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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

August 15, 2011 For the quarterly period ended August 15, 2011

OR

 

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

For the transition period from                  to                .

Commission file number 1-11313 and 333-169977

 

 

LOGO

CKE RESTAURANTS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

6307 Carpinteria Avenue, Ste. A,

Carpinteria, California

   93013
(Address of principal executive offices)    (Zip Code)

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

 

 

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   ¨     No   x  Explanatory Note: While the registrant is not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, it has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).     Yes   x     No   ¨

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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨     No   x

The number of outstanding shares of the registrant’s common stock was 100 shares as of September 16, 2011.

 

 

 


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

INDEX

 

      Page No.  
Part I. Financial Information   

Item 1. Condensed Consolidated Financial Statements (Unaudited):

  

Condensed Consolidated Balance Sheets

     3   

Condensed Consolidated Statements of Operations

     4   

Condensed Consolidated Statements of Cash Flows

     6   

Notes to Condensed Consolidated Financial Statements

     7   

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

     22   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     46   

Item 4. Controls and Procedures

     46   
Part II. Other Information   

Item 1. Legal Proceedings

     47   

Item 6. Exhibits

     49   

Signatures

     50   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except shares and par values)

(Unaudited)

 

     Successor  
     August 15,
2011
    January 31,
2011
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 38,258      $ 42,586   

Accounts receivable, net of allowance for doubtful accounts of $161 as of August 15, 2011 and $92 as of January 31, 2011

     26,440        27,533   

Related party trade receivables

     73        216   

Inventories

     17,850        14,526   

Prepaid expenses

     12,353        14,219   

Assets held for sale

     —          196   

Advertising fund assets, restricted

     21,791        18,464   

Deferred income tax assets, net

     16,687        17,079   

Other current assets

     3,508        4,065   
  

 

 

   

 

 

 

Total current assets

     136,960        138,884   

Notes receivable, net

     —          172   

Property and equipment, net of accumulated depreciation and amortization

    of $74,614 as of August 15, 2011 and $36,342 as of January 31, 2011

     628,217        640,194   

Property under capital leases, net of accumulated amortization of $6,940 as

    of August 15, 2011 and $3,638 as of January 31, 2011

     34,588        36,156   

Goodwill

     208,885        207,817   

Intangible assets, net

     440,628        448,499   

Other assets, net

     22,330        24,444   
  

 

 

   

 

 

 

Total assets

   $ 1,471,608      $ 1,496,166   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY     

Current liabilities:

    

Current portion of bank indebtedness and other long-term debt

   $ 3      $ 29   

Current portion of capital lease obligations

     8,117        7,434   

Accounts payable

     45,420        41,442   

Advertising fund liabilities

     21,791        18,464   

Other current liabilities

     81,826        81,958   
  

 

 

   

 

 

 

Total current liabilities

     157,157        149,327   

Bank indebtedness and other long-term debt, less current portion

     550,618        589,987   

Capital lease obligations, less current portion

     38,478        41,082   

Deferred income tax liabilities, net

     153,812        151,828   

Other long-term liabilities

     149,138        139,173   
  

 

 

   

 

 

 

Total liabilities

     1,049,203        1,071,397   
  

 

 

   

 

 

 

Commitments and contingencies (Notes 7, 8, 10 and 15)

    

Stockholder’s equity:

    

Common stock, $0.01 par value; 100 shares authorized, issued and outstanding as of August 15, 2011 and January 31, 2011

     —          —     

Additional paid-in capital

     455,127        452,659   

Accumulated deficit

     (32,722     (27,890
  

 

 

   

 

 

 

Total stockholder’s equity

     422,405        424,769   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 1,471,608      $ 1,496,166   
  

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

 

     Successor     Predecessor  
     Twelve
Weeks Ended
August 15, 2011
    Four
Weeks Ended
August 9, 2010
    Eight
Weeks Ended
July 12, 2010
 

Revenue:

        

Company-operated restaurants

   $ 262,991      $ 85,951         $ 169,526   

Franchised and licensed restaurants and other

     36,738        11,078        47,408   
  

 

 

   

 

 

   

 

 

 

Total revenue

     299,729        97,029        216,934   
  

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Restaurant operating costs:

        

Food and packaging

     80,231        25,309        50,493   

Payroll and other employee benefits

     75,310        24,372        49,136   

Occupancy and other

     63,393        20,522        39,384   
  

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

     218,934        70,203        139,013   

Franchised and licensed restaurants and other

     18,440        5,262        35,358   

Advertising

     15,399        4,848        9,830   

General and administrative

     29,346        19,728        20,388   

Facility action charges, net

     (70     137        (273

Other operating expenses, net

     194        19,661        3,681   
  

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     282,243        119,839        207,997   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     17,486        (22,810     8,937   

Interest expense

     (17,816     (5,980     (3,592

Other (expense) income, net

     (2,215     165        274   
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (2,545     (28,625     5,619   

Income tax (benefit) expense

     (314     (5,737     10,041   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (2,231   $ (22,888   $ (4,422
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

4


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

 

     Successor     Predecessor  
     Twenty-Eight
Weeks Ended
August 15, 2011
    Four
Weeks Ended
August 9, 2010
    Twenty-Four
Weeks  Ended
July 12, 2010
 

Revenue:

        

Company-operated restaurants

   $ 614,595      $ 85,951         $ 500,531   

Franchised and licensed restaurants and other

     85,717        11,078        151,588   
  

 

 

   

 

 

   

 

 

 

Total revenue

     700,312        97,029        652,119   
  

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Restaurant operating costs:

        

Food and packaging

     189,133        25,309        148,642   

Payroll and other employee benefits

     176,973        24,372        147,391   

Occupancy and other

     146,076        20,522        118,138   
  

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

     512,182        70,203        414,171   

Franchised and licensed restaurants and other

     44,318        5,262        115,120   

Advertising

     35,460        4,848        29,647   

General and administrative

     70,306        19,728        59,859   

Facility action charges, net

     441        137        590   

Other operating expenses, net

     545        19,661        10,249   
  

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     663,252        119,839        629,636   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     37,060        (22,810     22,483   

Interest expense

     (42,211     (5,980     (8,617

Other (expense) income, net

     (1,416     165        (13,609
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (6,567     (28,625     257   

Income tax (benefit) expense

     (1,735     (5,737     7,772   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,832   $ (22,888   $ (7,515
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

5


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Successor     Predecessor  
     Twenty-Eight
Weeks Ended
August 15, 2011
    Four
Week Ended
August 9, 2010
    Twenty-Four
Weeks  Ended
July 12, 2010
 

Cash flows from operating activities:

        

Net loss

   $ (4,832   $ (22,888   $ (7,515

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

        

Depreciation and amortization

     43,843        5,922           33,703   

Amortization of debt issuance costs and discount on notes

     2,169        278        522   

Loss on early extinguishment of senior secured second lien notes

     2,641        —          —     

Share-based compensation expense

     2,468        174        4,710   

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

     94        9        (100

Loss (gain) on sale of property and equipment

     996        65        (1,326

Facility action charges, net

     862        137        590   

Deferred income taxes

     2,376        (6,320     8,241   

Net changes in operating assets and liabilities:

        

Receivables, inventories, prepaid expenses and other current and non-current assets

     (1,937     5,878        4,826   

Estimated liability for closed restaurants and estimated liability for self-insurance

     (1,053     64        (2,318

Accounts payable and other current and long-term liabilities

     10,187        (24,557     4,317   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     57,814        (41,238     45,650   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Purchases of property and equipment

     (28,113     (4,703     (33,738

Acquisition of Predecessor

     —          (693,478     —     

Proceeds from sale of property and equipment

     1,748        —          1,011   

Proceeds from sale of Distribution Center assets

     —          —          19,203   

Collections of non-trade notes receivable

     639        33        673   

Other investing activities

     102        13        (284
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (25,624     (698,135     (13,135
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Net change in bank overdraft

     (6,416     (7,312     (7,364

Borrowings under revolving credit facilities

     —          —          138,500   

Repayments of borrowings under revolving credit facilities

     —          (34,000     (134,500

Repayments of Predecessor senior credit facility term loan

     —          (236,487     (10,945

Proceeds from issuance of senior secured second lien notes, net of original issue discount

     —          588,510        —     

Proceeds from financing method sale-leaseback transactions

     16,027        —          —     

Payment of debt issuance costs

     (49     (18,079     —     

Payment for early extinguishment of senior secured second lien notes

     (41,200     —          —     

Repayments of other long-term debt

     (614     (2     (13

Repayments of capital lease obligations

     (4,266     (613     (3,748

Repurchase of common stock

     —          —          (2,072

Exercise of stock options

     —          —          1,063   

Dividends paid on common stock

     —          —          (3,317

Net advances from (to) affiliates of Apollo Management

     —          2,641        (2,641

Equity contribution

     —          450,000        —     
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (36,518     744,658        (25,037
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (4,328     5,285        7,478   

Cash and cash equivalents at beginning of period

     42,586        25,724        18,246   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 38,258      $ 31,009      $ 25,724   
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

6


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

Description of Business

CKE Restaurants, Inc. (“CKE”), 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 and its consolidated subsidiaries (the “Company”) throughout these Notes to Condensed Consolidated Financial Statements are made using the first person notations of “we,” “us” and “our.”

Carl’s Jr. restaurants are primarily located in the Western United States. Hardee’s restaurants are primarily located throughout the Southeastern and Midwestern United States. Green Burrito restaurants are primarily located in dual-branded Carl’s Jr. restaurants. The Red Burrito concept is located in dual-branded Hardee’s restaurants. Generally, our franchisees are domestic and our licensees are international. As of August 15, 2011, our system-wide restaurant portfolio consisted of:

 

     Carl’s Jr.      Hardee’s      Other      Total  

Company-operated

     425         468         —           893   

Franchised

     684         1,226         10         1,920   

Licensed

     169         220         —           389   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,278         1,914         10         3,202   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of August 15, 2011, 258 of our 425 company-operated Carl’s Jr. restaurants were dual-branded with Green Burrito and 185 of our 468 company-operated Hardee’s restaurants were dual-branded with Red Burrito.

Merger and Related Transactions

On July 12, 2010, we completed a merger with Columbia Lake Acquisition Corp. (“Merger Sub”), a Delaware corporation and wholly-owned subsidiary of CKE Holdings, Inc. (“Parent”), a Delaware corporation, providing for the merger of Merger Sub with and into CKE (the “Merger”), with CKE surviving the Merger as a wholly-owned subsidiary of Parent, pursuant to the Agreement and Plan of Merger, dated April 18, 2010 (“Merger Agreement”). Parent is indirectly controlled by investment entities managed by Apollo Management VII, L.P. (“Apollo Management”). As a result of the Merger, shares of CKE common stock ceased to be traded on the New York Stock Exchange after the close of market on July 12, 2010.

The aggregate consideration for all equity securities of CKE was $704,065, including $10,587 of post-combination share-based compensation expense, and the total debt assumed and refinanced in connection with the Merger was $270,487. The Merger was funded by (i) equity contributions from affiliates of Apollo Management of $436,645, (ii) equity contributions from our senior management of $13,355, and (iii) proceeds of $588,510 from the issuance of $600,000 senior secured second lien notes (the “Notes”). In addition, we entered into a senior secured revolving credit facility of $100,000 (the “Credit Facility”), which was undrawn at closing.

The aforementioned transactions, including the Merger and payment of costs related to these transactions, are collectively referred to as the “Transactions.”

 

7


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

Basis of Presentation and Fiscal Year

Our accompanying unaudited Condensed Consolidated Financial Statements include the accounts of CKE, our wholly-owned subsidiaries and certain variable interest entities (“VIE”) for which we are the primary beneficiary and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), the instructions to Form 10-Q and Article 10 of Regulation S-X. CKE does not have any non-controlling interests in other entities. These financial statements should be read in conjunction with the audited Consolidated Financial Statements presented in our Annual Report on Form 10-K for the fiscal year ended January 31, 2011. In our opinion, all adjustments considered necessary for a fair presentation of financial position and results of operations for this interim period have been included. The results of operations for such interim period are not necessarily indicative of results for the full year or for any future period.

We operate on a retail accounting calendar. Our fiscal year ends on the last Monday in January and typically has 13 four-week accounting periods. For clarity of presentation, we generally label all fiscal year ends as if the fiscal year ended January 31. The fiscal year ended January 31, 2011 is referred to herein as fiscal 2011. The fiscal year ending January 30, 2012 is referred to herein as fiscal 2012. The first quarter of our fiscal year has four periods, or 16 weeks. All other quarters generally have three periods, or 12 weeks.

Our restaurant sales, and therefore our profitability, are subject to seasonal fluctuations and are traditionally higher during the spring and summer months because of factors such as increased travel during school vacations and improved weather conditions, which affect the public’s dining habits.

For the purposes of presentation and disclosure, all references to “Predecessor” relate to CKE and its consolidated subsidiaries for periods prior to the Merger. All references to “Successor” relate to CKE and its consolidated subsidiaries merged with Merger Sub for periods subsequent to the Merger. References to “we”, “us”, “our” and the “Company” relate to the Predecessor for the periods prior to the Merger and to the Successor for periods subsequent to the Merger.

Certain prior year amounts in these unaudited Condensed Consolidated Financial Statements have been reclassified to conform to the current year presentation.

Variable Interest Entities

We consolidate one national and approximately 80 local co-operative advertising funds (“Hardee’s Funds”) as we have concluded that they are VIEs for which we are the primary beneficiary. We have included $21,791 and $18,464 of advertising fund assets, restricted, and advertising fund liabilities in our accompanying unaudited Condensed Consolidated Balance Sheets as of August 15, 2011 and January 31, 2011, respectively. Consolidation of the Hardee’s Funds had no impact on our accompanying unaudited Condensed Consolidated Statements of Operations and Cash Flows. We have no rights to the assets, nor do we have any obligation with respect to the liabilities, of the Hardee’s Funds, and none of our assets serve as collateral for the creditors of these VIEs.

