10-K 1 a28747e10vk.htm FORM 10-K e10vk
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended January 29, 2007
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-11313
 
(CKE RESTAURANTS LOGO)
CKE Restaurants, Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware   33-0602639
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
6307 Carpinteria Ave., Ste. A
Carpinteria, California 93013
(Address of principal executive offices)
 
Registrant’s telephone number, including area code
(805) 745-7500
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $.01 par value   New York Stock Exchange
4% Convertible Subordinated Notes due 2023   New York Stock Exchange
 
Securities Registered Pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark whether the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):  Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
 
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of the voting stock held by non-affiliates of the registrant as of August 14, 2006 was $885,818,062.
 
The number of outstanding shares of the registrant’s common stock was 67,198,004 as of March 22, 2007.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
Portions of the registrant’s Proxy Statement for the 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of January 29, 2007, are incorporated by reference into Part III of this Report.
 


 

 
CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended January 29, 2007

TABLE OF CONTENTS
 
                 
        Page
        No.
 
  Business   1
  Risk Factors   11
  Unresolved Staff Comments   15
  Properties   16
  Legal Proceedings   17
  Submission of Matters to a Vote of Security Holders   17
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   18
  Selected Financial Data   20
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   24
  Quantitative and Qualitative Disclosures About Market Risk   60
  Financial Statements and Supplementary Data   60
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   60
  Controls and Procedures   61
  Other Information   63
 
  Directors and Executive Officers of the Registrant   64
  Executive Compensation   64
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   64
  Certain Relationships and Related Transactions   65
  Principal Accountant Fees and Services   65
 
  Exhibits and Financial Statement Schedules   66
 EXHIBIT 10.79
 EXHIBIT 10.80
 EXHIBIT 12.1
 EXHIBIT 21.1
 EXHIBIT 23.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2


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PART I
 
Item 1.   Business
 
Our fiscal year ends on the last Monday in January each year. In this Annual Report on Form 10-K, we refer to the fiscal years by reference to the calendar year in which they end (e.g., the fiscal year ended January 29, 2007, is referred to as “fiscal 2007,” and the fiscal year ended January 30, 2006, is referred to as “fiscal 2006”). Fiscal 2007 and fiscal 2006 each include 52 weeks, and fiscal 2005 includes 53 weeks. For clarity of presentation, we generally label all fiscal years presented as if the fiscal year ended January 31. All dollar amounts, except per share amounts, presented in this Annual Report on Form 10-K are in thousands, unless otherwise noted.
 
Company Overview
 
We own, operate, franchise or license 3,105 quick-service and fast-casual restaurants, which are referred to in our industry as QSRs, primarily under the brand names Carl’s Jr.®, Hardee’s® and La Salsa Fresh Mexican Grill® (“La Salsa”). According to the June 26, 2006 issue of Nation’s Restaurant News, our Hardee’s and Carl’s Jr. chains are the tenth and twelfth largest sandwich restaurant chains in the U.S., respectively, based on U.S. system-wide foodservice sales. Our system-wide restaurant portfolio at January 31, 2007, consisted of:
 
                                         
    Carl’s Jr.     Hardee’s     La Salsa     Other     Total  
 
Company-operated
    393       696       55       1       1,145  
Franchised and licensed
    694       1,210       41       15       1,960  
                                         
Total
    1,087       1,906       96       16       3,105  
                                         
 
Carl’s Jr.  The first Carl’s Jr. restaurant was opened in 1956. Our Carl’s Jr. restaurants are located predominantly in the Western United States. Carl’s Jr. restaurants offer superior quality food, a largely burger-based menu with other premium quality dining selections at reasonable prices and attentive customer service to create a quality dining experience for our customers. As of January 31, 2007, 171 of our 393 company-operated Carl’s Jr. restaurants are dual-branded with Green Burrito®. These dual-branded Carl’s Jr. restaurants typically have both higher sales and profits. Carl’s Jr. is predominantly a lunch and dinner concept, with approximately 85% of Carl’s Jr. company-operated restaurant revenue coming from the lunch and dinner portion of its business in fiscal 2007.
 
Hardee’s.  The first Hardee’s restaurant was opened in 1960. Our Hardee’s restaurants are located predominantly in the Southeastern and Midwestern United States. Hardee’s lunch and dinner menu is anchored by its super-premium quality line of 1/3-, 1/2- and 2/3-lb. Angus beef Thickburgerstm, which are complemented with best-in-class charbroiled and crispy chicken sandwiches. Historically, Hardee’s has been known as the best choice for breakfast in the QSR industry, with approximately 44% of company-operated revenue derived from that portion of its business in fiscal 2007. Hardee’s breakfast menu can attribute much of its success to the industry-first Made From Scratch® biscuits and biscuit breakfast sandwiches. The brand’s emphasis on superior customer service coupled with its more balanced current menu now gives Hardee’s an ideal opportunity to build sales in all meal occasions.
 
La Salsa.  We acquired La Salsa on March 1, 2002, when we acquired Santa Barbara Restaurant Group, Inc. (“SBRG”). Our La Salsa restaurants are located predominantly in California, and are quality, fast-casual restaurants featuring traditional Mexican food items including tacos, burritos, enchiladas and salads.
 
