Attached files

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EX-10.4 - EXHIBIT 10.4 - AMENDMENT NO. 1 TO THE ESPP - CKE RESTAURANTS INCespp.htm
EX-32.1 - EXHIBIT 32.1 - CERTIFICATION OF CEO - CKE RESTAURANTS INCex32_1.htm
EX-31.2 - EXHIBIT 31.2 - CERTIFICATION OF CFO - CKE RESTAURANTS INCex31_2.htm
EX-12.1 - EXHIBIT 12.1 - RATIO OF EARNINGS TO FIXED CHARGES - CKE RESTAURANTS INCratios.htm
EX-32.2 - EXHIBIT 32.2 - CERTIFICATION OF CFO - CKE RESTAURANTS INCex32_2.htm
EX-31.1 - EXHIBIT 31.1 - CERTIFICATION OF CEO - CKE RESTAURANTS INCex31_1.htm
EX-10.18 - EXHIBIT 10.18 - AMENDMENT NO. 5 TO EMPLOYMENT AGREEMENT WITH ANDREW F. PUZDER - CKE RESTAURANTS INCex10_18.htm
EX-10.23 - EXHIBIT 10.23 - AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT WITH E. MICHAEL MURPHY - CKE RESTAURANTS INCex10_23.htm
EX-10.33 - EXHIBIT 10.33 - AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT WITH BRAD R. HALEY - CKE RESTAURANTS INCex10_33.htm
EX-10.28 - EXHIBIT 10.28 - AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT WITH THEODORE ABAJIAN - CKE RESTAURANTS INCex10_28.htm
EX-10.39 - EXHIBIT 10.39 - AMENDMENT NO. 5 TO EMPLOYMENT AGREEMENT WITH NOAH J. GRIGGS - CKE RESTAURANTS INCex10_39.htm
EX-23.1 - EXHIBIT 23.1 - CONSENT - CKE RESTAURANTS INCconsent.htm
EX-10.46 - EXHIBIT 10.46 - AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT WITH ROBERT J. STARKE - CKE RESTAURANTS INCex10_46.htm
EX-21.1 - EXHIBIT 21.1 - LIST OF SUBSIDIARIES - CKE RESTAURANTS INCsubsidiary.htm
EX-3.1 - EXHIBIT 3.1 - CERTIFICATION OF INCORPORATION, AS AMENDED THROUGH DECEMBER 9, 1997 - CKE RESTAURANTS INCincorporation.htm
EX-10.44 - EXHIBIT 10.44 - AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT WITH RICHARD E. FORTMAN - CKE RESTAURANTS INCex10_44.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended January 25, 2010
 
or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-11313
 
CKE LOGO

CKE Restaurants, Inc.
(Exact name of registrant as specified in its charter)

Delaware
33-0602639
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

6307 Carpinteria Ave., Ste. A
Carpinteria, California 93013
(Address of principal executive offices)

Registrant’s telephone number, including area code
(805) 745-7500

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $.01 par value
New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o Yes     o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Smaller reporting company o
   
(Do not check if a smaller reporting company)
   

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

The aggregate market value of the voting stock held by non-affiliates of the registrant as of August 10, 2009 was $455,282,234.

The number of outstanding shares of the registrant’s common stock was 55,292,177 as of March 17, 2010.

DOCUMENTS INCORPORATED BY REFERENCE:

In accordance with Instruction G(3) to Form 10-K, certain information required by Part III of Form 10-K is incorporated into this Annual Report on Form 10-K by reference to the registrant’s definitive proxy statement for its 2010 annual meeting of stockholders, or to an amendment to this Annual Report on Form 10-K, either of which will be filed within 120 days after the end of the registrant’s fiscal year, which ended on January 25, 2010.
 


 
 
 
 
 
CKE RESTAURANTS, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended January 25, 2010


     
Page
No.
 
           
PART I
 
   
1
 
   
9
 
   
15
 
   
16
 
   
17
 
   
18
 
PART II
 
   
19
 
   
21
 
   
23
 
   
45
 
   
45
 
   
45
 
   
45
 
   
48
 
PART III
 
   
49
 
   
49
 
   
49
 
   
49
 
   
49
 
PART IV
 
   
50
 

 
 

 
 
PART I

 
CKE Restaurants, Inc. (“CKE” or the “Company”), through its wholly-owned subsidiaries, owns, operates, franchises and licenses the Carl’s Jr.®, Hardee’s®, Green Burrito® and Red Burrito® concepts. References to CKE Restaurants, Inc. throughout this Annual Report on Form 10-K are made using the first person notations of “we,” “us” and “our.”
 
Our fiscal year ends on the last Monday in January each year. In this Annual Report on Form 10-K, we refer to our fiscal years by reference to the calendar year in which they end, and we generally label all fiscal years presented as if the fiscal year ended January 31 (e.g., the fiscal year ended January 25, 2010, is referred to as fiscal 2010 or the fiscal year ended January 31, 2010). All dollar amounts, except per share amounts, presented in this Annual Report on Form 10-K are in thousands, unless otherwise noted.

Merger Agreement

On February 26, 2010, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Western Acquisition Holdings, Inc. (“Parent”), and Western Acquisition Corp., a wholly-owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent.  Parent and Merger Sub are affiliates of Thomas H. Lee Partners, L.P. (“THL”).  If the Merger is completed, each share of our common stock issued and outstanding immediately prior to closing will be automatically cancelled and converted into the right to receive $11.05 in cash, and the Company will cease to be a publicly traded company. Completion of the Merger is subject to approval by the holders of a majority of the outstanding shares of the Company’s common stock entitled to vote on the Merger, the receipt of any required approvals, or the expiration or termination of the applicable waiting periods, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), and other customary closing conditions. On March 19, 2010, we received notice from the Federal Trade Commission that early termination of the waiting period under the HSR Act has been granted effective immediately.  In addition, on the same date, we filed a preliminary proxy statement with the Securities and Exchange Commission (the “SEC”) relating to the proposed special meeting of our stockholders to consider and vote on a proposal to adopt the Merger Agreement.

Company Overview

We own, operate, franchise and/or license more than 3,100 quick-service restaurants (“QSR”), primarily under the brand names Carl’s Jr.® and Hardee’s®, both of which offer innovative, premium products intended to appeal to our target audience of “young, hungry guys.”  Our focus on this customer type is enhanced through edgy, breakthrough advertising; high visibility sports sponsorships in major markets; a creative internet presence; and a menu anchored by a variety of big, juicy charbroiled hamburgers. According to the June 29, 2009 issue of Nation’s Restaurant News, our Hardee’s and Carl’s Jr. chains are the tenth and twelfth largest sandwich restaurant chains in the United States, respectively, based on U.S. system-wide foodservice sales. As of January 31, 2010, our system-wide restaurant portfolio consisted of:

   
Carl’s Jr.
   
Hardee’s
   
Other
   
Total
 
Company-operated
   
422
     
475
     
1
     
898
 
Franchised
   
666
     
1,228
     
11
     
1,905
 
Licensed
   
136
     
202
     
     
338
 
 Total
   
1,224
     
1,905
     
12
     
3,141
 
 
The following is a brief description of our primary restaurant concepts:
 
Carl’s Jr.

The first Carl’s Jr. restaurant was opened by Carl N. Karcher in 1956. Our Carl’s Jr. restaurants, which are located predominantly in the Western United States, offer superior quality food at reasonable prices and emphasize attentive customer service to create an enjoyable QSR dining experience. Carl’s Jr. utilizes cutting edge commercials to promote big, juicy burgers and other premium products to young, hungry guys and to emphasize the value-for-the-money of our menu items. Carl’s Jr. is a well-recognized brand that has operated profitably in each of the past twelve fiscal years. Carl’s Jr. is predominantly a lunch and dinner concept, with approximately 84% of Carl’s Jr. company-operated restaurants revenue coming from the lunch and dinner portion of its business in fiscal 2010. As of January 31, 2010, 233 of our 422 company-operated Carl’s Jr. restaurants were dual-branded with Green Burrito®. These dual-branded Carl’s Jr. restaurants typically have both higher sales and profits. Carl’s Jr. is currently focused on growing same-store sales and remodeling its existing company-operated, franchised and licensed restaurants.  As of January 31, 2010, approximately 81% of our company-operated restaurants have been recently remodeled or developed.

Carl’s Jr. focuses on selling its signature products, such as the Western Bacon Cheeseburger ® and a full line of Six Dollar Burgers, and on developing innovative and exciting premium products, such as the Big Carltm, Parmesan Chicken Sandwich, Portabello Mushroom Six Dollar Burgertm, and Grilled Cheese Bacon Burger. Also, Carl’s Jr. has begun to emphasize a number of healthier menu items including indulgent warm grilled chicken salads and gluten free burgers. The brand’s growth in recent years has come from new company-operated restaurants and from those built by its strong franchise community, as well as dual-branding opportunities.  Carl’s Jr. sponsors a number of professional sports teams in its major markets, including the National Basketball Association’s (“NBA”) Los Angeles Lakers and Sacramento Kings, the National Football League’s San Diego Chargers and Major League Baseball’s (“MLB”) Los Angeles Dodgers, Los Angeles Angels of Anaheim, and San Diego Padres.
Hardee’s

The first Hardee’s restaurant was opened by Wilbur Hardee in 1960. Our Hardee’s restaurants are located predominantly in the Southeastern and Midwestern United States. Hardee’s marketing campaigns primarily promote our premium burgers and breakfast items, in addition to emphasizing the value-for-the money of our menu items. Hardee’s lunch and dinner menu is anchored by its premium quality line of 1/3- to 2/3-lb. 100% Black Angus beef Thickburgerstm, which are complemented with best-in-class charbroiled and crispy chicken sandwiches. Historically, Hardee’s has also been known as the best choice for breakfast in the QSR industry, with approximately 48% of fiscal 2010 company-operated restaurants revenue coming from breakfast. Hardee’s breakfast menu can attribute much of its success to the industry-first Made From Scratch biscuits and biscuit breakfast sandwiches.

There are several key initiatives and areas of focus at Hardee’s.  The brand’s emphasis on superior customer service coupled with its balanced menu gives Hardee’s an ideal opportunity to build sales during all meal occasions.  While we believe the greatest opportunity for the brand is building the lunch and dinner day parts at our existing restaurants, we expect to gradually increase the number of new restaurants built and will continue to dual-brand with our Red Burrito® concept. As of January 31, 2010, 113 of our 475 company-operated Hardee’s restaurants were dual-branded with Red Burrito.  The key driver in improving Hardee’s profitability is increasing sales. For fiscal 2010, the average unit volume ("AUV") at our company-operated Hardee’s restaurants was approximately $1,002, up from $993 in fiscal 2009 and $954 in fiscal 2008. Franchise-operated AUV was approximately $976 at the end of fiscal 2010, up from $970 at the end of fiscal 2009 and $964 in fiscal 2008. Hardee’s is currently focusing on remodeling its existing company-operated, franchised and licensed restaurants.  As of January 31, 2010, approximately 67% of the company-operated restaurants have been recently remodeled or developed.