NOTE 2 — ACQUISITION OF PREDECESSOR

The acquisition of Predecessor was accounted for as a business combination using the acquisition method of accounting, whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair market values. Fair-value measurements were applied based on assumptions that market participants would have used in the pricing of the asset or liability. During the second quarter of fiscal 2012, we completed our accounting for the acquisition of Predecessor. The following table summarizes the fair values assigned to the net assets acquired as of the July 12, 2010 acquisition date:

 

8


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

Total consideration:

  

Cash paid to shareholders

   $ 704,065   

Less: post-combination share-based compensation expense

     (10,587
  

 

 

 

Total purchase price consideration

     693,478   
  

 

 

 

Fair value of assets acquired and liabilities assumed:

  

Cash and cash equivalents

     25,724   

Accounts receivable(1)

     39,762   

Inventories

     13,956   

Deferred income tax assets, net – current

     19,872   

Other current assets

     36,372   

Notes receivable – current and long-term(2)

     2,311   

Property and equipment(3)

     654,467   

Property under capital leases

     39,738   

Intangible assets

     457,001   

Other assets

     5,363   

Bank indebtedness – current and long-term

     (271,505

Capital lease obligations – current and long-term

     (52,922

Accounts payable

     (54,811

Deferred income tax liabilities, net – long-term

     (165,456

Unfavorable lease obligations

     (96,356

Other liabilities – current and long-term(4)

     (167,855
  

 

 

 

Net assets acquired

     485,661   
  

 

 

 

Excess purchase price attributed to goodwill acquired

   $ 207,817   
  

 

 

 

 

(1) The gross amount due under accounts receivable acquired is $40,081, of which $319 was expected to be uncollectible.
(2) The gross amount due under notes receivable acquired is $5,947, of which $3,636 was expected to be uncollectible.
(3) The estimated fair value of property and equipment acquired consisted of $231,916 of land, $87,709 of leasehold improvements, $223,751 of buildings and improvements, and $111,091 of equipment, furniture and fixtures.
(4) Litigation reserves of $2,305 are included within other current liabilities. Since the acquisition date fair value of these contingent liabilities could not be determined during the measurement period, we recorded an accrued liability for litigation contingencies with a probable likelihood of loss and for which the range of loss was reasonably estimable.

During the first quarter of fiscal 2012, we recorded retrospective purchase price adjustments at the acquisition date to increase the fair value of accounts receivable by $7, current deferred income tax assets, net by $768, other current assets by $158, property and equipment by $17,813, property under capital leases by $1,375, other assets by $126, unfavorable lease obligations by $27,376 and other liabilities by $2,436. Purchase price adjustments were also recorded to reduce the fair value of intangible assets by $14,763, capital lease obligations by $127 and long-term deferred income tax liabilities by $13,504. These adjustments to our purchase price allocation caused an increase to goodwill of $10,697. In connection with the completion of our accounting for the acquisition of Predecessor during the second quarter of fiscal 2012, no further acquisition accounting adjustments were recorded.

We have retrospectively adjusted our post-combination consolidated results of operations and cash flows for the impacts of the purchase price adjustments. As a result of the retrospective adjustments, our net loss for the Successor twenty-nine weeks ended January 31, 2011 decreased by $852, and our Successor stockholder’s equity as of January 31, 2011 increased by the same amount.

At the time of the Merger, the Company believed its market position and future growth potential for both company-operated and franchised and licensed restaurants were the primary factors that contributed to a total purchase price that resulted in the recognition of goodwill. There was $45,939 of goodwill recognized in connection with the Merger that had carryover basis from previous acquisitions and was expected to be deductible for federal income tax purposes.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

Transaction Costs

We recorded $194 and $545 in transaction-related costs for accounting, investment banking, legal and other costs in connection with the Transactions within other operating expenses, net in our accompanying unaudited Condensed Consolidated Statements of Operations for the Successor twelve and twenty-eight weeks ended August 15, 2011, respectively.

We recorded $19,661, $7,123 and $13,691 in transaction-related costs for accounting, investment banking, legal and other costs in connection with the Transactions within other operating expenses, net in our accompanying unaudited Condensed Consolidated Statements of Operations for the Successor four weeks ended August 9, 2010 and the Predecessor eight and twenty-four weeks ended July 12, 2010, respectively. Additionally, we recorded a termination fee for a prior merger agreement with an affiliate of Thomas H. Lee Partners, L.P. of $9,283 and $5,000 in reimbursable costs within other operating expenses, net in our accompanying unaudited Condensed Consolidated Statement of Operations for the Predecessor twenty-four weeks ended July 12, 2010.

Pro Forma Financial Information (Unaudited)

The following unaudited pro forma results of operations assume that the Transactions had occurred on February 1, 2010 for the twelve and twenty-eight weeks ended August 9, 2010, after giving effect to acquisition accounting adjustments relating to depreciation and amortization of the revalued assets, interest expense associated with the Credit Facility and the Notes, and other acquisition-related adjustments in connection with the Transactions. These unaudited pro forma results exclude transaction costs and share-based compensation expense related to the acceleration of stock options and restricted stock awards in connection with the Merger. Additionally, the following unaudited pro forma results of operations do not give effect to the sale of our Carl’s Jr. distribution facility operations, which was completed on July 2, 2010. This unaudited pro forma information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the Transactions had actually occurred on those dates, nor of the results that may be obtained in the future.

 

     Twelve
Weeks  Ended
August 9, 2010(1)
     Twenty-Eight
Weeks Ended
August 9, 2010(1)
 

Total revenue

   $ 314,668       $ 750,876   

Net income (loss)

     11,188         (2,524

 

(1) The unaudited pro forma results of operations exclude any effect related to the senior unsecured PIK toggle notes issued by CKE Holdings, Inc. (see Note 7).

NOTE 3 — ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED AND ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance to require additional disclosures for fair value measurements including the following: (1) amounts transferred in and out of Level 1 and 2 fair value measurements, which is effective for interim and annual reporting periods beginning after December 15, 2009 (“Part I”), and (2) activities in Level 3 fair value measurements including purchases, sales, issuances and settlements, which is effective for interim and annual reporting periods beginning after December 15, 2010 (“Part II”). Our adoption of Part I of the revised guidance for fair value measurements disclosures as of the beginning of fiscal 2011 did not have a material effect on our Condensed Consolidated Financial Statements. Our adoption of Part II of the revised guidance for fair value measurement disclosures as of the beginning of fiscal 2012 did not have a material effect on our Condensed Consolidated Financial Statements.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

In May 2011, the FASB issued new authoritative guidance to provide a consistent definition of fair value and ensure that fair value measurements and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This guidance changes certain fair value measurement principles and enhances the disclosure requirements for fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. We do not expect that the adoption of this guidance will have a material impact on our Condensed Consolidated Financial Statements.

NOTE 4 — ASSETS HELD FOR SALE

Assets held for sale consist of surplus restaurant properties and company-operated restaurants that we expect to sell within one year. We no longer depreciate assets once classified as held for sale. As of August 15, 2011, there were no assets held for sale. As of January 31, 2011, total assets held for sale were $196 and were comprised of one surplus property in our Hardee’s operating segment.

NOTE 5 — PURCHASE AND SALE OF ASSETS

Purchase of Assets

During the twenty-eight weeks ended August 15, 2011, we purchased three Hardee’s restaurants from one of our franchisees for the aggregate purchase price consideration of $1,500, which was reduced by the settlement of certain pre-existing liabilities, resulting in a net purchase price consideration of $1,207. As a result of this transaction, we recorded property and equipment of $54, identifiable intangible assets of $85, capital leases assets of $55 and capital lease obligations of $55, resulting in $1,068 of additional goodwill in our Hardee’s operating segment.

We did not purchase any restaurants from franchisees during the twenty-eight weeks ended August 9, 2010.

Sale of Assets

On July 2, 2010, pursuant to an Asset Purchase Agreement (“APA”) with Meadowbrook Meat Company, Inc. (“MBM”), we sold to MBM our Carl’s Jr. distribution center assets located in Ontario, California and Manteca, California (“Distribution Centers”). In connection with the APA, we received total consideration of $21,195 from MBM for the Distribution Center assets, which included inventory, fixed assets, real property in Manteca, California, and other related assets. We collected proceeds of $19,203 related to the sale of the Distribution Center assets during the twenty-four weeks ended July 12, 2010 and collected the remaining $1,992 of consideration during the third quarter of fiscal 2011. As a result of the transaction, we recorded a gain of $3,442, which is included in other operating expenses, net in our accompanying unaudited Condensed Consolidated Statements of Operations for the Predecessor eight and twenty-four weeks ended July 12, 2010.

NOTE 6 — GOODWILL AND INTANGIBLE ASSETS, NET

The following table sets forth changes in our goodwill:

 

     Carl’s Jr.      Hardee’s      Total  

Successor:

        

Balance at January 31, 2011

   $ 199,166       $ 8,651       $ 207,817   

Additions

     —           1,068         1,068   
  

 

 

    

 

 

    

 

 

 

Balance at August 15, 2011

   $ 199,166       $ 9,719       $ 208,885   
  

 

 

    

 

 

    

 

 

 

The following table presents our indefinite and definite-lived intangible assets for each of the respective reporting periods:

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

     Successor  
     August 15, 2011      January 31, 2011  
     Weighted
Average
Life
(Years)
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

Trademarks/Tradenames

     Indefinite       $ 278,000       $ —        $ 278,000       $ 278,000       $ —        $ 278,000   

Favorable lease agreements

     13         89,823         (10,540     79,283         90,181         (5,313     84,868   

Franchise agreements

     20         88,085         (4,740     83,345         88,000         (2,369     85,631   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
      $ 455,908       $ (15,280   $ 440,628       $ 456,181       $ (7,682   $ 448,499   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense related to intangible assets for the Successor twelve and twenty-eight weeks ended August 15, 2011, Successor four weeks ended August 9, 2010 and Predecessor eight and twenty-four weeks ended July 12, 2010 was $3,348, $7,873, $1,104, $40 and $116, respectively. Our estimated future amortization expense related to these intangible assets is set forth as follows:

 

August 16, 2011 through January 31, 2012

   $ 6,523   

Fiscal 2013

     13,832   

Fiscal 2014

     12,899   

Fiscal 2015

     11,743   

Fiscal 2016

     11,117   

Fiscal 2017

     10,629   

Thereafter

     95,885   
  

 

 

 
   $ 162,628   
  

 

 

 

NOTE 7 — INDEBTEDNESS AND INTEREST EXPENSE

Successor

Our Credit Facility provides for senior secured revolving facility loans, swingline loans and letters of credit in an aggregate amount of up to $100,000. As of August 15, 2011, we had no outstanding loan borrowings, $31,913 of outstanding letters of credit and remaining availability of $68,087 on our Credit Facility. The Credit Facility bears interest at a rate equal to, at our option, either: (1) the higher of Morgan Stanley’s “prime rate” plus 2.75% or the federal funds rate, as defined in our Credit Facility, plus 3.25%, or (2) the London Interbank Offered Rate (“LIBOR”) plus 3.75%.

The terms of our Credit Facility include financial performance covenants, which include a maximum secured leverage ratio and a specified minimum interest coverage ratio. As of August 15, 2011, our financial performance covenants did not limit our ability to draw on the remaining availability of $68,087 under our Credit Facility.

On July 15, 2011, we redeemed $40,000 of the principal amount of our Notes at a price equal to 103% of the principal amount of the Notes pursuant to the terms of the indenture governing the Notes. During the Successor twelve and twenty-eight weeks ended August 15, 2011, we recognized a loss of $2,641 on the early extinguishment of the Notes. Subsequent to the redemption, and as of August 15, 2011, the remaining aggregate principal amount of the Notes was $560,000. As of August 15, 2011, the carrying value of the Notes was $550,231, which is presented net of the remaining unamortized portion of the original issue discount of $9,769 in our accompanying unaudited Condensed Consolidated Balance Sheet. The Notes bear interest at a rate of 11.375% per annum, payable semi-annually in arrears on January 15 and July 15.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

Each of our wholly-owned domestic subsidiaries that guarantees indebtedness under the Credit Facility also guarantees the performance and punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all our obligations under the Notes. Separate financial statements and other disclosures of each of the guarantors are not presented because CKE Restaurants, Inc. is a holding company with no material independent assets or operations, the guarantor subsidiaries are, directly or indirectly, wholly-owned subsidiaries of CKE Restaurants, Inc. and such guarantees are full, unconditional and joint and several. The aggregate assets, liabilities, earnings and equity of the guarantor subsidiaries are substantially equivalent to the assets, liabilities, earnings and equity of CKE Restaurants, Inc. on a consolidated basis. The one non-guarantor subsidiary of the parent company is minor. There are no significant restrictions on the ability of CKE Restaurants, Inc. or any of the guarantors to obtain funds from its respective subsidiaries by dividend or loan.

Predecessor

In connection with the Merger, we repaid at closing the total principal outstanding balance of the term loan portion of our senior credit facility (“Predecessor Facility”) of $236,487 and the total outstanding borrowings on the revolving portion of our Predecessor Facility of $34,000, as well as all incurred and unpaid interest on our Predecessor Facility.

Additionally, in connection with the Merger, we settled and paid in full all obligations related to our fixed rate interest rate swap agreements, which totaled $14,844. During the Predecessor eight and twenty-four weeks ended July 12, 2010, we recorded interest expense of $1,743 and $3,113, respectively, under these interest rate swap agreements to adjust their carrying value to fair value. During the Predecessor eight and twenty-four weeks ended July 12, 2010, we paid $767 and $3,750, respectively, for net settlements under our interest rate swap agreements, excluding the settlement at closing of the Merger.

Interest expense

Interest expense consisted of the following:

 

     Successor     Predecessor  
     Twelve
Weeks Ended
August 15,
2011
     Twenty-Eight
Weeks Ended
August 15,
2011
     Four
Weeks Ended
August  9,

2010
    Eight
Weeks Ended
July 12,
2010
     Twenty-Four
Weeks  Ended
July 12,
2010
 

Senior secured revolving credit facility

   $ —         $ —         $ —        $ —         $ —     

Senior secured second lien notes

     15,358         36,474         5,195        —           —     

Predecessor senior credit facility

     —           —           —          797         2,338   

Amortization of debt issuance costs and discount on notes

     925         2,169         278        155         488   

Interest rate swap agreements

     —           —           —          1,743         3,113   

Capital lease obligations

     1,117         2,579         434        782         2,318   

Financing method sale-leaseback transactions(1)

     101         101         —          —           —     

Letter of credit fees and other

     315         888         73        115         360   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 17,816       $ 42,211       $ 5,980       $ 3,592       $ 8,617   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) See Note 8.

As of August 15, 2011 and January 31, 2011, accrued interest was $5,601 and $3,147, respectively, which is included in other current liabilities in our accompanying unaudited Condensed Consolidated Balance Sheets.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

CKE Holdings, Inc. Senior Unsecured PIK Toggle Notes

On March 14, 2011, CKE Holdings, Inc. issued $200,000 aggregate principal amount of senior unsecured PIK toggle notes due March 14, 2016 (the “Parent Notes”). The Parent Notes were issued with an original issue discount of 1.885%, or $3,770. The interest on the Parent Notes can be paid (1) entirely in cash, at a rate of 10.50% (“Cash Interest”), (2) entirely by increasing the principal amount of the note or by issuing new notes for the entire amount of the interest payment, at a rate per annum equal to the cash interest rate of 10.50% plus 0.75% (“PIK Interest”) or (3) with a 25%/75%, 50%/50% or 75%/25% combination of Cash Interest and PIK Interest. Pursuant to the indenture governing the Parent Notes, Parent paid the September 15, 2011 interest payment entirely in PIK Interest. Parent will also pay the March 15, 2012 interest payment entirely in PIK Interest. We have not guaranteed the Parent Notes, nor have we pledged any of our assets or stock as collateral for the Parent Notes. As a result, we have not reflected the Parent Notes in our unaudited Condensed Consolidated Financial Statements.