Recent Developments
 
Restatement of Prior Period Financial Results.  As reported in our Current Report on Form 8-K filed on February 28, 2007, the Audit Committee of our Board of Directors, after discussion with management and KPMG LLP, our independent registered public accounting firm, concluded on February 27, 2007, that our previously issued fiscal 2006 consolidated financial statements needed to be restated. As a result of the restatement, the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2006, should no longer be relied upon, and the consolidated financial statements for fiscal 2006 contained in this Annual Report


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should be relied upon in their place. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Restatement of Previously Issued Financial Statements and Notes to Consolidated Financial Statements — Note 1 — Significant Accounting Policies — Restatement of Previously Issued Financial Statements” for additional information.
 
Amendment to Sixth Amended and Restated Credit Facility (“Facility”).  On January 22, 2007, we entered into an amendment of our existing senior credit facility, increasing the aggregate amount that we are permitted to expend for stock repurchases and dividend payments by $130,000, and increasing the total amount available to us for revolving loans under the Facility by $100,000 to $250,000. As a result of the increased capacity for stock repurchases under the Facility, our Board of Directors authorized a further expansion of our stock repurchase program, as discussed below.
 
Seventh Amended and Restated Credit Facility (“Amended Facility”). On March 27, 2007, we amended and restated the Facility by entering into the Amended Facility, which provides for a $320,000 senior secured credit facility consisting of a $200,000 revolving credit facility and a $120,000 term loan. The revolving credit facility matures on March 27, 2012. The principal amount of the term loan is scheduled to be repaid in quarterly installments, with the remaining principal balance scheduled to mature on March 27, 2013.
 
Repurchase of Common Stock.  Pursuant to a program (“Stock Repurchase Plan”) authorized by our Board of Directors, as modified during fiscal 2007, we are allowed to repurchase up to an aggregate of $200,000 of our common stock in the open market. As part of our Stock Repurchase Plan, we have implemented a stock repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), under which we are allowed to repurchase $5,000 of our common stock in the open market each fiscal quarter through the quarter ending January 28, 2008. Rule 10b5-1 allows us to repurchase our common stock when we might otherwise be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. As of January 31, 2007, we have repurchased common stock totaling $90,613, with $81,057 of these repurchases occurring during fiscal 2007. Based on the Board of Directors’ authorization and the amount of cumulative repurchase of our common stock that we have already made thereunder, we are permitted to make additional repurchases of our common stock up to $109,387 under the Stock Repurchase Plan as of January 31, 2007.
 
Expiration of Stockholder Rights Plan.  During fiscal 2006, our Board of Directors approved the adoption of a Stockholder Rights Plan (“Rights Plan”) pursuant to a Rights Agreement between us and Mellon Investor Services, LLC, dated October 10, 2005 (“Rights Agreement”). On December 31, 2006, the Rights expired pursuant to the terms of the Rights Plan. The Rights expired because our Board of Directors determined not to solicit the requisite stockholder approval of the Rights Agreement by December 31, 2006. As a result, the Rights have no further force or effect and the Rights Plan has effectively terminated.
 
Purchase of Restaurant Assets.  During March 2006, we purchased, for aggregate consideration of $15,762, a total of 36 restaurant locations that we had previously leased from a commercial lessor.
 
Termination of Franchise Agreement.  During February 2006, we terminated our franchise agreement with a Hardee’s franchisee that operated 90 franchised restaurants as a result of its inability to remedy, on a timely basis, certain defaults under the terms of the agreement. At that time, ten of the affected restaurants were located on property that we owned and leased to the franchisee, and 51 of the affected restaurants were located on leased premises that we sublet to the franchisee. During March 2006, we purchased five additional parcels that we had previously leased from a commercial lessor and sublet to the franchisee. The franchisee continued to operate the affected restaurants pursuant to a temporary license agreement until May 18, 2006, when we terminated the license agreement, leases and subleases and assumed full operational control of the aforementioned 61 restaurants. Since the termination of the license agreement, we have purchased $2,400 of existing equipment, closed 19 of the 61 restaurants and recorded facility action charges of $1,959 related to closing these restaurants. We currently operate the remaining 42 restaurants as company-operated restaurants. The former franchisee’s lenders (through a receiver) kept the remaining 29 restaurant locations, of which they subsequently closed 15. During October 2006, we purchased 11 of these restaurants for $6,538 and an existing franchisee, under a franchise agreement, purchased the remaining three restaurants. The total purchase price included land, buildings and existing equipment.
 
Adoption of New Accounting Pronouncements. See Note 3 of Notes to Consolidated Financial Statements.


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Use of Non-GAAP Financial Measurements
 
In various places throughout this Annual Report on Form 10-K, we use certain non-GAAP financial measures, which we believe provide valuable information to our stockholders. An example of such a non-GAAP financial measure would be Adjusted EBITDA, which is a measure used by our senior lenders under the Facility to evaluate our ability to service debt. Additional information regarding the non-GAAP financial measures used in this Annual Report can be found under the headings “Presentation of Non-GAAP Measurements” and “Liquidity and Capital Resources” in Item 7 of this Annual Report on Form 10-K.
 