Hardee’s is a well-recognized brand focused on selling its signature products, such as its line of 100% Black Angus beef Thickburger and Made From Scratch breakfast biscuits, and on developing inventive and exciting premium products, such as the Biscuit Holes, Oscar Mayer Fried Bologna Biscuit, the Little Thickburger, French Dip Thickburger ®, and Portabello Mushroom Melt Thickburger ®. Hardee’s sponsors a number of professional sports teams in its major markets, including the NBA’s Indiana Pacers and MLB’s St. Louis Cardinals.

Business Strategy

Our business strategy focuses on strengthening our competitive position, growing same-store sales, enhancing profitability at both the Carl’s Jr. and Hardee’s concepts, and differentiating our Carl’s Jr. and Hardee’s brands from our competitors.  In response to the current economic environment, a number of our major competitors have implemented heavy discounts on certain menu items and actively promoted $1 menu items in order to maintain or increase their sales.  While our restaurants offer a number of relatively low-priced, high-value menu items, we have resisted the deep-discounting trend.  Instead, we have developed and implemented a long-term strategy which includes the following elements:

·  
Continuing development and promotion of distinctive, premium-quality, great tasting products such as the Carl’s Jr. line of 100% Black Angus beef Six Dollar Burgerstm and Hand-Scooped Ice Cream Shakes and Maltstm; as well as Hardee’s line of 1/3- to 2/3-lb. 100% Black Angus beef Thickburgers, and Made From Scratch breakfast biscuits;

·  
Correcting consumer misperceptions of affordability by advertising products with excellent value-for-the-money such as the Grilled Cheese Bacon Burger and Big Carltm at Carl’s Jr., as well as the Big Hardeetm at Hardee’s;

·  
Increasing customer awareness of existing healthy menu choices and developing new healthy products such as the new Carl’s Jr’s line of premium entrée salads;

·  
Emphasizing and capitalizing on our unique brand positioning through cutting-edge and attention-grabbing advertising in order to increase our market share;

·  
Remodeling existing company-operated and franchised Carl’s Jr. and Hardee’s restaurants to improve customer perception of our brands, so that we will be well-positioned to benefit from a recovery in consumer spending;

·  
Capitalizing on dual-branding opportunities available with our Green Burrito and Red Burrito concepts;

·  
Growing our restaurant base through increasing development of new franchised restaurants in both new and existing markets in the U.S., increasing licensed restaurants internationally for both Carl’s Jr. and Hardee’s, and opening new company-operated Carl’s Jr. and Hardee’s restaurants in our existing core markets; and

·  
Remaining focused on core restaurant fundamentals of quality, service and cleanliness.
 
 
Franchise Strategy

Our franchise and licensing strategy depends upon on our franchisees’ active involvement in and management of restaurant operations. Candidates are reviewed for appropriate operational experience and financial stability, including specific net worth and liquidity requirements.

Carl’s Jr.  Franchise agreements with Carl’s Jr. franchisees, which operate restaurants predominantly in the Western United States, generally provide for the payment of franchise fees plus continuing royalty and advertising fees to us based upon a percentage of gross sales (typically 4% for royalties and 5% to 6% for advertising). As of January 31, 2010, our Carl’s Jr. franchisees and licensees operated 802 Carl’s Jr. restaurants, or approximately 66% of the Carl’s Jr. system. The Carl’s Jr. franchise community is actively developing new restaurants across the Carl’s Jr. system. The majority of our Carl’s Jr. franchisees own more than one restaurant, with 23 franchisees owning ten or more restaurants.

Hardee’s.  Franchise agreements with Hardee’s franchisees, which operate restaurants predominantly in the Southeastern and Midwestern United States, generally provide for the payment of franchise fees and royalty fees to us, and advertising fees to a national fund and/or a regional cooperative fund, based upon a percentage of gross sales (typically 4% for royalties and 4% to 6% for advertising). As of January 31, 2010, our Hardee’s franchisees and licensees operated 1,430 Hardee’s restaurants, or approximately 75% of the Hardee’s system. The majority of our Hardee’s franchisees own more than one restaurant, with 26 franchisees owning ten or more restaurants.  Our refranchising program, combined with improving sales and store economics, has stimulated new franchise restaurant growth in the Hardee’s system in recent years.
 
International.  International licensee development is an integral part of our growth strategy. Our international expansion efforts focus on penetrating existing markets while targeting new markets that have been identified as part of our strategic planning process. In fiscal 2010, we, through our licensees, opened 35 international locations. Carl’s Jr. licensed restaurants currently operate in American Samoa, Malaysia, Mexico, Singapore, the Russian Federation and China. Hardee’s licensed restaurants are concentrated in the Middle East in the countries of Bahrain, Egypt, Jordan, Kuwait, Lebanon, Oman, Pakistan, Qatar, Saudi Arabia, and United Arab Emirates.

 Development Agreements. Area development agreements require franchisees to open a specified number of restaurants in a designated geographic area within a specified period of time. Our franchise strategy is designed to accelerate the development of our restaurant chains and reduce the total capital we need to invest in order to develop our brands. As of January 31, 2010, we have 60 franchise development agreements representing commitments to build a total of 730 restaurants, consisting of 495 domestic and 235 international restaurants. Our two most significant domestic development agreements call for the development of 193 new restaurants in Texas over the next ten years. Our three most significant international development agreements provide for the development of 160 new restaurants in China, Russia, and Pakistan over the next four to eight years.

Restaurant Development

We have a detailed two-year capital spending plan to develop new company-operated restaurants and remodel and maintain existing restaurants.  Based on our current capital spending projections, we expect capital expenditures to be between $85,000 and $95,000 for fiscal 2011; and between $75,000 and $85,000 for fiscal 2012. We perform extensive due diligence on prospective restaurant sites before we commit to opening or permitting a franchisee to open a restaurant at a location. We intend to continue to penetrate existing markets, while exploring new market opportunities as they arise. In fiscal 2010, we opened 15 new company-operated restaurants, and our franchisees and licensees opened 65 new restaurants. The average development cost for company-operated restaurants opened in fiscal 2010 is summarized in the following table:
 
   
Average per
restaurant(1)(2)
 
   
Carl’s Jr.
   
Hardee’s
 
Building and leasehold improvements
  $ 1,019     $ 853  
Equipment
    396       345  
 Total
  $ 1,415     $ 1,198  
_________
(1)
Averages are contingent upon a number of factors including, but not limited to, restaurant prototype, geographical area and local zoning requirements.
 
(2)
The majority of these restaurants were constructed on leased land.  One Hardee’s restaurant was constructed on land we purchased at a cost of $546.


Restaurant Operations and Support

Our goal is to quickly serve the highest quality products to our guests in a clean and inviting environment with superior customer service. We adhere to very strict procedures for cleanliness, food preparation, safety and sanitation, food quality and guest service. This is accomplished through two guiding principles — Operation QSC and Six Dollar Service.

Operation QSC puts in place the processes and procedures to operate our restaurants in the most efficient manner. Six Dollar Service ensures our crew members are doing everything possible to exceed our guests’ expectations while providing a very pleasant QSR dining experience.

We charbroil our burgers for maximum flavor. We cook all of our fried foods in zero trans fat shortening. We cook, heat and assemble our lunch and dinner burgers and sandwiches after our guests place their orders for guaranteed freshness. Our Hardee’s breakfast menu, built on our Made From Scratch biscuits, continues to lead the industry.

Our commitment to quality in both our products and operations is supported by a variety of training programs. A general manager oversees the operation of each company-operated Carl’s Jr. and Hardee’s restaurant. Our general managers are required to complete a comprehensive training course which covers restaurant operations, product quality, safety awareness, inter-personal skills, and food safety. These training programs include a combination of instructor-led classroom training and in-restaurant, hands-on experience in a certified training restaurant.

Our other training initiatives include Operation Drive-thru, which focuses on labor scheduling optimization and achieving drive-thru service standards. We offer English as a Second Language tools for our Spanish-speaking crew members. We developed and implemented a Learning Management System (“LMS”), which is a web-based tool that enables us to deliver and track learning and training throughout the organization. LMS’ benefits include consistent delivery of training, an audit trail for compliance, a culture of recognition and accountability, and talent management to develop management from within.  We completed the LMS integration for all company-operated restaurants during fiscal 2010, and LMS is now available to all franchise-operated restaurants for a small fee.
 
At the restaurant level, our general managers hire, train and supervise our crew members in accordance with our operations’ guidelines. Crew members who demonstrate a desire and aptitude for advancement can enter our Shift Leader Development Program to begin their careers in management. LMS training kiosks are available in all company-operated restaurants to better prepare our crew members and management teams for their careers with us.

Our general managers are supervised, coached and developed by district managers, who are typically responsible for six to eight restaurants each. District managers are, in turn, supervised, coached and developed by either a Regional Vice President or a Regional Director of Operations.

Supply Chain

We purchase most of the food products and packaging supplies that are used in our Carl’s Jr. restaurant system, and we distribute these items to both company-operated and franchised Carl’s Jr. restaurants. A small percentage of franchised Carl’s Jr. restaurants, which are located outside our distribution service area, receive food, packaging and supplies from The SYGMA Network, Inc. (“SYGMA”).  Additionally, a small percentage of company-operated and franchised restaurants receive such products from Meadowbrook Meat Company, Inc., dba MBM, Inc. (“MBM”). Our agreements with SYGMA and MBM expire on December 31, 2011 and July 14, 2010, respectively.
 
Our Carl’s Jr. franchisees in California, some adjacent states, and many licensees in Mexico purchase their food, packaging and supplies from us. Our current distribution agreement with Carl’s Jr. franchisees expired on March 12, 2010. Carl’s Jr. is currently considering outsourcing our distribution needs to a third party distributor as an alternative to our existing Carl’s Jr. distribution operations. We plan to continue to provide distribution services to our franchisees and licensees on a month-to-month basis until a future decision is made related to the Carl's Jr. distribution operations. Carl’s Jr. has received a number of proposals from third party foodservice distributors, but no decision has been made whether to retain our existing distribution operations or to outsource distribution to a third party. We expect the ultimate decision to be driven by cost, service and quality assurance requirements and the extent to which we can leverage the participation of the Carl’s Jr. franchisees in providing significant purchase economies of scale.

Excluding fresh baked buns, we purchase substantially all of the food, packaging and supplies sold or used in our Hardee’s restaurants from MBM. MBM distributes products to our company-operated and franchised Hardee’s restaurants. Pursuant to the terms of our distribution agreements we are obligated to purchase substantially all of our specified product requirements from MBM through July 14, 2010. We are also presently in the request for proposal process with MBM, as well as other foodservice distributors, and plan to negotiate a new distribution agreement for Hardee’s. Regardless of the distributor selected, the prices and delivery fees we pay for products will be subject to adjustment, which may include increases or decreases resulting from changes in the supplier’s cost structure.

We seek competitive bids from suppliers of our products, and we require approved suppliers of those products to comply with certain quality assurance requirements including facility standards and product specifications.

Information about our unconditional purchase obligations can be found under the heading “Long-Term Obligations” in Item 7 of this Annual Report on Form 10-K.


