##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q  (Mark One)x
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934.For the quarterly period ended November 1, 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 December 3, 2004, 57,740,267 shares of the Registrants Common Stock
were outstanding.




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CKE RESTAURANTS, INC. AND SUBSIDIARIES INDEX  
 PagePart I. Financial InformationItem 1 Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of November 1, 2004 and January 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the twelve weeks and forty weeks ended November 1, 2004 and November 3, 2003
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the forty weeks ended November 1, 2004
    
    
    5Condensed Consolidated Statements of Cash Flows for the forty weeks ended November 1, 2004 and November 3, 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    51Item 4 Controls and Procedures
    
    
    51Part II. Other InformationItem 1 Legal Proceedings
    
    
    54Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    54Item 6 Exhibits
    
    
    54Signatures
    
    
    55EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART 1. FINANCIAL INFORMATION 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par values)
(Unaudited)
 November 1, 2004
    
    January 31, 2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,872
    
    
    $
    54,355Accounts receivable, net of allowance for doubtful accounts of
$2,632 as of November 1, 2004 and $5,580 as of January 31,
2004
    
    
    27,128
    
    
    
    26,562Related party trade receivables
    
    
    7,023
    
    
    
    7,991Inventories
    
    
    18,060
    
    
    
    17,972Prepaid expenses
    
    
    13,407
    
    
    
    16,053Assets held for sale
    
    
    1,825
    
    
    
    18,760Advertising fund assets, restricted
    
    
    22,095
    
    
    
    Other current assets
    
    
    1,731
    
    
    
    1,656Total current assets
    
    
    112,141
    
    
    
    143,349Notes receivable, net of allowance for doubtful accounts of
$7,053 as of November 1, 2004 and $6,186 as of January 31, 2004
    
    
    3,762
    
    
    
    2,317Property and equipment, net
    
    
    463,143
    
    
    
    479,660Property under capital leases, net
    
    
    37,961
    
    
    
    44,895Goodwill
    
    
    22,649
    
    
    
    22,649Other assets
    
    
    33,579
    
    
    
    37,433Total assets
    
    $
    673,235
    
    
    $
    730,303LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of bank indebtedness and other long-term debt
    
    $
    5,510
    
    
    $
    26,843Current portion of capital lease obligations
    
    
    5,127
    
    
    
    7,028Accounts payable
    
    
    55,932
    
    
    
    47,592Advertising fund liabilities
    
    
    22,095
    
    
    
    Other current liabilities
    
    
    101,173
    
    
    
    105,419Total current liabilities
    
    
    189,837
    
    
    
    186,882Bank indebtedness and other long-term debt, less current portion
    
    
    156,039
    
    
    
    22,428Senior subordinated notes
    
    
    
    
    
    
    200,000Convertible subordinated notes due 2023
    
    
    105,000
    
    
    
    105,000Capital lease obligations, less current portion
    
    
    52,020
    
    
    
    56,877Other long-term liabilities
    
    
    57,635
    
    
    
    56,077Total liabilities
    
    
    560,531
    
    
    
    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;
57,735,000 shares issued and 57,535,000 shares outstanding at
November 1, 2004; 59,216,000 shares issued and 57,631,000
shares outstanding at January 31, 2004
    
    
    577
    
    
    
    592Additional paid-in capital
    
    
    453,238
    
    
    
    464,689Officer and non-employee director notes receivable
    
    
    (547
    )
    
    
    (2,530
    )Accumulated deficit
    
    
    (338,359
    )
    
    
    (349,306
    )Treasury stock at cost, 200,000 and 1,585,000 shares at
November 1, 2004 and January 31, 2004, respectively
    
    
    (2,205
    )
    
    
    (10,406
    )Total stockholders equity
    
    
    112,704
    
    
    
    103,039Total liabilities and stockholders equity
    
    $
    673,235
    
    
    $
    730,303
 See Accompanying Notes to Condensed Consolidated Financial Statements 3




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts)
(Unaudited)
 Twelve Weeks Ended
    
    Forty Weeks EndedNovember 1, 2004
    
    November 3, 2003
    
    November 1, 2004
    
    November 3, 2003(as restated)
    
    
    
    
    
    (as restated)Revenue:Company-operated restaurants
    
    $
    280,618
    
    
    $
    271,026
    
    
    $
    928,291
    
    
    $
    881,237Franchised and licensed restaurants and
other
    
    
    68,328
    
    
    
    63,747
    
    
    
    229,700
    
    
    
    206,804Total revenue
    
    
    348,946
    
    
    
    334,773
    
    
    
    1,157,991
    
    
    
    1,088,041Operating costs and expenses:Restaurant operations:Food and packaging
    
    
    84,213
    
    
    
    81,600
    
    
    
    273,834
    
    
    
    262,549Payroll and other employee benefit
expenses
    
    
    85,162
    
    
    
    86,687
    
    
    
    286,970
    
    
    
    284,232Occupancy and other operating
expenses
    
    
    62,490
    
    
    
    61,735
    
    
    
    206,248
    
    
    
    205,595231,865
    
    
    
    230,022
    
    
    
    767,052
    
    
    
    752,376Franchised and licensed restaurants and
other
    
    
    51,977
    
    
    
    49,967
    
    
    
    171,532
    
    
    
    163,400Advertising expenses
    
    
    16,466
    
    
    
    16,719
    
    
    
    56,140
    
    
    
    54,302General and administrative expenses
    
    
    28,630
    
    
    
    25,661
    
    
    
    105,439
    
    
    
    82,119Facility action charges, net
    
    
    1,045
    
    
    
    1,084
    
    
    
    9,745
    
    
    
    2,280Total operating costs and expenses
    
    
    329,983
    
    
    
    323,453
    
    
    
    1,109,908
    
    
    
    1,054,477Operating income
    
    
    18,963
    
    
    
    11,320
    
    
    
    48,083
    
    
    
    33,564Interest expense
    
    
    (6,746
    )
    
    
    (9,940
    )
    
    
    (30,429
    )
    
    
    (31,126
    )Other income (expense), net
    
    
    1,024
    
    
    
    (217
    )
    
    
    (5,536
    )
    
    
    (971
    )Income before income taxes and
discontinued operations
    
    
    13,241
    
    
    
    1,163
    
    
    
    12,118
    
    
    
    1,467Income tax expense (benefit)
    
    
    (70
    )
    
    
    335
    
    
    
    525
    
    
    
    1,053Income from continuing operations
    
    
    13,311
    
    
    
    828
    
    
    
    11,593
    
    
    
    414Income (loss) from operations of
discontinued segment (net of income tax
expense (benefit) of $0, $(21), $0 and
$(47) for the twelve-week periods ended
November 1, 2004 and November 3, 2003,
and the forty week periods ended
November 1, 2004 and November 3, 2003,
respectively)
    
    
    (179
    )
    
    
    111
    
    
    
    (646
    )
    
    
    (1,955
    )Net income (loss)
    
    $
    13,132
    
    
    $
    939
    
    
    $
    10,947
    
    
    $
    (1,541
    )Basic income (loss) per common share:Continuing operations
    
    $
    0.23
    
    
    $
    0.02
    
    
    $
    0.20
    
    
    $
    0.01Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.04
    )Net income (loss)
    
    $
    0.23
    
    
    $
    0.02
    
    
    $
    0.19
    
    
    $
    (0.03
    )Diluted income (loss) per common share:Continuing operations
    
    $
    0.20
    
    
    $
    0.02
    
    
    $
    0.19
    
    
    $
    0.01Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.04
    )Net income (loss)
    
    $
    0.20
    
    
    $
    0.02
    
    
    $
    0.18
    
    
    $
    (0.03
    )Weighted-average common shares
outstanding:Basic
    
    
    57,605
    
    
    
    57,598
    
    
    
    57,568
    
    
    
    57,511Dilutive effect of stock options,
warrants and convertible notes
    
    
    13,812
    
    
    
    1,304
    
    
    
    1,934
    
    
    
    Diluted
    
    
    71,417
    
    
    
    58,902
    
    
    
    59,502
    
    
    
    57,511
 See Accompanying Notes to Condensed Consolidated Financial Statements 4




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CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
  (In thousands)
(Unaudited)
 Forty Weeks Ended November 1, 2004Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    Treasury StockOfficer andNumber of
    
    
    
    
    
    Additional
    
    Non-Employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalShares
    
    
    
    
    
    Paid-In
    
    Director Notes
    
    Accumulated
    
    Number of
    
    
    
    
    
    StockholdersIssued
    
    Amount
    
    Capital
    
    Receivable
    
    Deficit
    
    Shares
    
    Amount
    
    EquityBalance at January
31, 2004 (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
    
    
    423
    
    
    
    4
    
    
    
    2,290
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,294Collections on
officer and
non-employee
director notes
receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,983
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,983Repurchase of
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (519
    )
    
    
    (5,559
    )
    
    
    (5,559
    )Retirement of
treasury stock
    
    
    (1,904
    )
    
    
    (19
    )
    
    
    (13,741
    )
    
    
    
    
    
    
    
    
    
    
    1,904
    
    
    
    13,760
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,947
    
    
    
    
    
    
    
    
    
    
    
    10,947Balance at November
1, 2004
    
    
    57,735
    
    
    $
    577
    
    
    $
    453,238
    
    
    $
    (547
    )
    
    $
    (338,359
    )
    
    
    (200
    )
    
    $
    (2,205
    )
    
    $
    112,704
 See Accompanying Notes to Condensed Consolidated Financial Statements 5




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Forty Weeks EndedNovember 1, 2004
    
    November 3, 2003(as restated)Cash flow from operating activities:Net income (loss)
    
    $
    10,947
    
    
    $
    (1,541
    )Adjustments to reconcile net income (loss) to net cash provided by operating
activities:Depreciation and amortization
    
    
    52,071
    
    
    
    53,416Amortization of loan fees
    
    
    3,051
    
    
    
    3,696(Recovery of) provision for losses on accounts and notes receivable
    
    
    (1,784
    )
    
    
    2,197Loss on sale of property and equipment, capital leases and extinguishment
of debts
    
    
    8,352
    
    
    
    630Facility action charges, net
    
    
    9,745
    
    
    
    2,280Other non-cash credits
    
    
    126
    
    
    
    (387
    )Net change in refundable income taxes
    
    
    (818
    )
    
    
    723Deferred income taxes
    
    
    205
    
    
    
    431Change in estimated liability for closing restaurants and estimated
liability for self-insurance
    
    
    (4,317
    )
    
    
    (7,453
    )Net change in accounts receivable, inventories, prepaid expenses and
other current assets
    
    
    3,243
    
    
    
    10,815Net change in accounts payable and other current and long-term liabilities
    
    
    19,303
    
    
    
    (5,939
    )Loss from operations of discontinued segment
    
    
    646
    
    
    
    1,955Net cash provided to discontinued segment
    
    
    (257
    )
    
    
    (237
    )Net cash provided by operating activities
    
    
    100,513
    
    
    
    60,586Cash flow from investing activities:Purchases of property and equipment
    
    
    (43,864
    )
    
    
    (32,735
    )Proceeds from sale of property and equipment
    
    
    11,650
    
    
    
    12,451Collections on notes receivable
    
    
    2,337
    
    
    
    4,884Increase in cash upon consolidation of variable interest entity
    
    
    100
    
    
    
    Disposition of brand, net of cash surrendered
    
    
    6,954
    
    
    
    Net change in other assets
    
    
    (407
    )
    
    
    968Net cash used in investing activities
    
    
    (23,230
    )
    
    
    (14,432
    )Cash flow from financing activities:Net change in bank overdraft
    
    
    (8,852
    )
    
    
    (7,566
    )Repayments of borrowings under credit facility
    
    
    (114,464
    )
    
    
    (174,500
    )Long-term borrowings
    
    
    248,500
    
    
    
    149,500Repayments of long-term debt
    
    
    (222,505
    )
    
    
    (100,047
    )Repayments of capital lease obligations
    
    
    (5,975
    )
    
    
    (7,859
    )Collections on officer and non-employee director notes receivable
    
    
    1,983
    
    
    
    Payment of deferred loan fees
    
    
    (6,188
    )
    
    
    (1,157
    )Proceeds from issuance of convertible debt
    
    
    
    
    
    
    101,588Repurchase of common stock
    
    
    (5,559
    )
    
    
    Proceeds from exercise of stock options
    
    
    2,294
    
    
    
    1,127Net cash used in financing activities
    
    
    (110,766
    )
    
    
    (38,914
    )Net (decrease) increase in cash and cash equivalents
    
    
    (33,483
    )
    
    
    7,240Cash and cash equivalents at beginning of period
    
    
    54,355
    
    
    
    18,440Cash and cash equivalents at end of period
    
    $
    20,872
    
    
    $
    25,680Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    (28,165
    )
    