NOTE 8 — SALE-LEASEBACK TRANSACTIONS

During the twelve and twenty-eight weeks ended August 15, 2011, we entered into agreements with independent third parties under which we sold and leased back five Carl’s Jr. and six Hardee’s restaurant properties. The initial minimum lease terms are 20 years, and the leases include renewal options and right of first offer provisions that, for accounting purposes, constitute continuing involvement with the associated restaurant properties. Due to this continuing involvement, these sale-leaseback transactions are accounted for under the financing method, rather than as completed sales. Under the financing method, we include the net sales proceeds received in other long-term liabilities until our continuing involvement with the properties is terminated, report the associated property as owned assets, continue to depreciate the assets over their remaining useful lives, and record the rental payments as interest expense. When and if our continuing involvement with a property terminates and the sale of that property is recognized for accounting purposes, we expect to record a gain equal to the excess of the net proceeds received over the remaining net book value of the associated restaurant property.

During the twenty-eight weeks ended August 15, 2011, we received net proceeds of $16,027 in connection with these transactions, which are included in other long-term liabilities in our accompanying unaudited Condensed Consolidated Balance Sheet as of August 15, 2011. The net book value of the associated assets was $11,986, which is included in property and equipment, net of accumulated depreciation and amortization in our accompanying unaudited Condensed Consolidated Balance Sheet as of August 15, 2011. The net proceeds received exceeded the net book value of the associated restaurant properties by $4,041 as of August 15, 2011.

Our future minimum cash obligations associated with these transactions from August 16, 2011 through January 31, 2012, for fiscal 2013, 2014, 2015, 2016, 2017 and thereafter are $568, $1,135, $1,135, $1,135, $1,135, $1,199 and $19,963, respectively.

NOTE 9 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents information on our financial instruments as of:

 

     Successor  
     August 15, 2011      January 31, 2011  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial assets:

           

Cash and cash equivalents

   $ 38,258       $ 38,258       $ 42,586       $ 42,586   

Notes receivable

     2,438         2,474         4,681         4,619   

Financial liabilities:

           

Bank indebtedness and other long-term debt, including current portion

     550,621         588,391         590,016         676,005   

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

The fair value of cash and cash equivalents approximates its carrying amount due to its short maturity. The estimated fair value of notes receivable was determined by discounting future cash flows using current rates at which similar loans might be made to borrowers with similar credit ratings. The estimated fair value of the Notes was determined by using estimated market prices of our outstanding Notes. For all other long-term debt, the estimated fair value was determined by discounting future cash flows using rates currently available to us for debt with similar terms and remaining maturities.

Our non-financial assets, which include long-lived assets, including goodwill, intangible assets, property and equipment and capital lease assets, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value.

NOTE 10 — COMMITMENTS AND CONTINGENT LIABILITIES

Lease Commitments

Under various past and present refranchising programs, we have sold restaurants to franchisees, some of which were on leased sites. We entered into sublease agreements with these franchisees but remained principally liable for the lease obligations. We account for the sublease payments received as franchising rental income in franchised and licensed restaurants and other revenue, and the payments on the leases as rental expense in franchised and licensed restaurants and other expense, in our Condensed Consolidated Statements of Operations. As of August 15, 2011, the present value of the lease obligations under the remaining master leases’ primary terms is $123,257. Franchisees may, from time to time, experience financial hardship and may cease payment on their sublease obligations to us. The present value of the exposure to us from franchisees characterized as under financial hardship is $3,511.

Letters of Credit

Pursuant to our Credit Facility, we may borrow up to $100,000 for senior secured revolving facility loans, swingline loans and letters of credit (see Note 7). We have several standby letters of credit outstanding under our Credit Facility, which primarily secure our potential workers’ compensation, general and auto liability obligations. We are required to provide letters of credit each year, or set aside a comparable amount of cash or investment securities in a trust account, based on our existing claims experience. As of August 15, 2011, we had outstanding letters of credit of $31,913, expiring at various dates through August 2012.

Unconditional Purchase Obligations

As of August 15, 2011, we had unconditional purchase obligations in the amount of $89,398, which consisted primarily of contracts for goods and services related to restaurant operations and contractual commitments for marketing and sponsorship arrangements.

Employment Agreements

We entered into employment agreements with certain key executives (the “Employment Agreements”), dated July 12, 2010. Pursuant to the terms of the Employment Agreements, each executive is entitled to receive certain retention bonus payments that will be paid out over the next two to three years, in accordance with such executive’s Employment Agreement. In addition, each executive will be entitled to payments that may be triggered by the termination of employment under certain circumstances, as set forth in each Employment Agreement. If certain provisions are triggered, our Chief Executive Officer shall be entitled to receive an amount equal to his minimum base salary multiplied by six and our President and Chief Legal Officer and our Chief Financial Officer shall each be entitled to receive an amount equal to his respective minimum base salary multiplied by three plus a pro-rata portion of his then-current year bonus. The affected executive may also be entitled to receive a portion of his retention bonus. If all payment provisions of the Employment Agreements had been triggered as of August 15, 2011, we would have been required to make cash payments of approximately $13,279.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

Litigation

We are currently involved in legal disputes related to employment claims, real estate claims and other business disputes. As of August 15, 2011, our accrued liability for litigation contingencies with a probable likelihood of loss was $2,140, with an expected range of losses from $2,140 to $9,940. With respect to employment matters, our most significant legal disputes relate to employee meal and rest break disputes, and wage and hour disputes. Several potential class action lawsuits have been filed in the State of California, regarding such employment matters, 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 these actions. As of August 15, 2011, we estimated the contingent liability of those losses related to litigation claims that are not accrued, but that we believe are reasonably possible to result in an adverse outcome and for which a range of loss can be reasonably estimated, to be in the range of $2,555 to $12,780. In addition, we are involved in legal matters where the likelihood of loss has been judged to be reasonably possible, but for which a range of the potential loss cannot be reasonably estimated.

NOTE 11 — SHARE-BASED COMPENSATION

Total share-based compensation expense and associated tax benefits recognized were as follows:

 

     Successor     Predecessor  
     Twelve
Weeks Ended
August 15,
2011
     Twenty-Eight
Weeks Ended
August 15,
2011
     Four
Weeks  Ended
August 9,

2010
    Eight
Weeks  Ended
July 12,
2010
     Twenty-Four
Weeks  Ended
July 12,
2010
 

Share-based compensation expense related to restricted stock awards that contain market or performance conditions

   $ —         $ —         $ —        $ 184       $ 717   

Share-based compensation expense related to the acceleration of vesting of stock options and awards in connection with the Merger

     —           —           10,587        1,521         1,521   

Share-based compensation expense related to Units that contain performance conditions

     480         1,247         —          —           —     

All other share-based compensation expense

     519         1,221         174        818         2,472   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total share-based compensation expense

   $ 999       $ 2,468       $ 10,761       $ 2,523       $ 4,710   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Associated tax benefits

   $ —         $ —         $ —        $ 1,138       $ 1,804   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Successor

In connection with the Merger, certain affiliates of Apollo Management, certain members of our senior management team and our board of directors formed Apollo CKE Holdings, L.P., a limited partnership (the “Partnership”) to fund the equity contribution to CKE Restaurants, Inc. The Partnership also granted 5,108,333 profit sharing interests (“Units”) in the Partnership to certain of our senior management team and directors in the form of time vesting and performance vesting Units. Under certain circumstances, a portion of the Units may become subject to both performance and market conditions. We recorded $999, $2,468 and $174 of share-based compensation expense related to the Units for the twelve and twenty-eight weeks ended August 15, 2011 and the four weeks ended August 9, 2010, respectively. The maximum unrecognized compensation cost for the time and performance vesting Units was $12,829 as of August 15, 2011.

In connection with the Merger, the vesting of all outstanding unvested options and restricted stock awards was accelerated immediately prior to closing. As a result of the acceleration, we recorded $10,587 in share-based compensation expense during the four weeks ended August 9, 2010 within general and administrative expense in our accompanying unaudited Condensed Consolidated Statement of Operations related to the post-Merger service period for certain stock options and awards (see also Predecessor below).

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

Predecessor

We had various share-based compensation plans (“Predecessor Plans”) that provided restricted stock awards and stock options for certain employees, non-employee directors and external service providers to acquire shares of our common stock. In connection with the Merger, we recorded $1,521 in stock compensation expense related to the acceleration of options and restricted stock awards from the Predecessor Plans during the eight and twenty-four weeks ended July 12, 2010.

NOTE 12 — FACILITY ACTION CHARGES, NET

The components of facility action charges, net are as follows:

 

     Successor     Predecessor  
     Twelve
Weeks Ended
August 15,
2011
    Twenty-Eight
Weeks Ended
August 15,
2011
    Four
Weeks Ended
August 9,
2010
    Eight
Weeks Ended
July 12,
2010
    Twenty-Four
Weeks  Ended
July 12,
2010
 

Estimated liability for new restaurant closures

   $ —        $ 133      $ —        $ —        $ 363   

Adjustments to estimated liability for closed restaurants

     72        564        34        (13     60   

Impairment of assets classified as held for sale

     —          —          —          —          156   

Impairment of assets classified as held and used

     192        250        —          158        161   

(Gain) loss on sales of restaurants and surplus properties, net

     (460     (758     62        (486     (348

Amortization of discount related to estimated liability for closed restaurants

     126        252        41        68        198   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (70   $ 441      $ 137       $ (273   $ 590   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the twelve weeks and twenty-eight weeks ended August 15, 2011, we received cash of $250 and $500, respectively, and recorded a gain of $250 and $421, respectively, (included above) in connection with an agreement to terminate a restaurant lease.

We evaluate our restaurant-level long-lived assets for impairment whenever events or circumstances indicate that the carrying value of assets may be impaired. We determine whether the assets are recoverable by comparing the undiscounted future cash flows that we expect to generate from their use and disposal to their carrying value. Restaurant-level assets that are not deemed to be recoverable are written down to their estimated fair value, which is determined by assessing the highest and best use of the assets and the amounts that would be received for such assets in an orderly transaction between market participants. The determination of fair value is dependent upon level 3 significant unobservable inputs.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

Impairment charges recognized in facility action charges, net were recorded against the following asset categories:

 

     Successor     Predecessor  
     Twelve
Weeks Ended
August 15,
2011
     Twenty-Eight
Weeks Ended
August 15,

2011
     Four
Weeks Ended
August 9,
2010
    Eight
Weeks Ended
July 12,
2010
     Twenty-Four
Weeks  Ended
July 12,
2010
 

Property and equipment:

               

Carl’s Jr.

   $ —         $ —         $ —        $ 46       $ 49   

Hardee’s

     192         250         —           98         254   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     192         250         —          144         303   

Property under capital leases:

               

Carl’s Jr.

     —           —           —          14         14   

Hardee’s

     —           —           —          —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     —           —           —          14         14   

Total:

               

Carl’s Jr.

     —           —           —          60         63   

Hardee’s

     192         250         —          98         254   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 192       $ 250       $ —        $ 158       $ 317   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

NOTE 13 — INCOME TAXES

Income tax (benefit) expense consisted of the following:

 

     Successor     Predecessor  
     Twelve
Weeks Ended
August 15,
2011
    Twenty-Eight
Weeks Ended
August 15,

2011
    Four
Weeks Ended
August 9,
2010
    Eight
Weeks Ended
July 12,
2010
     Twenty-Four
Weeks Ended
July 12,
2010
 

Federal and state income taxes

   $ (760   $ (2,672   $ (5,818   $ 9,837       $ 7,173   

Foreign income taxes

     446        937        81         204         599   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income tax (benefit) expense

   $ (314   $ (1,735   $ (5,737   $ 10,041       $ 7,772   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Our effective income tax rate for the Successor twelve and twenty-eight weeks ended August 15, 2011 differs from the federal statutory rate primarily as a result of non-deductible share-based compensation expense, state income taxes and federal income tax credits. Our effective income tax rate for the Successor four weeks ended August 9, 2010 differs from the federal statutory rate primarily as a result of non-deductible transaction-related costs and share-based compensation expense. Our effective income tax rate for the Predecessor eight and twenty-four weeks ended July 12, 2010 differs from the federal statutory rate primarily as a result of non-deductible transaction-related costs, state income taxes and certain expenses that are non-deductible for income tax purposes.

We had $2,776 of tax benefits as of January 31, 2011, that, if recognized, would affect our effective income tax rate. There were no material changes in the unrecognized tax benefits during the twenty-eight weeks ended August 15, 2011. We believe that it is reasonably possible that decreases in unrecognized tax benefits of up to $565 may be necessary within twelve months as a result of statutes closing on such items. In addition, we believe that it is reasonably possible that our unrecognized tax benefits may increase as a result of tax positions that may be taken during fiscal 2012 and 2013.

As of August 15, 2011, we maintained a valuation allowance of $10,667 for state capital loss carryforwards and certain state net operating loss and income tax credit carryforwards. Realization of the tax benefit of such deferred income tax assets may remain uncertain for the foreseeable future, since they are subject to various limitations and may only be used to offset income of certain entities or of a certain character.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

NOTE 14 — SEGMENT INFORMATION

We are principally engaged in developing, operating, franchising and licensing our Carl’s Jr. and Hardee’s quick-service restaurant concepts, each of which is considered an operating segment that is managed and evaluated separately. The accounting policies of the segments are the same as those described in our summary of significant accounting policies (see Note 1 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2011).

 

     Successor     Predecessor  
     Twelve
Weeks Ended
August 15,
2011
    Twenty-Eight
Weeks Ended
August 15,
2011
    Four
Weeks Ended
August 9,
2010
    Eight
Weeks Ended
July 12,
2010
    Twenty-Four
Weeks  Ended
July 12,
2010
 

Revenue:

            

Carl’s Jr.

   $ 152,314      $ 358,448      $ 49,575       $ 122,457      $ 383,234   

Hardee’s

     147,234        341,450        47,399        94,366        268,523   

Other

     181        414        55        111        362   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 299,729      $ 700,312      $ 97,029      $ 216,934      $ 652,119   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Segment income:

            

Carl’s Jr.

   $ 20,682      $ 48,103      $ 7,651      $ 14,156      $ 45,280   

Hardee’s

     26,165        60,007        9,034        18,516        47,693   

Other

     109        242        31        61        208   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     46,956        108,352        16,716        32,733        93,181   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: General and administrative expense

     (29,346     (70,306     (19,728     (20,388     (59,859

Less: Facility action charges, net

     70        (441     (137     273        (590

Less: Other operating expenses, net

     (194     (545     (19,661     (3,681     (10,249
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     17,486        37,060        (22,810     8,937        22,483   

Interest expense

     (17,816     (42,211     (5,980     (3,592     (8,617

Other (expense) income, net

     (2,215     (1,416     165        274        (13,609
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

   $ (2,545   $ (6,567   $ (28,625   $ 5,619      $ 257   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Depreciation and amortization:

            

Depreciation and amortization included in segment income:

            

Carl’s Jr.