Marketing and Advertising

Our marketing and advertising initiatives focus on building brand awareness and image through the balanced use of television, radio, digital and print advertising.  Our on-air advertising campaigns are generally intended to create buzz around our promotional product offerings and are often eye-catching or edgy.  Our advertising messages seek to emphasize the quality and taste of our premium menu items and to correct consumers’ misperceptions regarding the affordability of our products by emphasizing value-for-the-money. During fiscal 2010, Carl’s Jr. company-operated restaurants contributed 4.6% of their sales for television, radio, internet and print advertising and spent an additional 1.5% of sales on local advertising, billboards and point of purchase materials. Carl’s Jr. franchised restaurants contributed 5.4% of their sales for advertising during fiscal 2010.

During fiscal 2010, Hardee’s company-operated restaurants contributed 4.3% of their sales for television, radio, internet and print advertising and spent an additional 1.5% of sales on local advertising, billboards and point of purchase materials. Hardee’s franchised restaurants contributed 4.1% to 5.6% of their sales for advertising during fiscal 2010.

 Competition and Markets

The restaurant business and the QSR industry are intensely competitive and affected by changes in a geographic competition, changes in the public’s eating habits and preferences, local and national economic conditions affecting consumer spending habits, population trends and local traffic patterns. Key elements of competition in our industry are the price, quality and value of food products offered; quality and speed of service; advertising effectiveness; brand name awareness; restaurant convenience; and attractiveness of facilities.

We primarily compete with major restaurant chains, some of which dominate the QSR industry, and also compete with a variety of other take-out foodservice companies and fast-food restaurants. Our competitors also include a variety of mid-price, full-service casual-dining restaurants; health and nutrition-oriented restaurants; delicatessens and prepared food restaurants; supermarkets; and convenience stores. In selling franchises, we compete with many other restaurant franchisors, some of which have substantially greater financial resources and higher franchise AUVs.

Financial Information about Operating Segments

We are engaged in the development, operation and franchising of QSRs, primarily under the brand names Carl’s Jr. and Hardee’s, principally in the U.S. Information about our revenues, operating results and assets is contained in Part II, Items 6 and 7 of this Annual Report on Form 10-K and in Note 20 of Notes to Consolidated Financial Statements. In evaluating the profitability of our segments, we allocate the majority of our general and administrative expenses to these segments.
 
Quarterly operating income (loss) from continuing operations by segment has been:
 
   
Carl’s Jr.
   
Hardee’s
   
Other
   
Consolidated
 
Fiscal 2010
                       
 First Quarter
  $ 20,497     $ 9,003     $ 175     $ 29,675  
 Second Quarter
    13,510       8,598       60       22,168  
 Third Quarter
    10,512       5,624       126       16,262  
 Fourth Quarter
    8,908       2,535       (53 )     11,390  
Fiscal 2009
                               
 First Quarter
  $ 24,051     $ 5,468     $ 111     $ 29,630  
 Second Quarter
    16,672       6,125       88       22,885  
 Third Quarter
    12,871       4,801       83       17,755  
 Fourth Quarter
    13,911       (241 )     80       13,750  

Our same-store sales trends for company-operated restaurants, for each brand by quarter were:

   
Carl’s Jr.
   
Hardee’s
 
Fiscal 2010
               
 First Quarter
   
(5.1)%
     
2.5%
 
 Second Quarter
   
(6.1)%
     
(2.7)%
 
 Third Quarter
   
(5.2)%
     
(1.8)%
 
 Fourth Quarter
   
(8.7)%
     
(2.5)%
 
Fiscal 2009
               
 First Quarter
   
3.9%
     
(0.6)%
 
 Second Quarter
   
3.8%
     
3.3%
 
 Third Quarter
   
0.5%
     
1.3%
 
 Fourth Quarter
   
(0.6)%
     
1.5%
 


Investments in Other Restaurant Concepts

We selectively evaluate opportunities to acquire additional interests in other restaurant concepts, and we may make such investments and/or acquisitions in the future depending on the business prospects of the restaurant concept, the availability of financing at attractive terms, alternative business opportunities available to us, the consent of our senior lenders, if required, and general economic conditions.

Trademarks and Service Marks

We own numerous trademarks and service marks, and have registered many of those marks with the United States Patent and Trademark Office, including Carl’s Jr., the Happy Star logo, Hardee’s, Green Burrito, Red Burrito and proprietary names for a number of our menu items. We believe our trademarks and service marks have value and play an important role in our marketing efforts.

Government Regulation

Each company-operated and franchised restaurant must comply with regulations adopted by federal agencies and with licensing and other regulations enforced by state and local health, sanitation, safety, fire and other departments. Stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors can delay and sometimes prevent development of new restaurants and remodeling of existing restaurants in particular locations.

We are also subject to federal laws and a substantial number of state laws regulating the offer and sale of franchises. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises and may include substantive standards regarding the relationship between franchisor and franchisee, including limitations on the ability of franchisors to terminate franchise agreements or otherwise alter franchise arrangements. We believe we are operating in substantial compliance with applicable laws and regulations governing our franchise operations.

We, and our franchisees, must comply with the Fair Labor Standards Act (“FLSA”) and various federal and state laws governing employment matters, such as minimum wage, overtime pay practices, child labor laws, citizenship requirements and other working conditions. Many of our employees are paid hourly rates related to the federal and state minimum wage laws and, accordingly, increases in the minimum wage increase our labor costs. Federal and state laws may also require us to provide new or increased levels of employee benefits to our employees, many of whom are not currently eligible for such benefits. We believe we are operating in substantial compliance with all such laws and regulations.

We monitor our facilities for compliance with the Americans with Disabilities Act of 1990 (“ADA”) in order to conform to its requirements. Under the ADA, we could be required to expend funds to modify our restaurants to better provide service to, or make reasonable accommodation for the employment of, disabled persons. We believe that such expenditures, if required, would not have a material adverse effect on our consolidated financial position or results of operations.

Environmental Matters

We are subject to various federal, state and local environmental laws and regulations that govern discharges to air and water from our restaurants, as well as handling and disposal practices for solid and hazardous wastes. These laws may impose liability for damages from and the costs of cleaning up sites of spills, disposals or other releases of hazardous materials. We may be responsible for environmental conditions relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurants or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant.

We cannot provide assurance that all such environmental conditions have been identified by us. These conditions include the presence of asbestos-containing materials, leaking underground storage tanks and on-site spills. Further, certain properties formerly had landfills, historic industrial use, gasoline stations and/or dry cleaning businesses located on or near the premises. Corrective action, as required by the regulatory agencies, has been undertaken at some of the sites by former landowners or tenants. The enforcement of our rights against third parties for environmental conditions, such as off-site sources of contamination, may result in additional costs for us. However, we do not believe that any such costs, if incurred, would have a material adverse effect on our consolidated financial position or results of operations.


Seasonality

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 during school vacations and improved weather conditions, which affect the public’s dining habits.

Government Contracts

No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.

Employees

As of January 31, 2010, we employed approximately 21,300 persons, primarily in company-operated restaurants and in our corporate offices and distribution facilities. Past attempts to unionize our distribution center employees have been rejected by employee votes. We believe our employee relations are good.

Working Capital Practices

Information about our liquidity is contained under the caption “Liquidity and Capital Resources” in Item 7 of this Annual Report on Form 10-K and the Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2010, 2009 and 2008.

Use of Non-GAAP Financial Measures

In various places throughout this Annual Report on Form 10-K, we use certain financial measures which are not prepared in accordance with accounting principles generally accepted in the United States (“Non-GAAP”), which we believe provide valuable information to our stockholders. Examples of such Non-GAAP financial measures include Adjusted EBITDA, which is a measure used by our lenders under our senior credit facility ("Facility") to evaluate our ability to service debt and fund capital expenditures; company-operated restaurant-level margin, which is a measure of restaurant profitability; franchise contribution, which is a measure of our operating results related to franchised and licensed restaurants; and diluted income per common share, excluding mark-to-market adjustments, which is a financial metric used by management to measure our performance. Additional information regarding the Non-GAAP financial measures used in this Annual Report can be found under the heading “Presentation of Non-GAAP Measures” in Item 7 of this Annual Report on Form 10-K.
 
Contact Information; Obtaining Copies of this Annual Report

We are incorporated in the State of Delaware. Our principal offices are located at 6307 Carpinteria Avenue, Suite A, Carpinteria, California, 93013. Our general website address is www.ckr.com.

Electronic copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act"), are available free of charge by visiting the “Investors” section of www.ckr.com. These reports are posted as soon as reasonably practicable after they are electronically filed with the SEC. You may read and copy any materials we file with the SEC at www.sec.gov.
 
In addition, print copies of any of the foregoing documents may be obtained free of charge by visiting the “Contact” section of www.ckr.com, or by contacting Investor Relations at (805) 745-7500.

Information contained in our website is not deemed to be a part of this Annual Report on Form 10-K.


Executive Officers of the Registrant

The names and ages, as of March 24, 2010, of our executive officers are as follows:

Name
 
Age
 
Position
Andrew F. Puzder   59   Chief Executive Officer ("CEO")
E. Michael Murphy
 
58
 
President and Chief Legal Officer
Theodore Abajian
 
46
 
Executive Vice President and Chief Financial Officer ("CFO")
Bradford R. Haley
 
51
 
Executive Vice President, Marketing — Carl’s Jr. and Hardee’s
Noah J. Griggs Jr.
 
46
 
Executive Vice President, Training
Richard E. Fortman
 
60
 
Executive Vice President, Carl's Jr. Operations
Robert J. Starke
 
57
 
Executive Vice President, Hardee’s Operations

Andrew F. Puzder was appointed to our Board of Directors in May 2001. Mr. Puzder became our CEO in September 2000. From September 2000 to January 2009, he also served as our President and from February 1997 to September 2000, he served as our Executive Vice President, General Counsel and Secretary. Mr. Puzder was also Executive Vice President of Fidelity National Financial, Inc. (“FNF”) from January 1995 to June 2000. Mr. Puzder was a partner in the Costa Mesa, California law firm of Lewis, D’Amato, Brisbois & Bisgaard from September 1991 to March 1994, and a shareholder in the Newport Beach, California law firm of Stradling Yocca Carlson & Rauth from March 1994 until joining FNF in 1995.

E. Michael Murphy became our President and Chief Legal Officer in January 2009 and continues to serve as our Secretary.  From January 2001 to January 2009, he served as our Executive Vice President, General Counsel, and previously served as Senior Vice President of CKE and Senior Vice President, General Counsel of Hardee’s Food Systems, Inc. from July 1998. He also served as our Chief Administrative Officer from August 2006 to January 2009. For the ten years prior to 1998, Mr. Murphy was a partner of The Stolar Partnership law firm in St. Louis, Missouri.

Theodore Abajian was appointed our Executive Vice President and CFO in May 2003. From March 2002 to May 2003, he served as our Executive Vice President, Chief Administrative Officer. From November 2000 to March 2002, Mr. Abajian served as President and CEO of Santa Barbara Restaurant Group (“SBRG”), and as its Executive Vice President and CFO from May 1998. In addition, from January 2000 to October 2000, Mr. Abajian held the position of Senior Vice President and CFO for Checkers Drive-In Restaurants, Inc., and served as the CFO of Star Buffet, Inc. from July 1997 to May 1998. Mr. Abajian also served as a director of Staceys Buffet, Inc. from October 1997 to February 1998, and was Vice President and Controller with Summit Family Restaurants, Inc. from 1994 to 1998.
 