    $
    (33,397
    )Income taxes, net of refunds received
    
    $
    (3,363
    )
    
    $
    (1,521
    )Non-cash investing and financing activities:Gain recognized on sale and leaseback transactions
    
    $
    258
    
    
    $
    271Consolidation of advertising funds assets and liabilities
    
    $
    22,095
    
    
    $
    
 See Accompanying Notes to Condensed Consolidated Financial Statements 6




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
 NOTE (1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS CKE Restaurants, Inc. (CKE or the Company), through its wholly-owned
subsidiaries, owns, operates, franchises and licenses the Carls Jr.®,
Hardees®, The Green Burrito® (Green Burrito) and La Salsa Fresh Mexican
Grill® (La Salsa) concepts. Carls Jr. restaurants are primarily located in
the Western United States. Hardees restaurants are located throughout the
Southeastern and Midwestern United States. Green Burrito restaurants are
located in California, primarily in dual-brand Carls Jr. restaurants. La Salsa
restaurants are primarily located in California. As of November 1, 2004, the
Companys system-wide restaurant portfolio consisted of: Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalCompany-operated
    
    
    432
    
    
    
    680
    
    
    
    61
    
    
    
    3
    
    
    
    1,176Franchised and licensed
    
    
    585
    
    
    
    1,367
    
    
    
    40
    
    
    
    15
    
    
    
    2,007Total
    
    
    1,017
    
    
    
    2,047
    
    
    
    101
    
    
    
    18
    
    
    
    3,183
 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 No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure(SFAS 148). SFAS 148
amended the disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation(SFAS 123), to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Disclosures required by this standard are included in the notes to these
condensed consolidated financial statements. For purposes of the following pro forma disclosures required by SFAS 148 and
SFAS 123, the fair value of each option has been estimated on the date of grant
using the Black-Scholes option-pricing model. The Black-Scholes option-pricing
model was developed for use in estimating the fair value of traded options that
do not have vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Companys stock
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the value of an estimate, in managements opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of its
stock options. 7




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
 The assumptions used for grants in the twelve weeks ended November 3, 2003, are
as follows. No options were granted in the twelve weeks ended November 1,
2004. November 3, 2003Annual dividends
    
    $
    Expected volatility
    
    
    140.0
    %Risk-free interest rate (matched to the expected term of
the outstanding option)
    
    
    2.99
    %Expected life of all options outstanding (years)
    
    
    5.45Weighted-average fair value of each option granted
    
    $
    6.08
 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) inFair Value of Options GrantedTwelve Weeks EndedChange in Assumption
    
    November 3, 200310% increase in expected volatility
    
    $
    0.141% increase in risk-free interest rate
    
    
    0.021 year increase in expected life of all options
outstanding
    
    
    0.1710% decrease in expected volatility
    
    
    (0.17
    )1% decrease in risk-free interest rate
    
    
    (0.02
    )1 year decrease in expected life of all options
outstanding
    
    
    (0.25
    )
 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 EndedNovember 1, 2004
    
    November 3, 2003(as restated)Net income, as reported
    
    $
    13,132
    
    
    $
    939Add: Stock-based employee compensation expense
included in reported net income
    
    
    
    
    
    
    Deduct: Total stock-based employee compensation
expense determined under fair value based method, net
of related tax effects
    
    
    (1,197
    )
    
    
    (892
    )Net income  pro forma
    
    $
    11,935
    
    
    $
    47Net income per common share:Basic  as reported
    
    $
    0.23
    
    
    $
    0.02Basic  pro forma
    
    
    0.21
    
    
    
    0.00Diluted  as reported
    
    
    0.20
    
    
    
    0.02Diluted  pro forma
    
    
    0.18
    
    
    
    0.00
 Forty Weeks EndedNovember 1, 2004
    
    November 3, 2003(as restated)Net income (loss), as reported
    
    $
    10,947
    
    
    $
    (1,541
    )Add: 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
    
    
    (3,396
    )
    
    
    (2,520
    )Net income (loss)  pro forma
    
    $
    7,551
    
    
    $
    (4,061
    )Net income (loss) per common share:Basic  as reported
    
    $
    0.19
    
    
    $
    (0.03
    )Basic  pro forma
    
    
    0.13
    
    
    
    (0.07
    )Diluted  as reported
    
    
    0.18
    
    
    
    (0.03
    )Diluted  pro forma
    
    
    0.13
    
    
    
    (0.07
    )
 8




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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 forty weeks ended November 3, 2003, rent expense, net, had been
understated by $232 and $775, 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
forty weeks ended November 3, 2003, depreciation and amortization expense had
been understated by $1,342 and $4,480, respectively. 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 forty weeks ended November 3, 2003, the Company
overstated facility action charges by $217 and $913, respectively, and
understated depreciation and amortization expense by $98 and $327,
respectively. As a result, in the twelve and forty weeks ended November 3,
2003, these errors resulted in a net overstatement of expenses by $119 and
$586, respectively. The Company has corrected these errors through its
restatement. 9




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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) (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 forty weeks
ended November 3, 2003, the Company overstated depreciation expense by $34 and
$113, 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
forty weeks ended November 3, 2003, the Company overstated general and
administrative expenses by $9 and $29, 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 forty weeks ended November 3, 2003,
the Company overstated expenses by $140 and $190, 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 forty
weeks ended November 3, 2003, the Company overstated property tax expenses by
$141 and $474, respectively. The Company has corrected these errors through
its restatement. (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 forty weeks ended November 3, 2003, the Companys income tax
expense was understated by $143 and $431, 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. 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) (v) Other Items The Company identified several other items that it has corrected through its
restatement. For the twelve and forty weeks ended November 3, 2003, these
additional items aggregate to reduction to expense upon restatement of $50 and
$152, respectively. The impacts of these restatements on the condensed consolidated financial
statements are summarized below: PreviouslyReported
    
    Adjustments
    
    As RestatedTwelve Weeks Ended November 3, 2003Statement of Operations DataFranchised and licensed restaurants and other revenues
    
    $
    63,751
    
    
    $
    (4
    )
    
    $
    63,747Total revenue
    
    
    334,777
    
    
    
    (4
    )
    
    
    334,773Occupancy and other operating expenses
    
    
    60,465
    
    
    
    1,270
    
    
    
    61,735Franchised and licensed restaurants and other expenses
    
    
    49,962
    
    
    
    5
    
    
    
    49,967General and administrative expenses
    
    
    25,777
    
    
    
    (116
    )
    
    
    25,661Facility action charges, net
    
    
    1,301
    
    
    
    (217
    )
    
    
    1,084Total operating costs and expenses
    
    
    322,511
    
    
    
    942
    
    
    
    323,453Operating income
    
    
    12,266
    
    
    
    (946
    )
    
    
    11,320Interest expense
    
    
    (9,947
    )
    
    
    7
    
    
    
    (9,940
    )Other expense, net
    
    
    (76
    )
    
    
    (141
    )
    
    
    (217
    )Income before income taxes and discontinued operations
    
    
    2,243
    
    
    
    (1,080
    )
    
    
    1,163Income tax expense
    
    
    192
    
    
    
    143
    
    
    
    335Income from continuing operations
    
    
    2,051
    
    
    
    (1,223
    )
    
    
    828Net income
    
    
    2,162
    
    
    
    (1,223
    )
    
    
    939Basic income per common share:Continuing operations
    
    
    0.04
    
    
    
    (0.02
    )
    
    
    0.02Net income
    
    
    0.04
    
    
    
    (0.02
    )
    
    
    0.02Diluted income per common share:Continuing operations
    
    
    0.04
    
    
    
    (0.02
    )
    
    
    0.02Net income
    
    
    0.04
    
    
    
    (0.02
    )
    
    
    0.02
 PreviouslyReported
    
    Adjustments
    
    As RestatedForty Weeks Ended November 3, 2003Statement of Operations DataFranchised and licensed restaurants and other revenues
    
    $
    206,817
    
    
    $
    (13
    )
    
    $
    206,804Total revenue
    
    
    1,088,054
    
    
    
    (13
    )
    
    
    1,088,041Occupancy and other operating expenses
    
    
    201,356
    
    
    
    4,239
    
    
    
    205,595Franchised and licensed restaurants and other expenses
    
    
    163,376
    
    
    
    24
    
    
    
    163,400General and administrative expenses
    
    
    82,232
    
    
    
    (113
    )

    
    
    82,119Facility action charges, net
    
    
    3,193
    
    
    
    (913
    )
    
    
    2,280Total operating costs and expenses
    
    
    1,051,240
    
    
    
    3,237
    
    
    
    1,054,477Operating income
    
    
    36,814
    
    
    
    (3,250
    )
    
    
    33,564Interest expense
    
    
    (31,149
    )
    
    
    23
    
    
    
    (31,126
    )Other expense, net
    
    
    (487
    )
    
    
    (484
    )
    
    
    (971
    )Income before income taxes and discontinued operations
    
    
    5,178
    
    
    
    (3,711
    )
    
    
    1,467Income tax expense
    
    
    622
    
    
    
    431
    
    
    
    1,053Income from continuing operations
    
    
    4,556
    
    
    
    (4,142
    )
    
    
    414Net income (loss)
    
    
    2,601
    
    
    
    (4,142
    )
    
    
    (1,541
    )Basic income (loss) per common share:Continuing operations
    
    
    0.07
    
    
    
    (0.06
    )
    
    
    0.01Net income (loss)
    
    
    0.04
    
    
    
    (0.07
    )
    
    
    (0.03
    )Diluted income (loss) per common share:Continuing operations
    
    
    0.07
    
    
    
    (0.06
    )
    
    
    0.01Net income (loss)
    
    
    0.04
    
    
    
    (0.07
    )
    
    
    (0.03
    )
 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) PreviouslyReported
    
    Adjustments
    
    As RestatedStatement of Cash Flows DataNet cash provided by operating activities
    
    
    63,103
    
    
    
    (2,517
    )
    
    
    60,586Net cash used in investing activities
    
    
    (14,692
    )
    
    
    260
    
    
    
    (14,432
    )Net cash used in financing activities
    
    
    (41,171
    )
    
    
    2,257
    
    
    
    (38,914
    )Net increase in cash and cash equivalents
    
    
    7,240
    
    
    
    
    
    
    
    7,240
 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 In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share-Based Payment(SFAS 123R), which amends FASB
Statements No. 123 and 95. SFAS 123R requires all companies to measure
compensation cost for all share-based payments (including employee stock
options) at fair value, and will be effective for public companies for interim
or annual periods beginning after June 15, 2005. This new standard may be
adopted in one of two ways  the modified prospective transition method or the
modified retrospective transition method. The Company is currently evaluating
the effect that the accounting change will have on its financial position and
results of operations. 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 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 VIEs 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 generally 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 12




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) beneficiary of this VIE. The assets and liabilities of this entity included in
the accompanying Condensed Consolidated Balance Sheet as of November 1, 2004,
are as follows: ASSETS:Cash
    
    $
    137Inventories
    
    
    38Property and equipment, net
    
    
    27Other assets
    
    
    31$
    233LIABILITIES:Other current liabilities
    
    $
    146Other long-term debt
    
    
    26Other long-term liabilities
    
    
    61$
    233
 The operating results of this franchise entity are included within the
Companys accompanying Condensed Consolidated Statements of Operations for the
twelve and forty weeks ended November 1, 2004, and are not significant. The
minority interest in the income of this franchise entity is classified in Other
Expense in the Companys accompanying Condensed Consolidated Statements of
Operations for the twelve and forty weeks ended November 1, 2004, and in Other
Long-Term Liabilities in the Companys accompanying Condensed Consolidated
Balance Sheet as of November 1, 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 forty weeks
ended November 1, 2004, the Company has no rights to the assets, nor does it
have any obligation with respect to the liabilities, of this franchise entity.
None of the Companys assets serve as collateral for the creditors of this
franchisee or any of the Companys other franchisees. 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 $22,095 of Advertising
Fund Assets, Restricted, and Advertising Fund Liabilities in its accompanying
Condensed Consolidated Balance Sheet as of November 1, 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. 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) Advertising Fund Assets, Restricted, and Advertising Fund Liabilities as of
September 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 November 1, 2004, and consisted of the following: ADVERTISING FUND ASSETS, RESTRICTED:Cash
    
    $
    17,418Accounts and notes receivable, net
    
    
    4,116Other assets
    
    
    561$
    22,095ADVERTISING FUND LIABILITIES:Accounts payable and other liabilities
    
    $
    9,026Deferred obligations
    
    
    13,069$
    22,095
 NOTE (4) INTANGIBLE ASSETS The table below presents identifiable, definite-lived intangible assets as of
November 1, 2004, and January 31, 2004: November 1, 2004
    
    January 31, 2004Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetIntangible
    
    Carrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingAsset
    
    Amount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountTrademarks
    
    $
    17,159
    
    
    $
    (2,277
    )
    
