    (7
    )
    
    $
    5,223Income from operations of discontinued segment, excluding
impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    (46
    )Interest expense (income)
    
    
    1,338
    
    
    
    7,726
    
    
    
    (32
    )
    
    
    (15
    )
    
    
    9,017Income tax expense
    
    
    146
    
    
    
    27
    
    
    
    
    
    
    
    182
    
    
    
    355Depreciation and amortization
    
    
    6,230
    
    
    
    9,053
    
    
    
    916
    
    
    
    42
    
    
    
    16,241Facility action charges (gains), net
    
    
    (737
    )
    
    
    976
    
    
    
    192
    
    
    
    (21
    )
    
    
    410EBITDA
    
    $
    20,970
    
    
    $
    9,038
    
    
    $
    1,057
    
    
    $
    135
    
    
    $
    31,200
 Twenty-eight Weeks Ended August 9, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    
    
    (as restated)Net income (loss)
    
    $
    25,351
    
    
    $
    (22,916
    )
    
    $
    (4,534
    )
    
    $
    (86
    )
    
    $
    (2,185
    )Income from operations of discontinued
segment, excluding impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (431
    )
    
    
    (431
    )Interest expense (income)
    
    
    2,767
    
    
    
    20,927
    
    
    
    (25
    )
    
    
    14
    
    
    
    23,683Income tax expense
    
    
    247
    
    
    
    39
    
    
    
    1
    
    
    
    308
    
    
    
    595Depreciation and amortization
    
    
    13,121
    
    
    
    21,269
    
    
    
    2,333
    
    
    
    95
    
    
    
    36,818Facility action charges, net
    
    
    1,469
    
    
    
    5,407
    

    
    
    1,766
    
    
    
    57
    
    
    
    8,699Premium on early redemption of Senior Notes
    
    
    
    
    
    
    9,126
    
    
    
    
    
    
    
    
    
    
    
    9,126Impairment of Timber Lodge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    898
    
    
    
    898EBITDA
    
    $
    42,955
    
    
    $
    33,852
    
    
    $
    (459
    )
    
    $
    855
    
    
    $
    77,203
 Twenty-eight Weeks Ended August 11, 2003Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Net income (loss)
    
    $
    30,294
    
    
    $
    (30,645
    )
    
    $
    (431
    )
    
    $
    (1,697
    )
    
    $
    (2,479
    )Loss from operations of discontinued segment, excluding impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501
    
    
    
    501Interest expense (income)
    
    
    2,864
    
    
    
    18,357
    
    
    
    (27
    )
    
    
    (8
    )
    
    
    21,186Income tax expense
    
    
    345
    
    
    
    61
    
    
    
    
    
    
    
    312
    
    
    
    718Depreciation and amortization
    
    
    14,331
    
    
    
    20,453
    
    
    
    2,038
    
    
    
    98
    
    
    
    36,920Facility action charges (gains), net
    
    
    (485
    )
    
    
    2,235
    
    
    
    192
    
    
    
    (745
    )
    
    
    1,197Impairment of Timber Lodge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,566
    
    
    
    1,566EBITDA
    
    $
    47,349
    
    
    $
    10,461
    
    
    $
    1,772
    
    
    $
    27
    
    
    $
    59,609
 44




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) The following table reconciles EBITDA (a non-GAAP measure) to cash flow
provided by operating activities (a GAAP measure): Twelve Weeks Ended
    
    Twenty-eight Weeks EndedAugust 9, 2004
    
    August 11, 2003
    
    August 9, 2004
    
    August 11, 2003(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Net cash provided by operating
activities
    
    $
    20,162
    
    
    $
    26,311
    
    
    $
    67,603
    
    
    $
    44,475Interest expense
    
    
    11,963
    
    
    
    9,017
    
    
    
    23,683
    
    
    
    21,186Income tax expense
    
    
    244
    
    
    
    355
    
    
    
    595
    
    
    
    718Premium 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
    
    
    (5,031
    )
    
    
    (309
    )
    
    
    (6,316
    )
    
    
    (78
    )Deferred income taxes
    
    
    (62
    )
    
    
    (144
    )
    
    
    (144
    )
    
    
    (288
    )Other non-cash credits
    
    
    (183
    )
    
    
    149
    
    
    
    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
    
    
    3,321
    
    
    