   $ 8,655      $ 20,579      $ 2,793      $ 5,139      $ 15,586   

Hardee’s

     9,411        21,466        2,794        5,323        16,214   

Other

     —          —          —          —          —     

Other depreciation and amortization(1)

     839        1,798        335        597        1,903   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization

   $ 18,905      $ 43,843      $ 5,922      $ 11,059      $ 33,703   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Successor                    
     August 15,
2011
    January 31,
2011
                   

Total assets:

          

Carl’s Jr.

   $ 758,536      $ 779,306         

Hardee’s

     651,279        648,813         

Other

     61,793        68,047         
  

 

 

   

 

 

       

Total

   $ 1,471,608      $ 1,496,166         
  

 

 

   

 

 

       

 

(1) Represents depreciation and amortization excluded from the computation of segment income.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

NOTE 15 — RELATED PARTY TRANSACTIONS

Transactions with Apollo Management

Pursuant to our management services agreement with Apollo Management and in exchange for on-going investment banking, management, consulting and financial planning services that will be provided to us, we are obligated to pay Apollo Management an aggregate annual management fee of $2,500, which may be increased at Apollo Management’s sole discretion up to an amount equal to two percent of our Adjusted EBITDA, as defined in our Credit Facility. We recorded $575, $1,342 and $62 in management fees, which are included in general and administrative expense in our accompanying unaudited Condensed Consolidated Statements of Operations for the Successor twelve and twenty-eight weeks ended August 15, 2011 and Successor four weeks ended August 9, 2010, respectively.

In addition, pursuant to our management services agreement, Apollo Management received on the closing date cash consideration of $10,020 for services and reimbursable expenses in connection with the Merger. We recorded $5,010 of these costs to other operating expenses, net in our Condensed Consolidated Statement of Operations during the Successor four weeks ended August 9, 2010 and capitalized $5,010 to debt issuance costs.

Transactions with Successor Board of Directors

Certain members of our Successor Board of Directors are also our franchisees. These franchisees regularly pay royalties and purchase equipment and other products from us on the same terms and conditions as our other franchisees. During the Successor twenty-eight weeks ended August 15, 2011, total revenue generated from related party franchisees was $3,641, which is included in franchised and licensed restaurants and other revenue in our accompanying unaudited Condensed Consolidated Statement of Operations. As of August 15, 2011 and January 31, 2011, our related party trade receivables from franchisees were $73 and $216, respectively.

During the Successor four weeks ended August 9, 2010, total revenue generated from related party franchisees was $458, which is included in franchised and licensed restaurants and other revenue in our accompanying unaudited Condensed Consolidated Statement of Operations.

Transactions with Predecessor Board of Directors

Certain members of our Predecessor Board of Directors were also our franchisees. These franchisees regularly paid royalties and purchased food, equipment and other products from us on the same terms and conditions as our other franchisees. During the Predecessor twenty-four weeks ended July 12, 2010, total revenue generated from related party franchisees was $36,775, which is included in franchised and licensed restaurants and other revenue in our accompanying unaudited Condensed Consolidated Statement of Operations.

We leased one restaurant property from a Partnership, which was a related party of a member of our Predecessor Board of Directors. During the twenty-four weeks ended July 12, 2010, we made lease payments of $90 related to this lease.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

NOTE 16 — SUPPLEMENTAL CASH FLOW INFORMATION

 

     Successor     Predecessor  
     Twenty-Eight
Weeks Ended
August 15, 2011
    Four
Weeks  Ended
August 9, 2010
    Twenty-Four
Weeks  Ended
July 12, 2010
 

Cash paid for:

        

Interest, net of amounts capitalized

   $ 37,369      $ 15,792         $ 8,299   

Income taxes (received) paid, net

     (326     69        530   

Non-cash investing and financing activities:

        

Proceeds receivable from sale of Distribution Center assets

     —          —          1,992   

Capital lease obligations incurred to acquire assets

     2,456        26        4,179   

Accrued property and equipment purchases

     3,983        4,870        4,593   

During the twenty-eight weeks ended August 15, 2011, we recorded a non-cash transaction to acquire three Hardee’s restaurants from one of our franchisees for an aggregate purchase price of $1,500. The entire purchase price was applied as a reduction of outstanding promissory notes due to the Company. See Note 5 for additional discussion.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of financial statements with a narrative from the perspective of management on the financial condition, results of operations, liquidity and certain other factors that may affect future results. MD&A is presented in the following sections:

 

   

Overview

 

   

Operating Review

 

   

Liquidity and Capital Resources

 

   

Critical Accounting Policies

 

   

Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal 2012 Comparisons with Fiscal 2011

 

   

New Accounting Pronouncements Not Yet Adopted and Adoption of New Accounting Pronouncements

 

   

Presentation of Non-GAAP Measures

 

   

Certain Financial Information of CKE Holdings, Inc.

The MD&A should be read in conjunction with the unaudited Condensed Consolidated Financial Statements contained herein and the CKE Restaurants, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 2011.

Overview

CKE Restaurants, Inc. (“CKE”), through its wholly-owned subsidiaries is an international owner, operator and franchisor of quick-service restaurants (“QSR”), operating principally under the Carl’s Jr.®, Hardee’s®, Green Burrito® and Red Burrito® concepts. Carl’s Jr. restaurants are primarily located in the Western and Southwestern United States. Hardee’s restaurants are primarily located throughout the Southeastern and Midwestern United States. Green Burrito restaurants are primarily located in dual-branded Carl’s Jr. restaurants. The Red Burrito concept is located in dual-branded Hardee’s restaurants.

On July 12, 2010, CKE completed a merger with Columbia Lake Acquisition Corp. (“Merger Sub”), a Delaware corporation and wholly-owned subsidiary of CKE Holdings, Inc. (“Parent”), a Delaware corporation, providing for the merger of Merger Sub with and into CKE (the “Merger”), with CKE surviving the Merger as a wholly-owned subsidiary of Parent, pursuant to the Agreement and Plan of Merger, dated April 18, 2010 (“Merger Agreement”). Parent is indirectly controlled by investment entities managed by Apollo Management VII, L.P. (“Apollo Management”). As a result of the Merger, shares of CKE common stock ceased to be traded on the New York Stock Exchange after the close of market on July 12, 2010.

The aggregate consideration for all equity securities of the Company was $704,065, including $10,587 of post-combination share-based compensation expense, and the total debt assumed and refinanced in connection with the Merger was $270,487. The Merger was funded by (i) equity contributions from affiliates of Apollo Management of $436,645, (ii) equity contributions from our senior management of $13,355, (iii) proceeds of $588,510 from the issuance of $600,000 senior secured second lien notes (the “Notes”), and (iv) a senior secured revolving credit facility of $100,000 (the “Credit Facility”), which was undrawn at closing.

The aforementioned transactions, including the Merger and payment of costs related to these transactions, are collectively referred to as the “Transactions.”

For the purposes of presentation and disclosure, all references to “Predecessor” relate to CKE and its consolidated subsidiaries for periods prior to the Merger. All references to “Successor” relate to CKE and its consolidated subsidiaries merged with Merger Sub for periods subsequent to the Merger. References to “we”, “us”, “our” and the “Company” relate to the Predecessor for the periods prior to the Merger and to the Successor for periods subsequent to the Merger.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

We have prepared our discussion of the results of operations by comparing the Successor twelve weeks ended August 15, 2011 to the combined results of operations for the Successor four weeks ended August 9, 2010 and Predecessor eight weeks ended July 12, 2010. Similarly, we have prepared our discussion of the results of operations and cash flows by comparing the Successor twenty-eight weeks ended August 15, 2011 to the combined results of operations and cash flows for the Successor four weeks ended August 9, 2010 and Predecessor twenty-four weeks ended July 12, 2010. Although this combined presentation does not comply with accounting principles generally accepted in the United States (“GAAP”), we believe that it provides a meaningful method of comparison. The combined operating results have not been prepared on a pro forma basis under applicable regulations and may not reflect the actual results we would have achieved absent the Transactions and may not be predictive of future results of operations.

Operating Review

The following tables present the change in our restaurant portfolios, consolidated and by brand, for the trailing-13 periods ended August 15, 2011:

 

      Company-
operated
    Franchised     Licensed     Total  

Consolidated:

        

Open at August 9, 2010

     896        1,906        347        3,149   

New

     7        38        46        91   

Closed

     (13     (21     (4     (38

Divested

     —          (3     —          (3

Acquired

     3        —          —          3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Open at August 15, 2011

     893        1,920        389        3,202   
  

 

 

   

 

 

   

 

 

   

 

 

 
      Company-
operated
    Franchised     Licensed     Total  

Carl’s Jr.:

        

Open at August 9, 2010

     423        673        143        1,239   

New

     6        20        27        53   

Closed

     (4     (9     (1     (14

Divested

     —          —          —          —     

Acquired

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Open at August 15, 2011

     425        684        169        1,278   
  

 

 

   

 

 

   

 

 

   

 

 

 
      Company-
operated
    Franchised     Licensed     Total  

Hardee’s:

        

Open at August 9, 2010

     472        1,222        204        1,898   

New

     1        18        19        38   

Closed

     (8     (11     (3     (22

Divested

     —          (3     —          (3

Acquired

     3        —          —          3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Open at August 15, 2011

     468        1,226        220        1,914   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Consolidated Fiscal Quarter

 

     Successor     Successor/
Predecessor
    Successor     Predecessor  
     Twelve
Weeks Ended
August 15, 2011
    Twelve
Weeks Ended

August  9, 2010
    Four
Weeks Ended
August 9, 2010
    Eight
Weeks Ended
July 12, 2010
 

Revenue:

        

Company-operated restaurants

   $ 262,991      $ 255,477      $ 85,951      $ 169,526   

Franchised and licensed restaurants and other

     36,738        58,486        11,078        47,408   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     299,729        313,963        97,029        216,934   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Restaurant operating costs

     218,934        209,216        70,203        139,013   

Franchised and licensed restaurants and other

     18,440        40,620        5,262        35,358   

Advertising

     15,399        14,678        4,848        9,830   

General and administrative

     29,346        40,116        19,728        20,388   

Facility action charges, net

     (70     (136     137        (273

Other operating expenses, net

     194        23,342        19,661        3,681   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     282,243        327,836        119,839        207,997   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     17,486        (13,873     (22,810     8,937   

Interest expense

     (17,816     (9,572     (5,980     (3,592

Other (expense) income, net

     (2,215     439        165        274   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (2,545     (23,006     (28,625     5,619   

Income tax (benefit) expense

     (314     4,304        (5,737     10,041   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (2,231   $ (27,310   $ (22,888   $ (4,422
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA(1):

        

Company-operated restaurants revenue

   $ 262,991      $ 255,477      $ 85,951      $ 169,526   

Less: restaurant operating costs

     (218,934     (209,216     (70,203     (139,013

Add: depreciation and amortization expense

     16,387        15,068        5,032        10,036   

Less: advertising expense

     (15,399     (14,678     (4,848     (9,830
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA

   $ 45,045      $ 46,651      $ 15,932      $ 30,719   
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin

     17.1     18.3     18.5     18.1

Franchise restaurant adjusted EBITDA(1):

        

Franchised and licensed restaurants and other revenue

   $ 36,738      $ 58,486      $ 11,078      $ 47,408   

Less: franchised and licensed restaurants and other expense

     (18,440     (40,620     (5,262     (35,358

Add: depreciation and amortization expense

     1,679        981        555        426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Franchise restaurant adjusted EBITDA

   $ 19,977      $ 18,847      $ 6,371      $ 12,476   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise restaurant adjusted EBITDA under the heading “Presentation of Non-GAAP Measures” in this Item 2.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Consolidated Year to Date

 

     Successor     Successor/
Predecessor
    Successor     Predecessor  
     Twenty-Eight
Weeks Ended
August 15, 2011
    Twenty-Eight
Weeks Ended
August 9, 2010
    Four
Weeks Ended
August 9, 2010
    Twenty-Four
Weeks  Ended
July 12, 2010
 

Revenue:

        

Company-operated restaurants

   $ 614,595      $ 586,482      $ 85,951      $ 500,531   

Franchised and licensed restaurants and other

     85,717        162,666        11,078        151,588   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     700,312        749,148        97,029        652,119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

        

Restaurant operating costs

     512,182        484,374        70,203        414,171   

Franchised and licensed restaurants and other

     44,318        120,382        5,262        115,120   

Advertising

     35,460        34,495        4,848        29,647   

General and administrative

     70,306        79,587        19,728        59,859   

Facility action charges, net

     441        727        137        590   

Other operating expenses, net

     545        29,910        19,661        10,249   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     663,252        749,475        119,839        629,636   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     37,060        (327     (22,810     22,483   

Interest expense

     (42,211     (14,597     (5,980     (8,617

Other (expense) income, net

     (1,416     (13,444     165        (13,609
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (6,567     (28,368     (28,625     257   

Income tax (benefit) expense

     (1,735     2,035        (5,737     7,772   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,832   $ (30,403   $ (22,888   $ (7,515
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA(1):

        

Company-operated restaurants revenue

   $ 614,595      $ 586,482      $ 85,951      $ 500,531   

Less: restaurant operating costs

     (512,182     (484,374     (70,203     (414,171

Add: depreciation and amortization expense

     37,987        35,444        5,032        30,412   

Less: advertising expense

     (35,460     (34,495     (4,848     (29,647
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA

   $ 104,940      $ 103,057      $ 15,932      $ 87,125   
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin

     17.1     17.6     18.5     17.4

Franchise restaurant adjusted EBITDA(1):

        

Franchised and licensed restaurants and other revenue

   $ 85,717      $ 162,666      $ 11,078      $ 151,588   

Less: franchised and licensed restaurants and other expense

     (44,318     (120,382     (5,262     (115,120

Add: depreciation and amortization expense

     4,058        1,943        555        1,388   
  

 

 

   

 

 

   

 

 

   

 

 

 

Franchise restaurant adjusted EBITDA

   $ 45,457      $ 44,227      $ 6,371      $ 37,856   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise restaurant adjusted EBITDA under the heading “Presentation of Non-GAAP Measures” in this Item 2.