    $
    14,882
    
    
    $
    17,159
    
    
    $
    1,616
    
    
    $
    15,543Franchise agreements
    
    
    1,780
    
    
    
    (237
    )
    
    
    1,543
    
    
    
    1,780
    
    
    
    (169
    )
    
    
    1,611Favorable lease agreements
    
    
    9,534
    
    
    
    (6,074
    )
    
    
    3,460
    
    
    
    16,149
    
    
    
    (12,004
    )
    
    
    4,145$
    28,473
    
    
    $
    (8,588
    )
    
    $
    19,885
    
    
    $
    35,088
    
    
    $
    (13,789
    )
    
    $
    21,299
 Amortization expense related to identifiable definite-lived intangible assets
was $428 and $1,920 for the twelve and forty week periods ended November 1,
2004, and $463 (as restated) and $1,628 (as restated) for the twelve and forty
week periods ended November 3, 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 Statements of Operations. During the quarter ended November 1, 2004, the Company voluntarily prepaid
$44,475 of the $230,000 term loan in addition to the $401 regularly scheduled
payment. As of November 1, 2004, the Company had cash borrowings outstanding
under the term loan and revolving portions of the Facility of $154,599 and
$3,500, respectively, outstanding letters of credit under the revolving portion
of the Facility of $65,597, and availability under the revolving portion of the
Facility of $80,903. Subsequent to quarter-end, the Company voluntarily prepaid
an additional $11,599 of the term loan, reducing the term loan balance to
$143,000. 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) The terms of the Facility include certain restrictive covenants. Among other
things, these covenants restrict the Companys ability to incur debt or 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 November 1, 2004, the applicable interest rate on the term loan was LIBOR
plus 3.0%, or 4.875% 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. On November 4, 2004, the Company and its lenders amended the Facility
resulting in a 0.25% decrease to all borrowing rates. 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 twelve and forty week periods ended November 1, 2004, the Company
recorded $173 and $223 of interest expense, respectively, to reduce the
carrying value of the interest rate cap premium to its fair value of $148 at
November 1, 2004. As a matter of policy, the Company does not use derivative
instruments unless there is an underlying exposure. Subject to the terms of the Facility, the Company may make capital expenditures
in the amount of $50,000, plus 80% of the amount of actual EBITDA (as defined)
in excess of $110,000 during the current fiscal year and $45,000, plus 80% of
the amount of actual EBITDA (as defined) in excess of $110,000 during each
subsequent fiscal year. In fiscal 2005 and thereafter, the Company may carry
forward any unused capital expenditure amounts to the following year. The
Facility also permits the Company to repurchase its common stock in the amount
of $27,000, plus a portion of excess cash flow and certain net asset sale
proceeds (as defined) during the term of the Facility. During the twelve and
forty week periods ended November 1, 2004, the Company repurchased 200,000 and
519,000 shares of its common stock for a total of $2,205 and $5,559,
respectively. 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 November 1, 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 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) 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
    
    Forty Weeks EndedNovember 1, 2004
    
    November 3, 2003
    
    November 1, 2004
    
    November 3, 2003(as restated)
    
    
    
    
    
    (as restated)Facility
    
    $
    1,989
    
    
    $
    81
    
    
    $
    4,351
    
    
    $
    1,050Senior subordinated notes due 2009
    
    
    
    
    
    
    4,212
    
    
    
    7,855
    
    
    
    14,039Capital lease obligations
    
    
    1,593
    
    
    
    2,436
    
    
    
    5,392
    
    
    
    6,6482004 Convertible Notes
    
    
    
    
    
    
    1,188
    
    
    
    73
    
    
    
    3,9882023 Convertible Notes
    
    
    947
    
    
    
    415
    
    
    
    3,208
    
    
    
    415Amortization of loan fees
    
    
    884
    
    
    
    1,159
    
    
    
    2,829
    
    
    
    3,696Write-off of unamortized loan fees
    
    
    726
    
    
    
    
    
    
    
    4,936
    
    
    
    Letter of credit fees and other
    
    
    607
    
    
    
    449
    
    
    
    1,785
    
    
    
    1,290$
    6,746
    
    
    $
    9,940
    
    
    $
    30,429
    
    
    $
    31,126
 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);(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 11
Hardees and one La Salsa company-operated restaurants during the twelve weeks
ended November 1, 2004. The Company closed 43 Hardees, one Carls Jr. and two
La Salsa company-operated restaurants during the forty weeks ended November 1,
2004. During the twelve and forty weeks ended November 1, 2004, and November 3,
2003, the Company also identified company-operated restaurants that are still
in operation, but whose estimated fair values did not support the related net
asset values and, accordingly, impairment charges were recorded. The components of facility action charges (gains), net are as follows: Twelve Weeks Ended
    
    Forty Weeks EndedNovember 1, 2004
    
    November 3, 2003
    
    November 1, 2004
    
    November 3, 2003(as restated)
    
    
    
    
    
    (as restated)HardeesNew decisions regarding closing restaurants
    
    $
    184
    
    
    $
    264
    
    
    $
    4,489
    
    
    $
    698Favorable dispositions of leased and fee
surplus properties, net
    
    
    (322
    )
    
    
    (588
    )
    
    
    (744
    )
    
    
    (3,066
    )Impairment of assets to be disposed of
    
    
    256
    
    
    
    233
    
    
    
    683
    
    
    
    3,360
 16




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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
    
    Forty Weeks EndedNovember 1, 2004
    
    November 3, 2003
    
    November 1, 2004
    
    November 3, 2003(as restated)
    
    
    
    
    
    (as restated)Impairment of assets to be held and used
    
    
    183
    
    
    
    734
    
    
    
    1,888
    
    
    
    1,540Gain on sales of restaurants and surplus
properties, net
    
    
    (126
    )
    
    
    (8
    )
    
    
    (1,329
    )
    
    
    (941
    )Amortization of discount related to
estimated liability for closing
restaurants
    
    
    214
    
    
    
    548
    
    
    
    809
    
    
    
    1,828389
    
    
    
    1,183
    
    
    
    5,796
    
    
    
    3,419Carls Jr.New decisions regarding closing restaurants
    
    
    
    
    
    
    131
    
    
    
    7
    
    
    
    145(Favorable)/unfavorable dispositions of
leased and fee surplus properties, net
    
    
    67
    
    
    
    (292
    )
    
    
    (88
    )
    
    
    (537
    )Impairment of assets to be disposed of
    
    
    24
    
    
    
    
    
    
    
    28
    
    
    
    Impairment of assets to be held and used
    
    
    43
    
    
    
    
    
    
    
    1,667
    
    
    
    503Gain on sales of restaurants and surplus
properties, net
    
    
    (212
    )
    
    
    (81
    )
    
    
    (405
    )
    
    
    (1,034
    )Amortization of discount related to
estimated liability for closing
restaurants
    
    
    59
    
    
    
    69
    
    
    
    241
    
    
    
    263(19
    )
    
    
    (173
    )
    
    
    1,450
    
    
    
    (660
    )La Salsa and OtherNew decisions regarding closing restaurants
    
    
    275
    
    
    
    73
    
    
    
    1,075
    
    
    
    73(Favorable)/unfavorable dispositions of
leased and fee surplus properties, net
    
    
    16
    
    
    
    
    
    
    
    41
    
    
    
    (846
    )Impairment of assets to be disposed of
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Impairment of assets to be held and used
    
    
    384
    
    
    
    
    
    
    
    1,377
    
    
    
    429(Gain) loss on sales of restaurants and
surplus properties, net
    
    
    (1
    )
    
    
    
    
    
    
    2
    
    
    
    (136
    )Amortization of discount related to
estimated liability for closing
restaurants
    
    
    1
    
    
    
    
    
    
    
    4
    
    
    
    675
    
    
    
    74
    
    
    
    2,499
    
    
    
    (479
    )TotalNew decisions regarding closing restaurants
    
    
    459
    
    
    
    468
    
    
    
    5,571
    
    
    
    916Favorable dispositions of leased and fee
surplus properties, net
    
    
    (239
    )
    
    
    (880
    )
    
    
    (791
    )
    
    
    (4,449
    )Impairment of assets to be disposed of
    
    
    280
    
    
    
    234
    
    
    
    711
    
    
    
    3,361Impairment of assets to be held and used
    
    
    610
    
    
    
    734
    
    
    
    4,932
    
    
    
    2,472Gainon sales of restaurants and surplus
properties, net
    
    
    (339
    )
    
    
    (89
    )
    
    
    (1,732
    )
    
    
    (2,111
    )Amortization of discount related to
estimated liability for closing
restaurants
    
    
    274
    
    
    
    617
    
    
    
    1,054
    
    
    
    2,091$
    1,045
    
    
    $
    1,084
    
    
    $
    9,745
    
    
    $
    2,280
 Facility action charges for new decisions regarding closing restaurants during
the forty weeks ended November 1, 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
    
    
    5,571Usage
    
    
    (8,810
    )Favorable dispositions of leased and fee surplus properties, net
    
    
    (791
    )Amortization of discount
    
    
    1,054
 17




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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) Balance at November 1, 2004
    
    
    19,349Less current portion, included in Other Current Liabilities
    
    
    8,487Long-term portion, included in Other Long-Term Liabilities
    
    $
    10,862
 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 and
amortization of debt issuance costs, net of taxes, applicable to the
convertible debt are added back to income and the convertible debt is assumed
to have been converted at the beginning of the reporting period, with the
resulting common shares being included in weighted-average shares. For the
twelve week period ended November 1, 2004, the only reporting period herein in
which the convertible debt is dilutive using the if-converted method, the
applicable net amount to be added back was $1,126. 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
    
    Forty Weeks EndedNovember 1, 2004
    
    November 3, 2003
    
    November 1, 2004
    
    November 3, 20032004 Convertible Notes
    
    
    N/A
    
    
    
    2,764
    
    
    
    87
    
    
    
    2,7832023 Convertible Notes
    
    
    
    
    
    
    4,821
    
    
    
    11,811
    
    
    
    1,446Stock Options
    
    
    2,721
    
    
    
    4,503
    
    
    
    3,709
    
    
    
    5,258Warrants
    
    
    982
    
    
    
    982
    
    
    
    982
    
    
    
    982
 NOTE (8) SEGMENT INFORMATION The Company is principally engaged in developing, operating and franchising its
Carls Jr.and Hardees quick-service restaurants and La Salsa fast-casual
restaurants, each of which is considered an operating segment that is managed
and evaluated separately. 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
    
    TotalTwelve Weeks Ended November 1, 2004Revenue
    
    $
    180,890
    
    
    $
    155,572
    
    
    $
    11,061
    
    
    $
    1,423
    
    
    $
    348,946Operating income (loss)
    
    
    16,334
    
    
    
    4,186
    
    
    
    (1,484
    )
    
    
    73
    
    
    
    18,963Income (loss) before income taxes
and discontinued operations
    
    
    15,768
    
    
    
    (1,110
    )
    
    
    (1,466
    )
    
    
    49
    
    
    
    13,241Goodwill (as of November 1, 2004)
    
    
    22,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,649
 18




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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) Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Twelve Weeks Ended November 3, 2003Revenue
    
    $
    166,735
    
    
    $
    157,450
    
    
    $
    10,187
    
    
    $
    401
    
    
    $
    334,773Operating income (loss)
    
    
    12,597
    
    
    
    (396
    )
    
    
    (692
    )
    
    
    (189
    )
    
    
    11,320Income (loss) before income taxes
and discontinued operations
    
    
    10,696
    
    
    
    (9,109
    )
    
    
    (703
    )
    
    
    279
    
    
    
    1,163Goodwill (as of November 3, 2003)
    
    
    22,649
    
    
    
    
    
    
    
    34,059
    
    
    
    
    
    
    
    56,708
 Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalForty Weeks Ended November 1, 2004Revenue
    
    $
    599,315
    
    
    $
    517,104
    
    
    $
    37,719
    
    
    $
    3,853
    
    
    $
    1,157,991Operating income (loss)
    
    
    43,899
    
    
    
    10,014
    
    
    
    (5,947
    )
    
    
    117
    
    
    
    48,083Income (loss) before income taxes
and discontinued operations
    
    
    41,366
    
    
    
    (23,988
    )
    
    
    (5,998
    )
    
    
    738
    
    
    
    12,118Goodwill (as of November 1, 2004)
    
    
    22,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,649
 Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Forty Weeks Ended November 3, 2003Revenue
    
    $
    553,748
    
    
    $
    498,787
    
    
    $
    34,158
    
    
    $
    1,348
    
    
    $
    1,088,041Operating income (loss)
    
    
    45,565
    
    
    
    (11,177
    )
    
    
    (1,125
    )
    
    
    301
    
    
    
    33,564Income (loss) before income taxes
and discontinued operations
    
    
    41,336
    
    
    
    (39,695
    )
    
