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

For the quarterly period ended November 7, 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

 

 

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 December 9, 2011.

 

 

 

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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			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			44
Part II. Other Information
Item 1. Legal Proceedings			45
Item 6. Exhibits			46
Signatures			47

 

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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
		November 7, 2011				January 31, 2011
ASSETS
Current assets:
Cash and cash equivalents		$	61,075			$	42,586
Accounts receivable, net of allowance for doubtful accounts of $72 as of November 7, 2011 and $92 as of January 31, 2011			27,059				27,533
Related party trade receivables			150				216
Inventories			16,733				14,526
Prepaid expenses			14,246				14,219
Assets held for sale			—				196
Advertising fund assets, restricted			17,481				18,464
Deferred income tax assets, net			16,503				17,079
Other current assets			3,824				4,065
Total current assets			157,071				138,884
Notes receivable, net			—				172
Property and equipment, net of accumulated depreciation and amortization of $90,792 as     of November 7, 2011 and $36,342 as of January 31, 2011			625,971				640,194
Property under capital leases, net of accumulated amortization of $8,397 as     of November 7, 2011 and $3,638 as of January 31, 2011			33,200				36,156
Goodwill			208,885				207,817
Intangible assets, net			436,874				448,499
Other assets, net			21,509				24,444
Total assets		$	1,483,510			$	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			8,220				7,434
Accounts payable			38,805				41,442
Advertising fund liabilities			17,481				18,464
Other current liabilities			105,311				81,958
Total current liabilities			169,820				149,327
Bank indebtedness and other long-term debt, less current portion			542,799				589,987
Capital lease obligations, less current portion			36,626				41,082
Deferred income tax liabilities, net			151,101				151,828
Other long-term liabilities			169,575				139,173
Total liabilities			1,069,921				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 November 7, 2011 and January 31, 2011			—				—
Additional paid-in capital			456,190				452,659
Investment in Parent Notes			(8,362	)			—
Accumulated deficit			(34,239	)			(27,890	)
Total stockholder’s equity			413,589				424,769
Total liabilities and stockholder’s equity		$	1,483,510			$	1,496,166

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

 

		Successor
		Twelve Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010
Revenue:
Company-operated restaurants		$	256,976			$	250,097
Franchised and licensed restaurants and other			35,643				34,690
Total revenue			292,619				284,787
Operating costs and expenses:
Restaurant operating costs:
Food and packaging			78,763				73,879
Payroll and other employee benefits			72,485				71,701
Occupancy and other			62,926				61,756
Total restaurant operating costs			214,174				207,336
Franchised and licensed restaurants and other			17,907				16,995
Advertising			15,698				14,880
General and administrative			30,570				30,033
Facility action charges, net			262				822
Other operating expenses			—				167
Total operating costs and expenses			278,611				270,233
Operating income			14,008				14,554
Interest expense			(17,415	)			(18,055	)
Other (expense) income, net			(252	)			803
Loss before income taxes			(3,659	)			(2,698	)
Income tax benefit			(2,142	)			(2,743	)
Net (loss) income		$	(1,517	)		$	45

 

See Accompanying Notes to Condensed Consolidated Financial Statements

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

 

		Successor								Predecessor
		Forty Weeks Ended November 7, 2011				Sixteen Weeks Ended November 1, 2010				Twenty-Four Weeks Ended July 12, 2010
Revenue:
Company-operated restaurants		$	871,571			$	336,048			$	500,531
Franchised and licensed restaurants and other			121,360				45,768				151,588
Total revenue			992,931				381,816				652,119
Operating costs and expenses:
Restaurant operating costs:
Food and packaging			267,896				99,188				148,642
Payroll and other employee benefits			249,458				96,073				147,391
Occupancy and other			209,002				82,278				118,138
Total restaurant operating costs			726,356				277,539				414,171
Franchised and licensed restaurants and other			62,225				22,257				115,120
Advertising			51,158				19,728				29,647
General and administrative			100,876				49,761				59,859
Facility action charges, net			703				959				590
Other operating expenses, net			545				19,828				10,249
Total operating costs and expenses			941,863				390,072				629,636
Operating income (loss)			51,068				(8,256	)			22,483
Interest expense			(59,626	)			(24,035	)			(8,617	)
Other (expense) income, net			(1,668	)			968				(13,609	)
(Loss) income before income taxes			(10,226	)			(31,323	)			257
Income tax (benefit) expense			(3,877	)			(8,480	)			7,772
Net loss		$	(6,349	)		$	(22,843	)		$	(7,515	)

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Successor								Predecessor
		Forty Weeks Ended November 7, 2011				Sixteen Weeks Ended November 1, 2010				Twenty-Four Weeks Ended July 12, 2010
Cash flows from operating activities:
Net loss		$	(6,349	)		$	(22,843	)		$	(7,515	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			62,873				23,718				33,703
Amortization of debt issuance costs and discount on notes			3,065				1,115				522
Loss on early extinguishment of senior secured second lien notes			2,927				—				—
Share-based compensation expense			3,531				1,465				4,710
Provision for (recovery of) losses on accounts and notes receivable			114				62				(100	)
Loss (gain) on sale of property and equipment			1,339				415				(1,326	)
Facility action charges, net			1,224				959				590
Deferred income taxes			(151	)			(7,992	)			8,241
Net changes in operating assets and liabilities:
Receivables, inventories, prepaid expenses and other current and non-current assets			(3,725	)			876				4,826
Estimated liability for closed restaurants and estimated liability for self-insurance			(1,891	)			(825	)			(2,318	)
Accounts payable and other current and long-term liabilities			28,040				(7,754	)			4,317
Net cash provided by (used in) operating activities			90,997				(10,804	)			45,650
Cash flows from investing activities:
Purchases of property and equipment			(44,440	)			(18,565	)			(33,738	)
Acquisition of Predecessor			—				(693,478	)			—
Proceeds from sale of property and equipment			1,749				46				1,011
Proceeds from sale of Distribution Center assets			—				1,992				19,203
Collections of non-trade notes receivable			703				282				673
Other investing activities			146				53				(284	)
Net cash used in investing activities			(41,842	)			(709,670	)			(13,135	)
Cash flows from financing activities:
Net change in bank overdraft			(6,767	)			(5,247	)			(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			40,702				—				—
Payment of debt issuance costs			(49	)			(18,697	)			—
Payment for early extinguishment of senior secured second lien notes			(49,370	)			—				—
Repayments of other long-term debt			(614	)			(9	)			(13	)
Repayments of capital lease obligations			(6,206	)			(2,467	)			(3,748	)
Purchase of Parent Notes			(8,362	)			—				—
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			(30,666	)			744,244				(25,037	)
Net increase in cash and cash equivalents			18,489				23,770				7,478
Cash and cash equivalents at beginning of period			42,586				25,724				18,246
Cash and cash equivalents at end of period		$	61,075			$	49,494			$	25,724

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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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 November 7, 2011, our system-wide restaurant portfolio consisted of:

 

		Carl’s Jr.				Hardee’s				Other				Total
Company-operated			425				469				—				894
Franchised			692				1,225				10				1,927
Licensed			175				223				—				398
Total			1,292				1,917				10				3,219

As of November 7, 2011, 258 of our 425 company-operated Carl’s Jr. restaurants were dual-branded with Green Burrito and 207 of our 469 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.”

 

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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 $17,481 and $18,464 of advertising fund assets, restricted, and advertising fund liabilities in our accompanying unaudited Condensed Consolidated Balance Sheets as of November 7, 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.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

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:

 

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.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

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.

Transaction Costs

We recorded $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 forty weeks ended November 7, 2011. We did not incur any transaction-related costs during the Successor twelve weeks ended November 7, 2011.

We recorded $167, $19,828 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 twelve and sixteen weeks ended November 1, 2010 and the Predecessor 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 (expense) income, 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 forty weeks ended November 1, 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.