Bradford R. Haley was appointed Executive Vice President, Marketing for Hardee’s in September 2000. He also assumed responsibility for Carl’s Jr. marketing in January 2004. Prior to joining Hardee’s, Mr. Haley worked as Chief Marketing Officer for Church’s Chicken. From 1992 to 1999, Mr. Haley served as Corporate Vice President of Marketing Communications for Jack in the Box Inc.

Noah J. Griggs, Jr. was named Executive Vice President, Training of Carl’s Jr. and Hardee’s in May 2007. Prior to that appointment, Mr. Griggs served as Executive Vice President, Hardee’s Operations for company-operated restaurants beginning in July 2000 and franchisee-operated restaurants beginning in July 2002. Mr. Griggs joined Hardee’s in July 1996 as Vice President of Quality and Standards and was named Senior Vice President of Operations in April 1998. Prior to joining Hardee’s, Mr. Griggs worked as Vice President of Operations for one of Hardee’s largest franchisees.

Richard E. Fortman was named Executive Vice President, Operations for Carl’s Jr. in September 2000. Before assuming this position, Mr. Fortman was a Senior Area Vice President for Hardee’s, a position he had held since April 1998. Mr. Fortman first joined the Company in 1969 beginning in the restaurants and has had a long career in Carl’s Jr. operations.

Robert J. Starke was named Executive Vice President, Hardee’s Operations in May 2007. Mr. Starke first joined Hardee’s in 1975 and has had a long career in Hardee’s operations.  He began his career with Hardee’s in the restaurants and later became a Regional Vice President. He had served as Senior Vice President of Restaurant Operations from 2002 until being promoted to his current position.


Forward-Looking Statements

Matters discussed in this Annual Report on Form 10-K 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 that are often difficult to predict, are beyond our control and which may cause results to differ materially from expectations. Factors that could cause our results to differ materially from those described include, but are not limited to, the Company’s ability to compete with other restaurants, supermarkets and convenience stores; the effectiveness of operating initiatives and advertising and promotional effort; changes in economic conditions which may affect the Company’s business and stock price; the effect of restrictive covenants in the Company’s credit facility on the Company’s business; the Company’s ability to attract and retain key personnel; the Company’s franchisees’ willingness to participate in the Company’s strategy; the operational and financial success of the Company’s franchisees; changes in consumer preferences and perceptions; changes in the price or availability of commodities; changes in the Company’s suppliers’ ability to provide quality products to the Company in a timely manner; the effect of the media’s reports regarding food-borne illnesses and other health-related issues on the Company’s reputation and its ability to obtain products; the seasonality of the Company’s operations; increased insurance and/or self-insurance costs; the Company’s ability to select appropriate restaurant locations, construct new restaurants, complete remodels of existing restaurants and renew leases with favorable terms; the Company’s ability to comply with existing and future health, employment, environmental and other government regulation; the completion and timing of the proposed merger; and other factors as discussed under the caption “Risk Factors” in Item 1A of this Annual Report on Form 10-K and in our other filings with the SEC.

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 ("NYSE").


We are engaged in a business strategy that includes the long-term growth of our operations. The success of a business strategy, by its very nature, involves a significant number of risks and uncertainties.  The risk factors listed below are important factors that could cause actual results to differ materially from our historical results and from projections in forward-looking statements contained in this report, in our other filings with the SEC, in our news releases and in oral statements by our representatives. However, other factors that we do not anticipate or that we do not consider significant based on currently available information may also have an adverse effect on our results.

Our success depends on our ability to compete with others.

The foodservice industry is intensely competitive with respect to the quality and value of food products offered, service, price, convenience, and dining experience. We compete with major restaurant chains, some of which dominate the QSR industry. Our competitors also include a variety of mid-price, full-service casual-dining restaurants, health and nutrition-oriented restaurants, delicatessens and prepared food restaurants, take-out food service companies, fast food restaurants, supermarkets and convenience stores. In addition to competing with such companies for customers, we also must compete with them for access to qualified employees and management personnel, suitable restaurant locations and capable franchisees. Many of our competitors have substantially greater brand recognition, as well as greater financial, marketing, operating and other resources than we have, which may give them competitive advantages with respect to some or all of these areas of competition. Some of our competitors have engaged and may continue to engage in substantial price discounting, which may adversely impact our sales and operating results. As our competitors expand operations and marketing campaigns, we expect competition to intensify.  Such increased competition could have a material adverse effect on our consolidated financial position and results of operations.
 
Restrictive covenants in our credit facility could adversely affect our business.

Our Facility contains restrictive covenants and requirements that we comply with certain financial ratios. Certain of these covenants limit our ability to take various actions, including incurring additional debt, guaranteeing indebtedness and engaging in various types of transactions, including mergers and sales of assets, and making specified distributions or other restricted payments, including capital expenditures and other investments. These covenants could have an adverse effect on our business by limiting our ability to take advantage of business opportunities. Failure to maintain financial ratios required by our Facility or to comply with the covenants in our Facility could also result in acceleration of our indebtedness, which would impair our liquidity and limit our ability to operate.  If the current economic conditions and decreases in discretionary consumer spending continue for a prolonged period of time, our results of operations may be materially impacted and we may fail to maintain the financial ratios required by our Facility.
 
The recent worldwide financial crisis has resulted in diminished liquidity and credit availability, and future turmoil in the financial markets could make it more difficult and more costly for us to refinance our Facility (if necessary) or incur additional indebtedness and could impact the ability of banks to honor draws on our existing credit facilities.


Changes in consumer preferences and perceptions, economic, market and other conditions could adversely affect our operating results.

The QSR industry is affected by changes in economic conditions, consumer preferences and spending patterns, demographic trends, consumer perceptions of food safety, weather, traffic patterns, the type, number and location of competing restaurants, and other factors. Multi-location foodservice businesses such as ours can also be materially and adversely affected by publicity resulting from poor food quality, food tampering, illness, injury or other health concerns or operating issues stemming from one or a limited number of restaurants. We can be similarly affected by consumer concerns with respect to the nutritional value of quick-service food.
 
Our ability to anticipate and respond to trends and changes in consumer preferences may affect our future operating results.  Additionally, current economic conditions may cause changes in consumer preferences, and if such economic conditions persist for an extended period of time, this may result in consumers making long-lasting changes to their spending behaviors.  A number of our major competitors have been increasing their “value item” offerings and implementing certain pricing promotions for various other menu items.  If consumer preference continues to shift towards these “value items”, it may become necessary for us to implement temporary promotional pricing offerings.  If we implement such promotional offerings our operating margins may be adversely impacted.  Any promotional offerings or temporary price cuts implemented by us are not expected to represent a permanent change in our business strategy, and would only be temporary in duration.

Factors such as interest rates, inflation, gasoline prices, commodity costs, labor and benefits costs, legal claims, and the availability of management and hourly employees also affect restaurant operations and administrative expenses. In particular, increases in interest rates may impact land and construction costs and the cost and availability of borrowed funds, and thereby adversely affect our ability and our franchisees’ ability to finance new restaurant development and improve existing restaurants. In addition, inflation can cause increased commodity and labor and benefits costs and can increase our operating expenses.

We depend on a limited number of key suppliers to deliver quality products to us at moderate prices.

Our profitability is dependent on, among other things, our continuing ability to offer premium-quality food at moderate prices. While we continue to operate our own distribution business for most of our Carl’s Jr. system, we rely upon an independent distributor for our Hardee’s restaurants. Our Hardee’s restaurants depend on the distribution services of MBM, a national distributor of food and other products. MBM is responsible for delivering food, packaging and other products from our suppliers to our Hardee’s restaurants on a frequent and routine basis. MBM also provides distribution services to nearly all of our Hardee’s franchisees. Pursuant to the terms of our distribution agreement, we are obligated to purchase substantially all of our specified product requirements from MBM through July 14, 2010. We are currently in discussions with MBM, as well as other distribution service providers, to negotiate a new distribution agreement. There can be no assurance that the new or revised distribution agreement will contain similar or favorable terms. Additionally, should we successfully enter into a new agreement, we cannot predict the future terms or prices after expiration of the renewed agreement.

Our suppliers may be adversely impacted by current economic conditions, such as the tightening of the credit markets, decreased transaction volumes, fluctuating commodity prices and various other factors. As a result, our suppliers may seek to change the terms on which they do business with us in order to lessen the impact of any current and future economic challenges on their businesses. If we are forced to renegotiate the terms upon which we conduct business with our suppliers or find alternative suppliers to provide key services, it could adversely impact our financial condition or results of operations.

In addition, the current economic environment has forced some food suppliers to seek financing in order to stabilize their businesses, and others have ceased operations completely.  If MBM or a large number of other suppliers suspend or cease operations, we may have difficulty keeping our restaurants fully supplied with the high quality ingredients we require.  If we were forced to suspend serving one or more of our menu items that could have a significant adverse impact on our restaurant traffic and public perceptions of us, which would be harmful to our business.


Our financial results may be impacted by our ability to successfully enter new markets, select appropriate restaurant locations, construct new restaurants, complete remodels or renew leases with desirable terms.

Our growth strategy includes opening new restaurants in markets where we have relatively few or no existing restaurants. There can be no assurance that we will be able to successfully expand or acquire critical market presence for our brands in new geographical markets. Consumer characteristics and competition in new markets may differ substantially from those in the markets where we currently operate. Additionally, we may be unable to identify appropriate locations, develop brand recognition, successfully market our products or attract new customers.  It may also be difficult for us to recruit and retain qualified personnel to manage restaurants. Should we not succeed in entering new markets, there may be adverse impacts to our financial condition and results of operations.

Our strategic plan, and a component of our business strategy, includes the construction of new restaurants and the remodeling of existing restaurants. We face competition from other restaurant operators, retail chains, companies and developers for desirable site locations, which may adversely affect the cost, implementation and timing of our expansion plans. If we experience delays in the construction or remodel processes, we may be unable to complete such activities at the planned cost, which would adversely affect our future results of operations.  Additionally, we cannot guarantee that such remodels will increase the revenues generated by these restaurants or that any such increases will be sustainable. Likewise, we cannot be sure that the sites we select for new restaurants will result in restaurants whose sales results meet our expectations.
 
We lease a substantial number of our restaurant properties. The terms of our leases and subleases vary in length, with primary terms (i.e., before consideration of option periods) expiring on various dates through fiscal 2036. We do not expect the expiration of these leases to have a material impact on our operations in any particular year, as the expiration dates are staggered over a number of years and many of the leases contain renewal options. As our leases and available option periods expire, we will need to negotiate new leases with our landlords for those leased restaurants that we intend to continue operating. If we are unable to negotiate acceptable lease terms for them, we may decide to close the restaurants, or the new lease terms may negatively impact our consolidated results of operations.