Contact Information; Obtaining Copies of this Annual Report
 
We are incorporated in the State of Delaware. Our principal offices are located at 6307 Carpinteria Avenue, Suite A, Carpinteria, California, 93013. Our general website address is www.ckr.com.
 
Electronic copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge by visiting the “Investors” section of www.ckr.com.  These reports are posted as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains our reports.
 
In addition, print copies of any of the foregoing documents may be obtained free of charge by visiting the “Contact” section of www.ckr.com, or by contacting Investor Relations at (805) 745-7500.
 
Information contained in our website is not deemed to be a part of this Annual Report.
 
Competitive Strengths
 
The QSR industry is highly competitive. In order to maintain or increase their sales, a number of our major competitors have from time to time discounted certain menu items and promoted these discounted “value items.” By contrast, we have developed and implemented a strategy to differentiate our Carl’s Jr. and Hardee’s brands from our competitors that includes the following elements:
 
  •  promotion of distinctive, premium, great tasting products such as the Carl’s Jr. line of Six Dollar Burgerstm, Hand-Scooped Ice Cream Shakes and Maltstm and Breakfast Burgerstm and burritos; as well as Hardee’s line of 1/3-, 1/2- and 2/3-lb. Angus Beef Thickburgers, Hand-Scooped Ice Cream Shakes and Maltstm, and Made From Scratchtm breakfast biscuits;
 
  •  utilization of gas-fired charbroilers in all of our Carl’s Jr. and Hardee’s restaurants to improve taste, operations and food safety;
 
  •  implementation of a program to focus on the essentials of restaurant operations — quality, service and cleanliness; and
 
  •  initiation of a program to elevate customer service at Carl’s Jr. and Hardee’s to an industry-leading level.
 
Carl’s Jr. and Hardee’s further differentiate themselves from their competitors by preparing their products according to exacting standards so that customers receive hot and fresh food, and by offering their customers the convenience of table service once the order is placed.
 
Carl’s Jr.  Carl’s Jr. is a well-recognized brand that has operated profitably in each of the past ten fiscal years. The brand focuses on selling its signature products, such as the Carl’s Famous Star® hamburger, The Six Dollar Burger® and the Green Burrito Taco Saladtm, and on developing innovative new premium products, such as the Pastrami Burgertm, Hand-Scooped Ice Cream Shakes and Malts and the Smoked Sausage Breakfast Sandwichtm, to attract what we characterize as the “young, hungry guy.” Carl’s Jr. focus on this customer type is enhanced through edgy, breakthrough advertising and high visibility sports sponsorships with professional sports teams in its major markets, including the National Basketball Association’s Los Angeles Lakers, Los Angeles Clippers and Sacramento Kings and Major League Baseball’s (“MLB”) Los Angeles Dodgers and Los Angeles Angels of


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Anaheim. While we continue to build new Carl’s Jr. restaurants, most of the brand’s growth in recent years has come from its strong franchise community and its dual-branding opportunities with our Green Burrito brand.
 
Hardee’s.  Hardee’s is a well-recognized brand that has completed its turnaround phase and is now focused on long-term growth initiatives. The brand focuses on selling its signature products, such as the Thickburger® and Made From Scratch breakfast biscuits, and on developing innovative new premium products, such as the Philly Cheesesteak Thickburgertm, Jalapeño Thickburgertm, Smoked Sausage Biscuittm, Hand-Scooped Ice Cream Shakes and Malts and the Monster Biscuittm, to attract what we characterize as the “young, hungry guy.” Hardee’s focus on this customer type is enhanced through edgy, breakthrough advertising and high visibility sports sponsorships with professional sports teams in its major markets, including the MLB’s St. Louis Cardinals. While we believe the greatest opportunity for the brand is within building the lunch and dayparts at our existing restaurants, we will gradually increase the number of new restaurants built and will continue to rollout the test of our Red Burrito dual-branded concept.
 
La Salsa.  Our La Salsa restaurants, modeled after the “taquerias” of Mexico, primarily cater to the lunch and dinner segment, and feature freshly prepared items such as tacos, burritos, enchiladas, salads and guacamole. La Salsa restaurants emphasize generous portions and quality ingredients including Grade “A” skinless chicken, USDA lean steak, fish, shrimp, real cheddar and Monterey Jack cheeses, long-grain rice, both black and pinto beans and avocado.
 
All ingredients are fresh, and there are no can openers or microwave ovens in the restaurants. Food is prepared to order, so that each item served will be fresh and hot. The restaurants offer a self-service salsa bar featuring a variety of condiments and freshly made salsas.
 
Business Strategy
 
We remain focused on vigorously pursuing a comprehensive business strategy. The main components of our strategy are as follows:
 
  •  increase revenues, average unit volumes and operating income at our major brands;
 
  •  remain focused on restaurant fundamentals — quality, service and cleanliness;
 
  •  capitalize on our unique brand positioning and cutting-edge advertising;
 
  •  offer premium products that compete on quality, innovation and taste;
 
  •  continue to capitalize on dual-branding opportunities available with Green Burrito and Red Burritotm;
 
  •  control costs and improve capital structure while increasing shareholder distributions;
 
  •  leverage our infrastructure and marketing presence to build out existing core markets;
 
  •  remodel our existing store base to remain competitive; and
 
  •  strengthen our franchise system and pursue further franchising opportunities, including new franchisees.
 