 

		Forty Weeks Ended November 1, 2010(1)
Total revenue		$	1,035,663
Net loss			(2,479	)

 

(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.

In September 2011, the FASB updated its guidance on the annual testing of goodwill for impairment to allow companies to first assess qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. If an entity determines, based on qualitative factors, that it is not more likely than not that a reporting unit’s fair value is less than its carrying amount, then it is not required to perform the quantitative two-step goodwill impairment test. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. 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 November 7, 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 forty weeks ended November 7, 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 lease 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 forty weeks ended November 1, 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. 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 Statement of Operations for the Predecessor 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 November 7, 2011		$	199,166			$	9,719			$	208,885

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

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

 

		Successor
		November 7, 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				88,973				(12,428	)			76,545				90,181				(5,313	)			84,868
Franchise agreements			20				88,085				(5,756	)			82,329				88,000				(2,369	)			85,631
						$	455,058			$	(18,184	)		$	436,874			$	456,181			$	(7,682	)		$	448,499

Amortization expense related to intangible assets for the Successor twelve and forty weeks ended November 7, 2011, Successor twelve and sixteen weeks ended November 1, 2010 and Predecessor twenty-four weeks ended July 12, 2010 was $3,276, $11,149, $3,311, $4,415 and $116, respectively. As of November 7, 2011, our estimated future amortization expense related to these intangible assets is set forth as follows:

 

November 8, 2011 through January 31, 2012		$	3,193
Fiscal 2013			13,670
Fiscal 2014			12,748
Fiscal 2015			11,633
Fiscal 2016			11,051
Fiscal 2017			10,598
Thereafter			95,981
		$	158,874

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 November 7, 2011, we had no outstanding loan borrowings, $31,463 of outstanding letters of credit and remaining availability of $68,537 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 November 7, 2011, our financial performance covenants did not limit our ability to draw on the remaining availability of $68,537 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. On October 4, 2011, we purchased $8,170 of the principal amount of our Notes at a price equal to 100% of the principal amount of the Notes in an open market transaction and paid the associated accrued and unpaid interest on these purchased Notes of $212. During the Successor twelve and forty weeks ended November 7, 2011, we recognized a loss of $286 and $2,927, respectively, on the early extinguishment of the Notes. Subsequent to the redemption and purchase, and as of November 7, 2011, the aggregate principal amount of the Notes outstanding was $551,830. As of November 7, 2011, the carrying value of the Notes was $542,413, which is presented net of the remaining unamortized portion of the original issue discount of $9,417 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.

In accordance with the indenture governing the Notes, we are required to make an offer to repurchase our Notes at 103% of the principal amount of the Notes with a portion of the net proceeds received from sale-leaseback transactions. Pursuant to these requirements, on December 1, 2011, we commenced a tender offer to purchase up to $27,871 of the principal amount of our Notes (“Tender Offer”) at a redemption price of 103%, which expires on December 29, 2011. In addition to the Tender Offer, on December 1, 2011, the holders of the Notes were notified that CKE will redeem on January 4, 2012, conditioned in part on the results of the Tender Offer, up to $20,000 aggregate principal amount of the Notes outstanding on January 4, 2012 (“Redemption”) at a redemption price of 103% pursuant to the terms of the indenture governing the Notes. Pursuant to the Redemption, the Notes to be redeemed will be reduced so that the total principal amount of Notes purchased in both the Tender Offer and Redemption will not exceed $30,000.

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 twenty-four weeks ended July 12, 2010, we recorded interest expense of $3,113 under these interest rate swap agreements to adjust their carrying value to fair value and paid $3,750 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 November 7, 2011				Forty Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010				Sixteen Weeks Ended November 1, 2010						Twenty-Four Weeks Ended July 12, 2010
Senior secured revolving credit facility		$	—			$	—			$	—			$	—					$	—
Senior secured second lien notes			14,462				50,936				15,584				20,779						—
Predecessor senior credit facility			—				—				—				—						2,338
Amortization of debt issuance costs and discount on notes			896				3,065				837				1,115						488
Interest rate swap agreements			—				—				—				—						3,113
Capital lease obligations			1,084				3,663				1,294				1,728						2,318
Financing method sale-leaseback transactions(1)			642				743				—				—						—
Letter of credit fees and other			331				1,219				340				413						360
		$	17,415			$	59,626			$	18,055			$	24,035					$	8,617

 

(1)	See Note 8.

As of November 7, 2011 and January 31, 2011, accrued interest was $19,809 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 Parent’s obligations under the Parent Notes in our unaudited Condensed Consolidated Financial Statements.

During the twelve weeks ended November 7, 2011, CKE purchased $9,948 principal amount of Parent Notes (“Purchased Parent Notes”) for $8,362, which represents a weighted average price of 84.06% of the principal amount of the Purchased Parent Notes. For accounting purposes, we have recorded our investment in Parent Notes, which remain outstanding, as a reduction of stockholder’s equity in the accompanying unaudited Condensed Consolidated Balance Sheet as of November 7, 2011. As a result of this accounting presentation, we do not expect to recognize interest or investment income associated with our investment in Parent Notes in our Consolidated Statements of Operations during the holding period.

As of November 7, 2011, the principal amount of Parent’s total long-term debt on a stand-alone basis was $211,313, which includes the September 15, 2011 interest payment of $11,313 that was added to the principal amount of the Parent Notes on September 15, 2011. The principal amount of Parent’s long-term debt on a stand-alone basis has not been reduced by the $9,948 principal amount of the Purchased Parent Notes since the Purchased Parent Notes remain outstanding. As of November 7, 2011, the carrying amount of Parent’s total long-term debt on a stand-alone basis, including the current portion and the Purchased Parent Notes, was $207,789, which is presented net of the unamortized portion of the original issue discount of $3,524.

NOTE 8 — SALE-LEASEBACK TRANSACTIONS

During the forty weeks ended November 7, 2011, we entered into agreements with independent third parties under which we sold and leased back 8 Carl’s Jr. and 21 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 forty weeks ended November 7, 2011, we received net proceeds of $40,702 in connection with these transactions, which are included in other long-term liabilities in our accompanying unaudited Condensed Consolidated Balance Sheet as of November 7, 2011. The net book value of the associated assets, which is included in property and equipment, net of accumulated depreciation and amortization in our accompanying unaudited Condensed Consolidated Balance Sheet, was $31,825 as of November 7, 2011. The net proceeds received exceeded the net book value of the associated restaurant properties by $8,877 as of November 7, 2011.

As of November 7, 2011, our future minimum cash obligations associated with these transactions from November 8, 2011 through January 31, 2012, for fiscal 2013, 2014, 2015, 2016, 2017 and thereafter are $746, $2,983, $2,983, $2,983, $2,983, $3,122 and $52,771, respectively.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

NOTE 9 — FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

		Successor
		November 7, 2011								January 31, 2011
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Financial assets:
Cash and cash equivalents		$	61,075			$	61,075			$	42,586			$	42,586
Notes receivable			2,289				2,294				4,681				4,619
Financial liabilities:
Bank indebtedness and other long-term debt, including current portion			542,802				596,367				590,016				676,005

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 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 November 7, 2011, the present value of the lease obligations under the remaining master leases’ primary terms is $123,698. 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 $2,566.

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 November 7, 2011, we had outstanding letters of credit of $31,463, expiring at various dates through August 2012.

Unconditional Purchase Obligations

As of November 7, 2011, we had unconditional purchase obligations in the amount of $92,220, which consisted primarily of contracts for goods and services related to restaurant operations and contractual commitments for marketing and sponsorship arrangements.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

Employment Agreements

We have entered into employment agreements with certain of our key executives (the “Employment Agreements”). Pursuant to the terms of the Employment Agreements, each executive is entitled to receive certain retention bonus payments that will be paid out in October 2012 and 2013, 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 November 7, 2011, we would have been required to make cash payments of approximately $12,873.