Our business and stock price may be adversely impacted by economic conditions.

Our financial condition and results of operations are dependent upon consumer discretionary spending, which is influenced by general economic conditions.  Worldwide economic conditions and consumer spending have deteriorated and may remain depressed for some time.  Current economic conditions have resulted in higher levels of unemployment, reductions in disposable income for many consumers and lower levels of consumer confidence.  If these economic conditions persist for an extended period of time, consumers may make long-lasting changes to their spending habits and behavior.  In addition, real or perceived concerns about the economy may seriously harm the market price of our common stock regardless of our operating performance.

In addition, unfavorable macroeconomic trends or developments concerning factors such as increased food, fuel, utilities, labor and benefits costs may also adversely affect our financial condition and results of operations.  Current economic conditions may prevent us from increasing prices to match increased costs without further harming our sales.  If we were unable to raise prices in order to recover increased costs for food, packaging, fuel, utilities, wages, clothing and equipment, our profitability would be negatively affected.
 
We have a geographic concentration of restaurants in certain states and regions, which can cause economic conditions in particular areas of the country to have a disproportionate impact on our overall results of operations.  As of January 31, 2010, we and our franchisees operated restaurants in 42 states and 14 foreign countries.  By number of restaurants, our operations are most concentrated in California, North Carolina and Virginia.  Adverse economic conditions in states or regions that contain a high concentration of Carl’s Jr. and Hardee’s restaurants could have a material adverse impact on our results of operations in the future.

Our success depends on our ability to attract and retain certain key personnel.

We believe that our success will depend, in part, on continuing services from certain of our key senior management team. The failure by us to retain members of our senior management team could adversely affect our ability to successfully execute key strategic business decisions and negatively impact the profitability of our business. Additionally, our success may depend on our ability to attract and retain additional skilled senior management personnel.

Our success depends on our franchisees’ participation in our strategy.

Our franchisees are an integral part of our business. We may be unable to successfully implement our brand strategies if our franchisees do not actively participate in such implementation. The failure of our franchisees to focus on the fundamentals of restaurant operations, such as quality, service and cleanliness, would have a negative impact on our success.  It may be more difficult for us to monitor our international licensees’ implementation of our brand strategies due to our lack of personnel in the markets served by such licensees.


Our financial results are affected by the financial results of our franchisees.

We receive royalties from our franchisees. As a result, our financial results are somewhat dependent upon the operational and financial success of our franchisees, including their implementation of our strategic plans, and their ability to secure adequate financing. If sales trends or economic conditions worsen for our franchisees, and they are unable to secure adequate sources of financing, 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. Additionally, refusal on the part of franchisees to renew their franchise agreements may result in decreased royalties. Entering into restructured franchise agreements may result in reduced franchise royalty rates in the future.  Furthermore, due to the current economic conditions, our franchisees may not be able to obtain the financing necessary to complete planned remodel and construction projects, and may be forced to postpone or cancel such projects.

The financial conditions of our international licensees may also be adversely impacted by political, economic or other changes in the global markets in which they operate.  As a result, the royalties we receive from our international licensees may be affected by recessionary or expansive trends in international markets, increasing labor costs in certain international markets, changes in applicable tax laws, changes in inflation rates, changes in exchange rates and the imposition of restrictions on currency conversion or the transfer of funds, expropriation of private enterprises, political and economic instability and other external factors.

Our international operations are subject to various risks and uncertainties and there is no assurance that our international operations will be successful.
 
An important component of our growth strategy involves increasing our net restaurant count in international markets.  The execution of this growth strategy depends upon the opening of new restaurants by our existing licensees and by new licensees. We and our current or future licensees face many risks and uncertainties in opening new international restaurants, including international economic and political conditions, differing cultures and consumer preferences, diverse government regulations and tax systems, securing acceptable suppliers, difficulty in collecting our royalties and longer payment cycles, uncertain or differing interpretations of rights and obligations in connection with international license agreements, the selection and availability of suitable restaurant locations, currency regulation and fluctuation, and other external factors.
 
In addition, our current licensees may be unwilling or unable to increase their investment in our system by opening new restaurants. Moreover, our international growth also depends upon the availability of prospective licensees or joint venture partners with the experience and financial resources to be effective operators of our restaurants.  There can be no assurance that we will be able to identify future licensees who meet our criteria, or that, once identified, they will successfully implement their expansion plans.

We face commodity price and availability risks.

We and our franchisees purchase large quantities of food and supplies which may be subject to substantial price fluctuations. We purchase agricultural and livestock products that are subject to price volatility caused by weather, supply, global demand, fluctuations in the value of the U.S. dollar, commodity market conditions and other factors that are not predictable or within our control. Increases in commodity prices could result in higher restaurant operating costs. Since we have a higher concentration of company-operated restaurants than many of our competitors, we may have greater operating cost exposure than those competitors who are more heavily franchised. Occasionally, the availability of commodities can be limited due to circumstances beyond our control. If we are unable to obtain such commodities, we may be unable to offer related products, which would have a negative impact on our operating expenses and profitability.

Our business may be impacted if we do not successfully manage changes to the Carl’s Jr. distribution center operations.

We currently supply food, packaging and other supplies both to company-operated Carl’s Jr. restaurants and to a majority of Carl’s Jr. franchised and licensed restaurants through our two distribution center facilities in California.  Our current distribution agreement with Carl’s Jr. franchisees expired on March 12, 2010. Carl’s Jr. is currently considering outsourcing our distribution needs to a third party distributor as an alternative to our existing Carl’s Jr. distribution operations. We plan to continue to provide distribution services to our franchisees and licensees on a month-to-month basis until a future decision is made related to the Carl's Jr. distribution operations. Carl’s Jr. has received a number of proposals from third party distributors, but a decision has not yet been made whether to retain the existing distribution operations or outsource to a third party distributor. The joint participation in the distribution arrangement with Carl’s Jr. franchisees provides significant economies of scale. There can be no assurance that Carl’s Jr. franchisees will participate in the distribution strategy that results in the most favorable terms for us, which could adversely impact our results of operations.


Events reported in the media, such as incidents involving food-borne illnesses or food tampering, whether accurate or not, could reduce the production and supply of important food products, cause damage to our reputation and adversely affect our sales and profitability.

Reports, whether true or not, of food-borne illnesses, such as those caused by E. coli, Listeria or Salmonella, in addition to Avian Influenza (commonly known as bird flu) and Bovine Spongiform Encephalopathy (commonly known as BSE or mad cow disease), and injuries caused by food tampering have, in the past, severely impacted the production and supply of certain food products, including poultry and beef. A reduction in the supply of such food products could have a material effect on the price at which we could obtain them. Failure to procure food products, such as poultry or beef, at reasonable terms and prices or any reduction in consumption of such food products by consumers could have a material adverse effect on our consolidated financial condition and results of operations.
 
In addition, reports, whether or not true, of food-borne illnesses or the use of hormones, antibiotics or pesticides in the production of certain food products may cause consumers to reduce or avoid consumption of such food products. Our brands’ reputations are important assets to us, and any such reports could damage our brands’ reputations and immediately and severely hurt sales and profits. If customers become ill from food-borne illnesses or food tampering, we could be forced to temporarily close some, or all, of our restaurants. In addition, instances of food-borne illnesses or food tampering occurring at the restaurants of competitors, could, by resulting in negative publicity about the QSR industry, adversely affect our sales on a local, regional, or national basis.

Our operations are seasonal and heavily influenced by weather conditions.

Weather, which is unpredictable, can adversely impact our sales. Harsh weather conditions that discourage customers from dining out result in lost opportunities for our restaurants. A heavy snowstorm can leave an entire metropolitan area snowbound, resulting in a reduction in sales. Our first and fourth quarters, most notably the fourth quarter, include winter months when there is historically a lower level of sales. Because a significant portion of our restaurant operating costs is fixed or semi-fixed in nature, the loss of sales during these periods adversely impacts our profitability. These adverse, weather-driven events have a more pronounced impact on our Hardee’s restaurants. For these reasons, sequential quarter-to-quarter comparisons may not be a good indication of our performance or how we may perform in the future.

Our business may suffer due to our inability to hire and retain qualified personnel and due to higher labor costs.

Given that our restaurant-level workforce requires large numbers of both entry-level and skilled employees, low levels of unemployment could compromise our ability to provide quality service in our restaurants. From time to time, we have had difficulty hiring and maintaining qualified restaurant management personnel. Increases in minimum wage levels have negatively impacted our labor costs. Due to the labor-intensive nature of our business, further increases in minimum wage levels could have additional negative effects on our consolidated results of operations.

Our business may be impacted by increased insurance and/or self-insurance costs.

From time to time, we have been negatively affected by increases in both workers’ compensation and general liability insurance and claims expense due to our claims experience and rising healthcare costs. Although we seek to manage our claims to prevent increases, such increases can occur unexpectedly and without regard to our efforts to limit them. If such increases occur, we may be unable to pass them along to the consumer through product price increases, resulting in decreased operating results.

We are subject to certain health, employment, environmental and other government regulations, and failure to comply with existing or future government regulations could expose us to litigation, damage to our reputation and lower profits.

We, and our franchisees, are subject to various federal, state and local laws. The successful development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations. Restaurant operations are also subject to licensing and regulation by state and local departments relating to health, food preparation, sanitation and safety standards, federal and state labor and immigration law, (including applicable minimum wage requirements, overtime pay practices, working and safety conditions and citizenship requirements), federal and state laws prohibiting discrimination and other laws regulating the design and operation of facilities, such as the ADA. If we fail to comply with any of these laws, we may be subject to governmental action or litigation, and our reputation could be harmed. Injury to our reputation would, in turn, likely reduce revenues and profits.

In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry, particularly among restaurants. As a result, we may become subject to regulatory initiatives in the area of nutrition disclosure or advertising, such as requirements to provide information about the nutritional content of our food products, which could increase expenses. The operation of our franchise system is also subject to franchise laws and regulations enacted by a number of states and rules promulgated by the U.S. Federal Trade Commission. Any future legislation regulating franchise relationships may negatively affect our operations, particularly our relationship with our franchisees. Failure to comply with new or existing franchise laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales. Changes in applicable accounting rules imposed by governmental regulators or private governing bodies could also affect our reported results of operations.
 
We are subject to the FLSA, which governs such matters as minimum wage, overtime and other working conditions, along with the ADA, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated, by federal, state and local governmental authorities that govern these and other employment matters. We have experienced and expect further increases in payroll expenses as a result of federal and state mandated increases in the minimum wage. In addition, our vendors may be affected by higher minimum wage standards, which may increase the price of goods and services they supply to us.  Additionally, we offer access to healthcare benefits to certain of our employees.  The imposition of any requirement that we provide health insurance to all employees on terms that differ significantly from our existing programs could have a material adverse impact on our results of operations and financial condition.

We are also subject to various federal, state and local environmental laws and regulations that govern discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes. These laws may also impose liability for damages from and the costs of cleaning up sites of spills, disposals or other releases of hazardous materials. We may be responsible for environmental conditions or contamination relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurant or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. The costs of any cleanup could be significant and have a material adverse effect on our consolidated financial position and results of operations.
 