    5,147
    
    
    
    (6,670
    )
    
    
    (6,030
    )Net change in accounts payable and
other current and long term
liabilities
    
    
    (14,030
    )
    
    
    (9,349
    )
    
    
    (14,926
    )
    
    
    (346
    )EBITDA from operations of
discontinued segment
    
    
    (19
    )
    
    
    32
    
    
    
    441
    
    
    
    (503
    )Net cash provided to discontinued
segment
    
    
    280
    
    
    
    51
    
    
    
    252
    
    
    
    216EBITDA, including operations of
discontinued segment
    
    
    26,584
    
    
    
    31,232
    
    
    
    77,644
    
    
    
    59,106Less: EBITDA from operations of
discontinued segment
    
    
    19
    
    
    
    (32
    )
    
    
    (441
    )
    
    
    503EBITDA
    
    $
    26,603
    
    
    $
    31,200
    
    
    $
    77,203
    
    
    $
    59,609
 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 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
    
    Change(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Company
    
    
    429
    
    
    
    442
    
    
    
    (13
    )
    
    $
    129,412
    
    
    $
    121,792
    
    
    $
    7,620
    
    
    $
    299,621
    
    
    $
    280,076
    
    
    $
    19,545Franchised and
licensed(a)
    
    
    587
    
    
    
    558
    
    
    
    29
    
    
    
    51,928
    
    
    
    46,504
    
    
    
    5,424
    
    
    
    118,804
    
    
    
    106,937
    
    
    
    11,867Total
    
    
    1,016
    
    
    
    1,000
    
    
    
    16
    
    
    $
    181,340
    
    
    $
    168,296
    
    
    $
    13,044
    
    
    $
    418,425
    
    
    $
    387,013
    
    
    $
    31,412
 45




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) (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
    
    Weeks(as restated)
    
    (as restated)Restaurant-level margin for the period ended
August 11, 2003
    
    
    21.4
    %
    
    
    20.9
    %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
    
    
    0.2
    
    
    
    0.1Decrease in repair and maintenance expense
    
    
    0.2
    
    
    
    0.2Increase in cost of promotional items
    
    
    
    
    
    
    (0.3
    )Other, net
    
    
    0.1
    
    
    
    0.3Restaurant-level margin for the period ended
August 9, 2004
    
    
    20.4
    %
    
    
    21.2
    %
 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. 46




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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 $5,424, or 11.7%, to
$51,928 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 $11,867, or 11.1%, to
$118,804 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 $2,084, or 39.5%, during the twelve weeks
ended August 9, 2004, as compared to the twelve weeks ended August 11, 2003,
and increased $4,451, or 36.8%, 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. 47




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Although not required to do so, approximately 89% of Carls Jr. franchised and
licensed restaurants purchase food, paper and other supplies from us. 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
    
    Change(as restated)
    
    (as restated)
    
    
    
    
    
    (as restated)
    
    (as restated)Company
    
    
    690
    
    
    
    729
    
    
    
    (39
    )
    
    $
    140,569
    
    
    $
    138,611
    
    
    $
    1,958
    
    
    $
    321,587
    
    
    $
    306,224
    
    
    $
    15,363Franchised and
licensed
    
    
    1,377
    
    
    
    1,425
    
    
    
    (48
    )
    
    
    18,042
    
    
    
    15,588
    
    
    
    2,454
    
    
    
    39,945
    
    
    
    35,113
    
    
    
    4,832Total
    
    
    2,067
    
    
    
    2,154
    
    
    
    (87
    )
    
    $
    158,611
    
    
    $
    154,199
    
    
    $
    4,412
    
    
    $
    361,532
    
    
    $
    341,337
    
    
    $
    20,195
 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 48




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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. The changes in restaurant-level margins are explained as follows: Twelve
    
    Twenty-eightWeeks
    
    Weeks(as restated)
    
    (as restated)Restaurant-level margin for the period ended August 11, 2003
    
    
    11.0
    %
    
    
    8.8
    %Decrease in labor and incentive costs, excluding workers compensation
    
    
    1.1
    
    
    
    3.0Decrease in food and packaging costs
    
    
    1.1
    
    
    
    1.4Increase 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
    
    
    0.3
    
    
    
    0.4Decrease in restaurant opening costs
    
    
    
    
    