Increasing average unit volume at Hardee’s remains a primary focus of our management team. The key driver in improving Hardee’s profitability is increasing sales. For the fiscal year ended January 31, 2007, the average unit volume (“AUV”) at our company-operated Hardee’s restaurants was approximately $916, up from $874 in fiscal 2006 and $862 in fiscal 2005. Franchise-operated AUV was approximately $949 at the end of fiscal 2007, up from $897 in fiscal 2006 and $891 in fiscal 2005. We can provide no assurance that we will be successful in improving company-operated Hardee’s restaurant AUVs, or maintaining franchise-operated Hardee’s restaurant AUVs.
 
Franchise Strategy
 
Our franchise and licensing strategy depends upon on our franchisees’ active involvement in and management of restaurant operations. Candidates are reviewed for appropriate operational experience and financial stability, including specific net worth and liquidity requirements. Generally, area development agreements require franchisees to open a specified number of restaurants in a designated geographic area within a specified period of time. Our franchise strategy is designed to further the development of our restaurant chains and reduce the total capital we need to develop our brands.


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Carl’s Jr.  Franchise agreements with Carl’s Jr. franchisees, which operate in Alaska, Arizona, California, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oklahoma, Oregon, Texas, Utah and Washington, generally provide for initial fees and continuing royalty payments and advertising fees to us based upon a percentage of gross sales (generally 4.0% for royalties and 5.0% to 6.0% for advertising). As of January 31, 2007, our Carl’s Jr. franchisees and licensees operated 694 Carl’s Jr. restaurants, or approximately 64% of the Carl’s Jr. system. The majority of our Carl’s Jr. franchisees own more than one restaurant, with 17 franchisees owning ten or more restaurants.
 
Hardee’s.  Franchise agreements with Hardee’s franchisees, who operate restaurants predominantly in the Southeastern and Midwestern United States, generally provide for initial fees and continuing royalty payments to us, and advertising fees to a national fund and/or a regional cooperative fund, based upon a percentage of gross sales (generally 4.0% for royalties and 4.0% to 5.0% for advertising). As of January 31, 2007, our Hardee’s franchisees and licensees operated 1,210 Hardee’s restaurants, or approximately 63% of the Hardee’s system. The majority of our Hardee’s franchisees own more than one restaurant, with 24 franchisees owning ten or more restaurants. Since our acquisition of Hardee’s in 1997, we have worked diligently to develop and enhance productive relationships with our Hardee’s franchisees. We have been supportive of the Hardee’s franchise association, and we believe that we have strong communications with the franchisees.
 
La Salsa.  Franchise agreements with La Salsa franchisees, which operate restaurants predominantly in California, generally provide for initial fees and continuing royalty payments and advertising fees to us based upon a percentage of gross sales (generally 5.0% for royalties and 1.0% to 2.0% for advertising). As of January 31, 2007, our La Salsa franchisees and licensees operated 41 La Salsa restaurants, or approximately 43% of the La Salsa system.
 
The results of executing our business strategy have been:
 
  •  We evolved the system-wide mix of restaurants to one that is primarily franchise-operated. At the end of fiscal 2007, approximately 64% of Carl’s Jr. and Hardee’s restaurants combined were franchised.
 
  •  We closed many unprofitable Hardee’s restaurants and increased our AUV for the brand.
 
  •  We believe we have improved the food quality, service and cleanliness at our Hardee’s restaurants.
 
  •  Our same-store sales trends for company-operated restaurants, for each brand by quarter are:
 
                         
    Carl’s Jr.   Hardee’s   La Salsa
 
Fiscal 2007
                       
First Quarter
    5.6 %     5.6 %     1.0 %
Second Quarter
    4.8 %     3.0 %     2.1 %
Third Quarter
    6.2 %     5.6 %     2.0 %
Fourth Quarter
    2.8 %     4.8 %     (0.2 )%
Fiscal 2006
                       
First Quarter
    2.4 %     (0.1 )%     2.0 %
Second Quarter
    1.0 %     0.0 %     2.6 %
Third Quarter
    (0.1 )%     (3.5 )%     2.6 %
Fourth Quarter
    5.3 %     2.9 %     3.7 %


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  •  Quarterly operating income (loss) by segment has been:
 
                                         
                            Consolidated
 
                            Operating
 
    Carl’s Jr.     Hardee’s     La Salsa     Other     Income  
 
Fiscal 2007
                                       
First Quarter
  $ 27,669     $ 7,796     $ (1,701 )   $ (130 )   $ 33,634  
Second Quarter
    21,571       13,303       (1,609 )     43       33,308  
Third Quarter
    17,157       10,764       (3,669 )     3       24,255  
Fourth Quarter
    17,128       684       (4,402 )     (115 )     13,295  
Fiscal 2006
                                       
First Quarter
  $ 21,265     $ 4,168     $ (2,233 )   $ (52 )   $ 23,148  
Second Quarter
    18,635       6,903       (1,242 )     (11,087 )     13,209  
Third Quarter
    17,754       4,275       (904 )     (141 )     20,984  
Fourth Quarter
    25,119       (1,953 )     (2,628 )     1       20,539  
 
The operating loss for Other, Including Discontinued Operations, for the second quarter of fiscal 2006 includes a charge of $11,000 to purchase and cancel all the outstanding options of Mr. William P. Foley, who resigned from the Board of Directors on July 19, 2005. This charge was recorded as a component of general and administrative expense.
 