Litigation

We are currently involved in legal disputes related to employment claims, real estate claims and other business disputes. As of November 7, 2011, our accrued liability for litigation contingencies with a probable likelihood of loss was $2,225, with an expected range of losses from $2,225 to $10,400. 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 November 7, 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 November 7, 2011				Forty Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010				Sixteen Weeks Ended November 1, 2010				Twenty-Four Weeks Ended July 12, 2010
Share-based compensation expense related to restricted stock awards that contain market or performance conditions		$	—			$	—			$	—			$	—			$	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
Share-based compensation expense related to Units that contain performance conditions			555				1,802				767				767				—
All other share-based compensation expense			508				1,729				524				698				2,472
Total share-based compensation expense		$	1,063			$	3,531			$	1,291			$	12,052			$	4,710
Associated tax benefits		$	—			$	—			$	—			$	—			$	1,804

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

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 $1,063, $3,531, $1,291 and $1,465 of share-based compensation expense related to the Units for the twelve and forty weeks ended November 7, 2011 and the twelve and sixteen weeks ended November 1, 2010, respectively. The maximum unrecognized compensation cost for the time and performance vesting Units was $11,227 as of November 7, 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 sixteen weeks ended November 1, 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).

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 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 November 7, 2011				Forty Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010				Sixteen Weeks Ended November 1, 2010						Twenty-Four Weeks Ended July 12, 2010
Estimated liability for new restaurant closures		$	—			$	133			$	99			$	99					$	363
Adjustments to estimated liability for closed restaurants			(86	)			478				371				405						60
Impairment of assets classified as held for sale			—				—				—				—						104
Impairment of assets classified as held and used			342				592				75				75						213
(Gain) loss on sales of restaurants and surplus properties, net			(113	)			(871	)			158				220						(348	)
Amortization of discount related to estimated liability for closed restaurants			119				371				119				160						198
		$	262			$	703			$	822			$	959					$	590

During the twelve and forty weeks ended November 7, 2011, we received cash of $100 and $600, respectively, and recorded a gain of $100 and $521, respectively, (included above) in connection with an agreement to terminate a restaurant lease.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

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.

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

 

		Successor																		Predecessor
		Twelve Weeks Ended November 7, 2011				Forty Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010				Sixteen Weeks Ended November 1, 2010						Twenty-Four Weeks Ended July 12, 2010
Property and equipment:
Carl’s Jr.		$	—			$	—			$	—			$	—					$	49
Hardee’s			304				554				75				75						254
			304				554				75				75						303
Property under capital leases:
Carl’s Jr.			—				—				—				—						14
Hardee’s			38				38				—				—						—
			38				38				—				—						14
Total:
Carl’s Jr.			—				—				—				—						63
Hardee’s			342				592				75				75						254
		$	342			$	592			$	75			$	75					$	317

NOTE 13 — INCOME TAXES

Income tax (benefit) expense consisted of the following:

 

		Successor																		Predecessor
		Twelve Weeks Ended November 7, 2011				Forty Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010				Sixteen Weeks Ended November 1, 2010						Twenty-Four Weeks Ended July 12, 2010
Federal and state income taxes		$	(2,483	)		$	(5,155	)		$	(3,135	)		$	(8,953	)				$	7,173
Foreign income taxes			341				1,278				392				473						599
Income tax (benefit) expense		$	(2,142	)		$	(3,877	)		$	(2,743	)		$	(8,480	)				$	7,772

Our effective income tax rate for the Successor twelve and forty weeks ended November 7, 2011 differs from the federal statutory rate primarily as a result of non-deductible share-based compensation expense, state income taxes, federal income tax credits and the release of $237 of unrecognized tax benefits due to statute closures. Our effective income tax rate for the Successor twelve and sixteen weeks ended November 1, 2010 differs from the federal statutory rate primarily as a result of non-deductible transaction-related costs, non-deductible share-based compensation expense, state income taxes and the release of $1,501 of unrecognized tax benefits due to statute closures. Our effective income tax rate for the Predecessor 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. During the forty weeks ended November 7, 2011, we released $237 of unrecognized tax benefits due to statute closures. We believe that it is reasonably possible that decreases in unrecognized tax benefits of up to $544 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

As of November 7, 2011, we maintained a valuation allowance of $10,147 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.

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 November 7, 2011				Forty Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010				Sixteen Weeks Ended November 1, 2010						Twenty-Four Weeks Ended July 12, 2010
Revenue:
Carl’s Jr.		$	149,966			$	508,414			$	144,705			$	194,280					$	383,234
Hardee’s			142,529				483,979				139,912				187,311						268,523
Other			124				538				170				225						362
Total		$	292,619			$	992,931			$	284,787			$	381,816					$	652,119
Segment income:
Carl’s Jr.		$	18,707			$	66,810			$	19,254			$	26,905					$	45,280
Hardee’s			26,016				86,023				26,228				35,262						47,693
Other			117				359				94				125						208
Total			44,840				153,192				45,576				62,292						93,181
Less: General and administrative expense			(30,570	)			(100,876	)			(30,033	)			(49,761	)					(59,859	)
Less: Facility action charges, net			(262	)			(703	)			(822	)			(959	)					(590	)
Less: Other operating expenses, net			—				(545	)			(167	)			(19,828	)					(10,249	)
Operating income (loss)			14,008				51,068				14,554				(8,256	)					22,483
Interest expense			(17,415	)			(59,626	)			(18,055	)			(24,035	)					(8,617	)
Other (expense) income, net			(252	)			(1,668	)			803				968						(13,609	)
(Loss) income before income taxes		$	(3,659	)		$	(10,226	)		$	(2,698	)		$	(31,323	)				$	257
Depreciation and amortization:
Depreciation and amortization included in segment income:
Carl’s Jr.		$	8,548			$	29,127			$	8,401			$	11,194					$	15,586
Hardee’s			9,712				31,178				8,667				11,461						16,214
Other			—				—				—				—						—
Other depreciation and amortization(1)			770				2,568				728				1,063						1,903
Total depreciation and amortization		$	19,030			$	62,873			$	17,796			$	23,718					$	33,703
		Successor
		November 7, 2011				January 31, 2011
Total assets:
Carl’s Jr.		$	780,961			$	779,306
Hardee’s			648,304				648,813
Other			54,245				68,047
Total		$	1,483,510			$	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 $574, $1,916, $575 and $637 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 forty weeks ended November 7, 2011 and Successor twelve and sixteen weeks ended November 1, 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 sixteen weeks ended November 1, 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 forty weeks ended November 7, 2011, total revenue generated from related party franchisees was $5,268, which is included in franchised and licensed restaurants and other revenue in our accompanying unaudited Condensed Consolidated Statement of Operations. As of November 7, 2011 and January 31, 2011, our related party trade receivables from franchisees were $150 and $216, respectively.

During the Successor sixteen weeks ended November 1, 2010, total revenue generated from related party franchisees was $2,043, 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.