We may not be able to adequately protect our intellectual property, which could decrease the value of our brands and products.

The success of our business depends on the continued ability to use existing trademarks, service marks and other components of our brands in order to increase brand awareness and further develop branded products. All of the steps we have taken to protect our intellectual property may not be adequate.

Provisions of our Certificate of Incorporation and Bylaws could limit the ability of our stockholders to effect a change in control.
 
Our Certificate of Incorporation and Bylaws include several provisions and features intended to render more difficult certain unsolicited or hostile attempts to acquire our business. In addition, our Board of Directors has the authority, without further action by our stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series, and to fix the rights, preferences and restrictions of such preferred stock.

These provisions may discourage a third party from attempting to acquire control of us and could limit the price that investors might be willing to pay in the future for shares of our common stock.
 
We face risks related to interest rates.

Our principal exposures to financial market risks are the impact that interest rate changes could have on our Facility, the magnitude of which depends on the amount of borrowings we have outstanding, and on the fair value of our interest rate swap agreements. As of January 31, 2010, we had borrowings outstanding of $247,432 and $30,000 under the term loan and revolving portions of our Facility, respectively. As of January 31, 2010, borrowings under the revolving portion of our Facility bore interest at a weighted-average rate of 1.75% per annum, and borrowings on the term loan bore interest at the London Inter Bank Offering Rate (“LIBOR”) plus 1.38%.

The fair value of our interest rate swap agreements, which effectively fix future interest payments on $200,000 of our term loan debt at 6.12% through March 2012, is directly linked both to current interest rates and to expected future interest rates over their remaining term. These interest rate swap agreements are highly sensitive to interest rate fluctuations, which could result in significant variability in their future fair value.

We are subject to litigation from customers, franchisees, and employees in the ordinary course of business that could adversely affect us.

We may be subject to claims, including class action lawsuits, filed by customers, franchisees, employees, and others in the ordinary course of business. Significant claims may be expensive to defend and may divert time and money away from our operations causing adverse impacts to our operating results. In addition, adverse publicity or a substantial judgment against us could negatively impact our brand reputation resulting in further adverse impacts to our financial condition and results of operations.

In addition, the restaurant industry has been subject to claims that relate to the nutritional content of food products, as well as claims that the menus and practices of restaurant chains have led to the obesity of some customers. We may also be subject to this type of claim in the future and, even if we are not specifically named, publicity about these matters may harm our reputation and have adverse impacts on our financial condition and results of operations.
 
A significant failure, interruption or security breach of our computer systems or information technology may adversely affect our business.
 
We are significantly dependent upon our computer systems and information technology to properly conduct our business. A significant failure or interruption of service, or a breach in security of our computer systems could cause reduced efficiency in operations, loss of data and business interruptions, and significant capital investment could be required to rectify the problems. In addition, any security breach involving our point of sale or other systems could result in loss of consumer confidence and potential costs associated with consumer fraud.

Catastrophic events may disrupt our business.

Unforeseen events, including war, terrorism and other international conflicts, public health issues, and natural disasters such as hurricanes, earthquakes, or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, could disrupt our operations, disrupt the operations of franchisees, distributors, suppliers or customers, or result in political or economic instability. These events could reduce demand for our products or make it difficult or impossible to receive products from our distributors or suppliers.

Failure to complete the proposed Merger could adversely affect our business.

On February 26, 2010, we entered into the Merger Agreement, pursuant to which we may be acquired for $11.05 per share in cash.  There is no assurance that our shareholders will approve the Merger Agreement or that other closing conditions will be satisfied. We are subject to several risks as a result of this Merger Agreement, including the following:

 
If the proposed Merger is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the proposed Merger will be completed;
 
Certain costs related to the proposed Merger, including the fees and/or expenses of our legal, accounting and financial advisors, must be paid even if the proposed Merger is not completed;
 
Under circumstances as defined in the Merger Agreement, we may be required to pay a termination fee and/or reimburse expenses if the Merger Agreement is terminated;
•      Additional shareholder lawsuits may be filed against us in connection with the Merger Agreement;
•      Our management and employees’ attention may have been diverted from day-to-day operations;
•      The terms of the financing for the proposed Merger may change; and
 
A failed Merger may result in negative publicity and/or a negative impression of us in the investment community or business community generally.


None.
 


The following table sets forth information regarding our restaurant properties as of January 31, 2010:

   
Land and
Building
Owned
   
Land Leased
and Building
Owned
   
Land and
Building
Leased
   
Total
 
Carl’s Jr.:
                               
Company-operated
   
23
     
146
     
253
     
422
 
Franchise-operated(1)
   
9
     
45
     
159
     
213
 
Third party-operated/vacant(2)
   
4
     
2
     
10
     
16
 
Subtotal
   
36
     
193
     
422
     
651
 
                                 
Hardee’s:
                               
Company-operated
   
252
     
102
     
121
     
475
 
Franchise-operated(1)
   
53
     
72
     
123
     
248
 
Third party-operated/vacant(2)
   
8
     
9
     
37
     
54
 
Subtotal
   
313
     
183
     
281
     
777
 
                                 
Other:
                               
Company-operated
   
     
     
1
     
1
 
Third party-operated/vacant(2)
   
     
     
1
     
1
 
Subtotal
   
     
     
2
     
2
 
                                 
Total:
                               
Company-operated
   
275
     
248
     
375
     
898
 
Franchise-operated(1)
   
62
     
117
     
282
     
461
 
Third party-operated/vacant(2)
   
12
     
11
     
48
     
71
 
Total
   
349
     
376
     
705
     
1,430
 
__________
(1)
“Franchise-operated” properties are those which we own and lease to franchisees, or lease and sublease to franchisees.
 
(2)
“Third party-operated/vacant” properties are those we own or lease that are either leased or subleased by unaffiliated entities or are currently vacant.

The terms of our leases and subleases vary in length, with primary terms (i.e., before consideration of option periods) expiring on various dates through fiscal 2036. We do not expect the expiration of these leases to have a material impact on our operations in any particular year, as the expiration dates are staggered over a number of years and many of the leases contain renewal options.

Our corporate headquarters and Carl’s Jr. brand headquarters are both located in Carpinteria, California, and combined they contain approximately 78,000 square feet of space. During fiscal 2010, we relocated our primary administrative service center in Anaheim, California. The new facility contains approximately 93,000 square feet of space. Our primary distribution center for the Carl’s Jr. brand is located in Ontario, California, and contains approximately 201,000 square feet of space. A secondary distribution center is located in Manteca, California, and contains approximately 52,000 square feet of space. Our Hardee’s corporate facility is located in St. Louis, Missouri, and contains approximately 54,000 square feet of space. Our Hardee’s equipment distribution center is located in Rocky Mount, North Carolina, and contains approximately 82,000 square feet of space.
 


There are currently a number of claims and lawsuits pending against us. These claims and lawsuits cover a variety of allegations spanning our entire business. The following is a brief description of the more significant of these categories of claims and lawsuits. In addition, we are subject to various federal, state and local regulations that affect our business.

Litigation Related to the Proposed Merger

In connection with the Merger Agreement, pursuant to which we may be acquired by an affiliate of THL (the “Proposed Merger”), six putative stockholder class action lawsuits have been filed in the Delaware Court of Chancery and in the Superior Court of California for the County of Santa Barbara.

On March 1, 2010, a putative stockholder class action, named Pieces of Eight Master Fund LP v. CKE Restaurants, Inc. et al., Case No. 5290, was filed in the Delaware Court of Chancery against the Company, each of our directors, and THL, asserting that the Company and our directors breached their fiduciary duties in connection with the Proposed Merger and asserting that THL aided and abetted those alleged breaches of duty.

On March 3, 2010, a putative stockholder class action, named Hendricks v. CKE Restaurants, Inc. et al., Case No. 1342245, was filed in the Superior Court of California for the County of Santa Barbara against the Company, our directors, and THL.  The lawsuit alleges that the Company’s directors breached their fiduciary duties in connection with the Proposed Merger. The Complaint also names the Company and THL as defendants and charges them with aiding and abetting the directors’ alleged breaches of fiduciary duty.
 
On March 5, 2010, a putative stockholder class action, named Inglima v. Allumbaugh et al., Case No. 1342293, was filed in the Superior Court of California for the County of Santa Barbara against the Company, each of its directors, Parent and Merger Sub.  The lawsuit alleges that the directors breached their fiduciary duties in connection with the Proposed Merger. The complaint also names the Company, Parent and Merger Sub as defendants and charges them with aiding and abetting the directors’ alleged breaches of fiduciary duty.  Also on March 5, 2010, a putative stockholder class action, named Curtis v. Allumbaugh et al., Case No. 1342349, was filed in the Superior Court of California for the County of Santa Barbara against the Company, each of our directors, THL, Parent and Merger Sub. The lawsuit alleges that the directors breached their fiduciary duties in connection with the Proposed Merger.  The complaint also names THL, Parent and Merger Sub as defendants and charges them with aiding and abetting the directors’ alleged breaches of fiduciary duty.

On March 11, 2010, a putative stockholder class action, named McDonald v. CKE Restaurants, Inc. et al., Case No. 1342415, was filed in the Superior Court of California for the County of Santa Barbara against the Company, each of our directors, and THL.  The lawsuit alleges that the directors breached their fiduciary duties in connection with the Proposed Merger. The complaint also names the Company and THL as defendants and charges both parties with aiding and abetting the directors’ alleged breaches of fiduciary duty.
 
On March 12, 2010, a putative stockholder class action, named Richard F. Warnock SEP IRA et al. v. Allumbaugh et al., Case No. 5340, was filed in the Delaware Chancery Court against the Company, each of our directors, Parent and Merger Sub.  The lawsuit alleges that the directors breached their fiduciary duties in connection with the Proposed Merger. The complaint also names Parent and Merger Sub as defendants and charges both parties with aiding and abetting the directors’ alleged breaches of fiduciary duty.

Among other remedies, the complaints in the six actions seek to enjoin the Proposed Merger. The Company believes these lawsuits are without merit and intends to defend them vigorously; however, we are presently unable to predict the ultimate outcome of this litigation.

Employees

We employ many thousands of persons in our company-operated restaurants, distribution facilities and corporate offices, both by us and in restaurants owned and operated by our subsidiaries. In addition, thousands of persons from time to time seek employment in such restaurants. In the ordinary course of business, disputes arise regarding hiring, firing, harassment, rest breaks, promotion practices and other employee related matters. With respect to employment matters, our most significant legal disputes relate to employee meal and rest breaks, and wage and hour disputes. Several potential class action lawsuits have been filed in the state of California, each of which is seeking injunctive relief and monetary compensation on behalf of current and former employees. The Company intends to vigorously defend against all claims in these lawsuits; however, we are presently unable to predict the ultimate outcome of this litigation.
 
Customers

Our restaurants serve a large cross-section of the public and, in the course of serving that many people, disputes arise as to products, services, accidents and other matters typical of an extensive restaurant business such as ours.
 