Financial Information about Operating Segments
 
We are engaged in the development, operation and franchising of quick-service and fast-casual restaurants, primarily under the brand names Carl’s Jr., Hardee’s, and La Salsa, principally in the United States of America. Information about our revenues, operating results and assets is contained in Part II, Items 6 and 7 of this Annual Report on Form 10-K and in Note 22 of Notes to Consolidated Financial Statements. As shown in the table of quarterly operating income (loss) above, Carl’s Jr. and Hardee’s typically generate operating income, while La Salsa generates a loss from operations. In evaluating the profitability of our segments, we allocate much of our general and administrative expenses between these segments.
 
Investments in Other Restaurant Concepts
 
We selectively evaluate opportunities to acquire additional interests in other restaurant concepts, and we may make such investments and/or acquisitions in the future depending on the business prospects of the restaurant concept, the availability of financing at attractive terms, alternative business opportunities available to us, the consent of our senior lenders, if required, and general economic conditions.
 
Restaurant Development
 
We perform extensive due diligence on prospective restaurant sites before we commit to opening, or permitting a franchisee to open, a restaurant at a location. We intend to continue to open new company-operated restaurants, primarily in established markets. In fiscal 2007, we opened 13 new company-operated restaurants, and our franchisees and licensees opened 62 new restaurants. The average development cost for company-operated restaurants opened in fiscal 2007 is summarized in the following table.


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    Average per restaurant(1)  
    Carl’s Jr.     Hardee’s     La Salsa  
 
Land(2)
  $     $ 456     $  
Building and leasehold improvements
    1,173       884       577  
Equipment
    327       319       265  
                         
Total
  $ 1,500     $ 1,659     $ 842  
                         
 
 
(1) The averages above are contingent upon a number of factors including, but not limited to, restaurant prototype, geographical area and local zoning requirements.
 
(2) The majority of Carl’s Jr. and La Salsa restaurants are constructed on leased land.
 
Restaurant Operations and Support
 
We strive to maintain high standards in all products and equipment used by our restaurants, as well as our operations related to food preparation, service and cleanliness. We generally prepare our hamburgers and chicken sandwiches after the customer has placed an order, with the goal of serving them promptly. In addition, we charbroil hamburger patties and chicken breasts in a gas-fired double broiler that sears the meat on both sides in a uniform heating and cooking time. At our La Salsa restaurants, we prepare our fresh-Mexican menu items after the customer has placed an order with the goal of serving them promptly.
 
Our commitment to quality in both our products and our operations is supported by our training program. Each company-operated Carl’s Jr. and Hardee’s restaurant is operated by a general manager who has received a minimum of nine to twelve weeks of management training. Each company-operated La Salsa restaurant is operated by a general manager who has received a minimum of seven weeks of management training. These training programs involve a combination of classroom instruction and on-the-job training in specially designated training restaurants. The general manager trains other employees in accordance with our guidelines. District managers, who are typically responsible for seven to nine restaurants, also supervise general managers. Approximately 158 Carl’s Jr. and Hardee’s district managers are under the supervision of regional vice presidents or regional directors, who regularly inspect the operations in their respective districts and regions.
 
Marketing and Advertising
 
Our marketing and advertising initiatives focus on building brand awareness through the balanced use of television, radio and print advertising. These activities have been supported by contributions of 5.6% of sales from Carl’s Jr. company-operated and approximately 5.3% of sales from franchised restaurants during fiscal 2007.
 
Hardee’s company-operated restaurants contributed 4.6% of their sales for television, radio and print advertising during fiscal 2007. They also spent an additional 1.3% of sales on local advertising, billboards and point of purchase materials. Hardee’s franchised restaurants contributed 4.2% to 5.6% of their sales for advertising during fiscal 2007.
 
La Salsa company-operated restaurants have contributed 3.0% of their sales for the production of print and broadcast advertising and marketing material during fiscal 2007, and La Salsa franchised restaurants contributed approximately 1.0% of their sales during fiscal 2007.
 
Additional discussion of advertising can be found under the heading “Consolidated Expenses” in Item 7 of this Annual Report on Form 10-K.
 
Purchasing
 
We purchase most of the food products and packaging supplies used in our Carl’s Jr. restaurant system and warehouse and distribute such items to both company-operated and franchised Carl’s Jr. restaurants. Although not required to do so, our Carl’s Jr. franchisees in California and some adjacent states purchase most of their food, packaging and supplies from us. We have elected not to outsource our Carl’s Jr. distribution activities because we believe our mature procurement process allows us to effectively manage our food costs, provide adequate quantities


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of food and supplies at competitive prices, generate revenue from Carl’s Jr. franchisees by adding a nominal mark-up to cover direct costs and provide better overall service to our restaurants in California and some adjacent states. We seek competitive bids from suppliers on many of our products, approve suppliers of those products and require them to adhere to our established product specifications.
 