 

25


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Carl’s Jr. Fiscal Quarter

 

    Successor     Successor/
Predecessor
    Successor     Predecessor  
    Twelve
Weeks Ended
August 15, 2011
    Twelve
Weeks Ended

August  9, 2010
    Four
Weeks Ended
August 9, 2010
    Eight
Weeks Ended
July 12, 2010
 

Company-operated restaurants revenue

  $ 138,370      $ 134,245      $ 45,145      $ 89,100   

Franchised and licensed restaurants and other revenue

    13,944        37,787        4,430        33,357   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    152,314        172,032        49,575        122,457   
 

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant operating costs:

       

Food and packaging

    41,384        39,198        13,030        26,168   

Payroll and other employee benefits

    39,039        37,700        12,448        25,252   

Occupancy and other

    35,379        33,739        11,279        22,460   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

    115,802        110,637        36,757        73,880   
 

 

 

   

 

 

   

 

 

   

 

 

 

Franchised and licensed restaurants and other expense

    7,508        31,453        2,418        29,035   

Advertising expense

    8,322        8,135        2,749        5,386   

General and administrative expense

    14,309        18,768        9,205        9,563   

Facility action charges, net

    (169     177        40        137   

Gain on sale of Distribution Center assets

    —          (3,442     —          (3,442
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  $ 6,542      $ 6,304      $ (1,594   $ 7,898   
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated average unit volume (trailing-52 weeks)

  $ 1,396      $ 1,389       

Franchise-operated average unit volume (trailing-52 weeks)

  $ 1,096      $ 1,103       

Company-operated same-store sales increase (decrease)

    2.0     (7.4 )%     

Franchise-operated same-store sales decrease

    (0.5 )%      (5.0 )%     

Company-operated same-store transaction decrease

    (0.1 )%      (5.0 )%     

Company-operated average check (actual $)

  $ 7.08      $ 6.89       

Restaurant operating costs as a percentage of company-operated restaurants revenue:

       

Food and packaging

    29.9     29.2    

Payroll and other employee benefits

    28.2     28.1    

Occupancy and other

    25.6     25.1    

Total restaurant operating costs

    83.7     82.4    

Advertising expense as a percentage of company-operated restaurants revenue

    6.0     6.1    

Company-operated restaurant-level adjusted EBITDA(1):

       

Company-operated restaurants revenue

  $ 138,370      $ 134,245      $ 45,145      $ 89,100   

Less: restaurant operating costs

    (115,802     (110,637     (36,757     (73,880

Add: depreciation and amortization expense

    7,891        7,456        2,527        4,929   

Less: advertising expense

    (8,322     (8,135     (2,749     (5,386
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA

  $ 22,137      $ 22,929      $ 8,166      $ 14,763   
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin

    16.0     17.1     18.1     16.6

Franchise restaurant adjusted EBITDA(1):

       

Franchised and licensed restaurants and other revenue

  $ 13,944      $ 37,787      $ 4,430      $ 33,357   

Less: franchised and licensed restaurants and other expense

    (7,508     (31,453     (2,418     (29,035

Add: depreciation and amortization expense

    764        476        266        210   
 

 

 

   

 

 

   

 

 

   

 

 

 

Franchise restaurant adjusted EBITDA

  $ 7,200      $ 6,810      $ 2,278      $ 4,532   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise restaurant adjusted EBITDA under the heading “Presentation of Non-GAAP Measures” in this Item 2.

 

26


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Carl’s Jr. Year to Date

 

     Successor     Successor/
Predecessor
    Successor     Predecessor  
     Twenty-Eight
Weeks Ended
August 15, 2011
    Twenty-Eight
Weeks Ended
August 9, 2010
    Four
Weeks Ended
August 9, 2010
    Twenty-Four
Weeks  Ended
July 12, 2010
 

Company-operated restaurants revenue

   $ 326,658      $ 316,524      $ 45,145      $ 271,379   

Franchised and licensed restaurants and other revenue

     31,790        116,285        4,430        111,855   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     358,448        432,809        49,575        383,234   
  

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant operating costs:

        

Food and packaging

     98,940        92,785        13,030        79,755   

Payroll and other employee benefits

     92,718        89,276        12,448        76,828   

Occupancy and other

     81,697        77,995        11,279        66,716   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

     273,355        260,056        36,757        223,299   
  

 

 

   

 

 

   

 

 

   

 

 

 

Franchised and licensed restaurants and other expense

     17,493        100,453        2,418        98,035   

Advertising expense

     19,497        19,369        2,749        16,620   

General and administrative expense

     33,608        37,728        9,205        28,523   

Facility action charges, net

     190        208        40        168   

Gain on sale of Distribution Center assets

     —          (3,442     —          (3,442
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 14,305      $ 18,437      $ (1,594   $ 20,031   
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated same-store sales increase (decrease)

     2.0     (6.6 )%     

Franchise-operated same-store sales decrease

     0.0     (4.2 )%     

Company-operated same-store transaction decrease

     (0.1 )%      (4.3 )%     

Company-operated average check (actual $)

   $ 7.02      $ 6.83       

Restaurant operating costs as a percentage of company-operated restaurants revenue:

        

Food and packaging

     30.3     29.3    

Payroll and other employee benefits

     28.4     28.2    

Occupancy and other

     25.0     24.6    

Total restaurant operating costs

     83.7     82.2    

Advertising expense as a percentage of company-operated restaurants revenue

     6.0     6.1    

Company-operated restaurant-level adjusted EBITDA(1):

        

Company-operated restaurants revenue

   $ 326,658      $ 316,524      $ 45,145      $ 271,379   

Less: restaurant operating costs

     (273,355     (260,056     (36,757     (223,299

Add: depreciation and amortization expense

     18,727        17,361        2,527        14,834   

Less: advertising expense

     (19,497     (19,369     (2,749     (16,620
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA

   $ 52,533      $ 54,460      $ 8,166      $ 46,294   
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin

     16.1     17.2     18.1     17.1

Franchise restaurant adjusted EBITDA(1):

        

Franchised and licensed restaurants and other revenue

   $ 31,790      $ 116,285      $ 4,430      $ 111,855   

Less: franchised and licensed restaurants and other expense

     (17,493     (100,453     (2,418     (98,035

Add: depreciation and amortization expense

     1,852        1,018        266        752   
  

 

 

   

 

 

   

 

 

   

 

 

 

Franchise restaurant adjusted EBITDA

   $ 16,149      $ 16,850      $ 2,278      $ 14,572   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise restaurant adjusted EBITDA under the heading “Presentation of Non-GAAP Measures” in this Item 2.

 

27


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Hardee’s Fiscal Quarter

 

     Successor     Successor/
Predecessor
    Successor     Predecessor  
     Twelve
Weeks Ended
August 15, 2011
    Twelve
Weeks Ended

August  9, 2010
    Four
Weeks Ended
August 9, 2010
    Eight
Weeks Ended
July 12, 2010
 

Company-operated restaurants revenue

   $ 124,575      $ 121,182      $ 40,790      $ 80,392   

Franchised and licensed restaurants and other revenue

     22,659        20,583        6,609        13,974   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     147,234        141,765        47,399        94,366   
  

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant operating costs:

        

Food and packaging

     38,828        36,583        12,272        24,311   

Payroll and other employee benefits

     36,241        35,778        11,915        23,863   

Occupancy and other

     27,991        26,144        9,235        16,909   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

     103,060        98,505        33,422        65,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

Franchised and licensed restaurants and other expense

     10,932        9,167        2,844        6,323   

Advertising expense

     7,077        6,543        2,099        4,444   

General and administrative expense

     15,037        21,325        10,523        10,802   

Facility action charges, net

     96        (313     97        (410
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

   $ 11,032      $ 6,538      $ (1,586   $ 8,124   
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated average unit volume (trailing-52 weeks)

   $ 1,096      $ 1,019       

Franchise-operated average unit volume (trailing-52 weeks)

   $ 1,038      $ 983       

Company-operated same-store sales increase

     2.5     6.8    

Franchise-operated same-store sales increase

     0.5     2.3    

Company-operated same-store transaction (decrease) increase

     (0.8 )%      3.3    

Company-operated average check (actual $)

   $ 5.44      $ 5.28       

Restaurant operating costs as a percentage of company-operated restaurants revenue:

        

Food and packaging

     31.2     30.2    

Payroll and other employee benefits

     29.1     29.5    

Occupancy and other

     22.5     21.6    

Total restaurant operating costs

     82.7     81.3    

Advertising expense as a percentage of company-operated restaurants revenue

     5.7     5.4    

Company-operated restaurant-level adjusted EBITDA(1):

        

Company-operated restaurants revenue

   $ 124,575      $ 121,182      $ 40,790      $ 80,392   

Less: restaurant operating costs

     (103,060     (98,505     (33,422     (65,083

Add: depreciation and amortization expense

     8,496        7,612        2,505        5,107   

Less: advertising expense

     (7,077     (6,543     (2,099     (4,444
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA

   $ 22,934      $ 23,746      $ 7,774      $ 15,972   
  

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin

     18.4     19.6     19.1     19.9

Franchise restaurant adjusted EBITDA(1):

        

Franchised and licensed restaurants and other revenue

   $ 22,659      $ 20,583      $ 6,609      $ 13,974   

Less: franchised and licensed restaurants and other expense

     (10,932     (9,167     (2,844     (6,323

Add: depreciation and amortization expense

     915        505        289        216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Franchise restaurant adjusted EBITDA

   $ 12,642      $ 11,921      $ 4,054      $ 7,867   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise restaurant adjusted EBITDA under the heading “Presentation of Non-GAAP Measures” in this Item 2.

 

28


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Hardee’s Year to Date

 

    Successor     Successor/
Predecessor
    Successor     Predecessor  
    Twenty-Eight
Weeks Ended
August 15, 2011
    Twenty-Eight
Weeks Ended
August 9, 2010
    Four
Weeks Ended
August 9, 2010
    Twenty-Four
Weeks  Ended
July 12, 2010
 

Company-operated restaurants revenue

  $ 287,825      $ 269,833      $ 40,790      $ 229,043   

Franchised and licensed restaurants and other revenue

    53,625        46,089        6,609        39,480   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    341,450        315,922        47,399        268,523   
 

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant operating costs:

       

Food and packaging

    90,145        81,114        12,272        68,842   

Payroll and other employee benefits

    84,182        82,413        11,915        70,498   

Occupancy and other

    64,328        60,613        9,235        51,378   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

    238,655        224,140        33,422        190,718   
 

 

 

   

 

 

   

 

 

   

 

 

 

Franchised and licensed restaurants and other expense

    26,825        19,929        2,844        17,085   

Advertising expense

    15,963        15,126        2,099        13,027   

General and administrative expense

    36,699        41,789        10,523        31,266   

Facility action charges, net

    247        466        97        369   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  $ 23,061      $ 14,472      $ (1,586   $ 16,058   
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated same-store sales increase

    6.4     2.2    

Franchise-operated same-store sales increase

    3.7     0.9    

Company-operated same-store transaction increase

    1.3     1.0    

Company-operated average check (actual $)

  $ 5.36      $ 5.12       

Restaurant operating costs as a percentage of company-operated restaurants revenue:

       

Food and packaging

    31.3     30.1    

Payroll and other employee benefits

    29.2     30.5    

Occupancy and other

    22.3     22.5    

Total restaurant operating costs

    82.9     83.1    

Advertising expense as a percentage of company-operated restaurants revenue

    5.5     5.6    

Company-operated restaurant-level adjusted EBITDA(1):

       

Company-operated restaurants revenue

  $ 287,825      $ 269,833      $ 40,790      $ 229,043   

Less: restaurant operating costs

    (238,655     (224,140     (33,422     (190,718

Add: depreciation and amortization expense

    19,260        18,083        2,505        15,578   

Less: advertising expense

    (15,963     (15,126     (2,099     (13,027
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA

  $ 52,467      $ 48,650      $ 7,774      $ 40,876   
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin

    18.2     18.0     19.1     17.8

Franchise restaurant adjusted EBITDA(1):

       

Franchised and licensed restaurants and other revenue

  $ 53,625      $ 46,089      $ 6,609      $ 39,480   

Less: franchised and licensed restaurants and other expense

    (26,825     (19,929     (2,844     (17,085

Add: depreciation and amortization expense

    2,206        925        289        636   
 

 

 

   

 

 

   

 

 

   

 

 

 

Franchise restaurant adjusted EBITDA

  $ 29,006      $ 27,085      $ 4,054      $ 23,031   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise restaurant adjusted EBITDA under the heading “Presentation of Non-GAAP Measures” in this Item 2.

 

29


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Carl’s Jr.

Company-Operated Restaurants Revenue

Revenue from company-operated Carl’s Jr. restaurants increased $4,125, or 3.1%, to $138,370 during the twelve weeks ended August 15, 2011, as compared to the twelve weeks ended August 9, 2010. This increase was primarily due to the 2.0% increase in company-operated same-store sales for the quarter and revenues generated from new company-operated restaurants opened since the end of the second quarter of fiscal 2011, partially offset by a decrease in revenues from restaurants closed since the end of the second quarter of fiscal 2011.

Revenue from company-operated Carl’s Jr. restaurants increased $10,134, or 3.2%, to $326,658 during the twenty-eight weeks ended August 15, 2011, as compared to the prior year period. This increase was primarily due to the 2.0% increase in company-operated same-store sales from the comparable prior year period and revenues generated from new company-operated restaurants opened since the end of the second quarter of fiscal 2011, partially offset by a decrease in revenues from restaurants closed since the end of the second quarter of fiscal 2011.

Company-Operated Restaurant-Level Adjusted EBITDA Margin

The changes in the company-operated restaurant-level adjusted EBITDA margin are summarized as follows:

 

     Twelve
Weeks
    Twenty-Eight
Weeks
 

Company-operated restaurant-level adjusted EBITDA margin for the period ended August 9, 2010

     17.1     17.2

Increase in food and packaging costs

     (0.7     (1.0

Payroll and other employee benefits

    

Increase in workers’ compensation expense

     (0.1     (0.4

Decrease in labor costs, excluding workers’ compensation

     —          0.2   

Occupancy and other (excluding depreciation and amortization):

    

Increase in property tax expense

     (0.2     (0.1

Increase in banking and ATM costs

     (0.2     (0.2

Increase in repairs and maintenance expense

     —          0.2   

Other, net

     —          0.1   

Advertising expense

     0.1        0.1   
  

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin for the period ended August 15, 2011

     16.0     16.1
  

 

 

   

 

 

 

Food and Packaging Costs

Food and packaging costs increased as a percentage of company-operated restaurants revenue during the twelve and twenty-eight weeks ended August 15, 2011, as compared to the prior year periods, due primarily to increased commodity costs of beef, cheese, oil and pork products.

Labor Costs

Workers’ compensation expense increased as a percentage of company-operated restaurants revenue during the twenty-eight weeks ended August 15, 2011, as compared to the prior year period, due primarily to unfavorable claims reserve adjustments as a result of actuarial analyses of outstanding claims reserves in the current year period and favorable claims reserve adjustments in the comparable prior year period.

 

30


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Franchised and Licensed Restaurants

 

Carl’s Jr. Fiscal Quarter    Successor      Successor/
Predecessor
     Successor      Predecessor  
     Twelve
Weeks Ended
August 15, 2011
     Twelve
Weeks Ended
August 9, 2010
     Four
Weeks Ended
August 9, 2010
     Eight
Weeks Ended
July 12, 2010
 

Franchised and licensed restaurants and other revenue:

           

Royalties

   $ 8,123       $ 7,495       $ 2,493       $ 5,002   

Distribution centers – food, packaging and supplies

     —           25,018         —           25,018   

Rent and other occupancy

     5,267         4,988         1,844         3,144   

Franchise fees

     554         286         93         193   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants and other revenue

   $ 13,944       $ 37,787       $ 4,430       $ 33,357   
  

 

 

    

 

 

    

 

 

    

 

 

 

Franchised and licensed restaurants and other expense:

           

Administrative expense (including provision for bad debts)

   $ 2,630       $ 1,953       $ 786       $ 1,167   

Distribution centers – food, packaging and supplies

     —           25,051         —           25,051   

Rent and other occupancy

     4,878         4,449         1,632         2,817   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants and other expense

   $ 7,508       $ 31,453       $ 2,418       $ 29,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants and other revenue decreased $23,843, or 63.1%, to $13,944 during the twelve weeks ended August 15, 2011, as compared to the prior year period. Distribution center sales of food, packaging and supplies to franchisees decreased by $25,018, due to the outsourcing of our Carl’s Jr. distribution center operations on July 2, 2010. Royalty revenues increased $628, or 8.4%, to $8,123, due primarily to the net increase of 37 franchised and licensed restaurants since the end of the second quarter of fiscal 2011, partially offset by a 0.5% decrease in franchise-operated same-store sales. Rent and other occupancy revenues increased $279, or 5.6%, mainly due to impact of the amortization of favorable and unfavorable leases, which were recorded in connection with the Merger.