Suppliers

We rely on large numbers of suppliers who are required to meet and maintain our high standards. On occasion, disputes may arise with our suppliers on a number of issues including, but not limited to, compliance with product specifications and certain business concerns. Additionally, disputes may arise on a number of issues between us and individuals or entities who claim they should have been granted the approval or opportunity to supply products or services to our restaurants.

Franchising

A substantial number of our restaurants are franchised to independent entrepreneurs operating under contractual arrangements with us. In the course of the franchise relationship, disputes occasionally arise between us and our franchisees relating to a broad range of subjects including, without limitation, quality, service and cleanliness issues, contentions regarding terminations of franchises, and delinquent payments. Additionally, occasional disputes arise between us and individuals who claim they should have been granted a franchise.

Intellectual Property

We have registered trademarks and service marks, patents and copyrights, some of which are of material importance to our business. From time to time, we may become involved in litigation to defend and protect our use of our intellectual property.



PART II


Our common stock is listed on the NYSE under the symbol “CKR”. As of March 17, 2010, there were approximately 1,492 record holders of our common stock. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock, as reported on the NYSE Composite Tape:

   
High
   
Low
 
Fiscal 2010
               
First Quarter
  $ 10.16     $ 5.65  
Second Quarter
   
9.86
     
7.60
 
Third Quarter
   
11.52
     
8.51
 
Fourth Quarter
   
9.63
     
8.00
 
                 
Fiscal 2009
               
First Quarter
  $ 13.35     10.25  
Second Quarter
   
14.32
     
8.82
 
Third Quarter      14.45        6.36  
Fourth Quarter
   
10.09
     
4.88
 

During fiscal 2010 and 2009, we declared aggregate annual cash dividends of $0.24 per share of common stock, for a total of $13,178 and $12,859, respectively.  In accordance with the terms of the Merger Agreement, our ability to declare dividends is restricted. See further discussion in Note 25 of Notes to Consolidated Financial Statements included herein. If the Merger is not completed, we will continue to base future dividend decisions on a number of factors, including our operating results and financial condition.

Pursuant to the Stock Repurchase Plan authorized by our Board of Directors, and announced on April 13, 2004, as modified during fiscal 2008, we are allowed to repurchase up to an aggregate of $400,000 of our common stock. During fiscal 2010, we repurchased 191,062 shares of common stock at an average price of $9.02 per share, for a total of $1,724, including commissions.  Based on our Board of Directors’ authorization and the amount of cumulative repurchases of our common stock that we have already made thereunder, we are permitted to make additional repurchases of our common stock up to $36,875 under the Stock Repurchase Plan as of January 31, 2010.

There was no common stock held in treasury as of January 31, 2010 and 2009.
 
The following table provides information with respect to shares of common stock repurchased by us during the fiscal quarter ended January 25, 2010:
 
   
(a)
   
(b)
   
(c)
   
(d)
 
Period  
Total
Number of
Shares
Purchased
   
Average
Price
Paid per
Share
    Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
    Maximum Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs
 
November 3, 2009 — November 30, 2009
        $           $ 36,909  
December 1, 2009 — December 28, 2009
                      36,909  
December 29, 2009 — January 25, 2010     4,216       8.05       4,216       36,875  
    Total     4,216     $ 8.05       4,216     $ 36,875  
 

The graph below shows the cumulative total stockholder return of an investment of $100 (and the reinvestment of any dividends thereafter) on January 31, 2005 in (i) our common stock, (ii) the QSR Peer Group and (iii) the Standard and Poor (“S&P”) Small Cap 600 Index. Our stock price performance shown in the graph below may not be indicative of future stock price performance.

 
PEER COMPARISON GRAPH
______________________
*    $100 invested on January 31, 2005 in stock or index, including reinvestment of dividends.



The information set forth below should be read in conjunction with the Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. All amounts, except per share and ratio amounts, presented in Item 6 are in thousands.

Selected Financial and Operating Data
 
   
Fiscal Year Ended January 31,(1)
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Consolidated Statements of Income Data:
                             
Revenue:
                             
Company-operated restaurants
 
$
1,084,474
   
$
1,131,312
   
$
1,201,577
   
$
1,225,227
   
$
1,162,179
 
Franchised and licensed restaurants and other
   
334,259
     
351,398
     
333,057
     
316,844
     
307,012
 
    Total revenue
 
$
1,418,733
   
$
1,482,710
   
$
1,534,634
   
$
1,542,071
   
$
1,469,191
 
Operating income(2)
 
$
79,495
   
$
84,020
   
$
88,327
   
$
110,694
   
$
80,368
 
Interest expense(3)
   
19,254
     
28,609
     
33,033
     
19,768
     
22,988
 
Income tax expense (benefit)(4)
   
14,978
     
21,533
     
24,659
     
34,019
     
(122,962
)
Income from continuing operations
   
48,198
     
36,956
     
35,072
     
54,194
     
182,709
 
Loss from discontinued operations(5)
   
     
     
(3,996
)
   
(4,022
)
   
(1,570
)
Net income
   
48,198
     
36,956
     
31,076
     
50,172
     
181,139
 
Basic income from continuing operations per common share 
   
0.88
     
0.69
     
0.58
     
0.85
     
3.08
 
Diluted income from continuing operations per common share 
   
0.87
     
0.68
     
0.56
     
0.77
     
2.53
 
Diluted loss from discontinued operations per common share
   
     
     
(0.06
)
   
(0.05
)
   
(0.02
)
Diluted income per common share 
   
0.87
     
0.68
     
0.50
     
0.72
     
2.51
 
Diluted income per common share, excluding mark-to-market adjustments(6)
   
0.95
     
0.78
     
0.61
                 
Cash dividends declared per common share
   
0.24
     
0.24
     
0.24
     
0.16
     
0.16
 
Ratio of earnings to fixed charges(7)
   
2.3
x
   
2.0
x
   
2.0
x
   
2.8
x
   
2.1
x
Blended same-store sales (decrease) increase(8)
   
(3.9
)%
   
1.7
%
   
1.5
%
   
4.8
%
   
1.0
%
Company-operated restaurant-level margin(6)
   
18.6
%
   
18.9
%
   
18.9
%
   
20.8
%
   
19.4
%
Franchise contribution(6)
 
$
80,409
   
$
81,699
   
$
74,762
   
$
77,324
   
$
69,937
 
Segment Operating Data:
                                       
Carl’s Jr.:
                                       
    Total revenue
 
$
852,479
   
$
886,349
   
$
845,634
   
$
830,961
   
$
802,761
 
    Operating income
   
53,427
     
67,505
     
66,801
     
80,692
     
80,047
 
Hardee’s:
                                       
    Total revenue
   
565,462
     
595,487
     
685,273
     
706,884
     
661,509
 
    Operating income
   
25,760
     
16,153
     
21,227
     
30,201
     
11,600
 
Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
 
$
18,246
   
$
17,869
   
$
19,993
   
$
18,620
   
$
21,279
 
Working capital deficit
   
(53,408
)
   
(38,779
)
   
(47,510
)
   
(33,631
)
   
(27,038
)
Total assets
   
823,543
     
804,687
     
791,711
     
796,638
     
795,428
 
Total long-term debt and capital lease obligations, including current portion
   
329,008
     
357,450
     
392,036
     
178,055
     
264,662
 
Stockholders’ equity
   
236,175
     
194,276
     
145,242
     
378,846
     
308,938
 
________
(1)
Our fiscal year is 52 or 53 weeks, ending the last Monday in January. For clarity of presentation, we generally label all fiscal years presented as if the fiscal year ended January 31. All years presented include 52 weeks.

(2)
Fiscal 2010, 2009, 2008, 2007, and 2006, include $4,695, $4,139, $(577), $3,543, and $6,481, respectively, of facility action charges, net, which are included in operating income.

(3)
Fiscal 2010, 2009 and 2008 include $6,803, $9,010 and $11,380, respectively, of interest expense related to changes in the fair value of our interest rate swap agreements.

(4)
Fiscal 2010 and 2006 include income tax benefits of $9,894 and $147,988, respectively, related to the reversal of previously established valuation allowance against deferred income tax assets.

(5)
Discontinued operations contain the financial results of La Salsa in fiscal 2008, 2007, and 2006.

(6)
Refer to definition of company-operated restaurant-level margin, franchise contribution and diluted income per common share, excluding mark-to-market adjustments, within subheading “Presentation of Non-GAAP Measures” in Item 7 of this Annual Report on Form10-K. We entered into our interest rate swap agreements during fiscal 2008. Accordingly, diluted income per share, excluding mark-to-market adjustments is not applicable for fiscal 2007 and 2006.

(7)
For purposes of calculating the ratio of earnings to fixed charges, (a) earnings represent income before income taxes, discontinued operations and fixed charges, and (b) fixed charges consist of interest on all indebtedness, interest related to capital lease obligations, amortization of debt issuance costs and a portion of rental expense that is representative of the interest factor (deemed by us to be one-third).

(8)
Blended same-store sales are calculated by using a weighted average of the company-operated same-store sales for our Carl’s Jr. and Hardee’s brands.
 

Selected Financial and Operating Data by Segment
 
   
Fiscal Year Ended January 31,(1)
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Carl’s Jr. Restaurants
                             
Restaurants open (at end of fiscal year):
                             
Company-operated
   
422
     
416
     
406
     
393
     
428
 
Franchised
   
666
     
658
     
632
     
608
     
552
 
    Licensed
   
136
     
121
     
103
     
86
     
69
 
    Total
   
1,224
     
1,195
     
1,141
     
1,087
     
1,049
 
Restaurant revenue:
                                       
    Company-operated restaurants
 
$
604,937
   
$
625,109
   
$
595,272
   
$
590,613
   
$
574,663
 
    Franchised and licensed restaurants(2)
   
859,672
     
894,611
     
853,391
     
795,520
     
700,590
 
Company-operated AUV (trailing-13 periods)
   
1,438
     
1,528
     
1,493
     
1,440
     
1,341
 
Franchise-operated AUV (trailing-13 periods)
   
1,123
     
1,182
     
1,197
     
1,205
     
1,160
 
Company-operated same-store sales (decrease) increase
   
(6.2
)%
   
2.1
%
   
0.9
%
   
4.9
%
   
2.2
%
Franchise-operated same-store sales (decrease) increase
   
(5.6
)%
   
(1.6
)%
   
(0.6
)%
   
5.4
%
   
0.7
%
Restaurant operating costs as a percentage of company-operated restaurants revenue
   
80.0
%
   
78.8
%
   
78.5
%
   
76.3
%
   
76.6
%
Company-operated restaurant-level margin (3)
   
20.0
%
   
21.2
%
   
21.5
%
   
23.7
%
   
23.4
%
Franchise contribution (3)
 
$
31,460
   
$
31,509
   
$
30,987
   
$
31,514
   
$
31,126
 
                                         
Hardee’s Restaurants
                                       
    Restaurants open (at end of fiscal year):
                                       
    Company-operated
   
475
     
482
     
560
     
696
     
663
 
    Franchised
   
1,228
     
1,231
     
1,187
     
1,058
     
1,184
 
    Licensed
   
202
     
195
     
179
     
152
     
146
 
    Total
   
1,905
     
1,908
     
1,926
     
1,906
     
1,993
 
Restaurant revenue:
                                       
    Company-operated restaurants
 
$
479,289
   
$
505,919
   
$
605,986
   
$
634,264
   
$
587,082
 
    Franchised and licensed restaurants(2)
   
1,380,503
     
1,314,624
     
1,196,505
     
1,156,201
     
1,173,442
 
Company-operated AUV (trailing-13 periods)
   
1,002
     
993
     
954
     
916
     
874
 
Franchise-operated AUV (trailing-13 periods)
   
976
     
970
     
964
     
949
     
897
 
Company-operated same-store sales (decrease) increase
   
 (0.9
)%
   
 1.2
%
   
2.0 
%
   
4.8
%
   
(0.2
)%
Franchise-operated same-store sales (decrease) increase 
   
(0.3
)%
   
 1.3
%
   
0.4 
%
   
4.3
%
   
(2.2
)%
Restaurant operating costs as a percentage of company-operated restaurants revenue
   
83.2
%
   
83.9
%
   
83.6
%
   
81.9
%
   
84.5
%
Company-operated restaurant-level margin (3)
   
16.8
%
   
16.1
%
   
16.4
%
   
18.1
%
   
15.5
%
Franchise contribution (3)
 
$
48,409
   
$
49,600
   
$
43,266
   
$
45,324
   
$
38,367
 
__________
(1)
Our fiscal year is 52 or 53 weeks, ending the last Monday in January. For clarity of presentation, we generally label all fiscal years presented as if the fiscal year ended January 31. All years presented include 52 weeks.