NOTE 16 — SUPPLEMENTAL CASH FLOW INFORMATION

		Successor								Predecessor
		Forty Weeks Ended November 7, 2011				Sixteen Weeks Ended November 1, 2010				Twenty-Four Weeks Ended July 12, 2010
Cash paid for:
Interest, net of amounts capitalized		$	39,467			$	17,253			$	8,299
Income taxes (received) paid, net			(64	)			1,408				530
Non-cash investing and financing activities:
Proceeds receivable from sale of Distribution Center assets			—				—				1,992
Capital lease obligations incurred to acquire assets			2,976				26				4,179
Accrued property and equipment purchases			3,044				3,161				4,593

During the forty weeks ended November 7, 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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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 and cash flows by comparing the Successor forty weeks ended November 7, 2011 to the combined results of operations and cash flows for the Successor sixteen weeks ended November 1, 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 November 7, 2011:

 

		Company- operated				Franchised				Licensed				Total
Consolidated:
Open at November 1, 2010			892				1,908				353				3,153
New			7				43				52				102
Closed			(8	)			(21	)			(7	)			(36	)
Divested			—				(3	)			—				(3	)
Acquired			3				—				—				3
Open at November 7, 2011			894				1,927				398				3,219
		Company- operated				Franchised				Licensed				Total
Carl’s Jr.:
Open at November 1, 2010			424				675				146				1,245
New			5				24				31				60
Closed			(4	)			(7	)			(2	)			(13	)
Divested			—				—				—				—
Acquired			—				—				—				—
Open at November 7, 2011			425				692				175				1,292
		Company- operated				Franchised				Licensed				Total
Hardee’s:
Open at November 1, 2010			467				1,222				207				1,896
New			2				19				21				42
Closed			(3	)			(13	)			(5	)			(21	)
Divested			—				(3	)			—				(3	)
Acquired			3				—				—				3
Open at November 7, 2011			469				1,225				223				1,917

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Consolidated Fiscal Quarter

 

		Successor
		Twelve Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010
Revenue:
Company-operated restaurants		$	256,976			$	250,097
Franchised and licensed restaurants and other			35,643				34,690
Total revenue			292,619				284,787
Operating costs and expenses:
Restaurant operating costs			214,174				207,336
Franchised and licensed restaurants and other			17,907				16,995
Advertising			15,698				14,880
General and administrative			30,570				30,033
Facility action charges, net			262				822
Other operating expenses			—				167
Total operating costs and expenses			278,611				270,233
Operating income			14,008				14,554
Interest expense			(17,415	)			(18,055	)
Other (expense) income, net			(252	)			803
Loss before income taxes			(3,659	)			(2,698	)
Income tax benefit			(2,142	)			(2,743	)
Net (loss) income		$	(1,517	)		$	45
Company-operated restaurant-level adjusted EBITDA(1):
Company-operated restaurants revenue		$	256,976			$	250,097
Less: restaurant operating costs			(214,174	)			(207,336	)
Add: depreciation and amortization expense			16,376				15,180
Less: advertising expense			(15,698	)			(14,880	)
Company-operated restaurant-level adjusted EBITDA		$	43,480			$	43,061
Company-operated restaurant-level adjusted EBITDA margin			16.9	%			17.2	%
Franchise restaurant adjusted EBITDA(1):
Franchised and licensed restaurants and other revenue		$	35,643			$	34,690
Less: franchised and licensed restaurants and other expense			(17,907	)			(16,995	)
Add: depreciation and amortization expense			1,884				1,888
Franchise restaurant adjusted EBITDA		$	19,620			$	19,583

 

(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
		Forty Weeks Ended November 7, 2011				Forty Weeks Ended November 1, 2010				Sixteen Weeks Ended November 1, 2010				Twenty-Four Weeks Ended July 12, 2010
Revenue:
Company-operated restaurants		$	871,571			$	836,579			$	336,048			$	500,531
Franchised and licensed restaurants and other			121,360				197,356				45,768				151,588
Total revenue			992,931				1,033,935				381,816				652,119
Operating costs and expenses:
Restaurant operating costs			726,356				691,710				277,539				414,171
Franchised and licensed restaurants and other			62,225				137,377				22,257				115,120
Advertising			51,158				49,375				19,728				29,647
General and administrative			100,876				109,620				49,761				59,859
Facility action charges, net			703				1,549				959				590
Other operating expenses, net			545				30,077				19,828				10,249
Total operating costs and expenses			941,863				1,019,708				390,072				629,636
Operating income (loss)			51,068				14,227				(8,256	)			22,483
Interest expense			(59,626	)			(32,652	)			(24,035	)			(8,617	)
Other (expense) income, net			(1,668	)			(12,641	)			968				(13,609	)
(Loss) income before income taxes			(10,226	)			(31,066	)			(31,323	)			257
Income tax (benefit) expense			(3,877	)			(708	)			(8,480	)			7,772
Net loss		$	(6,349	)		$	(30,358	)		$	(22,843	)		$	(7,515	)
Company-operated restaurant-level adjusted EBITDA(1):
Company-operated restaurants revenue		$	871,571			$	836,579			$	336,048			$	500,531
Less: restaurant operating costs			(726,356	)			(691,710	)			(277,539	)			(414,171	)
Add: depreciation and amortization expense			54,363				50,624				20,212				30,412
Less: advertising expense			(51,158	)			(49,375	)			(19,728	)			(29,647	)
Company-operated restaurant-level adjusted EBITDA		$	148,420			$	146,118			$	58,993			$	87,125
Company-operated restaurant-level adjusted EBITDA margin			17.0	%			17.5	%			17.6	%			17.4	%
Franchise restaurant adjusted EBITDA(1):
Franchised and licensed restaurants and other revenue		$	121,360			$	197,356			$	45,768			$	151,588
Less: franchised and licensed restaurants and other expense			(62,225	)			(137,377	)			(22,257	)			(115,120	)
Add: depreciation and amortization expense			5,942				3,831				2,443				1,388
Franchise restaurant adjusted EBITDA		$	65,077			$	63,810			$	25,954			$	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.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Carl’s Jr. Fiscal Quarter

 

		Successor
		Twelve Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010
Company-operated restaurants revenue		$	136,111			$	131,367
Franchised and licensed restaurants and other revenue			13,855				13,338
Total revenue			149,966				144,705
Restaurant operating costs:
Food and packaging			40,929				38,397
Payroll and other employee benefits			38,102				37,171
Occupancy and other			35,594				34,776
Total restaurant operating costs			114,625				110,344
Franchised and licensed restaurants and other expense			7,842				7,214
Advertising expense			8,792				7,893
General and administrative expense			14,447				14,117
Facility action charges, net			(63	)			170
Operating income		$	4,323			$	4,967
Company-operated average unit volume (trailing-52 weeks)		$	1,405			$	1,375
Franchise-operated average unit volume (trailing-52 weeks)		$	1,094			$	1,096
Company-operated same-store sales increase (decrease)			2.0	%			(5.0	)%
Franchise-operated same-store sales decrease			(2.5	)%			(4.3	)%
Company-operated same-store transaction decrease			(0.5	)%			(3.0	)%
Company-operated average check (actual $)		$	6.90			$	6.73
Restaurant operating costs as a percentage of company-operated restaurants revenue:
Food and packaging			30.1	%			29.2	%
Payroll and other employee benefits			28.0	%			28.3	%
Occupancy and other			26.2	%			26.5	%
Total restaurant operating costs			84.2	%			84.0	%
Advertising expense as a percentage of company-operated restaurants revenue			6.5	%			6.0	%
Company-operated restaurant-level adjusted EBITDA(1):
Company-operated restaurants revenue		$	136,111			$	131,367
Less: restaurant operating costs			(114,625	)			(110,344	)
Add: depreciation and amortization expense			7,760				7,557
Less: advertising expense			(8,792	)			(7,893	)
Company-operated restaurant-level adjusted EBITDA		$	20,454			$	20,687
Company-operated restaurant-level adjusted EBITDA margin			15.0	%			15.7	%
Franchise restaurant adjusted EBITDA(1):
Franchised and licensed restaurants and other revenue		$	13,855			$	13,338
Less: franchised and licensed restaurants and other expense			(7,842	)			(7,214	)
Add: depreciation and amortization expense			788				844
Franchise restaurant adjusted EBITDA		$	6,801			$	6,968

 

(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)

 

Carl’s Jr. Year to Date

 