    
    0.2Other, net
    
    
    0.3
    
    
    
    0.1Restaurant-level margin for the period ended August 9, 2004
    
    
    14.0
    %
    
    
    14.9
    %
 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 49




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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 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 $2,454, or 15.7%, 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 $559
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 $4,832, 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 $3,281, or 38.9%, during the twelve weeks
ended August 9, 2004 and increased $7,979, or 47.6%, 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. 50




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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: RevenueRestaurant PortfolioSecond 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 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 1.6% and 10.3% 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 3.6% and 10.3% 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 51




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Restaurants and Other and the resulting minority interest in the income of the
VIE franchisee is included in Other Income (Expense), Net, in the accompanying
Condensed Consolidated Statements of Operations for the twelve and twenty-eight
weeks ended August 9, 2004. (See Note 3 of the Notes to Condensed Consolidated
Financial Statements for further discussion of the VIE franchise.) The Hardees
cooperative advertising funds consist of the Hardees National Advertising Fund
and many local advertising cooperative funds. Each of these funds is a separate
non-profit association with all the proceeds segregated and managed by a
third-party accounting service company. The group of funds has been reported in
the Companys accompanying Condensed Consolidated Balance Sheet as of August 9,
2004, 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 Condensed Consolidated Statements
of Operations on a net basis, whereby contributions from franchisees have been
recorded as offsets to our reported advertising expenses. (See Note 3 of the
Notes to 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. 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 (as restated) General and administrative expenses were 11.1% of total revenue during the
twelve weeks ended August 9, 2004, as compared to 7.4% during the twelve weeks
ended August 11, 2003. For the same period, general and administrative expenses
increased $14,307, or 57.6%, to $39,153 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 10 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 $20,355, or 36.1%, to $76,810 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. 52




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Consolidated Interest Expense (as restated) During the twelve weeks ended August 9, 2004, interest expense increased
$2,946, or 32.7%, to $11,963, 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 5 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 $23,683, 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 (as restated) 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 $7,365, to $7,289, 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 $5,807, to $6,560, mainly due to the
same factors noted above. Consolidated Income Tax Expense (as restated) We recorded income tax expense of $244 and $355 for the twelve week periods
ended August 9, 2004, and August 11, 2003, respectively. For the twenty-eight
week periods ended August 9, 2004, and August 11, 2003, we recorded income tax
expense of $595 and $718, respectively. These amounts for both periods were
comprised of foreign income taxes and deferred taxes associated with a
difference in amortization of goodwill for financial reporting versus income
tax reporting purposes. We believe that our net operating loss carryforward is
such that we will not be required to pay federal or state income taxes on this
fiscal years taxable earnings, if any, and have only provided for foreign
income taxes. At January 31, 2004, we had federal net operating loss (NOL) carryforwards of
approximately $91,970, expiring in varying amounts in the years 2010 through
2024, and state NOL carryforwards totaling approximately $335,948, expiring in
varying amounts in the years 2006 through 2024. We have federal NOL
carryforwards for alternative minimum tax purposes of approximately $72,210 and
an alternative minimum tax credit carryforward of approximately $10,691. We
have also generated general business credit carryforwards of approximately
$10,952, expiring in varying amounts in the years 2020 through 2024, and
foreign tax credits in the amount of $2,829, expiring in varying amounts in the
years 2008 and 2009. We have recorded a 100% valuation allowance against our net deferred tax
assets, net of deferred tax liabilities that may be offset by our deferred tax
assets for income tax accounting purposes. If our business turnaround
continues to result in sustained profitability and our prospects for the
realization of our deferred tax assets are more likely than not, we would then
reverse our valuation allowance and record an income tax benefit. As
circumstances warrant, we continue to assess the likelihood that our net
deferred tax assets will more likely than not be realized. As of January 31,
2004, we maintained a deferred tax liability of $1,413, which results from our
net deferred tax assets and tax valuation allowance of approximately $187,276
and $188,689, respectively. Liquidity and Capital Resources (as restated) We have historically financed our business through cash flow from operations,
borrowings under our credit facility and the sale of restaurants. Our most
significant cash uses during the next 12 months will 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 53




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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 0.74 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 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(SFAS 133). Accordingly, the change in the fair value of
the $371 of interest rate cap premiums will be recognized quarterly in interest
expense in the 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. 54