Franchised and licensed restaurants and other expense decreased $23,945, or 76.1%, to $7,508 during the twelve weeks ended August 15, 2011, from the comparable prior year period. This decrease was due to a $25,051 decrease in distribution center costs resulting from the outsourcing of our Carl’s Jr. distribution center operations. This decrease was partially offset by an increase of $677 in administrative expense from the comparable prior year period, primarily caused by an increase of $380 in amortization expense related to the franchise agreement intangible asset recorded in connection with the Merger and increased franchise operations and administration costs related to our international growth strategy. The increase of rent and other occupancy expense of $429, or 9.6%, was primarily due to the impact of the amortization of favorable and unfavorable leases, which were recorded in connection with the Merger.

 

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(Dollars in thousands)

 

Carl’s Jr. Year to Date    Successor      Successor/
Predecessor
     Successor      Predecessor  
     Twenty-Eight
Weeks Ended
August 15, 2011
     Twenty-Eight
Weeks Ended
August 9, 2010
     Four
Weeks Ended
August 9, 2010
     Twenty-Four
Weeks  Ended
July 12, 2010
 

Franchised and licensed restaurants and other revenue:

           

Royalties

   $ 18,795       $ 17,561       $ 2,493       $ 15,068   

Distribution centers – food, packaging and supplies

     —           86,891         —           86,891   

Rent and other occupancy

     12,013         11,265         1,844         9,421   

Franchise fees

     982         568         93         475   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants and other revenue

   $ 31,790       $ 116,285       $ 4,430       $ 111,855   
  

 

 

    

 

 

    

 

 

    

 

 

 

Franchised and licensed restaurants and other expense:

           

Administrative expense (including provision for bad debts)

   $ 6,066       $ 3,978       $ 786       $ 3,192   

Distribution centers – food, packaging and supplies

     —           86,170         —           86,170   

Rent and other occupancy

     11,427         10,305         1,632         8,673   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants and other expense

   $ 17,493       $ 100,453       $ 2,418       $ 98,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants revenue decreased $84,495, or 72.7%, to $31,790 during the twenty-eight weeks ended August 15, 2011, as compared to the twenty-eight weeks ended August 9, 2010. Distribution center sales of food, packaging and supplies to franchisees decreased by $86,891, due to the outsourcing of our Carl’s Jr. distribution center operations on July 2, 2010. Royalty revenues increased by $1,234, or 7.0%, due to a net increase of 37 franchised and licensed restaurants since the end of the second quarter of fiscal 2011. Rent and other occupancy revenues increased $748, or 6.6%, mainly due to impact of the amortization of favorable and unfavorable leases, which were recorded in connection with the Merger.

Franchised and licensed operating and other expenses decreased $82,960, or 82.6%, to $17,493 during the twenty-eight weeks ended August 15, 2011, as compared to the prior year period. This decrease is mainly due to a $86,170 decrease in distribution center costs resulting from the outsourcing of our Carl’s Jr. distribution center operations. This decrease was partially offset by an increase of $2,088, or 52.5%, increase in administrative expense from the comparable prior year period, primarily caused by an increase of $1,141 in amortization expense related to the franchise agreement intangible asset recorded in connection with the Merger and increased franchise operations and administration costs related to our international growth strategy. The increase of rent and other occupancy expense of $1,122, or 10.9%, was primarily due to the impact of the amortization of favorable and unfavorable leases, which were recorded in connection with the Merger.

Hardee’s

Company-Operated Restaurants Revenue

Revenue from company-operated Hardee’s restaurants increased $3,393, or 2.8%, to $124,575 during the twelve weeks ended August 15, 2011, over the comparable prior year period, primarily due to the 2.5% increase in company-operated same-store sales.

During the twenty-eight weeks ended August 15, 2011, revenue from company-operated restaurants increased $17,992, or 6.7%, to $287,825 as compared to the twenty-eight weeks ended August 9, 2010. The increase is primarily due to the 6.4% increase in company-operated same-store sales.

 

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(Dollars in thousands)

 

Company-Operated Restaurant-Level Adjusted EBITDA Margin

The changes in the company-operated restaurant-level adjusted EBITDA margin are summarized as follows:

 

     Twelve Weeks     Twenty-Eight Weeks  

Company-operated restaurant-level adjusted EBITDA margin for the period ended August 9, 2010

     19.6     18.0

Increase in food and packaging costs

     (1.0     (1.2

Payroll and other employee benefits:

    

Decrease in labor costs, excluding workers’ compensation

     0.6        1.2   

(Increase) decrease in workers’ compensation expense

     (0.2     0.1   

Occupancy and other (excluding depreciation and amortization):

    

Increase in repairs and maintenance expense

     (0.3     (0.1

Other, net

     —          0.1   

Advertising expense

     (0.3     0.1   
  

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin for the period ended August 15, 2011

     18.4     18.2
  

 

 

   

 

 

 

Food and Packaging Costs

Food and packaging costs increased as a percentage of company-operated restaurants revenue during the twelve weeks ended August 15, 2011, as compared to the prior year period, mainly due to an increase in commodity costs of beef, oil, flour and dairy products. Food and packaging costs increased as a percentage of company-operated restaurants revenue during the twenty-eight weeks ended August 15, 2011, as compared to the prior year period, mainly due to an increase in commodity costs of beef, oil, pork and flour products.

Labor Costs

Labor costs, excluding workers’ compensation expense, decreased as a percentage of company-operated restaurants revenue during the twelve and twenty-eight weeks ended August 15, 2011, as compared to the prior year periods, due primarily to sales leverage and the relatively fixed nature of restaurant management costs.

Occupancy and Other Costs

Repairs and maintenance expense increased as a percentage of company-operated restaurants revenue during the twelve weeks ended August 15, 2011, from the comparable prior year period, due primarily to increased spending on repairs of kitchen equipment and buildings in the current year period.

Depreciation and amortization expense increased as a percentage of company-operated restaurants revenue during the twelve weeks ended August 15, 2011, from the comparable prior year period, due primarily to fixed asset additions and impacts of acquisition accounting related to the Merger, partially offset by sales leverage.

 

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(Dollars in thousands)

 

Franchised and Licensed Restaurants

 

Hardee’s Fiscal Quarter    Successor      Successor/
Predecessor
     Successor      Predecessor  
     Twelve
Weeks Ended
August 15, 2011
     Twelve
Weeks Ended
August 9, 2010
     Four
Weeks Ended
August 9, 2010
     Eight
Weeks Ended
July 12, 2010
 

Franchised and licensed restaurants and other revenue:

           

Royalties

   $ 13,841       $ 12,892       $ 4,369       $ 8,523   

Distribution center – equipment

     5,639         4,847         1,140         3,707   

Rent and other occupancy

     2,987         2,684         1,000         1,684   

Franchise fees

     192         160         100         60   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants and other revenue

   $ 22,659       $ 20,583       $ 6,609       $ 13,974   
  

 

 

    

 

 

    

 

 

    

 

 

 

Franchised and licensed restaurants and other expense:

           

Administrative expense (including provision for bad debts)

   $ 2,822       $ 2,222       $ 850       $ 1,372   

Distribution center – equipment

     5,580         4,841         1,138         3,703   

Rent and other occupancy

     2,530         2,104         856         1,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants and other expense

   $ 10,932       $ 9,167       $ 2,844       $ 6,323   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants and other revenue increased $2,076 or 10.1%, to $22,659 during the twelve weeks ended August 15, 2011, as compared to the prior year period. Royalty revenues increased $949, or 7.4%, to $13,841, from the comparable prior year period, due primarily to a net increase of 20 franchised and licensed restaurants since the end of the second quarter of fiscal 2011 and an increase in our franchise-operated same-store sales of 0.5%. Distribution center sales of equipment increased by $792, from the comparable prior year period, primarily due to an increase in equipment sales to franchisees. Rent and other occupancy revenues increased $303, or 11.3%, to $2,987, from the comparable prior year period, mainly due to the impact of the amortization of favorable and unfavorable leases, which were recorded in connection with the Merger.

Franchised and licensed restaurants and other expense increased $1,765, or 19.3%, to $10,932, during the twelve weeks ended August 15, 2011, as compared to the prior year period. The increase in distribution center costs of $739 resulted directly from the increase in distribution center sales of equipment to franchisees. The increase in administrative expense of $600 was primarily due to an increase of $293 in amortization expense related to the franchise agreement intangible asset recorded in connection with the Merger and increased franchise operations and administration costs to support our long-term growth strategy. The increase in rent and other occupancy expense of $426, or 20.2%, was due primarily to the impact of the amortization of favorable and unfavorable leases, which were recorded in connection with the Merger.

 

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(Dollars in thousands)

 

Hardee’s Year to Date    Successor      Successor/
Predecessor
     Successor      Predecessor  
     Twenty-Eight
Weeks Ended
August 15, 2011
     Twenty-Eight
Weeks Ended
August 9, 2010
     Four
Weeks Ended
August 9, 2010
     Twenty-Four
Weeks  Ended
July 12, 2010
 

Franchised and licensed restaurants and other revenue:

           

Royalties

   $ 31,812       $ 29,071       $ 4,369       $ 24,702   

Distribution centers – equipment

     14,210         10,360         1,140         9,220   

Rent and other occupancy

     7,010         6,187         1,000         5,187   

Franchise fees

     593         471         100         371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants and other revenue

   $ 53,625       $ 46,089       $ 6,609       $ 39,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

Franchised and licensed restaurants and other expense:

           

Administrative expense (including provision for bad debts)

   $ 6,786       $ 4,877       $ 850       $ 4,027   

Distribution centers – equipment

     14,112         10,344         1,138         9,206   

Rent and other occupancy

     5,927         4,708         856         3,852   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants and other expense

   $ 26,825       $ 19,929       $ 2,844       $ 17,085   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total franchised and licensed restaurants revenue increased $7,536, or 16.4%, to $53,625 during the twenty-eight weeks ended August 15, 2011, as compared to the prior year period. This increase is mainly due to the increase in distribution center revenues of $3,850 resulting from an increase in equipment sales to franchisees. Royalty revenues increased by $2,741, or 9.4%, due to a net increase of 20 franchised and licensed restaurants since the end of the second quarter of fiscal 2011 and an increase in our franchise-operated same-store sales of 3.7%. Rent and other occupancy revenue increased $823, or 13.3%, primarily due to the impact of the amortization of favorable and unfavorable leases, which were recorded in connection with the Merger.

Franchised and licensed operating and other expenses increased $6,896, or 34.6%, to $26,825, during the twenty-eight weeks ended August 15, 2011, as compared to the prior year period. This increase in costs is mainly due to an increase in distribution center expenses of $3,768 resulting directly from the increase in distribution center sales to franchisees. The increase in administrative expense of $1,909 was primarily due to an increase of $878 in amortization expense related to the franchise agreement intangible asset recorded in connection with the Merger and increased franchise operations and administration costs to support our long-term growth strategy. Additionally, rent and other occupancy expense increased $1,219, or 25.9%, due primarily to the impact of the amortization of favorable and unfavorable leases, which were recorded in connection with the Merger.

Consolidated Expenses

General and Administrative Expense

General and administrative expense decreased $10,770, or 26.8%, to $29,346, for the twelve weeks ended August 15, 2011, as compared to the twelve weeks ended August 9, 2010. This was mainly due to a $12,276 decrease in share-based compensation expense resulting primarily from the expense recorded in the prior year period for the acceleration of vesting of stock options and restricted stock awards in connection with the Merger. This decrease was partially offset by an increase of $755 in bonus expense, which is based on our performance relative to executive management and operations bonus criteria, and an increase of $513 in management service fees paid to Apollo Management.

 

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(Dollars in thousands)

 

General and administrative expenses decreased $9,281, or 11.7%, to $70,306, for the twenty-eight weeks ended August 15, 2011, as compared to the twenty-eight weeks ended August 9, 2010. This was mainly due to a $12,947 decrease in share-based compensation expense resulting primarily from the expense recorded in the prior year period for the acceleration of vesting of stock options and restricted stock awards in connection with the Merger. This decrease was partially offset by an increase of $1,937 in bonus expense, which is based on our performance relative to executive management and operations bonus criteria, and an increase of $1,280 in management service fees paid to Apollo Management.

Other Operating Expenses, Net

During the twelve weeks ended August 15, 2011, other operating expenses, net decreased $23,148 from the comparable prior year period to $194. This decrease is primarily due to a decrease in transaction-related costs for accounting, investment banking, legal and other costs associated with the Transactions, which decreased from $26,784 for the twelve weeks ended August 9, 2010 to $194 for the twelve weeks ended August 15, 2011. Additionally, during the twelve weeks ended August 9, 2010, we recorded a gain of $3,442 on the sale of our Distribution Center assets.

During the twenty-eight weeks ended August 15, 2011, other operating expenses, net decreased $29,365 from the comparable prior year period to $545. This decrease is primarily due to a decrease in transaction-related costs for accounting, investment banking, legal and other costs associated with the Transactions, which decreased from $33,352 for the twenty-eight weeks ended August 9, 2010 to $545 for the twenty-eight weeks ended August 15, 2011. Additionally, during the twenty-eight weeks ended August 9, 2010, we recorded a gain of $3,442 on the sale of our Distribution Center assets.

Interest Expense

During the twelve weeks ended August 15, 2011, interest expense increased $8,244, to $17,816, as compared to the twelve weeks ended August 9, 2010. This increase was primarily caused by the interest incurred on our Notes. Interest expense during the twelve weeks ended August 9, 2010 included a charge of $1,743 to adjust the carrying value of our Predecessor interest rate swap agreements to fair value.

During the twenty-eight weeks ended August 15, 2011, interest expense increased $27,614 to $42,211, as compared to the twenty-eight weeks ended August 9, 2010. This increase was primarily caused by the interest incurred on our Notes. Interest expense during the twenty-eight weeks ended August 9, 2010 included a charge of $3,113 to adjust the carrying value of our Predecessor interest rate swap agreements to fair value.

See Note 7 of Notes to Condensed Consolidated Financial Statements included herein for additional detail of the components of interest expense.