We currently purchase substantially all of the food, packaging and supplies sold or used in our Hardee’s restaurants from Meadowbrook Meat Company, Inc., dba MBM, Inc. (“MBM”). See Risk Factors — We depend on our suppliers to deliver quality products to us timely” on page 12. MBM currently distributes products to company-operated restaurants and to many of the franchised Hardee’s restaurants. Pursuant to the terms of our distribution agreements, we are obligated to purchase substantially all of our specified product requirements from MBM through July 14, 2010. The prices and delivery fees we pay for MBM products are subject to adjustment in certain circumstances, which may include increases or decreases resulting from changes in MBM’s cost structure.
 
We purchase most of the food, packaging and supplies used in our La Salsa restaurants from McLane Foodservice (“McLane”). We have distribution agreements with both McLane, which services restaurants in California, Nevada and Arizona, and Sysco Corporation (“Sysco”), which distributes to a small number of our outer market franchise restaurants. The agreements with McLane and Sysco expire on September 30, 2007 and August 31, 2008, respectively.
 
Information about our unconditional purchase obligations can be found under the heading “Long-Term Obligations” in Item 7 of this Annual Report on Form 10-K.
 
Competition and Markets
 
The restaurant business is intensely competitive and affected by changes in a geographic area, changes in the public’s eating habits and preferences, local and national economic conditions affecting consumer spending habits, population trends and local traffic patterns. Key elements of competition in the industry are the price, quality and value of food products offered, quality and speed of service, advertising effectiveness, brand name identification, restaurant locations and attractiveness of facilities.
 
We primarily compete with major restaurant chains, some of which dominate the QSR industry, and also compete with a variety of other take-out foodservice companies and fast-food restaurants. Our competitors also include a variety of mid-price, full-service casual-dining restaurants, health and nutrition-oriented restaurants, delicatessens and prepared food restaurants, as well as supermarkets and convenience stores. In selling franchises, we compete with many other restaurant franchisors, some of which have substantially greater financial resources and higher franchise AUVs.
 
Trademarks and Service Marks
 
We own numerous trademarks and service marks, and have registered many of those marks with the United States Patent and Trademark Office, including Carl’s Jr., the Happy Star logo, Hardee’s, La Salsa Fresh Mexican Grill and proprietary names for a number of the Carl’s Jr. and Hardee’s menu items. We believe our trademarks and service marks have value and play an important role in our marketing efforts.
 
Government Regulation
 
Each company-operated and franchised restaurant must comply with regulations adopted by federal agencies and with licensing and other regulations enforced by state and local health, sanitation, safety, fire and other departments. In addition, these restaurants must comply with federal and state environmental regulations, but those regulations have not had a material effect on the restaurants’ operations. Stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors can delay and sometimes prevent development of new restaurants and remodeling of existing restaurants in particular locations.
 
We are also subject to federal laws and a substantial number of state laws regulating the offer and sale of franchises. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises and may include substantive standards regarding the relationship between franchisor and franchisee, including limitations on the ability of franchisors to terminate franchise agreements or otherwise alter franchise


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arrangements. We believe we are operating in substantial compliance with applicable laws and regulations governing our franchise operations.
 
We, and our franchisees, must comply with the Fair Labor Standards Act and various federal and state laws governing employment matters, such as minimum wages, overtime pay practices, child labor laws, citizenship requirements and other working conditions. Many of our employees are paid hourly rates related to the federal and state minimum wage laws and, accordingly, increases in the minimum wage increase our labor costs. Federal and state laws may also require us to provide new or increased levels of employee benefits to our employees, many of whom are not currently eligible for such benefits.
 
We monitor our facilities for compliance with the Americans with Disabilities Act (“ADA”) in order to conform to its requirements. Under the ADA, we could be required to expend funds to modify our restaurants to better provide service to, or make reasonable accommodation for the employment of, disabled persons. We believe that such expenditures, if required, would not have a material adverse effect on our consolidated financial position or results of operations.
 
Environmental Matters
 
We are subject to various federal, state and local environmental laws. These laws govern discharges to air and water from our restaurants, as well as handling and disposal practices for solid and hazardous wastes. These laws may impose liability for damages from and the costs of cleaning up sites of spills, disposals or other releases of hazardous materials. We may be responsible for environmental conditions relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurants or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant.
 
We cannot provide assurance that all such environmental conditions have been identified by us. These conditions include the presence of asbestos-containing materials, leaking underground storage tanks and on-site spills. Further, certain properties formerly had landfills, historic industrial use, gasoline stations and/or dry cleaning businesses located on or near the premises. Corrective action, as required by the regulatory agencies, has been undertaken at some of the sites, although the majority of these sites are being remediated by former landowners or tenants. The enforcement of our rights against third parties for environmental conditions, such as off-site sources of contamination, may result in additional costs for us.
 