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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 to cure periods in
certain instances, the lenders under our Facility may demand repayment of
borrowings prior to stated maturity upon certain events, including if we breach
the terms of the agreement, suffer a material adverse change, engage in a
change of control transaction, suffer certain adverse legal judgments, in the
event of specified events of insolvency or if we default 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 $67,603, an increase of $23,128 over the prior year comparable
period. The increase resulted mainly from a trend change in the 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 loss during the twenty-eight weeks ended August 9, 2004 is slightly lower
($294) than net loss for the 55




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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 $66,251, 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. 56




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Our principal exposure to financial market risks relates to the impact that
interest rate changes could have on our 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 133.
Accordingly, the change in the fair value of the $371 of interest rate cap
premiums will be recognized quarterly in interest expense in the consolidated
statement of operations. During the 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 Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in the Companys reports
under the Securities Exchange Act of 1934, such as this Form 10-Q/A, is
reported in accordance with the Securities and Exchange Commissions rules.
Disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In connection with the preparation of the Form 10-Q as of August 9, 2004, the
Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures as of the end of the period
covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 as amended. Based on that evaluation, the
Companys Chief Executive Officer 57




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and Chief Financial Officer concluded that the Companys disclosure controls
and procedures, as of the end of the period covered by the Form 10-Q report,
were effective in timely alerting them to material information relating to the
Company required to be included in the Companys periodic filings. Beginning with the Companys fiscal year ending January 31, 2005, in addition
to reporting on disclosure controls and procedures, Section 404 of the
Sarbanes-Oxley Act of 2002 will require the Companys senior management to
provide an annual report on internal controls over financial reporting. This
report must contain (i) a statement of managements responsibility for
establishing and maintaining adequate internal controls over financial
reporting for the Company, (ii) a statement identifying the framework used by
management to conduct the required evaluation of the effectiveness of internal
controls over financial reporting, (iii) managements assessment of the
effectiveness of internal controls over financial reporting as of the end of
the most recent fiscal year, including a statement as to whether or not the
Companys internal controls over financial reporting are effective, and (iv) a
statement that the Companys independent auditors have issued an attestation
report on managements assessment of internal controls over financial
reporting. Pursuant to this requirement, in early fiscal 2005 management
established an internal control steering committee and project team, engaged
outside consultants and adopted a detailed project work plan to document and
assess the adequacy of internal controls over financial reporting, remediate
any control weaknesses that may be identified, validate through testing that
the controls are functioning as documented and implement a continuous reporting
and improvement process for internal controls over financial reporting. In October and November of 2004, through an extensive internal review of its
consolidated financial statements, the Companys management identified several
accounting matters that led to a conclusion by the Companys Audit Committee of
the Board of Directors that previously filed financial statements of the
Company should be restated. See Managements Discussion and Analysis of
Financial Condition and Results of Operations and Note 2 of the Notes to
Consolidated Financial Statements included within this Form 10-Q/A for further
detailed discussion and quantification of the accounting errors identified. In December 2004, management determined that the accounting errors identified
in its internal review resulted collectively from material weaknesses in
internal controls over financial reporting in the associated accounting areas.
The Companys independent registered public accounting firm, KPMG LLP,
concurred with the Company that the matters identified in the Companys
internal review collectively resulted from a material weakness (as such term is
defined under standards established by the American Institute of Certified
Public Accountants) in the Companys internal controls over financial
reporting. Based on the information obtained during its internal review and Section 404
compliance work subsequent to August 9, 2004, the Companys Chief Executive
Officer and Chief Financial Officer concluded in December 2004 that, because of
the material weaknesses in internal controls over financial reporting described
above, the Companys disclosure controls and procedures, as of the end of the
period covered by this Form 10-Q/A report, were not effective in timely
alerting them to material information relating to the Company required to be
included in the Companys periodic filings. Except as described below, there have been no changes in the Companys internal
controls over financial reporting during the Companys fiscal quarter ended
August 9, 2004, or thereafter, that have materially affected, or are reasonably
likely to materially affect, the Companys internal controls over financial
reporting. The Company has addressed several deficiencies identified during its internal
review and Section 404 compliance work. Such efforts have resulted in changes
in the Companys internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting. These efforts have resulted in the
following:  
    