    
    (1,135
    )
    
    
    961
    
    
    
    1,467Goodwill (as of November 3, 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 did 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. The results of Timber Lodge included in the accompanying condensed consolidated
statements of operations as discontinued operations for the twelve and forty
week periods ended November 1, 2004, and November 3, 2003, are as follows: Twelve Weeks Ended
    
    Forty Weeks EndedNovember 1, 2004
    
    November 3, 2003
    
    November 1, 2004
    
    November 3, 2003Revenue
    
    $
    2,700
    
    
    $
    9,486
    
    
    $
    24,129
    
    
    $
    32,783Operating income (loss)
    
    
    (180
    )
    
    
    72
    
    
    
    (725
    )
    
    
    (706
    )Interest expense (income)
    
    
    
    
    
    
    (1
    )
    
    
    10
    
    
    
    23Other income (expense), net
    
    
    1
    
    
    
    17
    
    
    
    89
    
    
    
    (1,273
    )Income tax benefit
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (47
    )Net income (loss)
    
    $
    (179
    )
    
    $
    111
    
    
    $
    (646
    )
    
    $
    (1,955
    )
 The operating income (loss) for Timber Lodge for the twelve and forty weeks
ended November 1, 2004 and November 3, 2003, include impairment charges of $0,
$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 notes are both
secured by the personal property of T-Lodge Acquisition Corp. and are comprised
of (i) a $1,000 note maturing on January 1, 2009, with annual principal
installments of $200 leading up to the maturity date, and bearing interest of
8.0%, payable monthly, and (ii) an $862 note with a balloon principal payment
due on September 3, 2005, and bearing interest, payable monthly, 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. 19




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) As of November 1, 2004, assets held for sale consisted of surplus restaurant
properties. 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 existing claims experience. As of November 1, 2004, the Company had
outstanding letters of credit of $65,597 under the revolving portion of the
Facility. As of November 1, 2004, the Company had recorded an accrued liability for
contingencies related to litigation in the amount of $12,253,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 November 1, 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 $85 to $170. 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 November 1, 2004, the principal
outstanding under program loans guaranteed by the Company totaled approximately
$1,800, with maturity dates ranging from 2004 through 2009. As of November 1,
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 November 1, 2004, the Company had unconditional purchase obligations in
the amount of $51,511, 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 sublease 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 November 1, 2004,
the present value of the lease obligations under the remaining master leases
primary terms is $133,193. 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 $24,581. 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 20




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts) Angeles County, seeking class action status and alleging violations of
California wage and hour laws. Similar actions were filed by Mary Jane Amberson
and James Bolin, individually and on behalf of others similarly situated, in
the Superior Court of the State of California, Los Angeles County, on April 5,
2002 and November 26, 2002, respectively. The complaints allege that salaried
restaurant management personnel at the Companys Carls Jr. restaurants in
California were improperly classified as exempt from California overtime laws,
thereby depriving them of overtime pay. The complaints seek damages in an
unspecified amount, injunctive relief, prejudgment interest, costs and
attorneys fees. During the quarter ended August 9, 2004, the Company announced
that it had reached a preliminary agreement to settle these three lawsuits and
fully resolve all complaints contained therein, under which the Company will
make a cash payment of up to $9,000 to cover claims by eligible class members,
plaintiff attorneys fees and costs, payments to the named plaintiffs, and
costs of a third-party administrator. A charge of $7,000 was recorded in
general and administrative expense during the quarter ended August 9, 2004, to
increase the accrued liability for this matter to the estimated settlement
amount. 21




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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 Sstatements 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 contain forward-looking statements relating
to future plans and developments, financial goals, and operating performance
that are based on our current beliefs and assumptions. Such statements are
subject to risks and uncertainties. Factors that could cause our results to
differ materially from those described include, but are not limited to, whether
or not restaurants will be closed and the number of restaurant closures,
consumers concerns or adverse publicity regarding our products, the
effectiveness of operating initiatives and advertising and promotional efforts
(particularly at the Hardees brand), changes in economic conditions or
prevailing interest rates, changes in the price or availability of commodities,
availability and cost of energy, workers compensation and general liability
premiums and claims experience, changes in our suppliers ability to provide
quality and timely products, delays in opening new restaurants or completing
remodels, severe weather conditions, the operational and financial success of
our franchisees, our franchisees willingness to participate in our strategy,
the availability of financing for us and our franchisees, unfavorable outcomes
in litigation, changes in accounting policies and practices, effectiveness of
internal controls over financial reporting, new legislation or government
regulation (including environmental laws), the availability of suitable
locations and terms for the sites designed for development, and other factors
as discussed in our filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. 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
forty weeks ended November 3, 2003, rent expense, net, had been understated by
$232 and $775, 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. 22




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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 forty weeks ended
November 3, 2003, depreciation and amortization expense had been understated by
$1,342 and $4,480, respectively. 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 forty weeks ended November 3, 2003, we overstated
facility action charges by $217 and $913, respectively, and understated
depreciation and amortization expense by $98 and $327, respectively. As a
result, in the twelve and forty weeks ended November 3, 2003, these errors
resulted in a net overstatement of expenses by $119 and $586, respectively.
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 forty weeks ended November 3, 2003, we overstated depreciation expense by
$34 and $113, 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 forty weeks ended
November 3, 2003, we overstated general and administrative expenses by $9 and
$29, respectively. We have corrected these errors through our restatement. Additionally, 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 forty weeks ended November 3, 2003, we
overstated expenses by $140 and $190, respectively. We have corrected these
errors through our restatement. 23




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) (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 forty weeks ended November 3,
2003, we overstated property tax expenses by $141 and $474, 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 forty weeks
ended November 3, 2003, our income tax expense was understated by $143 and
$431, 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 forty weeks ended November 3, 2003, these
additional items aggregate to reduction to expense upon restatement of $50 and
$152, respectively. Adoption of New Accounting Pronouncements See Note 3 of notes to condensed consolidated financial statements. Critical Accounting Policies Our reported results are impacted by the application of certain accounting
policies that require us to make subjective or complex judgments. These
judgments involve making estimates about the effect of matters that are
inherently uncertain and may significantly impact our quarterly or annual
results of operations and financial condition. Specific risks associated with
these critical accounting policies are described in the following paragraphs. For all of these policies, we caution that future events rarely develop exactly
as expected, and the best estimates routinely require adjustment. Our most
significant accounting policies require:  
    
    estimation of future cash flows used to assess the recoverability of
long-lived assets, including goodwill, and 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. 24




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands)   Descriptions of these critical accounting policies follow. Impairment of Property and Equipment and Other Amortizable Long-Lived Assets
Held and Used, Held for Sale or To Be Disposed of Other than by Sale Each quarter we evaluate the carrying value of individual restaurants when the
operating results have reasonably progressed to a point to adequately evaluate
the probability of continuing operating losses or a current expectation that a
restaurant will be sold or otherwise disposed of before the end of its
previously estimated useful life. 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
and related estimated useful life. We employ a probability-weighted approach
wherein we estimate the effectiveness of future sales and marketing efforts on
same-store sales. In general, in scenarios where same-store sales are not
expected to increase, we generally assume a shorter than previously estimated
useful life. Quarterly, we update our model for estimating future cash flows based upon
experience gained, current intentions about refranchising restaurants and
closures, expected sales trends, internal plans and other relevant information.
As the operations of restaurants opened or remodeled in recent years progress
to the point that their profitability and future prospects can adequately be
evaluated, additional restaurants will become subject to review and to the
possibility that impairments exist. 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 currently 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. 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. 25




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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 November 1, 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. 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 $26,867, which represents the
discounted amount we would be required to pay if we are unable to enter into
sublease agreements or terminate the leases prior to the terms required in the
lease agreements. However, it is our experience that we can often terminate
those leases for less than that amount, or sublease the property and,
accordingly, we have recorded an estimated liability for operating lease
obligations of $15,039 as of November 1, 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 26




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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
November 1, 2004, we have recorded an accrued liability for contingencies
related to litigation in the amount of $12,256 (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 November 1, 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 $85 to $170. In
accordance with SFAS 5, we have not recorded a liability for those losses. Franchised and Licensed Operations We monitor the financial condition of certain franchisees and record provisions
for estimated losses on receivables when we believe that our franchisees are
unable to make their required payments to us. Each quarter we perform an
analysis to develop estimated bad debts for each franchisee. We then compare
the aggregate result of that analysis to the amount recorded in our
consolidated financial statements as the allowance for doubtful accounts and
adjust the allowance as appropriate. Additionally, we cease accruing royalties
and rent income from franchisees that are materially delinquent in paying or in
default for other reasons and reverse any royalties and rent income accrued
during the last 90 days. Over time our assessment of individual franchisees may
change. For instance, we have had some franchisees who, in the past, we had
determined required an estimated loss equal to the total amount of the
receivable, who have paid us in full or established a consistent record of
payments (generally one year) such that we determined an allowance was no
longer required. Depending on the facts and circumstances, there are a number of different
actions we and/or our franchisees may take to resolve franchise collections
issues. These actions may include the purchase of franchise restaurants by us
or by other franchisees, a modification to the franchise agreement, which may
include a provision to defer certain royalty payments or reduce royalty rates
in the future (if royalty rates are not sufficient to cover our costs of
service over the life of the franchise agreement, we record an estimated loss
at the time we modify the agreements), a restructuring of the franchisees
business and/or finances (including the restructuring of leases for which we
are the primary obligee  see further discussion below) or, if necessary, the
termination of the franchise agreement. The allowance established is based on
our assessment of the most probable course of action that will occur. 27




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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 November 1, 2004, the present
value of our total obligation on such lease arrangements with Hardees and
Carls Jr. franchisees was $36,027 and $97,167, 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 November 1, 2004, the net
book value of property under lease to Hardees and Carls Jr. franchisees was
$19,911 and $7,507, 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 November 1, 2004,
the net book value of land and buildings under lease to Hardees franchisees
that are considered to be troubled franchisees was approximately $17,673, 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 and have entered into subleases with
troubled franchisees was approximately $24,581 as of November 1, 2004 (eight
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- 28




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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). In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share-Based Payment(SFAS 123R), which amends FASB
Statements No. 123 and 95. SFAS 123R requires all companies to measure
compensation cost for all share-based payments (including employee stock
options) at fair value, and will be effective for public companies for interim
or annual periods beginning after June 15, 2005. This new standard may be
adopted in one of two ways  the modified prospective transition method or the
modified retrospective transition method. We are currently evaluating the
effect that the accounting change will have on our financial position and
results of operations. Valuation Allowance for Net Deferred Tax Assets 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 November 1, 2004, and January 31, 2004, we had a net deferred tax
liability of $1,618 and $1,413, respectively, that arises 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 The factors discussed below impact comparability of operating performance for
the twelve and forty weeks ended November 1, 2004, to the twelve and forty
weeks ended November 3, 2003, or could impact comparisons for the remainder of
fiscal 2005. 29




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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 was accounted for as a discontinued operation, and we completed
the sale of Timber Lodge on September 3, 2004 Because we had previously
impaired the carrying value of Timber Lodge to reflect the anticipated sale
proceeds, we did not generate additional gain or loss upon the Timber Lodge
sale. The results of Timber Lodge included in our Condensed Consolidated
Statements of Operations as discontinued operations for the twelve and forty
week periods ended November 1, 2004 and November 3, 2003, are as follows: Twelve Weeks Ended
    
    Forty Weeks EndedNovember 1, 2004
    
    November 3, 2003
    
    November 1, 2004
    
    November 3, 2003Revenue
    
    $
    2,700
    
    
    $
    9,486
    
    
    $
    24,129
    
    
    $
    32,783Operating income (loss)
    
    
    (180
    )
    
    
    72
    
    
    
    (725
    )
    
    
    (706
    )Interest expense (income)
    
    
    
    
    
    
    (1
    )
    
    
    10
    
    
    
    23Other income (expense), net
    
    
    1
    
    
    
    17
    
    
    
    89
    
    
    
    (1,273
    )Income tax benefit
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (47
    )Net income (loss)
    
    $
    (179
    )
    
    $
    111
    
    
    $
    (646
    )
    
    $
    (1,955
    )
 The operating income (loss) for Timber Lodge for the twelve and forty weeks
ended November 1, 2004 and November 3, 2003, include impairment charges of $0,
$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 30




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands)  
    
    strengthen our franchise system and pursue further franchising
opportunities. Hardees Revolution We completed a comprehensive plan to revitalize Hardees involving a
repositioning of the brand as a premium 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
ThickburgersTM 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 November
1, 2004, our consolidated provision for doubtful accounts of notes receivable
was 77.2% of the gross balance of notes receivable and our consolidated
provision for doubtful accounts on accounts receivable was 4.9% of the gross
balance of accounts receivable. During fiscal 2004, we accepted several notes
receivable pursuant to completing workout agreements with several financially
troubled franchisees. Also, as of November 1, 2004, we have not recognized
$4,746 in accounts receivable and $6,494 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
financially 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 November 1, 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 November 3, 2003, the effective royalty rates for domestic Carls
Jr. and Hardees franchised and licensed restaurants were 3.7% and 3.6%,
respectively. 31




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Financial Comparison The table below is a condensed presentation of certain changes in the
components of net income (loss), and is designed to facilitate the discussion
of results in this Form 10-Q. (All amounts are approximate and in millions)Third Fiscal Quarter
    
    Year-To-DateCurrent Year:Net income
    
    $
    13.1
    
    
    $
    10.9Prior Year:Net income (loss)
    
    $
    0.9
    
    
    $
    (1.5
    )Increase in net income
    
    $
    12.2
    
    
    $
    12.4
 (All amounts are approximate and in millions)Third Quarter
    
    Year-To-DateFiscal Year 2005 vs.
    