Other (Expense) Income, Net

During the twelve weeks ended August 15, 2011, we recorded $2,215 of other expense, net as compared to other income, net of $439 during the twelve weeks ended August 9, 2010. This change was primarily due to a loss of $2,641 recognized on the early extinguishment of $40,000 of the principal amount of our Notes during the twelve weeks ended August 15, 2011.

During the twenty-eight weeks ended August 15, 2011, we recorded $1,416 of other expense, net as compared to other expense, net of $13,444 during the twenty-eight weeks ended August 9, 2010. During the twenty-eight weeks ended August 9, 2010, we recorded a termination fee to terminate a prior merger agreement with an affiliate of Thomas H. Lee Partners, L.P. of $9,283 and $5,000 in reimbursable costs. During the twenty-eight weeks ended August 15, 2011, we recognized a loss of $2,641 on the early extinguishment of $40,000 of the principal amount of our Notes.

 

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(Dollars in thousands)

 

Income Tax (Benefit) Expense

Our effective income tax rate for the twelve and twenty-eight weeks ended August 15, 2011 differs from the federal statutory rate primarily as a result of non-deductible share-based compensation expense, state income taxes and federal income tax credits. Our effective income tax rate for the twelve and twenty-eight weeks ended August 9, 2010 differs from the federal statutory rate primarily as a result of non-deductible transaction-related costs and share-based compensation expense.

Liquidity and Capital Resources

Overview

Our cash requirements consist principally of our food and packaging purchases, labor, and occupancy costs; capital expenditures for restaurant remodels, new restaurant construction and replacement of equipment; debt service requirements; advertising expenditures; and general and administrative expenses. In addition, we may elect to redeem up to $20,000 of the principal amount of our Notes at a redemption price of 103% of the principal amount of the Notes on or before July 14, 2012 and an additional $60,000 of the principal amount of our Notes during the twelve month period commencing July 15, 2012. We expect that our cash on hand and future cash flows from operations will provide sufficient liquidity to allow us to meet our operating and capital requirements and service our existing debt. As of August 15, 2011, we have $38,258 in cash and cash equivalents and $68,087 in available commitments under our Credit Facility to help meet our operating and capital requirements.

We believe our most significant cash uses during the next 12 months will be for capital expenditures, debt service requirements and the partial redemption of our Notes, if any. Based on our current capital spending projections, we expect capital expenditures to be between $60,000 and $65,000 for fiscal 2012. Assuming the aggregate outstanding principal amount of our Notes remains unchanged, we will be required to make semi-annual interest payments on our Notes of approximately $31,850. As discussed below, our Credit Facility matures on July 12, 2015, and our Notes mature on July 15, 2018.

Credit Facility

Our Credit Facility provides for senior secured revolving facility loans, swingline loans and letters of credit, in an aggregate amount of up to $100,000. The Credit Facility bears interest at a rate equal to, at our option, either: (1) the higher of Morgan Stanley’s “prime rate” plus 2.75% or the federal funds rate, as defined in our Credit Facility, plus 3.25%, or (2) the LIBOR plus 3.75%. The Credit Facility matures on July 12, 2015, at which time all outstanding revolving facility loans and accrued and unpaid interest must be repaid. As of August 15, 2011, we had no outstanding loan borrowings, $31,913 of outstanding letters of credit, and remaining availability of $68,087 under our Credit Facility.

Pursuant to the terms of our Credit Facility, during each fiscal year our capital expenditures cannot exceed the sum of (1) the greater of (i) $100,000 and (ii) 8.5% of our consolidated gross total tangible assets as of the end of such fiscal year plus, without duplication, (2) 10% of certain assets acquired in permitted acquisitions during such fiscal year (the “Acquired Assets Amount”) and, (3) 5% of the Acquired Assets Amount for the preceding fiscal year, calculated on a cumulative basis. In addition, the annual base amount of permitted capital expenditures may be increased by an amount equal to any cumulative credit (as defined in the Credit Facility) which the Company elects to apply for this purpose and may be carried-back and/or carried-forward subject to the terms set forth in the Credit Facility.

The Credit Facility contains covenants that restrict our ability and the ability of our subsidiaries to: incur additional indebtedness; pay dividends on our capital stock or redeem, repurchase or retire our capital stock or indebtedness; make investments, loans, advances and acquisitions; create restrictions on the payment of dividends or other amounts to us from our subsidiaries; sell assets, including capital stock of our subsidiaries; consolidate or merge; create liens; enter into sale and leaseback transactions; amend, modify or permit the amendment or modification of any senior secured second lien note documents; engage in certain transactions with our affiliates; issue capital stock; create subsidiaries; and change the business conducted by us or our subsidiaries.

 

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(Dollars in thousands)

 

The terms of our Credit Facility also include financial performance covenants, which include a maximum secured leverage ratio and a specified minimum interest coverage ratio. Our Credit Facility defines our secured leverage ratio as the ratio of our: (1) Total Secured Debt plus eight times our Net Rent less Unrestricted Cash and Permitted Investments; over (2) Adjusted EBITDAR, each as defined in our Credit Facility. In determining our Total Secured Debt for the purpose of our financial covenants, we include our Notes and other long-term secured debt, capital lease obligations and the portion of the proceeds from financing method sale-leaseback transactions equal to the net book value of the associated properties. As of August 15, 2011, the net book value of the assets associated with financing method sale-leaseback transactions was $11,986. See Note 8 of Notes to Condensed Consolidated Financial Statements included herein for further discussion of these sale-leaseback transactions. Our Credit Facility defines our interest coverage ratio as the ratio of Adjusted EBITDA to Cash Interest Expense, each as defined in our Credit Facility. As of August 15, 2011, our financial performance covenants did not limit our ability to draw on the remaining availability of $68,087 under our Credit Facility.

We were in compliance with the covenants of our Credit Facility as of August 15, 2011.

The terms of our Credit Facility are not impacted by any changes in our credit rating. We believe the key company-specific factors affecting our ability to maintain our existing debt financing relationships and to access such capital in the future are our present and expected levels of profitability, cash flows from operations, capital expenditures, asset collateral bases and the level of our Adjusted EBITDA relative to our debt obligations. In addition, as noted above, our Credit Facility includes significant restrictions on future financings including, among others, limits on the amount of indebtedness we may incur or which may be secured by any of our assets.

Senior Secured Second Lien Notes

On July 15, 2011, we redeemed $40,000 of the principal amount of our Notes at a redemption price of 103% of the principal amount of the Notes pursuant to the terms of the indenture governing the Notes. Subsequent to the redemption, and as of August 15, 2011, the remaining aggregate principal amount of our Notes was $560,000. The Notes bear interest at a rate of 11.375% per annum, payable semi-annually in arrears on January 15 and July 15. As of August 15, 2011, the carrying value of the notes was $550,231, which is presented net of the remaining unamortized original issue discount of $9,769. The Notes mature on July 15, 2018.

The indenture governing the Notes contains restrictive covenants that limit our and our guarantor subsidiaries’ ability to, among other things: incur or guarantee additional debt or issue certain preferred equity; pay dividends, make capital stock distributions or other restricted payments; make certain investments; sell certain assets; create or incur liens on certain assets to secure debt; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; enter into certain transactions with affiliates; and designate subsidiaries as unrestricted subsidiaries. Additionally, the indenture contains certain reporting covenants, which requires us to provide all such information required to be filed by the Securities and Exchange Commission (“SEC”) in accordance with the reporting requirements of Section 13 or 15(d) of the Exchange Act of 1934, as amended (“Exchange Act”), as a non-accelerated filer, even if we are not specifically required to comply with such sections of the Exchange Act. Failure to comply with these covenants constitutes a default and may lead to the acceleration of the principal amount and accrued but unpaid interest on the Notes. Pursuant to the terms of the indenture governing the Notes, we may be required to offer to repurchase Notes with a portion of the net proceeds received from sale-leaseback transactions.

We were in compliance with the covenants included in the indenture governing the Notes as of August 15, 2011.

 

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(Dollars in thousands)

 

We may redeem the Notes prior to the maturity date based upon the following conditions: (1) prior to July 15, 2013, we may redeem up to 35% of the original aggregate principal amount of the Notes, or $210,000, with the proceeds of certain equity offerings at a redemption price of 111.375% of the aggregate principal amount of the Notes plus accrued and unpaid interest, (2) during, in each of the 12-month periods beginning July 15, 2011, July 15, 2012, and July 15, 2013, we may redeem up to 10% of the original aggregate principal amount of the Notes, or $60,000, at a redemption price of 103% of the aggregate principal amount of the Notes plus accrued and unpaid interest, (3) on or after July 15, 2014, we may redeem all or any portion of the Notes during the 12-month periods commencing July 15, 2014, July 15, 2015, July 15, 2016 and July 15, 2017 and thereafter at a redemption price of 105.688%, 102.844%, 101.422% and 100%, respectively, of the aggregate principal amount of the Notes plus accrued and unpaid interest, and (4) prior to July 15, 2014, we may redeem all or any portion of the Notes at a price equal to 100% of the aggregate principal amount of the Notes plus a make-whole premium and accrued and unpaid interest. Upon a change in control, the Note holders each have the right to require us to redeem their Notes at a redemption price of 101% of the aggregate principal amount of the Notes plus accrued and unpaid interest.

CKE Holdings, Inc. Senior Unsecured PIK Toggle Notes

On March 14, 2011, CKE Holdings, Inc. issued $200,000 aggregate principal amount of senior unsecured PIK toggle notes due March 14, 2016 (the “Parent Notes”). The net proceeds, after payment of offering expenses, were distributed to the corporate parent of Parent. The Parent Notes were issued with an original issue discount of 1.885%, or $3,770. The interest on the Parent Notes, which will be paid semi-annually on March 15 and September 15 of each year, can be paid (1) entirely in cash, at a rate of 10.50% (“Cash Interest”), (2) entirely by increasing the principal amount of the Parent Note or by issuing new notes for the entire amount of the interest payment, at a rate per annum equal to the cash interest rate of 10.50% plus 0.75% (“PIK Interest”) or (3) with a 25%/75%, 50%/50% or 75%/25% combination of Cash Interest and PIK Interest. Parent paid the September 15, 2011 interest payment entirely in PIK Interest. Parent will also pay the March 15, 2012 interest payment entirely in PIK Interest. We have not guaranteed the Parent Notes, nor have we pledged any of our assets or stock as collateral for the Parent Notes. The covenants included within the indenture governing our Notes and our Credit Facility are not directly impacted by the obligations of CKE Holdings, Inc. Because the Parent Notes contain a PIK feature, the interest obligations can be added to the principal amount of the Parent Note and Parent has the ability to defer cash payments of interest through March 14, 2016. At or prior to maturity, we expect Parent will evaluate all available options for redemption of the Parent Notes, including refinancing the Parent Notes, receiving dividends, and other options. Our Credit Facility and indenture governing our Notes contain restrictive covenants which limit our ability to pay dividends to Parent.

Cash Flows

During the twenty-eight weeks ended August 15, 2011, cash provided by operating activities totaled $57,814, an increase of $53,402 from the comparable prior year period. This increase is primarily attributable to significant cash payments made during the prior year period for transaction related costs and the Predecessor interest rate swap agreements, partially offset by the impact of cash paid for interest related to the Notes during the twenty-eight weeks ended August 15, 2011. Our working capital account balances, including accounts payable and other current and long-term liabilities, can vary significantly from quarter to quarter, depending upon the timing of large customer receipts, payments to vendors and semi-annual interest payments, and are not anticipated to be a significant source or use of cash over the long term.

Cash used in investing activities during the twenty-eight weeks ended August 15, 2011 totaled $25,624, which principally consisted of purchases of property and equipment of $28,113, partially offset by $1,748 of proceeds from the sale of property and equipment.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Capital expenditures were as follows:

 

     Successor     Successor/
Predecessor
 
     Twenty-Eight
Weeks Ended
August 15, 2011
    Twenty-Eight
Weeks Ended
August 9, 2010
 

Remodels:

      

Carl’s Jr.

   $ 1,382         $ 2,046   

Hardee’s

     7,907        11,341   

Capital maintenance:

      

Carl’s Jr.

     4,353        6,260   

Hardee’s

     7,246        8,662   

New restaurants and rebuilds:

      

Carl’s Jr.

     3,813        5,726   

Hardee’s

     1,445        1,577   

Dual-branding:

      

Carl’s Jr.

     424        444   

Hardee’s

     886        1,687   

Real estate and franchise acquisitions

     11        20   

Corporate and other

     646        678   
  

 

 

   

 

 

 

Total

   $ 28,113      $ 38,441   
  

 

 

   

 

 

 

Capital expenditures for the twenty-eight weeks ended August 15, 2011 decreased $10,328, or 26.9%, to $28,113 from the comparable prior year period mainly due to a $4,098 decrease in restaurant remodels, a $3,323 decrease in capital maintenance and a $2,045 decrease in new restaurants and rebuilds.

Cash used in financing activities during the twenty-eight weeks ended August 15, 2011 totaled $36,518 as compared to cash provided by financing activities during the twenty-eight weeks ended August 9, 2010 of $719,621. During the twenty-eight weeks ended August 15, 2011, we made a payment of $41,200 in connection with the early extinguishment of $40,000 principal amount of our Notes, there was a net decrease in our bank overdraft of $6,416 and we received proceeds from financing method sale-leaseback transactions of $16,027. During the twenty eight weeks ended August 9, 2010, we received proceeds from the issuance of Notes, net of discount, of $588,510 and equity contributions of $450,000 in connection with the Transactions. Additionally, we made net payments of $277,432 to fully repay our Predecessor term loan and borrowings under our Predecessor revolving credit facility during the twenty-eight weeks ended August 9, 2010.

Critical Accounting Policies

Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our consolidated financial position and results of operations. See our Annual Report on Form 10-K for the year ended January 31, 2011 for a description of our critical accounting policies. Specific risks associated with these critical accounting policies are described in the following paragraphs.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Impairment of Restaurant-Level Long-Lived Assets

In connection with analyzing restaurant-level long-lived assets to determine if they have been impaired, we make certain estimates and assumptions, including estimates of future cash flows, assumptions of future same-store sales and projected operating expenses for each of our restaurants over their estimated useful life in order to evaluate recoverability and estimate fair value. Future cash flows are estimated based upon experience gained, current intentions about refranchising restaurants and closures, recent and expected sales trends, internal plans, the period of time since the restaurant was opened or remodeled and other relevant information. If our future cash flows or same-store sales do not meet or exceed our forecasted levels, or if restaurant operating cost increases exceed our forecast and we are unable to recover such costs through price increases, the carrying value of certain of our restaurants may prove to be unrecoverable, and we may incur additional impairment charges in the future.