		Successor				Successor/ Predecessor				Successor				Predecessor
		Forty Weeks Ended November 7, 2011				Forty Weeks Ended November 1, 2010				Sixteen Weeks Ended November 1, 2010				Twenty-Four Weeks Ended July 12, 2010
Company-operated restaurants revenue		$	462,769			$	447,891			$	176,512			$	271,379
Franchised and licensed restaurants and other revenue			45,645				129,623				17,768				111,855
Total revenue			508,414				577,514				194,280				383,234
Restaurant operating costs:
Food and packaging			139,869				131,182				51,427				79,755
Payroll and other employee benefits			130,820				126,447				49,619				76,828
Occupancy and other			117,291				112,771				46,055				66,716
Total restaurant operating costs			387,980				370,400				147,101				223,299
Franchised and licensed restaurants and other expense			25,335				107,667				9,632				98,035
Advertising expense			28,289				27,262				10,642				16,620
General and administrative expense			48,055				51,845				23,322				28,523
Facility action charges, net			127				378				210				168
Gain on sale of Distribution Center assets			—				(3,442	)			—				(3,442	)
Operating income		$	18,628			$	23,404			$	3,373			$	20,031
Company-operated same-store sales increase (decrease)			2.0	%			(6.2	)%
Franchise-operated same-store sales decrease			(0.8	)%			(4.2	)%
Company-operated same-store transaction decrease			(0.2	)%			(3.9	)%
Company-operated average check (actual $)		$	6.98			$	6.80
Restaurant operating costs as a percentage of company-operated restaurants revenue:
Food and packaging			30.2	%			29.3	%
Payroll and other employee benefits			28.3	%			28.2	%
Occupancy and other			25.3	%			25.2	%
Total restaurant operating costs			83.8	%			82.7	%
Advertising expense as a percentage of company-operated restaurants revenue			6.1	%			6.1	%
Company-operated restaurant-level adjusted EBITDA(1):
Company-operated restaurants revenue		$	462,769			$	447,891			$	176,512			$	271,379
Less: restaurant operating costs			(387,980	)			(370,400	)			(147,101	)			(223,299	)
Add: depreciation and amortization expense			26,487				24,918				10,084				14,834
Less: advertising expense			(28,289	)			(27,262	)			(10,642	)			(16,620	)
Company-operated restaurant-level adjusted EBITDA		$	72,987			$	75,147			$	28,853			$	46,294
Company-operated restaurant-level adjusted EBITDA margin			15.8	%			16.8	%			16.3	%			17.1	%
Franchise restaurant adjusted EBITDA(1):
Franchised and licensed restaurants and other revenue		$	45,645			$	129,623			$	17,768			$	111,855
Less: franchised and licensed restaurants and other expense			(25,335	)			(107,667	)			(9,632	)			(98,035	)
Add: depreciation and amortization expense			2,640				1,862				1,110				752
Franchise restaurant adjusted EBITDA		$	22,950			$	23,818			$	9,246			$	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.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Hardee’s Fiscal Quarter

 

		Successor
		Twelve Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010
Company-operated restaurants revenue		$	120,865			$	118,680
Franchised and licensed restaurants and other revenue			21,664				21,232
Total revenue			142,529				139,912
Restaurant operating costs:
Food and packaging			37,835				35,461
Payroll and other employee benefits			34,381				34,499
Occupancy and other			27,326				26,956
Total restaurant operating costs			99,542				96,916
Franchised and licensed restaurants and other expense			10,065				9,781
Advertising expense			6,906				6,987
General and administrative expense			16,124				15,917
Facility action charges, net			326				651
Operating income		$	9,566			$	9,660
Company-operated average unit volume (trailing-52 weeks)		$	1,102			$	1,039
Franchise-operated average unit volume (trailing-52 weeks)		$	1,045			$	1,002
Company-operated same-store sales increase			1.8	%			8.3	%
Franchise-operated same-store sales increase			1.3	%			7.4	%
Company-operated same-store transaction (decrease) increase			(1.5	)%			3.3	%
Company-operated average check (actual $)		$	5.30			$	5.16
Restaurant operating costs as a percentage of company-operated restaurants revenue:
Food and packaging			31.3	%			29.9	%
Payroll and other employee benefits			28.4	%			29.1	%
Occupancy and other			22.6	%			22.7	%
Total restaurant operating costs			82.4	%			81.7	%
Advertising expense as a percentage of company-operated restaurants revenue			5.7	%			5.9	%
Company-operated restaurant-level adjusted EBITDA(1):
Company-operated restaurants revenue		$	120,865			$	118,680
Less: restaurant operating costs			(99,542	)			(96,916	)
Add: depreciation and amortization expense			8,616				7,623
Less: advertising expense			(6,906	)			(6,987	)
Company-operated restaurant-level adjusted EBITDA		$	23,033			$	22,400
Company-operated restaurant-level adjusted EBITDA margin			19.1	%			18.9	%
Franchise restaurant adjusted EBITDA(1):
Franchised and licensed restaurants and other revenue		$	21,664			$	21,232
Less: franchised and licensed restaurants and other expense			(10,065	)			(9,781	)
Add: depreciation and amortization expense			1,096				1,044
Franchise restaurant adjusted EBITDA		$	12,695			$	12,495

 

(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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Hardee’s Year to Date

 

		Successor				Successor/ Predecessor				Successor				Predecessor
		Forty Weeks Ended November 7, 2011				Forty Weeks Ended November 1, 2010				Sixteen Weeks Ended November 1, 2010				Twenty-Four Weeks Ended July 12, 2010
Company-operated restaurants revenue		$	408,690			$	388,513			$	159,470			$	229,043
Franchised and licensed restaurants and other revenue			75,289				67,321				27,841				39,480
Total revenue			483,979				455,834				187,311				268,523
Restaurant operating costs:
Food and packaging			127,980				116,575				47,733				68,842
Payroll and other employee benefits			118,563				116,912				46,414				70,498
Occupancy and other			91,654				87,569				36,191				51,378
Total restaurant operating costs			338,197				321,056				130,338				190,718
Franchised and licensed restaurants and other expense			36,890				29,710				12,625				17,085
Advertising expense			22,869				22,113				9,086				13,027
General and administrative expense			52,823				57,706				26,440				31,266
Facility action charges, net			573				1,117				748				369
Operating income		$	32,627			$	24,132			$	8,074			$	16,058
Company-operated same-store sales increase			5.0	%			4.0	%
Franchise-operated same-store sales increase			3.4	%			3.1	%
Company-operated same-store transaction increase			0.5	%			1.7	%
Company-operated average check (actual $)		$	5.34			$	5.13
Restaurant operating costs as a percentage of company-operated restaurants revenue:
Food and packaging			31.3	%			30.0	%
Payroll and other employee benefits			29.0	%			30.1	%
Occupancy and other			22.4	%			22.5	%
Total restaurant operating costs			82.8	%			82.6	%
Advertising expense as a percentage of company-operated restaurants revenue			5.6	%			5.7	%
Company-operated restaurant-level adjusted EBITDA(1):
Company-operated restaurants revenue		$	408,690			$	388,513			$	159,470			$	229,043
Less: restaurant operating costs			(338,197	)			(321,056	)			(130,338	)			(190,718	)
Add: depreciation and amortization expense			27,876				25,706				10,128				15,578
Less: advertising expense			(22,869	)			(22,113	)			(9,086	)			(13,027	)
Company-operated restaurant-level adjusted EBITDA		$	75,500			$	71,050			$	30,174			$	40,876
Company-operated restaurant-level adjusted EBITDA margin			18.5	%			18.3	%			18.9	%			17.8	%
Franchise restaurant adjusted EBITDA(1):
Franchised and licensed restaurants and other revenue		$	75,289			$	67,321			$	27,841			$	39,480
Less: franchised and licensed restaurants and other expense			(36,890	)			(29,710	)			(12,625	)			(17,085	)
Add: depreciation and amortization expense			3,302				1,969				1,333				636
Franchise restaurant adjusted EBITDA		$	41,701			$	39,580			$	16,549			$	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.

 

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Carl’s Jr.