    Fiscal Year 2005 vs.Third Quarter
    
    Year-To-DateFiscal Year 2004
    
    Fiscal Year 2004Items causing net income to increase from the
prior year to the current year:Approximate store margin improvement in
Hardees restaurants
    
    $
    5.6
    
    
    $
    26.6Approximate store margin improvement in Carls
Jr. restaurants
    
    
    2.4
    
    
    
    7.6Increase in net franchising income, excluding
provisions for doubtful accounts
    
    
    2.9
    
    
    
    12.8Increase in provision for litigation settlements
    
    
    
    
    
    
    (8.3
    )Provision for disposal of interest in corporate
aircraft
    
    
    
    
    
    
    (1.5
    )Increase in corporate overhead
    
    
    (2.7
    )
    
    
    (13.3
    )Increase in facility action charges
    
    
    
    
    
    
    (7.5
    )(Increase) decrease in loss from discontinued
operations
    
    
    (0.3
    )
    
    
    1.3Decrease in provisions for doubtful accounts
    
    
    
    
    
    
    4.0(Increase) decrease in advertising expense,
excluding La Salsa and Green Burrito
    
    
    0.1
    
    
    
    (1.8
    )Decrease in interest expense, excluding
write-off of unamortized loan fees
    
    
    3.9
    
    
    
    5.6Increase in operating losses of La Salsa and
Green Burrito, excluding franchising income,
facility action charges and provisions for
doubtful accounts
    
    
    (0.6
    )
    
    
    (2.2
    )Increase in write-off of unamortized loan fees
    
    
    (0.7
    )
    
    
    (4.9
    )Premium paid upon redemption of Senior Notes
    
    
    
    
    
    
    (9.1
    )Increase in other income, net, excluding
premium paid upon redemption of Senior Notes
    
    
    1.2
    
    
    
    4.6All other, net
    
    
    0.4
    
    
    
    (1.5
    )Increase in net income
    
    $
    12.2
    
    
    $
    12.4
 32




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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 November 1, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other (A)
    
    TotalCompany-operated revenue
    
    $
    129,518
    
    
    $
    140,269
    
    
    $
    10,561
    
    
    $
    270
    
    
    $
    280,618Company-operated average weekly unit
volume (actual $- not in thousands)
    
    
    25,059
    
    
    
    17,111
    
    
    
    14,372Company-operated average unit volume
(trailing 13 periods)
    
    
    1,282
    
    
    
    850
    
    
    
    744Franchise-operated average unit volume
(trailing 13 periods)
    
    
    1,136
    
    
    
    891
    
    
    
    815Average check (actual $- not in
thousands)(B)
    
    
    5.84
    
    
    
    4.60
    
    
    
    9.61Company-operated same-store sales
increase I
    
    
    7.9
    %
    
    
    4.5
    %
    
    
    5.6
    %Company-operated same-store transactions
increase (decrease) (D)
    
    
    2.2
    %
    
    
    (1.2
    )%
    
    
    1.3
    %Franchise-operated same-store sales
increaI(C)
    
    
    6.7
    %
    
    
    0.7
    %
    
    
    2.8
    %Operating costs as a % of
company-operated revenue:Food and packaging
    
    
    29.9
    %
    
    
    30.4
    %
    
    
    26.4
    %Payroll and employee benefits
    
    
    27.9
    %
    
    
    32.3
    %
    
    
    34.3
    %Occupancy and other operating costs
    
    
    21.4
    %
    
    
    22.0
    %
    
    
    36.4
    %Restaurant level margin
    
    
    20.8
    %
    
    
    15.3
    %
    
    
    2.9
    %Advertising as a percentage of
company-operated revenue
    
    
    5.9
    %
    
    
    6.1
    %
    
    
    3.0
    %Franchising revenue:Royalties
    
    $
    5,804
    
    
    $
    10,210
    
    
    $
    421
    
    
    $
    73
    
    
    $
    16,508Distribution centers
    
    
    39,970
    
    
    
    3,396
    
    
    
    
    
    
    
    
    
    
    
    43,366Rent
    
    
    5,393
    
    
    
    1,585
    
    
    
    
    
    
    
    
    
    
    
    6,978Retail sales of variable interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,080
    
    
    
    1,080Other
    
    
    205
    
    
    
    112
    
    
    
    79
    
    
    
    
    
    
    
    396Total franchising revenue
    
    
    51,372
    
    
    
    15,303
    
    
    
    500
    
    
    
    1,153
    
    
    
    68,328Franchising expense:Administrative expense (including
provision for bad debts)
    
    
    1,045
    
    
    
    1,425
    
    
    
    193
    
    
    
    
    
    
    
    2,663Distribution centers
    
    
    38,924
    
    
    
    3,407
    
    
    
    
    
    
    
    
    
    
    
    42,331Rent and other occupancy
    
    
    4,380
    
    
    
    1,560
    
    
    
    
    
    
    
    
    
    
    
    5,940Operating costs of variable interest
entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,043
    
    
    
    1,043Total franchising expense
    
    
    44,349
    
    
    
    6,392
    
    
    
    193
    
    
    
    1,043
    
    
    
    51,977Net franchising income
    
    $
    7,023
    
    
    $
    8,911
    
    
    $
    307
    
    
    $
    110
    
    
    $
    16,351Facility action charges, net
    
    $
    (19
    )
    
    $
    389
    
    
    $
    641
    
    
    $
    34
    
    
    $
    1,045Operating income (loss)
    
    $
    16,334
    
    
    $
    4,186
    
    
    $
    (1,484
    )
    
    $
    (73
    )
    
    $
    18,963
 33




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Twelve Weeks Ended November 3, 2003Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other (A)
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Company-operated revenue
    
    $
    120,926
    
    
    $
    139,944
    
    
    $
    9,827
    
    
    $
    329
    
    
    $
    271,026Company-operated average weekly
unit volume (actual $- not in
thousands)
    
    
    22,793
    
    
    
    16,087
    
    
    
    13,648Company-operated average unit
volume (trailing 13 periods)
    
    
    1,172
    
    
    
    771
    
    
    
    724Franchise-operated average unit
volume (trailing 13 periods)
    
    
    1,069
    
    
    
    815
    
    
    
    689Average check (actual $- not in
thousands)(B)
    
    
    5.53
    
    
    
    4.35
    
    
    
    8.80Company-operated same-store sales
increase (decrIe) (C)
    
    
    5.4
    %
    
    
    6.8
    %
    
    
    (2.6
    )%Company-operated same-store
transactions decrease (D)
    
    
    (1.2
    )%
    
    
    (3.5
    )%
    
    
    (1.9
    )%Franchise-operated same-store sales
increase (dIease) (C)
    
    
    2.6
    %
    
    
    6.3
    %
    
    
    1.3
    %Operating costs as a % of
company-operated revenue:Food and packaging
    
    
    28.7
    %
    
    
    31.5
    %
    
    
    27.5
    %Payroll and employee benefits
    
    
    29.0
    %
    
    
    34.5
    %
    
    
    33.5
    %Occupancy and other operating costs
    
    
    22.0
    %
    
    
    22.7
    %
    
    
    33.3
    %Restaurant level margin
    
    
    20.3
    %
    
    
    11.3
    %
    
    
    5.7
    %Advertising as a percentage of
company-operated revenue
    
    
    6.4
    %
    
    
    6.1
    %
    
    
    4.9
    %Franchising revenue:Royalties
    
    $
    5,054
    
    
    $
    9,273
    
    
    $
    360
    
    
    $
    72
    
    
    $
    14,759Distribution centers
    
    
    35,859
    
    
    
    6,459
    
    
    
    
    
    
    
    
    
    
    
    42,318Rent
    
    
    4,601
    
    
    
    1,667
    
    
    
    
    
    
    
    
    
    
    
    6,268Other
    
    
    295
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    402Total franchising revenue
    
    
    45,809
    
    
    
    17,506
    
    
    
    360
    
    
    
    72
    
    
    
    63,747Franchising expense:Administrative expense (including
provision for bad debts)
    
    
    549
    
    
    
    1,544
    
    
    
    312
    
    
    
    
    
    
    
    2,405Distribution centers
    
    
    35,255
    
    
    
    6,027
    
    
    
    
    
    
    
    
    
    
    
    41,282Rent and other occupancy
    
    
    4,815
    
    
    
    1,465
    
    
    
    
    
    
    
    
    
    
    
    6,280Total franchising expense
    
    
    40,619
    
    
    
    9,036
    
    
    
    312
    
    
    
    
    
    
    
    49,967Net franchising income
    
    $
    5,190
    
    
    $
    8,470
    
    
    $
    48
    
    
    $
    72
    
    
    $
    13,780Facility action charges (gains), net
    
    $
    (173
    )
    
    $
    1,183
    
    
    $
    3
    
    
    $
    71
    
    
    $
    1,084Operating income (loss)
    
    $
    12,597
    
    
    $
    (396
    )
    
    $
    (692
    )
    
    $
    (189
    )
    
    $
    11,320
 34




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Forty Weeks Ended November 1, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other (A)
    
    TotalCompany-operated revenue
    
    $
    429,139
    
    
    $
    461,855
    
    
    $
    36,262
    
    
    $
    1,035
    
    
    $
    928,291Company-operated average weekly unit
volume (actual $- not in thousands)
    
    
    25,041
    
    
    
    16,771
    
    
    
    14,674Average check (actual $- not in
thousands)(B)
    
    
    5.85
    
    
    
    4.61
    
    
    
    9.62Company-operated same-store salIincrease (C)
    
    
    8.7
    %
    
    
    7.8
    %
    
    
    5.4
    %Company-operated same-store transactions
increase (D)
    
    
    1.9
    %
    
    
    0.0
    %
    
    
    1.6
    %Franchise-operated same-store Ies
increase (C)
    
    
    7.6
    %
    
    
    5.3
    %
    
    
    3.4
    %Operating costs as a % of
company-operated revenue:Food and packaging
    
    
    29.2
    %
    
    
    30.0
    %
    
    
    27.1
    %Payroll and employee benefits
    
    
    28.3
    %
    
    
    33.0
    %
    
    
    34.8
    %Occupancy and other operating costs
    
    
    21.4
    %
    
    
    22.0
    %
    
    
    34.7
    %Restaurant level margin
    
    
    21.1
    %
    
    
    15.0
    %
    
    
    3.4
    %Advertising as a percentage of company-
operated revenue
    
    
    6.4
    %
    
    
    6.0
    %
    
    
    2.9
    %Franchising revenue:Royalties
    
    $
    19,150
    
    
    $
    34,381
    
    
    $
    1,345
    
    
    $
    256
    
    
    $
    55,132Distribution centers
    
    
    133,356
    
    
    
    13,048
    
    
    
    
    
    
    
    
    
    
    
    146,404Rent
    
    
    16,883
    
    
    
    7,438
    
    
    
    
    
    
    
    
    
    
    
    24,321Retail sales of variable interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,562
    
    
    
    2,562Other
    
    
    787
    
    
    
    382
    
    
    
    112
    
    
    
    
    
    
    
    1,281Total franchising revenue
    
    
    170,176
    
    
    
    55,249
    
    
    
    1,457
    
    
    
    2,818
    
    
    
    229,700Franchising expense:Administrative expense (including
provision for bad debts)
    
    
    3,041
    
    
    
    3,127
    
    
    
    845
    
    
    
    
    
    
    
    7,013Distribution centers
    
    
    129,689
    
    
    
    13,135
    
    
    
    
    
    
    
    
    
    
    
    142,824Rent and other occupancy
    
    
    13,863
    
    
    
    5,327
    
    
    
    
    
    
    
    
    
    
    
    19,190Operating costs of variable interest
entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,505
    
    
    
    2,505Total franchising expense
    
    
    146,593
    
    
    
    21,589
    
    
    
    845
    
    
    
    2,505
    
    
    