Seasonality
 
We operate on a retail accounting calendar. Our fiscal year is comprised of 13 four-week accounting periods and ends on the last Monday in January. The first quarter of our fiscal year has four periods, or 16 weeks. All other quarters have three periods, or 12 weeks. Fiscal 2007 and fiscal 2006 each include 52 weeks, and fiscal 2005 includes 53 weeks (including one five-week accounting period in our fiscal fourth quarter). For clarity of presentation, we generally label all fiscal years presented as if the fiscal year ended January 31.
 
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.
 
Government Contracts
 
No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.
 
Research and Development
 
We operate research and development facilities in California and Missouri. While research and development activities are important to our business, these expenditures are not material.


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Employees
 
We employ approximately 30,000 persons, primarily in company-operated restaurants and in our corporate offices and distribution facilities. Only those hourly employees working at the La Salsa restaurant located in the Luxor Hotel in Las Vegas, Nevada are covered by a collective bargaining agreement. We have never experienced a work stoppage attributable to a labor dispute. Past attempts to unionize our distribution center employees have been rejected by employee votes. We believe our employee relations are good.
 
Working Capital Practices
 
Information about our liquidity is contained under the caption “Liquidity and Capital Resources” in Item 7 of this Annual Report on Form 10-K and the accompanying Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2007, 2006 and 2005.
 
Disclosure Regarding Forward-Looking Statements
 
Matters discussed in this Annual Report on Form 10-K contain forward-looking statements relating to future plans and developments, financial goals and operating performance that are based on our current beliefs and assumptions. Such statements are subject to risks and uncertainties that are often difficult to predict, are beyond our control and which may cause results to differ materially from expectations. Factors that could cause our results to differ materially from those described include, but are not limited to, whether or not restaurants will be closed and the number of restaurant closures, consumers’ concerns or adverse publicity regarding our products, the effectiveness of operating initiatives and advertising and promotional efforts (particularly at the Hardee’s brand), changes in economic conditions or prevailing interest rates, changes in the price or availability of commodities, availability and cost of energy, workers’ compensation and general liability premiums and claims experience, changes in our suppliers’ ability to provide quality and timely products, delays in opening new restaurants or completing remodels, severe weather conditions, the operational and financial success of our franchisees, franchisees’ willingness to participate in our strategies, the availability of financing for us and our franchisees, unfavorable outcomes in litigation, changes in accounting policies and practices, effectiveness of internal controls over financial reporting, new legislation or government regulation (including environmental laws), the availability of suitable locations and terms for the sites designated for development, and other factors as discussed in our filings with the Securities and Exchange Commission.
 
Forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law or the rules of the New York Stock Exchange.
 
Executive Officers of the Registrant
 
The names and ages, as of March 30, 2007, of our executive officers are as follows:
 
             
Name
 
Age
 
Position
 
Andrew F. Puzder
  56   Chief Executive Officer and President
E. Michael Murphy
  55   Executive Vice President, Chief Administrative Officer, General Counsel and Secretary
Theodore Abajian
  43   Executive Vice President, Chief Financial Officer
John J. Dunion
  49   Executive Vice President, Supply Chain Management
Brad Haley
  49   Executive Vice President, Marketing — Carl’s Jr. and Hardee’s
 
Andrew F. Puzder was appointed to the Board of Directors in May 2001. Mr. Puzder became Chief Executive Officer and President of CKE in September 2000. From February 1997 to September 2000, he served as Executive Vice President, General Counsel and Secretary of CKE. Mr. Puzder was also Executive Vice President of Fidelity National Financial, Inc. (“FNF”) from January 1995 to June 2000. Mr. Puzder was a partner in the Costa Mesa, California law firm of Lewis, D’Amato, Brisbois & Bisgaard from September 1991 to March 1994, and a


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shareholder in the Newport Beach, California law firm of Stradling Yocca Carlson & Rauth from March 1994 until joining FNF in 1995.
 
E. Michael Murphy became Executive Vice President, General Counsel and Secretary of CKE in January 2001, after serving as Senior Vice President of the Company and Senior Vice President, General Counsel of Hardee’s Food Systems, Inc. from July 1998. He was also named Chief Administrative Officer of the Company in August 2006. For the prior 10 years, Mr. Murphy was a partner of The Stolar Partnership law firm in St. Louis, Missouri.
 
Theodore Abajian was appointed Executive Vice President and Chief Financial Officer of the Company in May 2003. From March 2002 to May 2003, he served as Executive Vice President, Chief Administrative Officer. From November 2000 to March 2002, Mr. Abajian served as President and Chief Executive Officer of SBRG, and as its Executive Vice President and Chief Financial Officer from May 1998. In addition, from January 2000 to October 2000, Mr. Abajian held the position of Senior Vice President and Chief Financial Officer for Checkers Drive-In Restaurants, Inc., and served as the Chief Financial Officer of Star Buffet, Inc. from July 1997 to May 1998. Mr. Abajian also served as a director of Staceys Buffet, Inc. from October 1997 to February 1998, and was Vice President and Controller with Summit Family Restaurants, Inc. from 1994 to 1998.
 