Impairment of Goodwill and Indefinite-Lived Intangible Assets

As of August 15, 2011, our goodwill consisted of $199,166 for our Carl’s Jr. reporting unit and $9,719 for our Hardee’s reporting unit. The goodwill for both reporting units resulted primarily from the Merger on July 12, 2010. During the fourth quarter of fiscal 2011, we performed our goodwill impairment test for our Carl’s Jr. and Hardee’s reporting units. As of the date of the annual impairment test, the fair value of the Carl’s Jr. and Hardee’s reporting units exceeded their respective carrying values. In order to evaluate the sensitivity of the fair value calculation on the goodwill impairment test, we applied hypothetical decreases to the fair value of each reporting unit. We determined that hypothetical decreases in fair value of greater than 10% would be required before either reporting unit would have a carrying value in excess of its fair value. The excess of the fair value as compared to the carrying value is attributed primarily to the general improvement in financial markets between the date of the acquisition and the date of the impairment test. However, future declines in market conditions and the actual future performance of our reporting units could negatively impact the results of future impairment tests.

As of August 15, 2011, our indefinite-lived intangible assets consisted of Carl’s Jr. trademarks / tradenames of $144,000 and Hardee’s trademarks / tradenames of $134,000. During the fourth quarter of fiscal 2011, we performed our impairment test for trademarks / tradenames at both Carl’s Jr. and Hardee’s and concluded that no impairment charge was required. However, any future declines in our system-wide restaurant portfolio at either concept, declines in company-operated or franchised and licensed revenues or increases to the discount rate used in our impairment test could negatively impact the results of future impairment tests.

Estimated Liability for Closed Restaurants

In determining the amount of the estimated liability for closed restaurants, we estimate the cost to maintain leased vacant properties until the lease can be abated. If the costs to maintain properties increase, or it takes longer than anticipated to sublease or terminate leases, we may need to record additional estimated liabilities. If the leases on the vacant restaurants are not terminated or subleased on the terms that we used to estimate the liabilities, we may be required to record losses in future periods. Conversely, if the leases on the vacant restaurants are terminated or subleased on more favorable terms than we used to estimate the liabilities, we reverse previously established estimated liabilities, resulting in an increase in operating income.

Estimated Liability for Self-Insurance

If we experience a higher than expected number of claims or the costs of claims rise more than the estimates used by management, developed with the assistance of our actuary, our reserves would require adjustment and we would be required to adjust the expected losses upward and increase our future self-insurance expense.

Our actuary provides us with estimated unpaid losses for each loss category, upon which our analysis is based. As of August 15, 2011 and January 31, 2011, our estimated liability for self-insured workers’ compensation, general and auto liability losses was $39,813 and $39,581, respectively.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Franchised and Licensed Operations

We have sublease agreements with some of our franchisees on properties for which we remain principally liable for the lease obligations. If sales trends or economic conditions deteriorate for our franchisees, their financial health may worsen, our collection rates may decline and we may be required to assume the responsibility for additional lease payments on franchised restaurants.

Income Taxes

When necessary, we record a valuation allowance to reduce our net deferred tax assets to the amount that is more likely than not to be realized. In considering the need for a valuation allowance against some portion or all of our deferred tax assets, we must make certain estimates and assumptions regarding future taxable income, the feasibility of tax planning strategies and other factors. Changes in facts and circumstances or in the estimates and assumptions that are involved in establishing and maintaining a valuation allowance against deferred tax assets could result in adjustments to the valuation allowance in future quarterly or annual periods.

We use an estimate of our annual income tax rate to recognize a provision for income taxes in financial statements for interim periods. However, changes in facts and circumstances could result in adjustments to our effective tax rate in future quarterly or annual periods.

Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal 2012 Comparisons with Fiscal 2011

The factors discussed below impact comparability of operating performance for the twelve and twenty-eight weeks ended August 15, 2011 and August 9, 2010, and for the remainder of fiscal 2012.

Merger and Transactions

In connection with the Transactions, we incurred significant additional indebtedness, including $600,000 of aggregate principal amount of senior secured second lien notes that bear interest at a rate of 11.375% per annum, payable semi-annually in arrears on January 15 and July 15. On July 15, 2011, we redeemed $40,000 of aggregate principal amount of our Notes, reducing the outstanding aggregate principal amount of our Notes to $560,000 as of August 15, 2011. In addition, our Credit Facility provides for aggregate borrowings up to $100,000 in senior secured revolving facility loans, swingline loans and letters of credit. Immediately prior to the Transactions, our indebtedness was significantly less. The changes in our indebtedness have caused our interest expense to be significantly higher following the Transactions than experienced in prior periods.

The acquisition of CKE Restaurants, Inc. has been accounted for as a business combination using the acquisition method of accounting, whereby the purchase price has been allocated to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair market values as of July 12, 2010. The fair value changes in our tangible and intangible assets acquired and liabilities assumed are expected to cause changes to our future operating results when compared to our historical results.

The discussion and analysis of the Company’s historical financial condition and results of operations covers periods prior to Transactions. Accordingly, the discussion and analysis of such periods does not reflect the significant impact of the Transactions.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Sale-Leaseback Transactions

During the second quarter of fiscal 2012, we entered into agreements with independent third parties under which we sold and leased back 11 restaurant properties. The initial minimum lease terms are 20 years, and the leases include renewal options and right of first offer provisions that, for accounting purposes, constitute continuing involvement with the associated restaurant properties. Due to this continuing involvement, these sale-leaseback transactions are accounted for under the financing method, rather than as completed sales. Under the financing method, we include the net sales proceeds received in other long-term liabilities until our continuing involvement with the properties is terminated, report the associated property as owned assets, continue to depreciate the assets over their remaining useful lives, and record the rental payments as interest expense. As of August 15, 2011, the net book value of the assets associated with these transactions was $11,986. When and if our continuing involvement with a property terminates and the sale of that property is recognized for accounting purposes, we expect to record a gain equal to the excess of the net proceeds received over the remaining net book value of the associated restaurant property. As of August 15, 2011, the net proceeds received of $16,027 exceeded the net book value of the associated restaurant properties by $4,041. We expect that we will sell and leaseback additional restaurant properties during fiscal 2012, however, there can be no assurance as to the number of transactions we will be able to complete, the amount of proceeds we will generate or whether we will be able to complete additional sale-leaseback transactions at all. See Note 8 of Notes to Condensed Consolidated Financial Statements included herein for further discussion.

Sale of Carl’s Jr. Distribution Center Assets

On July 2, 2010, we entered into an agreement to sell to MBM our Carl’s Jr. Distribution Center assets. Simultaneously, on July 2, 2010, we and our franchisees entered into distribution agreements with MBM to provide distribution services to our Carl’s Jr. restaurants. As a result of the outsourcing of our Carl’s Jr. distribution services, beginning July 2, 2010, we no longer generate revenues and incur the related expenses associated with the Carl’s Jr. distribution centers. Refer to further discussion of the Carl’s Jr. operating segment included within our “Operating Review” section of Management’s Discussion and Analysis.

Fiscal Year and Seasonality

We operate on a retail accounting calendar. Our fiscal year ends the last Monday in January and typically has 13 four-week accounting periods. The first quarter of our fiscal year has four periods, or 16 weeks. All other quarters generally have three periods, or 12 weeks. The fiscal year ended January 31, 2011 contains 53 weeks, whereby the additional week was included in the fourth quarter.

Our restaurant sales, and therefore our profitability, are subject to seasonal fluctuations and are traditionally higher during the spring and summer months because of factors such as increased travel upon school vacations and improved weather conditions, which affect the public’s dining habits.

New Accounting Pronouncements Not Yet Adopted and Adoption of New Accounting Pronouncements

See Note 3 of Notes to Condensed Consolidated Financial Statements included herein for a description of new accounting pronouncements not yet adopted and the adoption of new accounting pronouncements.

Presentation of Non-GAAP Measures

We have included in this report measures of financial performance that are not defined by GAAP. Company-operated restaurant-level adjusted EBITDA, company-operated restaurant-level adjusted EBITDA margin and franchise restaurant adjusted EBITDA are non-GAAP measures utilized by management internally to evaluate and compare our operating performance for company-operated restaurants and franchised and licensed restaurants between periods. In addition, management believes that these financial measures provide useful information to potential investors and analysts because they provide insight into management’s evaluation of our results of operations. Each of these non-GAAP financial measures is derived from amounts reported within our Condensed Consolidated Financial Statements, and the computations of each of these measures have been included within our “Operating Review” section of MD&A.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measures. These non-GAAP measures have certain limitations including the following:

 

   

Because not all companies calculate these measures identically, our presentation of such measures may not be comparable to similarly titled measures of other companies;

   

These measures exclude certain general and administrative and other operating costs, which should also be considered when assessing our operating performance; and

   

These measures exclude depreciation and amortization, and although they are non-cash charges, the assets being depreciated or amortized will often have to be replaced and new investments made to support the operations of our restaurant portfolio.

Company-Operated Restaurant-Level Non-GAAP Measures

We define company-operated restaurant-level adjusted EBITDA, which is expressed in dollars, as company-operated restaurants revenue less restaurant operating costs excluding depreciation and amortization expense and including advertising expense. Restaurant operating costs are the expenses incurred directly by our company-operated restaurants in generating revenues and do not include advertising costs, general and administrative expenses or facility action charges. We define company-operated restaurant-level adjusted EBITDA margin, which is expressed as a percentage, as company-operated restaurant-level adjusted EBITDA divided by company-operated restaurants revenue.

Franchise Restaurant Adjusted EBITDA

We define franchise restaurant adjusted EBITDA, which is expressed in dollars, as franchised and licensed restaurants and other revenue less franchised and licensed restaurants and other expense excluding depreciation and amortization expense.

Certain Financial Information of CKE Holdings, Inc.

On March 14, 2011, CKE Holdings, Inc. issued $200,000 aggregate principal amount of 10.50%/11.25% senior unsecured PIK toggle notes due March 14, 2016. The net proceeds, after the payment of offering expenses, were distributed to the corporate parent of Parent. We have not guaranteed the obligations of Parent under the Parent Notes, nor have we pledged any of our assets or stock as collateral for the Parent Notes. The covenants included within the indenture governing our Notes and our Credit Facility are not directly impacted by the obligations of CKE Holdings, Inc.

As of August 15, 2011, Parent’s total long-term debt, including current portion, on a stand-alone basis was $196,383, which is presented net of the unamortized portion of the original issue discount of $3,617. During the twelve and twenty-eight weeks ended August 15, 2011, Parent incurred interest expense on a stand-alone basis of $5,496 and $10,068 respectively. Parent’s consolidated interest expense was $23,312 and $52,279 during the twelve and twenty-eight weeks ended August 15, 2011, respectively.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Forward Looking Statements

This Quarterly Report on Form 10-Q includes statements relating to future plans and developments, financial goals and operating performance that are based on our current beliefs and assumptions. These statements constitute “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. 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, our ability to compete with other restaurants, supermarkets and convenience stores for customers, employees, restaurant locations and franchisees; changes in consumer preferences, perceptions and spending patterns; changes in food, packaging and supply costs; the ability of our key suppliers to continue to deliver premium-quality products to us at moderate prices; our ability to successfully enter new markets, complete construction of new restaurants and complete remodels of existing restaurants; changes in general economic conditions and the geographic concentration of our restaurants, which may affect our business; our ability to attract and retain key personnel; our franchisees’ willingness to participate in our strategy; the operational and financial success of our franchisees; the willingness of our vendors and service providers to supply us with goods and services pursuant to customary credit arrangements; risks associated with operating in international locations; the effect of the media’s reports regarding food-borne illnesses, food tampering and other health-related issues on our reputation and our ability to procure or sell food products; the seasonality of our operations; the effect of increasing labor costs including healthcare related costs; our ability to comply with existing and future health, employment, environmental and other government regulations; our ability to adequately protect our intellectual property; the potentially conflicting interests of our sole stockholder and our creditors; our substantial leverage, which could limit our ability to raise capital, react to economic changes or meet obligations under our indebtedness; the effect of restrictive covenants in our indenture and credit facility on our business; and other factors as discussed under the heading “Risk Factors” in our Annual Report on Form 10-K, which was filed with the SEC on April 15, 2011, and in our other filings with the SEC.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or circumstances arising after the date of this report, except as required by law.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes, foreign currency fluctuations and changes in commodity prices. In the normal course of business, we may employ policies and procedures to manage our exposure to these changes.

Interest Rate Risk

Our principal exposures to financial market risks relate to the impact that interest rate changes could have on our Credit Facility, which bears interest at a floating interest rate and, therefore, our results of operations and cash flows will be exposed to changes in interest rates. As of August 15, 2011, our Credit Facility remained undrawn. Accordingly, a hypothetical increase of 100 basis points in short-term interest rates in our floating rate would not have an impact on our interest expense. This sensitivity analysis assumes all other variables will remain constant in future periods.

Foreign Currency Risk

Our objective in managing our exposure to foreign currency fluctuations is to limit the impact of such fluctuations on earnings and cash flows. Our business at company-operated restaurants is transacted in U.S. dollars. Exposure outside of the United States relates primarily to the effect of foreign currency rate fluctuations on royalties paid to us by our licensees. As of August 15, 2011, our most significant exposure related to the Mexican Peso. Foreign exchange rate fluctuations have not historically had a significant impact on our results of operations. During the twenty-eight weeks ended August 15, 2011, if all foreign currencies had uniformly weakened 10% relative to the U.S. dollar, our franchised and licensed restaurants and other revenue would have decreased $853.

Commodity Price Risk

We and our franchisees purchase large quantities of food, packaging and supplies. The predominant food commodities purchased by our restaurants include beef, chicken, potatoes, pork, wheat flour, dairy, cheese, soybean oil and produce. Like all restaurant companies, we are susceptible to commodity price risks as a result of factors beyond our control, such as general economic conditions, seasonal fluctuations, weather conditions, global demand, food safety concerns, food-borne diseases, fluctuations in the value of the U.S. dollar, and government regulations. To mitigate these risks, we routinely enter into purchasing contracts or pricing arrangements that contain risk management techniques designed to minimize price volatility. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our Condensed Consolidated Balance Sheets. Typically, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing, or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase restaurant operating costs as a percentage of company-operated restaurants revenue, which could negatively affect our operating results.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls (as defined in Rule 13a-15(e) under the Exchange Act) and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

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In connection with the preparation of this Quarterly Report on Form 10-Q, as of August 15, 2011, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter ended August 15, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to legal proceedings and claims in the ordinary course of our business. These claims potentially cover a variety of allegations spanning our entire business. The following is a brief discussion of the most significant categories of claims that have been brought or that we believe are likely to be brought against us in the operation of our business. To the extent applicable, we also discuss the nature of any currently pending claims relating to each category. We are currently vigorously defending these pending claims. See Note 10 of Notes to Condensed Consolidated Financial Statements included herein for additional discussion of legal matters.

Employees

We employ many thousands of persons in our company-operated restaurants 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.

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.

 

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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.

 

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ITEM 6. EXHIBITS

 

Exhibit No.

  

Description

  31.1    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
  31.2    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
  32.1    Certification of the Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
  32.2    Certification of the Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

* The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

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SIGNATURES

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

 

  CKE RESTAURANTS, INC.
Date: September 21, 2011  

/s/ Reese Stewart

  Reese Stewart
  Senior Vice President
  Chief Accounting Officer
  (Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

  31.1    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
  31.2    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
  32.1    Certification of the Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
  32.2    Certification of the Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

 

* The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.