    171,532Net franchising income
    
    $
    23,583
    
    
    $
    33,660
    
    
    $
    612
    
    
    $
    313
    
    
    $
    58,168Facility action charges, net
    
    $
    1,450
    
    
    $
    5,796
    
    
    $
    2,406
    
    
    $
    93
    
    
    $
    9,745Operating income (loss)
    
    $
    43,899
    
    
    $
    10,014
    
    
    $
    (5,947
    )
    
    $
    117
    
    
    $
    48,083
 35




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Forty Weeks Ended November 3, 2003Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other (A)
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Company-operated revenue
    
    $
    401,002
    
    
    $
    446,168
    
    
    $
    32,962
    
    
    $
    1,105
    
    
    $
    881,237Company-operated average weekly
unit volume (actual $- not in
thousands)
    
    
    22,670
    
    
    
    15,312
    
    
    
    14,133Average check (actual $- not in
thousands)(B)
    
    
    5.46
    
    
    
    4.28
    
    
    
    9.10Company-operated same-store sales
inIase (decrease) (C)
    
    
    2.2
    %
    
    
    0.8
    %
    
    
    (2.1
    )%Company-operated same-store
transactions decrease (D)
    
    
    (1.5
    )%
    
    
    (7.2
    )%
    
    
    (3.7
    )%Franchise-operated same-store
salesIcrease (decrease) (C)
    
    
    (0.3
    )%
    
    
    (0.5
    )%
    
    
    1.6
    %Operating costs as a % of
company-operated revenue:Food and packaging
    
    
    28.5
    %
    
    
    31.2
    %
    
    
    26.5
    %Payroll and employee benefits
    
    
    28.8
    %
    
    
    35.4
    %
    
    
    31.7
    %Occupancy and other operating costs
    
    
    22.0
    %
    
    
    23.8
    %
    
    
    32.9
    %Restaurant level margin
    
    
    20.7
    %
    
    
    9.6
    %
    
    
    8.9
    %Advertising as a percentage of
company-operated revenue
    
    
    6.4
    %
    
    
    6.2
    %
    
    
    2.9
    %Franchising revenue:Royalties
    
    $
    16,701
    
    
    $
    28,937
    
    
    $
    1,131
    
    
    $
    243
    
    
    $
    47,012Distribution centers
    
    
    118,780
    
    
    
    17,526
    
    
    
    
    
    
    
    
    
    
    
    136,306Rent
    
    
    16,613
    
    
    
    5,868
    
    
    
    
    
    
    
    
    
    
    
    22,481Other
    
    
    652
    
    
    
    288
    
    
    
    65
    
    
    
    
    
    
    
    1,005Total franchising revenue
    
    
    152,746
    
    
    
    52,619
    
    
    
    1,196
    
    
    
    243
    
    
    
    206,804Franchising expense:Administrative expense (including
provision for bad debts)
    
    
    2,885
    
    
    
    4,607
    
    
    
    576
    
    
    
    
    
    
    
    8,068Distribution centers
    
    
    116,026
    
    
    
    17,284
    
    
    
    
    
    
    
    
    
    
    
    133,310Rent and other occupancy
    
    
    16,537
    
    
    
    5,485
    
    
    
    
    
    
    
    
    
    
    
    22,022Total franchising expense
    
    
    135,448
    
    
    
    27,376
    
    
    
    576
    
    
    
    
    
    
    
    163,400Net franchising income
    
    $
    17,298
    
    
    $
    25,243
    
    
    $
    620
    
    
    $
    243
    
    
    $
    43,404Facility action charges (gains), net
    
    $
    (660
    )
    
    $
    3,419
    
    
    $
    194
    
    
    $
    (673
    )
    
    $
    2,280Operating income (loss)
    
    $
    45,565
    
    
    $
    (11,177
    )
    
    $
    (1,125
    )
    
    $
    301
    
    
    $
    33,564
 (A) Other consists of a few Green Burrito restaurants that are not dual-branded
and a consolidated variable interest Hardees franchise entity over which we do
not exercise decision-making authority. Additionally, amounts that we do not
believe would be proper to allocate to the operating segments are included in
Other. (B) 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 priceIid 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 36




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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 November 1, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalNet income (loss)
    
    $
    15,661
    
    
    $
    (1,131
    )
    
    $
    (1,466
    )
    
    $
    68
    
    
    $
    13,132Loss from operations of
discontinued segment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179
    
    
    
    179Interest expense
    
    
    1,149
    
    
    
    5,577
    
    
    
    
    
    
    
    20
    
    
    
    6,746Income tax expense (benefit)
    
    
    107
    
    
    
    21
    
    
    
    
    
    
    
    (198
    )
    
    
    (70
    )Depreciation and amortization
    
    
    5,542
    
    
    
    8,861
    
    
    
    644
    
    
    
    206
    
    
    
    15,253Facility action charges (gains), net
    
    
    (19
    )
    
    
    389
    
    
    
    641
    
    
    
    34
    
    
    
    1,045EBITDA
    
    $
    22,440
    
    
    $
    13,717
    
    
    $
    (181
    )
    
    $
    309
    
    
    $
    36,285
 37




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##### Table of Contents



CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Twelve Weeks Ended November 3, 2003Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Net income (loss)
    
    $
    10,515
    
    
    $
    (9,131
    )
    
    $
    (703
    )
    
    $
    258
    
    
    $
    939Income from operations of discontinued segment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111
    )
    
    
    (111
    )Interest expense
    
    
    2,073
    
    
    
    7,886
    
    
    
    (18
    )
    
    
    (1
    )
    
    
    9,940Income tax expense
    
    
    181
    
    
    
    22
    
    
    
    
    
    
    
    132
    
    
    
    335Depreciation and amortization
    
    
    6,687
    
    
    
    8,996
    
    
    
    773
    
    
    
    40
    
    
    
    16,496Facility action charges (gains), net
    
    
    (173
    )
    
    
    1,183
    
    
    
    3
    
    
    
    71
    
    
    
    1,084EBITDA
    
    $
    19,283
    
    
    $
    8,956
    
    
    $
    55
    
    
    $
    389
    
    
    $
    28,683
 Forty Weeks Ended November 1, 2004Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    TotalNet income (loss)
    
    $
    41,012
    
    
    $
    (24,047
    )
    
    $
    (6,000
    )
    
    $
    (18
    )
    
    $
    10,947Income from operations of
discontinued segment,
excluding impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (252
    )
    
    
    (252
    )Interest expense
    
    
    3,916
    
    
    
    26,504
    
    
    
    (25
    )
    
    
    34
    
    
    
    30,429Income tax expense
    
    
    354
    
    
    
    59
    
    
    
    2
    
    
    
    110
    
    
    
    525Depreciation and amortization
    
    
    18,663
    
    
    
    30,130
    
    
    
    2,977
    
    
    
    301
    
    
    
    52,071Facility action charges, net
    
    
    1,450
    
    
    
    5,796
    
    
    
    2,406
    
    
    
    93
    
    
    
    9,745Premium on early redemption
of Senior Notes
    
    
    
    
    
    
    9,126
    
    
    
    
    
    
    
    
    
    
    
    9,126Impairment of Timber Lodge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    898
    
    
    
    898EBITDA
    
    $
    65,395
    
    
    $
    47,568
    
    
    $
    (640
    )
    
    $
    1,166
    
    
    $
    113,489
 Forty Weeks Ended November 3, 2003Carls Jr.
    
    Hardees
    
    La Salsa
    
    Other
    
    Total(as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)
    
    (as restated)Net income (loss)
    
    $
    40,806
    
    
    $
    (39,775
    )
    
    $
    (1,135
    )
    
    $
    (1,437
    )
    
    $
    (1,541
    )Loss from operations of discontinued segment,
excluding impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    389
    
    
    
    389Interest expense
    
    
    4,937
    
    
    
    26,243
    
    
    
    (45
    )
    
    
    (9
    )
    
    
    31,126Income tax expense
    
    
    530
    
    
    
    80
    
    
    
    
    
    
    
    443
    
    
    
    1,053Depreciation and amortization
    
    
    21,017
    
    
    
    29,450
    
    
    
    2,810
    
    
    
    139
    
    
    
    53,416Facility action charges (gains), net
    
    
    (660
    )
    
    
    3,419
    
    
    
    194
    
    
    
    (673
    )
    
    
    2,280Impairment of Timber Lodge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,566
    
    
    
    1,566EBITDA
    
    $
    66,630
    
    
    $
    19,417
    
    
    $
    1,824
    
    
    $
    418
    
    
    $
    88,289
 38




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##### Table of Contents



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
    
    Forty Weeks EndedNovember 1, 2004
    
    November 3, 2003
    
    November 1, 2004
    
    November 3, 2003(as restated)
    
    
    
    
    
    (as restated)Net cash provided by
operating activities
    
    $
    32,904
    
    
    $
    16,114
    
    
    $
    100,513
    
    
    $
    60,586Interest expense
    
    
    6,746
    
    
    
    9,940
    
    
    
    30,429
    
    
    
    31,126Income tax expense (benefit)
    
    
    (70
    )
    
    
    335
    
    
    
    525
    
    
    
    1,053Premium on early redemption
of Senior Notes
    
    
    
    
    
    
    
    
    
    
    9,126
    
    
    
    Amortization of loan fees
    
    
    (1,057
    )
    
    
    (1,160
    )
    
    
    (3,051
    )
    
    
    (3,696
    )Recovery of (provision for)
losses on accounts and
notes receivable
    
    
    (8
    )
    
    
    (5
    )
    
    
    1,784
    
    
    
    (2,197
    )Loss on sales of property
and equipment, capital
leases and extinguishment
of debts
    
    
    (2,036
    )
    
    
    (552
    )
    
    
    (8,352
    )
    
    
    (630
    )Deferred income taxes
    
    
    (61
    )
    
    
    (143
    )
    
    
    (205
    )
    
    
    (431
    )Other non-cash credits
    
    
    (607
    )
    
    
    220
    
    
    
    (126
    )
    
    
    387Net change in refundable
income taxes
    
    
    397
    
    
    
    (84
    )
    
    
    818
    
    
    
    (723
    )Change in estimated
liability for closing
restaurants and estimated
liability for
self-insurance
    
    
    1,019
    
    
    
    2,497
    
    
    
    4,317
    
    
    
    7,453Net change in accounts
receivable, inventories,
prepaid expenses and other
current assets
    
    
    3,430
    
    
    
    (4,785
    )
    
    
    (3,243
    )
    
    
    (10,815
    )Net change in accounts
payable and other current
and long term liabilities
    
    
    (4,377
    )
    
    
    6,285
    
    
    
    (19,303
    )
    
    
    5,939EBITDA from operations of
discontinued segment
    
    
    (179
    )
    
    
    89
    
    
    
    262
    
    
    
    (413
    )Net cash provided to
discontinued segment
    
    
    5
    
    
    
    21
    
    
    
    257
    
    
    
    237EBITDA, including
operations of discontinued
segment
    
    
    36,106
    
    
    
    28,772
    
    
    
    113,751
    
    
    
    87,876Less: EBITDA from
operations of discontinued
segment
    
    
    179
    
    
    
    (89
    )
    
    
    (262
    )
    
    
    413EBITDA
    
    $
    36,285
    
    
    $
    28,683
    
    
    $
    113,489
    
    
    $
    88,289
 Carls Jr. During the twelve weeks ended November 1, 2004, we opened three Carls Jr.
restaurants. Carls Jr. franchisees and licensees opened one restaurant. During
the forty weeks ended November 1, 2004, we opened seven and closed one Carls
Jr. restaurants. Carls Jr. franchisees and licensees opened ten and closed
seven 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
    
    RevenueThird Fiscal Quarter
    
    Third Fiscal Quarter
    
    Year-To-Date2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change(as restated)
    
    
    
    
    
    
    
    
    
    (as restated)Company
    
    
    432
    
    
    
    440
    
    
    
    (8
    )
    
    $
    129,518
    
    
    $
    120,926
    
    
    $
    8,592
    
    
    $
    429,139
    
    
    $
    401,002
    
    
    $
    28,137Franchised and
licensed(a)
    
    
    585
    
    
    
    563
    
    
    
    22
    
    
    
    51,372
    
    
    
    45,809
    
    
    
    5,563
    
    
    
    170,176
    
    
    
    152,746
    
    
    
    17,430Total
    
    
    1,017
    
    
    
    1,003
    
    
    