    Revisions to the Companys accounting policies to eliminate
inconsistencies in its definition of lease term, strengthening of
accounting practices whereby applicable lease terms are reviewed and
appropriately considered by the Fixed Asset Accounting Department when
establishing the depreciable lives for fixed and intangible assets that
are subject to leases, and establishment of management review and
approval procedures related thereto. 58




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
    
    Formalization and improvement of existing communication practices
among the Companys Real Estate, Fixed Assets and General Accounting
Departments to ensure timely and complete accounting for and financial
reporting of facility actions such as restaurant sales, closures and
lease/sublease modifications, or changes in the Companys intention to
sell or close restaurants or modify lease or sublease arrangements.  
    
    Increases to lease accounting staffing levels, additional training
of General Accounting Department personnel with respect to all facets
of lease accounting applicable to the Company, and implementation of
management review and approval procedures related thereto.  
    
    Formalization and improvement of existing documentation practices
to ensure communication of asset dispositions to the Companys
Accounting Department.  
    
    Implementation of annual fixed asset physical inventories in
restaurant operations and annual fixed asset listing reviews by
Facilities Department and Information Technology Department personnel.  
    
    Training of Information Technology Department and General
Accounting Department personnel, and establishment of communication
mechanisms between these two departments with respect to accounting for
the costs of computer software developed or obtained for internal use.  
    
    Development and implementation of an enhanced Delegation of
Authority policy to ensure that Company expenditures and contractual
commitments are approved in accordance with the Companys management
plan.  
    
    Additional training of the Companys Accounts Payable Department
personnel to ensure they review invoices, before making payment, to
ensure approval compliance in accordance with the Delegation of
Authority.  
    
    Formalization and improvement of existing communication practices
among General Accounting and other Corporate Departments throughout the
Company to ensure timely and complete accrual for incurred but unbilled
legal, information technology and other professional services.  
    
    Enhancement of property tax accrual preparation and management
review within the Companys Corporate Tax Department.  
    
    Additional training of individuals in the Companys Corporate Tax
Department regarding the appropriate accounting for deferred income
taxes arising from financial versus tax reporting differences with
respect to goodwill.  
    
    Segregation of development and production support duties within the
Companys Information Technology Department with respect to its key
accounting and financial reporting systems.  
    
    Formalization of documentation of management reviews that occur
during the periodic accounting close process.  
    
    Segregation of wire transfer and other electronic payment
initiation and approval duties within the Companys Treasury
Department.  
    
    Enhancement of revenue recognition cut-off procedures in the
Companys equipment distribution business to ensure proper revenue
recognition within each fiscal quarter. The Company continues to implement remedial measures in response to specific
accounting and reporting issues related to the restatement and its ongoing
Section 404 compliance work. These remedial measures will include 59




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additional personnel and organizational changes to improve supervision and
increased training for finance and accounting personnel. The Company will also
continue to develop new policies and procedures and educate and train its
employees on its existing policies and procedures in an effort to constantly
improve its internal controls over financial reporting and other disclosure
controls and procedures. Furthermore, the Section 404 compliance work may
identify additional weaknesses in the Companys system of internal controls
that may require additional remedial measures. Management will consider the
status of these remedial measures when assessing the effectiveness of the
Companys internal controls over financial reporting and other disclosure
controls and procedures as of January 31, 2005. 
 Part II. Other Information. 
 Item 1. Legal Proceedings. Information regarding legal proceedings is incorporated by reference from
Note 10 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 (dollars in thousands, except per share amounts): (a)
    
    (b)
    
    (c)
    
    (d)MaximumNumber (orApproximateDollarValue) ofTotal
    
    Shares (orNumber of Shares
    
    Units) thatAverage
    
    (or Units)
    
    May Yet BeTotal
    
    Price
    
    Purchased as Part
    
    PurchasedNumber of Shares
    
    Paid per
    
    of Publicly
    
    Under the(or Units)
    
    Share
    
    Announced Plans
    
    Plans orPeriod
    
    Purchased
    
    (or Unit)
    
    or Programs
    
    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. 60




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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
 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.
 61




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized. CKE RESTAURANTS, INC.(Registrant)Date: December 17, 2004
    
    /s/ Theodore AbajianTheodore AbajianExecutive Vice PresidentChief Financial Officer
 62




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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.
 63