Company-Operated Restaurants Revenue

Revenue from company-operated Carl’s Jr. restaurants increased $4,744, or 3.6%, to $136,111 during the twelve weeks ended November 7, 2011, as compared to the twelve weeks ended November 1, 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 third quarter of fiscal 2011, partially offset by a decrease in revenues from restaurants closed since the end of the third quarter of fiscal 2011.

Revenue from company-operated Carl’s Jr. restaurants increased $14,878, or 3.3%, to $462,769 during the forty weeks ended November 7, 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 third quarter of fiscal 2011, partially offset by a decrease in revenues from restaurants closed since the end of the third 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				Forty Weeks
Company-operated restaurant-level adjusted EBITDA margin for the period ended November 1, 2010			15.7	%			16.8	%
Increase in food and packaging costs			(0.8	)			(0.9	)
Payroll and other employee benefits
Decrease in labor costs, excluding workers’ compensation			0.2				0.2
Decrease (increase) in workers’ compensation expense			0.1				(0.2	)
Occupancy and other (excluding depreciation and amortization):
Decrease in rent expense			0.4				0.1
Increase in biscuit roll-out costs			(0.5	)			(0.2	)
Decrease in repairs and maintenance expense			0.3				0.2
Increase in credit card and banking fees			(0.2	)			(0.2	)
Other, net			0.3				—
Advertising expense			(0.5	)			—
Company-operated restaurant-level adjusted EBITDA margin for the period ended November 7, 2011			15.0	%			15.8	%

Food and Packaging Costs

Food and packaging costs increased as a percentage of company-operated restaurants revenue during the twelve and forty weeks ended November 7, 2011, as compared to the prior year periods, due primarily to increased commodity costs for beef, oil and cheese products.

Occupancy and Other Costs

Rent expense decreased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 7, 2011, from the comparable prior year period, due primarily to increased sales leverage.

Biscuit roll-out costs increased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 7, 2011, from the comparable prior year period, due to the additional costs incurred in connection with the roll-out of Hardee’s Made From Scratch breakfast biscuits at Carl’s Jr. in the Los Angeles market.

Repairs and maintenance expense decreased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 7, 2011, from the comparable prior year period, due primarily to decreased spending on contract services and repairs of restaurant equipment in the current year period.

 

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Advertising Expense

Advertising expense as a percentage of company-operated restaurants revenue increased from 6.0% to 6.5% during the twelve weeks ended November 7, 2011 as compared to the twelve weeks ended November 1, 2010. The increase as a percentage of company-operated restaurants revenue was mainly due to incremental print and media spending to promote the roll-out of Hardee’s Made From Scratch breakfast biscuits at Carl’s Jr. in the Los Angeles market and incremental media spending in select markets.

Franchised and Licensed Restaurants

 

Carl’s Jr. Fiscal Quarter		Successor
		Twelve Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010
Franchised and licensed restaurants and other revenue:
Royalties		$	7,813			$	7,527
Rent and other occupancy			5,387				5,671
Franchise fees			655				140
Total franchised and licensed restaurants and other revenue		$	13,855			$	13,338
Franchised and licensed restaurants and other expense:
Administrative expense (including provision for bad debts)		$	2,950			$	2,252
Rent and other occupancy			4,892				4,962
Total franchised and licensed restaurants and other expense		$	7,842			$	7,214

Total franchised and licensed restaurants and other revenue increased $517, or 3.9%, to $13,855 during the twelve weeks ended November 7, 2011, as compared to the prior year period. Royalty revenues increased $286, or 3.8%, to $7,813, due primarily to the net increase of 46 franchised and licensed restaurants since the end of the third quarter of fiscal 2011, partially offset by a 2.5% decrease in franchise-operated same-store sales. Franchise fees increased $515 to $655 during the twelve weeks ended November 7, 2011, as compared to the prior year period, due primarily to the opening of new franchised and licensed restaurants. Rent and other occupancy revenues decreased $284, or 5.0%, mainly due to the impact of franchisees entering into lease arrangements directly with landlords and a decrease in contingent rent revenue from franchisees.

Franchised and licensed restaurants and other expense increased $628, or 8.7%, to $7,842 during the twelve weeks ended November 7, 2011, from the comparable prior year period. Administrative expense increased $698, or 31.0%, from the comparable prior year period, due primarily to increased franchise operations and administration costs related to our international growth strategy.

 

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Carl’s Jr. Year to Date		Successor				Successor/ Predecessor				Successor				Predecessor
		Forty Weeks Ended November  7, 2011				Forty Weeks Ended November 1, 2010				Sixteen Weeks Ended November 1, 2010				Twenty-Four Weeks Ended July 12, 2010
Franchised and licensed restaurants and other revenue:
Royalties		$	26,608			$	25,087			$	10,019			$	15,068
Distribution centers – food, packaging and supplies			—				86,891				—				86,891
Rent and other occupancy			17,400				16,936				7,515				9,421
Franchise fees			1,637				709				234				475
Total franchised and licensed restaurants and other revenue		$	45,645			$	129,623			$	17,768			$	111,855
Franchised and licensed restaurants and other expense:
Administrative expense (including provision for bad debts)		$	9,016			$	6,230			$	3,038			$	3,192
Distribution centers – food, packaging and supplies			—				86,170				—				86,170
Rent and other occupancy			16,319				15,267				6,594				8,673
Total franchised and licensed restaurants and other expense		$	25,335			$	107,667			$	9,632			$	98,035

Total franchised and licensed restaurants revenue decreased $83,978, or 64.8%, to $45,645 during the forty weeks ended November 7, 2011, as compared to the forty weeks ended November 1, 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. This decrease was partially offset by an increase in royalty revenues of $1,521, or 6.1%, due primarily to the net increase of 46 franchised and licensed restaurants since the end of the third quarter of fiscal 2011, partially offset by a 0.8% decrease in franchise-operated same-store sales. Franchise fees increased $928 to $1,637 during the forty weeks ended November 7, 2011, as compared to the prior year period, due primarily to the opening of new franchised and licensed restaurants. Rent and other occupancy revenues increased $464, or 2.7%, mainly due to impact of the amortization of favorable and unfavorable leases, which were recorded in connection with the Merger, partially offset by the impact of franchisees entering into lease arrangements directly with landlords.

Franchised and licensed operating and other expenses decreased $82,332, or 76.5%, to $25,335 during the forty weeks ended November 7, 2011, as compared to the prior year period. This decrease is mainly due to an $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 $2,786, or 44.7%, 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. Rent and other occupancy expense increased $1,052, or 6.9%, to $16,319 due primarily 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 $2,185, or 1.8%, to $120,865 during the twelve weeks ended November 7, 2011, over the comparable prior year period, primarily due to the 1.8% increase in company-operated same-store sales.

During the forty weeks ended November 7, 2011, revenue from company-operated restaurants increased $20,177, or 5.2%, to $408,690 as compared to the forty weeks ended November 1, 2010. The increase is primarily due to the 5.0% increase in company-operated same-store sales.

 

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Company-Operated Restaurant-Level Adjusted EBITDA Margin

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

 

		Twelve Weeks				Forty Weeks
Company-operated restaurant-level adjusted EBITDA margin for the period ended November 1, 2010			18.9	%			18.3	%
Increase in food and packaging costs			(1.4	)			(1.3	)
Payroll and other employee benefits:
Decrease in labor costs, excluding workers’ compensation			0.4				1.0
Decrease in workers’ compensation expense			0.2				0.1
Occupancy and other (excluding depreciation and amortization):
Decrease in property tax expense			0.2				0.1
Decrease in general liability insurance expense			0.2				0.1
Decrease in asset disposal expense			0.2				0.1
Other, net			0.2				—
Advertising expense			0.2				0.1
Company-operated restaurant-level adjusted EBITDA margin for the period ended November 7, 2011			19.1	%			18.5	%

Food and Packaging Costs

Food and packaging costs increased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 7, 2011, as compared to the prior year period, mainly due to an increase in commodity costs for beef, oil, dairy and pork products.