    14
    
    
    $
    180,890
    
    
    $
    166,735
    
    
    $
    14,155
    
    
    $
    599,315
    
    
    $
    553,748
    
    
    $
    45,567
 39




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) (a) Includes $39,971, $35,859, $133,356 and $118,780 of revenues from
distribution of food, packaging and supplies to franchised and licensed
restaurants during the twelve weeks ended November 1, 2004, and November 3,
2003, and the forty weeks ended November 1, 2004, and November 3, 2003,
respectively. Company-Operated Restaurants Revenue from company-operated Carls Jr. restaurants increased $8,592, or 7.1%,
to $129,518 during the twelve weeks ended November 1, 2004, as compared to the
twelve weeks ended November 3, 2003. This increase resulted primarily from a
7.9% increase in same-store sales,partially offset by the impact of selling 15
company restaurants located in Arizona to a franchisee in the fourth quarter of
fiscal 2004. During the forty week period ended November 1, 2004, revenue from
company-operated Carls Jr. restaurants increased $28,137, or 7.0%, to
$429,139. 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 Loaded Breakfast Burrito, 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 $1,413 during the forty weeks ended
November 1, 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
    
    FortyWeeks
    
    WeeksRestaurant-level margin for the period
ended November 3, 2003(as restated)
    
    
    20.3
    %
    
    
    20.7
    %Increase in food and packaging costs
    
    
    (1.2
    )
    
    
    (0.7
    )Decrease (increase) in workers
compensation expense
    
    
    0.2
    
    
    
    (0.2
    )Decrease in labor costs, excluding
workers compensation
    
    
    0.8
    
    
    
    0.8Increase in rent expense
    
    
    (0.9
    )
    
    
    (0.5
    )Decrease in utilities expense
    
    
    0.1
    
    
    
    0.2Decrease in depreciation expense
    
    
    0.6
    
    
    
    0.4Decrease in repair and maintenance
expense
    
    
    0.4
    
    
    
    0.3Decrease in property taxes
    
    
    0.2
    
    
    
    0.2Other, net
    
    
    0.3
    
    
    
    (0.1
    )Restaurant-level margin for the period
ended November 1, 2004
    
    
    20.8
    %
    
    
    21.1
    %
 Food and packaging costs as a percent of sales increased during the twelve and
forty weeks ended November 1, 2004, as compared to the prior year periods, due
primarily to increases in the cost of several commodities, primarily beef,
during the third quarter of fiscal 2005. Workers compensation expense as a percent of sales decreased during the twelve
weeks ended November 1, 2004 as compared to the prior year period, due mainly
to benefits of sales leverage. For the forty weeks ended November 1, 2004,
workers compensation expense as a percentage of sales increased 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. Rent expense as a percent of sales increased during the twelve and forty weeks
ended November 1, 2004 as compared to the prior year periods, as a result of
the designation of certain leases as capital leases during the third fiscal
quarter of the prior year. Rent expense as a percent of sales has remained
relatively constant during the first three fiscal quarters of the current year. 40




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Labor costs, excluding workers compensation, as a percent of sales decreased
during the twelve and forty weeks ended November 1, 2004, as compared to the
twelve and forty weeks ended November 3, 2003, due mainly to benefits of sales
leverage. Depreciation, property taxes and utilities, as well as repair and maintenance
expense, as percents of sales, decreased during the twelve and forty weeks
ended November 1, 2004, from the comparable prior year period, due mainly to
sales leverage. On October 5, 2003, the Governor of California signed Senate Bill 2, known as
the Health Insurance Act of 2003 (SB2), which would have required that the
company provide healthcare coverage for the majority of its workers. On
November 2, 2004, Proposition 72 was defeated by the voters of California,
which had the effect of nullifying SB2. Franchised and Licensed Restaurants Total franchising revenue increased $5,563, or 12.1%, to $51,372 during the
twelve weeks ended November 1, 2004, as compared to the twelve weeks ended
November 3, 2003. The increase is comprised mainly of an increase of $4,112, or
11.5%, 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 6.7% increase in franchise same-store sales.
For similar reasons, franchise royalties also grew $750, or 14.8%, during the
twelve weeks ended November 1, 2004, as compared to the twelve weeks ended
November 3, 2003. Total franchising revenue increased $17,430, or 11.4%, to $170,176 during the
forty weeks ended November 1, 2004, as compared to the forty weeks ended
November 3, 2003. The increase is comprised mainly of an increase of $14,576,
or 12.3%, in food, paper and supplies sales to franchisees and an increase of
$2,449, or 14.7%, in franchise royalties, both for reasons similar to those
noted in the third fiscal quarter discussion above. Net franchising income increased $1,833, or 35.3%, during the twelve weeks
ended November 1, 2004, as compared to the twelve weeks ended November 3, 2003,
and increased $6,285, or 36.3%, during the forty weeks ended November 1, 2004,
as compared to the forty weeks ended
November 3, 2003. These increases are primarily due to increased profits from
subleasing facilities to franchisees and the increase in franchise royalties. Although not required to do so, approximately 89% of Carls Jr. franchised and
licensed restaurants purchase food, paper and other supplies from us. 41




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Hardees During the twelve weeks ended November 1, 2004, we opened one and closed 11
Hardees restaurants. During the same period, Hardees franchisees and
licensees opened one restaurant and closed thirteen restaurants. For the forty
weeks ended November 1, 2004, we opened two restaurants and closed 43 Hardees
restaurants. During the same period, Hardees franchisees and licensees opened
four restaurants and closed 45 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
    
    RevenueThird Fiscal Quarter
    
    Third Fiscal Quarter
    
    Year-To-Date2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change(as restated)
    
    
    
    
    
    
    
    
    
    (as restated)Company
    
    
    680
    
    
    
    721
    
    
    
    (41
    )
    
    $
    140,269
    
    
    $
    139,944
    
    
    $
    325
    
    
    $
    461,855
    
    
    $
    446,168
    
    
    $
    15,687Franchised and
licensed
    
    
    1,367
    
    
    
    1,413
    
    
    
    (46
    )
    
    
    15,303
    
    
    
    17,506
    
    
    
    (2,203
    )
    
    
    55,249
    
    
    
    52,619
    
    
    
    2,630Total
    
    
    2,047
    
    
    
    2,134
    
    
    
    (87
    )
    
    $
    155,572
    
    
    $
    157,450
    
    
    $
    (1,878
    )
    
    $
    517,104
    
    
    $
    498,787
    
    
    $
    18,317
 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 forty week periods ended November 3, 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 17 consecutive four-week reporting periods
through November 1, 2004. Company-Operated Restaurants Same-store sales for company-operated Hardees restaurants increased 4.5%
during the twelve weeks, and 7.8% during the forty weeks ended November 1,
2004. We believe this increase reflects positive consumer reception of the
Hardees Revolution menu changes. A 4.0% 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 $325, or 0.2%, to
$140,269 during the twelve weeks ended November 1, 2004, as compared to the
twelve weeks ended November 3, 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 November 1, 2004 was
$4.60, as compared to $4.35 during the twelve weeks ended November 3, 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 $15,687, or 3.5%,
during the forty weeks ended November 1, 2004, as compared to the forty weeks
ended November 3, 2003. This increase is also due to the increase in same-store
sales discussed above, partially offset by the restaurant closures. Consistent
with the third quarter of fiscal 2005, the average check during the forty weeks
ended November 1, 2004 increased to $4.61, as compared to $4.28 during the
forty weeks ended November 3, 2003. 42




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) The changes in restaurant-level margins are explained as follows: Twelve
    
    FortyWeeks
    
    WeeksRestaurant-level margin for the period ended November 3, 2003
(as restated)
    
    
    11.3
    %
    
    
    9.6
    %Decrease in labor and incentive costs, excluding workers
compensation
    
    
    2.1
    
    
    
    2.5Decrease in food and packaging costs
    
    
    1.1
    
    
    
    1.2Decrease (increase) in workers compensation insurance expense
    
    
    0.1
    
    
    
    (0.2
    )Decrease in general liability insurance expense
    
    
    0.4
    
    
    
    0.6Increase in asset retirement expense
    
    
    (0.2
    )
    
    
    (0.3
    )(Increase) decrease in repair and maintenance expenses
    
    
    (0.2
    )
    
    
    0.1Decrease in utilities expense
    
    
    0.3
    
    
    
    0.5Decrease in depreciation expense
    
    
    0.3
    
    
    
    0.6Decrease in restaurant opening costs
    
    
    
    
    
    
    0.2Other, net
    
    
    0.1
    
    
    
    0.2Restaurant-level margin for the period ended November 1, 2004
    
    
    15.3
    %
    
    
    15.0
    %
 Labor costs, excluding workers compensation, decreased significantly as a
percent of sales during the twelve and forty week periods ended November 1,
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. Food and packaging costs as a percent of sales decreased from the comparable
prior year periods primarily due to lower discounting and couponing 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 decreased during the twelve
weeks ended November 1, 2004, due mainly to benefits of sales leverage.
Workers compensation expense as a percent of sales increased during the forty
weeks ended November 1, 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. During the twelve weeks ended November 1, 2004, we retired a minor amount of
obsolete restaurant cooking equipment assets based on the completion 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. Depreciation and utilities expense decreased as a percent of sales from the
comparable prior year periods due mainly to the benefits of sales leverage. General liability insurance expense decreased as a percent of sales from the
prior year comparable periods due primarily to favorable adjustments to the
reserve for general liability claims resulting from our semi annual actuarial
analysis. Franchised and Licensed Restaurants Total franchising revenue decreased $2,203, or 12.6%, to $15,303 during the
twelve weeks ended November 1, 2004, as compared to the twelve weeks ended
November 3, 2003. The decrease is primarily due to a $3,063 or 47% decrease in
distribution center revenues related to equipment and sales to franchisees,
partially offset by franchise royalties which increased by $937, or 10.1%. The
decrease in distribution revenues are a result of reduced equipment sales to
franchisees which made significant investments in fiscal 2003 and early fiscal
2004 pursuant to the Star Hardees remodel program. The increase in franchise
royalties is primarily due to improved financial health of certain franchisees,
which allowed them to resume royalty payments to us, and the 0.7% increase in
franchise same-store sales, partially offset by the decrease in the number of
franchised restaurants. 43




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) Total franchising revenue increased $2,630, or 5.0%, to $55,249 during the
forty weeks ended November 1, 2004, as compared to the forty weeks ended
November 3, 2003. During the same period franchise royalties grew $5,444, or
18.8%, both for reasons similar to those noted in the third fiscal quarter
discussion above. Net franchising income increased $441, or 5.2%, during the twelve weeks ended
November 1, 2004, and increased $8,417, or 33.3%, during the forty weeks ended
November 1, 2004, as compared to the same periods in the prior year. For the
twelve weeks ended November 1, 2004, the increase in net franchising income was
primarily due to the increases in franchise royalties and rents noted above,
partially offset by a $286 increase in the provision for bad debts. The
increase in provision for bad debts results from a provision of $52 during the
twelve weeks ended November 1, 2004, as compared to a credit of $235 during the
twelve weeks ended November 3, 2003. For the forty weeks ended November 1,
2004, the increase in net franchising income was also primarily due to the
increases in franchise royalties and rents noted above, as well as a $967
decrease in the provision for bad debts. The decrease in provision for bad
debts results from a credit of $1,401 during the forty weeks ended November 1,
2004 principally due to improved collections, as compared to a credit of $434
during the forty weeks ended November 3, 2003. La Salsa During the twelve weeks ended November 1, 2004, we closed one La Salsa
restaurant. During the forty weeks ended November 1, 2004, we opened two La
Salsa restaurants and closed two restaurants. During the same period, La Salsa
franchisees and licensees opened two and closed three restaurants. The
following table shows the change in the La Salsa restaurant portfolio, as well
as the change in revenue at La Salsa for the current quarter and year-to-date: Restaurant Portfolio
    
    RevenueThird Fiscal Quarter
    
    Third Fiscal Quarter
    
    Year-To-Date2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    Change
    
    2005
    
    2004
    
    ChangeCompany
    
    
    61
    
    
    
    60
    
    
    
    1
    
    
    $
    10,561
    
    
    $
    9,827
    
    
    $
    734
    
    
    $
    36,262
    
    
    $
    32,962
    
    
    $
    3,300Franchised and
licensed
    
    
    40
    
    
    
    40
    
    
    
    
    
    
    
    500
    
    
    
    360
    
    
    
    140
    
    
    
    1,457
    
    
    
    1,196
    
    
    
    261Total
    
    
    101
    
    
    
    100
    
    
    