(2)
Franchised and licensed restaurant operations are not included in our Consolidated Statements of Income; however, franchised and licensed restaurants revenues result in royalties and rental revenues, which are included in franchised and licensed restaurants and other revenue.

(3)
Refer to definition of company-operated restaurant-level margin and franchise contribution within subheading “Presentation of Non-GAAP Measures” in Item 7 of this Annual Report on Form10-K.



The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes and Selected Financial and Operating Data included elsewhere in this Annual Report on Form 10-K.

Merger Agreement

On February 26, 2010, we entered into the Merger Agreement, which provides for the Merger of the Company with and into the Merger Sub with the Company surviving as a wholly-owned subsidiary of Parent, which is an affiliate of THL.  If the Merger is completed, each share of our common stock issued and outstanding immediately prior to closing automatically will be cancelled and converted into the right to receive $11.05 in cash, and the Company will cease to be a publicly traded company.

Overview

Highlights from fiscal 2010 include:

·  
We remodeled 55 Carl’s Jr. and 102 Hardee’s company-operated restaurants, and we also completed a combined 42 dual-branded Green Burrito and Red Burrito company-operated restaurant conversions. In addition, our franchisees and licensees remodeled 38 Carl’s Jr. and 63 Hardee’s restaurants and completed 14 dual-branded restaurant conversions.

·  
Carl’s Jr. and Hardee’s systemwide restaurant count increased by 26 restaurants, marking our third straight year of net restaurant growth. We opened 15 company-operated and our franchisees and licensees opened 30 domestic and 35 international restaurants, respectively.

·  
A total of 4 development agreements were signed with new and existing franchisees representing commitments to build a total of 106 restaurants domestically and internationally.

·  
Bank and other long-term debt decreased by $36,324, or 11.5%, to $278,464.

·  
During fiscal 2010, we declared cash dividends of $0.06 per share of our common stock each quarter for an annual total of $0.24 per share, or $13,178.

·  
Restaurant operating costs as a percentage of company-operated restaurants revenue on a consolidated basis increased 0.3% to 81.4% due to higher depreciation and amortization expense as well as payroll and other employee benefits, partially offset by lower food and packaging costs.

·  
General and administrative expense decreased $7,168, or 5.1%, in fiscal 2010, which is our third consecutive year of declining general and administrative expense.

·  
Consolidated revenue decreased 4.3%, to $1,418,733 in fiscal 2010 from $1,482,710 in fiscal 2009.

·  
Net income increased $11,242 to $48,198, or $0.87 per diluted common share in fiscal 2010, versus $36,956, or $0.68 per diluted common share in fiscal 2009. Net income in fiscal 2010 includes an income tax benefit of $9,894 related to a reduction in our valuation allowance for deferred income tax assets.

·  
Same-store sales decreased 6.2% and 0.9% at Carl’s Jr. and Hardee’s company-operated restaurants, respectively.

·  
Average unit volumes decreased to $1,438 and increased to $1,002 for the trailing-13 periods at company-operated Carl’s Jr. and Hardee’s restaurants, respectively.

We are an international owner, operator and franchisor of QSRs, operating principally under the Carl’s Jr. and Hardee’s brand names. As of January 31, 2010, we operated 422 and our franchisees and licensees operated 666 domestic and 136 international Carl’s Jr. restaurants. These 1,224 Carl’s Jr. restaurants are predominately located in the Western United States, primarily in California, with a strong international presence in Mexico. As of January 31, 2010, we operated 475 and our franchisees and licensees operated 1,228 domestic and 202 international Hardee’s restaurants. These 1,905 Hardee’s restaurants are located predominately throughout the Southeastern and Midwestern United States, with a growing international presence in the Middle East.

 
23

 
CKE RESTAURANTS, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis – (Continued)
(Dollars in thousands)


We derive our revenue primarily from sales at company-operated restaurants and revenue from franchisees and licensees, including franchise and royalty fees, sales to Carl’s Jr. franchisees and licensees of food and packaging products, rental revenue under real property leases and revenue from the sale of equipment to our franchisees. Restaurant operating expenses consist primarily of food and packaging costs, payroll and other employee benefits and occupancy and other operating expenses of company-operated restaurants. Franchise operating costs include the cost of food and packaging products sold to Carl’s Jr. franchisees and licensees, lease payments or depreciation expense on properties leased or subleased to our franchisees, the cost of equipment sold to franchisees and franchise administrative support. Our revenue and expenses are directly affected by the number and sales volume of company-operated restaurants and, to a lesser extent, by the number and sales volume of franchised and licensed restaurants.

Operating Review

The following table is presented to facilitate Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
   
Fiscal
   
Fourth Quarter Fiscal
 
   
2010
   
2009
   
2008
   
2010
   
2009
 
Company-operated restaurants revenue
 
$
1,084,474
   
$
1,131,312
   
$
1,201,577
   
$
236,820
   
$
250,454
 
Restaurant operating costs:
                                       
Food and packaging
   
310,483
     
335,707
     
356,332
     
68,417
     
73,493
 
Payroll and other employee benefits
   
312,571
     
322,936
     
350,526
     
71,429
     
72,587
 
Occupancy and other
   
260,061
     
258,995
     
267,372
     
58,600
     
59,308
 
Total restaurant operating costs
   
883,115
     
917,638
     
974,230
     
198,446
     
205,388
 
Franchised and licensed restaurants and other revenue:
                                       
Royalties
   
84,447
     
83,600
     
75,690
     
18,840
     
18,843
 
Distribution centers
   
213,818
     
228,480
     
219,441
     
47,831
     
49,787
 
Rent
   
33,596
     
33,625
     
29,659
     
7,738
     
7,520
 
Retail sales of variable interest entity
   
     
     
2,954
     
     
 
Franchise fees
   
2,398
     
5,693
     
5,313
     
516
     
850
 
Total franchised and licensed restaurants and other revenue
   
334,259
     
351,398
     
333,057
     
74,925
     
77,000
 
Franchised and licensed restaurants and other expenses:
                                       
Administrative expense
   
15,218
     
14,542
     
11,951
     
3,685
     
3,397
 
Distribution centers
   
210,913
     
228,360
     
219,350
     
47,242
     
49,842
 
Rent and other occupancy
   
27,719
     
26,797
     
24,095
     
6,243
     
6,329
 
Operating costs of variable interest entity
   
     
     
2,899
     
     
 
Total franchised and licensed restaurants and other expenses
   
253,850
     
269,699
     
258,295
     
57,170
     
59,568
 
Advertising expense
   
64,443
     
66,911
     
70,324
     
12,992
     
15,009
 
General and administrative expense
   
133,135
     
140,303
     
144,035
     
30,074
     
32,266
 
Facility action charges, net
   
4,695
     
4,139
     
(577
)
   
1,673
     
1,473
 
Operating income
 
$
79,495
   
$
84,020
   
$
88,327
   
$
11,390
   
$
13,750
 
Blended same-store sales (decrease) increase(1)
   
(3.9
)%
   
1.7
%
   
1.5
%
   
(6.0
)%
   
0.3
%
Blended AUV (trailing-13 periods) (1)
 
1,206
   
$
1,232
   
1,162
                 
Company-operated restaurant-level margin(2)
   
18.6
%
   
18.9
%
   
18.9
%
   
16.2
%
   
18.0
%
Franchise contribution(2)
 
$
80,409
   
$
81,699
   
$
74,762
   
$
17,755
   
$
17,432
 
________
(1)
Blended same-store sales is calculated by using a weighted average of the company-operated same-store sales for our Carl’s Jr. and Hardee’s brands. Blended AUV is calculated by using the company-operated AUV from the trailing-13 periods for our Carl’s Jr. and Hardee’s brands.
 
(2)
Refer to definition of company-operated restaurant-level margin and franchise contribution within subheading “Presentation of Non-GAAP Measures” in Item 7 of this Annual Report on Form 10-K.

 
24

 
CKE RESTAURANTS, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis – (Continued)
(Dollars in thousands)


The following table sets forth the percentage relationship to total revenue, unless otherwise indicated, of certain items included in our Consolidated Statements of Income for fiscal 2010, 2009, and 2008, and our unaudited Condensed Consolidated Statements of Income for the fourth quarters of fiscal 2010 and 2009:

   
Fiscal
   
Fourth Quarter Fiscal
 
   
2010
   
2009
   
2008
   
2010
   
2009
 
Revenue:
                       
Company-operated restaurants
   
76.4
%
   
76.3
%
   
78.3
%
   
76.0
%
   
76.5
%
Franchised and licensed restaurants and other
   
23.6
     
23.7
     
21.7
     
24.0
     
23.5
 
    Total revenue
   
100.0
     
100.0
     
100.0
     
100.0
     
100.0
 
Operating costs and expenses:
                                       
Restaurant operating costs(1):
                                       
    Food and packaging
   
28.6
     
29.7
     
29.7
     
28.9
     
29.3
 
    Payroll and other employee benefits
   
28.8
     
28.5
     
29.2
     
30.2
     
29.0
 
    Occupancy and other
   
24.0
     
22.9
     
22.3
     
24.7
     
23.7
 
    Total restaurant operating costs
   
81.4
     
81.1
     
81.1
     
83.8
     
82.0
 
Franchised and licensed restaurants and other(2)
   
75.9
     
76.8
     
77.6
     
76.3
     
77.4
 
Advertising expense(1)
   
5.9
     
5.9
     
5.9
     
5.5
     
6.0
 
General and administrative expense
   
9.4
     
9.5
     
9.4
     
9.6
     
9.9
 
Facility action charges, net
   
0.3
     
0.3
     
     
0.5
     
0.4
 
Operating income