Food and packaging costs increased as a percentage of company-operated restaurants revenue during the forty weeks ended November 7, 2011, as compared to the prior year period, mainly due to an increase in commodity costs for 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 forty weeks ended November 7, 2011, as compared to the prior year periods, due primarily to more efficient use of labor in the restaurants and sales leverage.

Occupancy and Other Costs

Depreciation and amortization expense increased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 7, 2011, from the comparable prior year period, due primarily to fixed asset additions, partially offset by sales leverage.

 

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Franchised and Licensed Restaurants

 

Hardee’s Fiscal Quarter		Successor
		Twelve Weeks Ended November 7, 2011				Twelve Weeks Ended November 1, 2010
Franchised and licensed restaurants and other revenue:
Royalties		$	13,753			$	13,214
Distribution centers – equipment			4,472				4,729
Rent and other occupancy			3,095				3,102
Franchise fees			344				187
Total franchised and licensed restaurants and other revenue		$	21,664			$	21,232
Franchised and licensed restaurants and other expense:
Administrative expense (including provision for bad debts)		$	2,958			$	2,453
Distribution centers – equipment			4,433				4,759
Rent and other occupancy			2,674				2,569
Total franchised and licensed restaurants and other expense		$	10,065			$	9,781

Total franchised and licensed restaurants and other revenue increased $432 or 2.0%, to $21,664 during the twelve weeks ended November 7, 2011, as compared to the prior year period. Royalty revenues increased $539, or 4.1%, to $13,753, from the comparable prior year period, due primarily to a net increase of 19 franchised and licensed restaurants since the end of the third quarter of fiscal 2011 and an increase in franchise-operated same-store sales of 1.3%. The decrease in distribution center sales of equipment of $257, or 5.4%, from the comparable prior year period, was primarily due to a decrease in equipment sales to third parties.

Franchised and licensed restaurants and other expense increased $284, or 2.9%, to $10,065, during the twelve weeks ended November 7, 2011, as compared to the prior year period. The increase in administrative expense of $505, or 20.6%, to $2,958 was primarily due to an increase in administration costs to support our long-term growth strategy. The decrease in distribution center costs of $326, or 6.9%, resulted directly from the decrease in distribution center sales of equipment to third parties.

 

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(Dollars in thousands)

 

Hardee’s Year to Date		Successor				Successor/ Predecessor				Successor				Predecessor
		Forty Weeks Ended November 7, 2011				Forty Weeks Ended November 1, 2010				Sixteen Weeks Ended November 1, 2010				Twenty-Four Weeks Ended July 12, 2010
Franchised and licensed restaurants and other revenue:
Royalties		$	45,565			$	42,285			$	17,583			$	24,702
Distribution centers – equipment			18,682				15,089				5,869				9,220
Rent and other occupancy			10,105				9,289				4,102				5,187
Franchise fees			937				658				287				371
Total franchised and licensed restaurants and other revenue		$	75,289			$	67,321			$	27,841			$	39,480
Franchised and licensed restaurants and other expense:
Administrative expense (including provision for bad debts)		$	9,744			$	7,330			$	3,303			$	4,027
Distribution centers – equipment			18,545				15,103				5,897				9,206
Rent and other occupancy			8,601				7,277				3,425				3,852
Total franchised and licensed restaurants and other expense		$	36,890			$	29,710			$	12,625			$	17,085

Total franchised and licensed restaurants revenue increased $7,968, or 11.8%, to $75,289 during the forty weeks ended November 7, 2011, as compared to the prior year period. Distribution center revenues increased $3,593, or 23.8%, primarily due to an increase in equipment sales to franchisees. Royalty revenues increased by $3,280, or 7.8%, from the comparable prior year period, due primarily to a net increase of 19 franchised and licensed restaurants since the end of the third quarter of fiscal 2011 and an increase in our franchise-operated same-store sales of 3.4%. Rent and other occupancy revenue increased $816, or 8.8%, 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 $7,180, or 24.2%, to $36,890, during the forty weeks ended November 7, 2011, as compared to the prior year period. Distribution center expenses increased $3,442, or 22.8%, resulting directly from the increase in distribution center sales to franchisees. The increase in administrative expense of $2,414 was primarily due to increased franchise operations and administration costs to support our long-term growth strategy and an increase of $878 in amortization expense related to the franchise agreement intangible asset recorded in connection with the Merger. Rent and other occupancy expense increased $1,324, or 18.2%, 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 $8,744, or 8.0%, to $100,876, for the forty weeks ended November 7, 2011, as compared to the forty weeks ended November 1, 2010. This was mainly due to a $13,175 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 $2,269 in bonus expense, which is based on our performance relative to executive management and operations bonus criteria, and an increase of $1,279 in management service fees paid to Apollo Management.

Other Operating Expenses, Net

During the twelve weeks ended November 7, 2011, other operating expenses decreased $167 from the comparable prior year period to zero. This decrease is primarily due to a decrease in transaction-related costs for accounting, investment banking, legal and other costs associated with the Transactions.

 

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During the forty weeks ended November 7, 2011, other operating expenses, net decreased $29,532 from the comparable prior year period to $545. This decrease was primarily due to a decrease in transaction-related costs for accounting, investment banking, legal and other costs associated with the Transactions, which decreased from $33,519 for the forty weeks ended November 1, 2010 to $545 for the forty weeks ended November 7, 2011. Additionally, during the forty weeks ended November 1, 2010, we recorded a gain of $3,442 on the sale of our Distribution Center assets.

Interest Expense

During the twelve weeks ended November 7, 2011, the decrease in interest expense of $640, to $17,415, as compared to the twelve weeks ended November 1, 2010 was primarily due to a decrease of $1,122 in interest expense associated with our Notes caused by a reduction in the principal amount of our Notes since the prior year period. This decrease was partially offset by the additional interest incurred on financing method sale-leaseback transactions entered into during fiscal 2012.

During the forty weeks ended November 7, 2011, interest expense increased $26,974 to $59,626, as compared to the forty weeks ended November 1, 2010. This increase was primarily caused by the interest incurred on our Notes and financing method sale-leaseback transactions entered into during fiscal 2012. Interest expense during the forty weeks ended November 1, 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 November 7, 2011, we recorded $252 of other expense, net as compared to other income, net of $803 during the twelve weeks ended November 1, 2010. This change was primarily due to expenses incurred related to previously disposed businesses and a loss of $286 recognized on the early extinguishment of $8,170 of the principal amount of our Notes during the twelve weeks ended November 7, 2011.

During the forty weeks ended November 7, 2011, we recorded $1,668 of other expense, net as compared to other expense, net of $12,641 during the forty weeks ended November 1, 2010. During the forty weeks ended November 7, 2011, we recognized a loss of $2,927 on the early extinguishment of $48,170 of the principal amount of our Notes. During the forty weeks ended November 1, 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.

Income Tax (Benefit) Expense

Our effective income tax rate for the twelve and forty weeks ended November 7, 2011 differs from the federal statutory rate primarily as a result of non-deductible share-based compensation expense, state income taxes, federal income tax credits and the release of $237 of unrecognized tax benefits due to statute closures. Our effective income tax rate for the twelve and forty weeks ended November 1, 2010 differs from the federal statutory rate primarily as a result of non-deductible transaction-related costs, non-deductible share-based compensation expense, state income taxes and the release of $1,501 of unrecognized tax benefits due to statute closures.