    1
    
    
    $
    11,061
    
    
    $
    10,187
    
    
    $
    874
    
    
    $
    37,719
    
    
    $
    34,158
    
    
    $
    3,561
 Same-store sales for company-operated La Salsa restaurants increased 5.6%
during the twelve weeks ended November 1, 2004. Revenue from company-operated
La Salsa restaurants increased $734, or 7.5%, when compared to the twelve weeks
ended November 3, 2003, primarily due to the net increase in the number of
company-operated restaurants and the increase in same-store sales. For the
forty weeks ended November 1, 2004, same-store sales for company-operated La
Salsa restaurants increased 5.4% and revenue from company-operated La Salsa
restaurants increased $3,300, or 10.0%, when compared to the same period in the
prior year, also primarily due to the company-operated restaurant count and
same-store sales growth. Restaurant-level margins were 2.9% and 5.7% as a percent of company-operated
restaurant revenues for the twelve-week periods ended November 1, 2004, and
November 3, 2003, respectively. Margins were favorably impacted by
approximately 110 basis points due to an decrease in food and packaging costs
as a percent of sales, resulting primarily from true-up of rebates. Margins
were negatively impacted by approximately 80 basis points due to an increase in
payroll and employee benefit costs, primarily as a result of increased hourly
labor related to higher costs associated with new restaurant openings with
lower sales average and the fixed nature of labor on lower sales, and increases
in workers compensation expense resulting from higher actuarial estimates.
Occupancy and other expenses negatively impacted margins by approximately 310
basis points, due to new point of sale cash register maintenance contracts,
higher energy bills in California (approximately 90 basis points), and higher
repair and maintenance costs (approximately 30 basis points). Additonally,
depreciation expense increased (approximately 200 basis points) due mainly to
higher costs associated with new restaurant openings with lower average sales,
partially offset by a decrease in restaurant opening costs. Restaurant-level margins were 3.4% and 8.9% as a percent of company-operated
restaurant revenues for the forty weeks ended November 1, 2004, and November 3,
2003, respectively. Margins were negatively impacted by 44




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) approximately 60 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 315 basis points due to an increase in
payroll and employee benefit costs primarily due to an approximate $570 charge
recorded in the current year fiscal second quarter 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. Additionally,
payroll and employee benefit costs also increased for the same reasons noted in
the third fiscal quarter discussion above. Occupancy and other expenses
negatively impacted margins by approximately 180 basis points, due mainly to
amortization of intangible assets (approximately 100 basis points), which had
been classified as general and administrative expenses in the prior year
comparable period, and increased rent expense (approximately 140 basis points)
due mainly to an adjustment to deferred rents based on current lease terms,
partially offset by a decrease in restaurant opening costs (approximately 90
basis points). Consolidated Variable Interest Entities We consolidate the results of one variable interest entity (VIE), a franchise
that operates six Hardees restaurants, and a group of Hardees cooperative
advertising funds. We do not possess
any ownership interest in the VIE franchise. Retail sales and operating
expenses of the VIE franchise are included within Franchise and Licensed
Restaurants and Other 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 forty weeks
ended November 1, 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 November 1, 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 September 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
decreased $253, or 1.5%, to $16,466 during the twelve
weeks ended November 1, 2004, as compared to the twelve weeks ended November 3,
2003. Advertising expenses as a percentage of company-operated restaurant
revenue decreased marginally from 6.2% to 5.9% during the same period. The
decrease in advertising costs is mainly as result of sales leverage related to
advertising production costs, which are mostly fixed in nature. Advertising expenses increased $1,838 or 3.4%, to $56,140 during the forty
weeks ended November 1, 2004, as compared to the forty weeks ended November 3,
2003. Advertising expenses as a percentage of company-operated restaurant
revenue decreased marginally from 6.2% to 6.0% for the same reasons noted in
the third fiscal quarter discussion above. Consolidated General and Administrative Expense General and administrative expenses were 8.2% of total revenue during the
twelve weeks ended November 1, 2004, as compared to 7.7% during the twelve
weeks ended November 3, 2003. For the same period, general and administrative
expenses increased $2,969, or 11.6%, to $28,630 as compared to the prior year
period. This increase, in both dollar and percentage terms, is primarily due to
charges of increased corporate and regional management incentive compensation
expense as a result of our improved financial performance, additional staffing
and increased consulting and audit expenses pursuant to 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. 45




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) General and administrative expenses were 9.1% of total revenue during the forty
weeks ended November 1, 2004, as compared to 7.5% during the forty weeks ended
November 3, 2003. For the same period, general and administrative expenses
increased $23,320, or 28.4%, to $105,439 as compared to the prior year period.
This increase, in both dollar and percentage terms, is primarily due to charges
incurred in the second fiscal quarter of $8,250 to increase the litigation
accruals for pending matters to their estimated settlement amounts and $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, along with the
increases noted in the third fiscal quarter discussion above, partially offset
by a decrease in depreciation expense. Consolidated Interest Expense During the twelve weeks ended November 1, 2004, interest expense decreased
$3,194, or 32.1%, to $6,746, as compared to the twelve weeks ended November 3,
2003, primarily as a result of lower average borrowings, lower interest rates
upon refinancing our Senior Notes with a lower cost bank term loan and further
amortization of our capital lease obligations since the prior year comparable
period. During the forty weeks ended November 1, 2004, interest expense
decreased $697, or 2.2%, to $30,429, as compared to the forty weeks ended
November 3, 2003 and included $4,936 to write off unamortized deferred
financing costs pursuant to our refinancing and debt prepayment activity in the
current year. Consolidated Other Income (Expense), Net Other income (expense), net, typically consists of lease and sublease income
from non-franchisee tenants, provisions for bad debts on certain notes
receivable from franchisees, and other non-operating charges. Other income, net
increased by $1,241, to $1,024, during the twelve weeks ended November 1, 2004,
over the comparable prior year period due mainly to a prior year payment of a
$708 redemption premium related to the early retirement of convertible notes.
For the forty weeks ended November 1, 2004, other expense, net increased by
$4,565, to $5,536, mainly due to a $9,126 premium paid upon early redemption of
our Senior Notes in the current year, partially offset by bad debt provisions
of $1,796 in the prior year and the 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 in the current year. Consolidated Income Tax Expense We recorded income tax
(benefit) expense of $(70) and $335 for the twelve week
periods ended November 1, 2004, and November 3, 2003, respectively. For the
forty week periods ended November 1, 2004, and November 3, 2003, we recorded
income tax expense of $525 and $1,053, respectively. These amounts for both
periods were comprised of foreign income taxes, provision for certain matters
under audit and deferred taxes associated with a difference in amortization of
goodwill for financial reporting versus income tax reporting purposes. At January 31, 2004, we had federal net operating loss (NOL) carryforwards
for regular tax and alternative minimum tax (AMT) purposes of approximately
$91,970 and $72,710, respectively, expiring in varying amounts in the years
2021 through 2024, and state NOL carryforwards of approximately $335,948,
expiring in varying amounts in the years 2006 through 2024. As of January 31,
2004, we also had AMT credit carryforwards of approximately $10,691, with no
expiration date, general business credit carryforwards (primarily wage-related)
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. As a result of our NOL and credit carryforwards and expected favorable book/tax
differences from depreciation and amortization, we expect that our cash
requirements for U.S. federal and state income taxes will not exceed 2.0% of
our taxable earnings for several years. The 2.0% rate
results from AMT under which 10% of taxable earnings cannot be offset by NOL
carryforwards and is subject to the AMT rate of 20%. The actual cash
requirements for taxes could vary significantly from our expectations for a
number of reasons, including, but not limited to, unanticipated fluctuations in
our deferred tax assets and liabilities, unexpected gains from significant
transactions, 46




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) unexpected outcomes of income tax audits, and changes in tax law.
We expect to continue to incur foreign taxes on our income earned outside the
U.S. 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 We have historically financed our business through cash flow from operations,
borrowings under our credit facility and the sale of restaurants. Our most
significant cash uses during the next 12 months will be for capital
expenditures. We amended and restated our senior credit facility (Facility)
on June 2, 2004 (see below). We anticipate that existing cash balances,
availability under the Facility and cash generated from operations will be
sufficient to service existing debt and to meet our operating and capital
requirements for the next 12 months. Additionally, we are able to sell
restaurants as a source of liquidity, although we have no intention to do so
significantly at this time. We have no potential mandatory payments of
principal on our $105,000 of 4% Convertible Subordinated Notes due 2023 until
October 1, 2008. On July 2, 2004, we redeemed our $200,000 of Senior
Subordinated Notes due 2009 with proceeds from the Facility. We, and the restaurant industry in general, maintain relatively low levels of
accounts receivable and inventories, and vendors grant trade credit for
purchases such as food and supplies. We also continually invest in our business
through the addition of new sites and the refurbishment of existing sites,
which are reflected as long-term assets and not as part of working capital. As
a result, we typically maintain current liabilities in excess of current
assets, resulting in a working capital deficit. As of November 1, 2004, our
current ratio was 0.59 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 November 1, 2004, we voluntarily prepaid $44,475 of
the $230,000 term loan in addition to the $401 regularly scheduled payment. As
of November 1, 2004, we had cash borrowings outstanding under the term loan and
revolving portions of the Facility of $154,599 and $3,500, respectively,
outstanding letters of credit under the revolving portion of the Facility of
$65,597, and availability under the revolving portion of the Facility of
$80,903. Subsequent to quarter-end, we voluntarily prepaid an additional
$11,599 of the term loan, reducing the term loan balance to $143,000. 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. 47




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) As of November 1, 2004, the
applicable interest rate on the term loan was LIBOR plus 3.0%, or 4.875% 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. On November 4, 2004, we amended the
Facility resulting in a 0.25% decrease to all borrowing rates. 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 consolidated statement of operations.
During the twelve and twenty-four week periods ended November 1, 2004, the
Company recorded $173 and $223 of interest expense, respectively, to reduce the
carrying value of the interest rate cap premium to its fair value of $148 at
November 1, 2004. As a matter of policy, the Company does not use derivative
instruments unless there is an underlying exposure. Subject to the terms of the Facility, 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 November 1, 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 48




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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 forty weeks ended November 1, 2004, cash provided by operating
activities was $100,513, an increase of $39,927 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. Net income during the forty weeks ended November 1, 2004 is $12,488
higher than net income for the comparable prior year period. In addition, 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 forty weeks ended November 1,
2004, totaled $23,230, which principally consisted of purchases of property and
equipment, partially offset by proceeds from the sale of property and
equipment, proceeds from the disposition of Timber Lodge, and collections on
notes receivable. Cash used in financing activities during the forty weeks ended November 1,
2004, totaled $110,766, which principally consisted of redemption of $200,000
of our Senior Notes due 2009 and $22,319 of our 2004 Convertible Notes,
repayment of $75,401 of the term loans under our Facility (of which $74,475
represented voluntary prepayment thereof), repayment of the $24,062 remaining
balance of our previously existing Facility term loan, $6,188 of financing
costs incurred in connection with our refinancing activity during the second
fiscal quarter, $5,559 used to repurchase 519,000 shares of our common stock
and a $8,852 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 forty weeks ended November 1, 2004 were: New restaurants (including restaurants under development)Carls Jr.
    
    $
    8,443Hardees
    
    
    3,468La Salsa
    
    
    925Remodels/Dual-branding (including construction in process)Carls Jr.
    
    
    618Hardees
    
    
    7,107Other restaurant additionsCarls Jr.
    
    
    6,594Hardees
    
    
    12,195La Salsa
    
    
    1,290Corporate/other
    
    
    3,224Total
    
    $
    43,864
 As of November 1, 2004, we had remodeled 89% of the Hardees company-operated
restaurants to the Star Hardees format. 49




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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
(Dollars in thousands) 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 $51,511 as of November 1, 2004. 50




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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 November 1, 2004, we
had $158,099 of borrowings and $65,597 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 $1,581. 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 November 1, 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 twelve and twenty-four week periods ended
November 1, 2004, the Company recorded $173 and $223 of interest expense,
respectively, to reduce the carrying value of the interest rate cap premium to
its fair value of $148 at November 1, 2004. As a matter of policy, the Company
does 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, 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 November 1, 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) 51




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under the
Securities Exchange Act of 1934 as amended. Based on that evaluation, the
Companys Chief Executive Officer 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 not 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 (Section 404) 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
Condensed Consolidated Financial Statements included within this Form 10-Q 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. 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
November 1, 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.
    
    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. 52




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
    
    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 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 53




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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. Unregistered Sales of Equity Securities and Use of Proceeds. Issuer Purchase of Equity Securities The following table provides information as of November 1, 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
    
    ProgramsAugust 10, 2004  September 6, 2004
    
    
    
    
    
    
    
    
    
    
    
    

    
    $
    16,646September 7, 2004  October 4, 2004
    
    
    200,000
    
    
    $
    10.99
    
    
    
    200,000
    
    
    
    14,441October 5, 2004  November 1, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,441Total
    
    
    200,000
    
    
    $
    10.99
    
    
    
    200,000
    
    
    $
    14,441
 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 did not repurchase
any additional shares in the twelve-week period ending August 9, 2004. During
the twelve weeks ended November 1, 2004, we purchased 200,000 shares of our
Common Stock at an average price of $10.99 per share, for a total cost,
including trading commissions, of $2,205. 
 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.
 54




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. CKE RESTAURANTS, INC.(Registrant)Date: December 17, 2004
    
    /s/ Theodore AbajianTheodore AbajianExecutive Vice PresidentChief Financial Officer
 55




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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.
 56