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. 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 November 7, 2011, we have $61,075 in cash and cash equivalents and $68,537 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. Based on our current capital spending projections, we expect capital expenditures to be between $55,000 and $60,000 for fiscal 2012. As discussed below, we commenced a tender offer to purchase up to $27,871 of the principal amount of our Notes (“Tender Offer”) at a redemption price of 103%, which expires December 29, 2011. In addition to the Tender Offer, on December 1, 2011, we elected to redeem up to $20,000 aggregate principal amount of the Notes outstanding on January 4, 2012 (“Redemption”) at a redemption price of 103%. The terms of the Redemption provide that the combined principal amount of the notes purchased in the Tender Offer and Redemption will not exceed $30,000. In addition to the Redemption and Tender Offer, we may elect to redeem up to an additional $60,000 of the principal amount of our Notes during the twelve month period commencing July 15, 2012.

 

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Assuming the aggregate outstanding principal amount of our Notes remains unchanged from November 7, 2011, we will be required to make semi-annual interest payments on our Notes of approximately $31,385. 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 November 7, 2011, we had no outstanding loan borrowings, $31,463 of outstanding letters of credit, and remaining availability of $68,537 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.

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 November 7, 2011, the net book value of the assets associated with financing method sale-leaseback transactions was $31,825. 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 November 7, 2011, our financial performance covenants did not limit our ability to draw on the remaining availability of $68,537 under our Credit Facility.

We were in compliance with the covenants of our Credit Facility as of November 7, 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. On October 4, 2011, we purchased $8,170 of the principal amount of our Notes at a price of 100% of the principal amount of the Notes in an open market transaction and paid the associated accrued and unpaid interest on these purchased Notes of $212. Subsequent to the redemption and purchase, and as of November 7, 2011, the aggregate principal amount of our Notes outstanding was $551,830. 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 November 7, 2011, the carrying value of the notes was $542,413, which is presented net of the remaining unamortized original issue discount of $9,417. The Notes mature on July 15, 2018.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

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.

We were in compliance with the covenants included in the indenture governing the Notes as of November 7, 2011.

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.

In accordance with the indenture governing the Notes, we are required to make an offer to repurchase our Notes at 103% of the principal amount of the Notes with a portion of the net proceeds received from sale-leaseback transactions. Pursuant to these requirements, on December 1, 2011, we commenced the Tender Offer to purchase up to $27,871 of the principal amount of our Notes at a redemption price of 103%, which expires on December 29, 2011. In addition to the Tender Offer, on December 1, 2011, the holders of the Notes were notified that CKE will redeem on January 4, 2012, conditioned in part on the results of the Tender Offer, up to $20,000 aggregate principal amount of the Notes outstanding on January 4, 2012 at a redemption price of 103% pursuant to the terms of the indenture governing the Notes. Pursuant to the Redemption, the Notes to be redeemed will be reduced so that the total principal amount of Notes purchased in both the Tender Offer and Redemption will not exceed $30,000.

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. During the twelve weeks ended November 7, 2011, CKE purchased $9,948 principal amount of Parent Notes for $8,362, which represents a weighted average price of 84.06% of the principal amount of the purchased Parent Notes. For accounting purposes, we have recorded our investment in Parent Notes as a reduction of stockholder’s equity. See Note 7 of Notes to Condensed Consolidated Financial Statements included herein for further discussion.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

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 forty weeks ended November 7, 2011, cash provided by operating activities totaled $90,997, an increase of $56,151 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 forty weeks ended November 7, 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 forty weeks ended November 7, 2011 totaled $41,842, which principally consisted of purchases of property and equipment of $44,440, partially offset by $1,749 of proceeds from the sale of property and equipment.

Capital expenditures were as follows:

 

		Successor				Successor/ Predecessor
		Forty Weeks Ended November 7, 2011				Forty Weeks Ended November 1, 2010
Remodels:
Carl’s Jr.		$	2,698			$	2,582
Hardee’s			9,763				14,883
Capital maintenance:
Carl’s Jr.			9,671				8,479
Hardee’s			10,406				11,749
New restaurants and rebuilds:
Carl’s Jr.			5,828				8,277
Hardee’s			2,125				2,607
Dual-branding:
Carl’s Jr.			419				672
Hardee’s			1,760				2,120
Real estate and franchise acquisitions			667				20
Corporate and other			1,103				914
Total		$	44,440			$	52,303

Capital expenditures for the forty weeks ended November 7, 2011 decreased $7,863, or 15.0%, to $44,440 from the comparable prior year period mainly due to a $5,004 decrease in restaurant remodels and a $2,931 decrease in new restaurants and rebuilds.

Cash used in financing activities during the forty weeks ended November 7, 2011 totaled $30,666 as compared to cash provided by financing activities during the forty weeks ended November 1, 2010 of $719,207. During the forty weeks ended November 7, 2011, we made payments of $49,370 in connection with the early extinguishment of $48,170 principal amount of our Notes. Additionally, we made payments of $8,362 to purchase $9,948 principal amount of Parent Notes and there was a net decrease in our bank overdraft of $6,767. This usage was partially offset by the proceeds from financing method sale-leaseback transactions of $40,702. During the forty weeks ended November 1, 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 forty weeks ended November 1, 2010.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

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.

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 November 7, 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 November 7, 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.

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

 

Our actuary provides us with estimated unpaid losses for each loss category, upon which our analysis is based. As of November 7, 2011 and January 31, 2011, our estimated liability for self-insured workers’ compensation, general and auto liability losses was $39,452 and $39,581, respectively.

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 forty weeks ended November 7, 2011 and November 1, 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 and October 4, 2011, we redeemed $40,000 and $8,170, respectively, of the aggregate principal amount of our Notes, reducing the outstanding aggregate principal amount of our Notes to $551,830 as of November 7, 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 periods prior to the Transactions.

The acquisition of CKE Restaurants, Inc. 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 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 the 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 forty weeks ended November 7, 2011, we entered into agreements with independent third parties under which we sold and leased back 29 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 November 7, 2011, the net book value of the assets associated with these transactions was $31,825. 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 November 7, 2011, the net proceeds received of $40,702 exceeded the net book value of the associated restaurant properties by $8,877. We expect that we will sell and leaseback additional restaurant properties in future quarters; 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. During the twelve weeks ended November 7, 2011, we purchased $9,948 principal amount of Parent Notes (“Purchased Parent Notes”) for $8,362, which represents a weighted average price of 84.06% of the principal amount of the Parent Notes. See Note 7 of Notes to Condensed Consolidated Financial Statements included herein for additional discussion.

As of November 7, 2011, the principal amount of Parent’s total long-term debt on a stand-alone basis was $211,313, including the $9,948 principal amount of the Purchased Parent Notes. As of November 7, 2011, the carrying amount of Parent’s total long-term debt on a stand-alone basis, including the current portion and the Purchased Parent Notes, was $207,789, which is presented net of the unamortized portion of the original issue discount of $3,524. During the twelve and forty weeks ended November 7, 2011, Parent incurred interest expense on a stand-alone basis of $5,727 and $15,795, respectively. Parent’s consolidated interest expense was $23,032 and $75,311 during the twelve and forty weeks ended November 7, 2011, respectively. Since the Purchased Parent Notes continue to be held by CKE, $110 of Parent’s stand-alone interest expense, which is associated with the Purchased Parent Notes, has been eliminated in Parent’s consolidated interest expense for both the twelve and forty weeks ended November 7, 2011.

 

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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 exposure to financial market risk relates 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 November 7, 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 November 7, 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 forty weeks ended November 7, 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 $1,231.

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.

In connection with the preparation of this Quarterly Report on Form 10-Q, as of November 7, 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.

 

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(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 November 7, 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.

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.

Real Property

We have various leasing arrangements related to our company-operated restaurants, franchised and licensed restaurants and other properties. In the course of managing these various leasing arrangements, disputes occasionally arise with respect to rental payments, property improvements, abandonment of property and the interpretation of lease provisions.

 

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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: December 14, 2011		/s/ Reese Stewart
		Reese Stewart
		Senior Vice President and 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.