John J. Dunion was appointed Executive Vice President, Supply Chain Management in July 2001. Prior to that, he served the Company as Executive Vice President, Chief Administrative Officer from February 1999, Senior Vice President, Purchasing from April 1998 and Vice President, Purchasing from September 1996. Mr. Dunion was Vice President, Purchasing at Unigate Restaurants, Inc. from 1993 to September 1996. Prior to 1990, Mr. Dunion held management positions with Jack in the Box Inc. and Taco Bell Corp.
 
Brad R. Haley was appointed Executive Vice President, Marketing for Hardee’s in September 2000. He also assumed responsibility for Carl’s Jr. marketing in January 2004. Prior to joining Hardee’s, Mr. Haley worked as Chief Marketing Officer for Church’s Chicken. From 1992 to 1999, Mr. Haley served as Corporate Vice President of Marketing Communications for Jack in the Box Inc.
 
Item 1A.   Risk Factors
 
We are engaged in a business strategy that includes the long-term growth of our Hardee’s operations. The success of a business strategy, by its very nature, involves a significant number of risks, many of which are discussed below:
 
Our success depends on our ability to judge the impact of competitive products and pricing.
 
Successful operation of our restaurants requires the ability to identify the effects of product and pricing trends. If we are unable to evaluate the impact of product or pricing trends effectively, we may fail to implement strategies allowing us to capitalize on those trends, which may result in decreased sales or increased costs.
 
Our success depends on our ability to compete with our competitors.
 
The foodservice industry is intensely competitive with respect to the quality and value of food products offered, concept service, price, dining experience and location. We compete with major restaurant chains, some of which dominate the QSR segment. Our competitors also include a variety of mid-price, full-service casual-dining restaurants, health and nutrition-oriented restaurants, delicatessens and prepared food restaurants, as well as supermarkets and convenience stores. Many of our competitors have substantially greater brand recognition, as well as greater financial, marketing, operating and other resources than we have, which may give them competitive advantages. Our competitors could also make changes to pricing or other marketing strategies which may impact us detrimentally. As our competitors expand operations, we expect competition to intensify. Such increased competition could have a material adverse effect on our consolidated financial position and results of operations.


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Restrictive covenants in our credit facility and outstanding senior indebtedness could adversely affect our business.
 
The Facility, the Amended Facility and our other outstanding senior indebtedness contain restrictive covenants and, in the case of the Amended Facility, requirements that we comply with certain financial ratios. Certain of these covenants limit our ability to take various actions, including the incurrence of additional debt, the guaranteeing of indebtedness and engaging in various types of transactions, including mergers and sales of assets, and making specified distributions or other restricted payments, including investments. These covenants could have an adverse effect on our business by limiting our ability to take advantage of business opportunities. Failure to maintain financial ratios required by the Amended Facility or to comply with the covenants in the Amended Facility or our other indebtedness could also result in acceleration of our indebtedness, which would impair our liquidity and limit our ability to operate.
 
Failure to continue our revitalization of Hardee’s would have a significant negative effect on our success.
 
We have been challenged in our efforts to reestablish the connection between Hardee’s and consumers. Our efforts have included developing new marketing strategies, remodeling restaurants, refranchising restaurants, enhancing menu variety and focusing on the fundamentals of quality, service and cleanliness. Hardee’s performance has improved significantly; however, we believe Hardee’s remains an under-performing brand.
 
Our success depends on our ability to attract and retain key personnel.
 
We believe that our success will depend, in part, on the continuing services of our key management personnel. The loss of the services of key personnel could have a material impact on our financial results. Additionally, our success may depend on our ability to attract and retain additional skilled management personnel.
 
Our success depends on our franchisees’ participation in our strategy.
 
Our franchisees are an integral part of our business. We may be unable to successfully implement our brand strategies if our franchisees do not actively participate in that implementation. The failure of our franchisees to focus on the fundamentals of restaurant operations, such as quality, service and cleanliness, would have a negative impact on our success.
 
Our financial results are affected by the financial results of our franchisees.
 
We receive royalties from our franchisees. Our financial results are somewhat contingent upon the operational and financial success of our franchisees, including implementation of our strategic plans, as well as their ability to secure adequate financing. If sales trends or economic conditions worsen for our franchisees, their financial health may worsen, our collection rates may decline and we may be required to assume the responsibility for additional lease payments on franchised restaurants. Additionally, refusal on the part of franchisees to renew their franchise agreements may result in decreased royalties. Entering into restructured franchise agreements may result in reduced franchise royalty rates in the future.
 
We may be unable to recover increased operating costs through price increases.
 
The QSR segment historically has attracted consumers that are either lower income and/or pressed for time. An economic downturn that decreases our customers’ disposable incomes would have a negative impact on our sales and profitability. In addition, unfavorable macroeconomic trends or developments concerning factors such as increased food, labor and employee benefit costs and availability of experienced employees may also adversely affect our financial condition and results of operations. We may be unable to increase prices to match increased costs without further harming our sales. If we are unable to raise prices in order to recover increased costs for food, fuel, utilities, wages, clothing and equipment, our profitability will be negatively affected.


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We face commodity price and availability risks.
 
We purchase energy and agricultural products that are subject to price volatility caused by weather, market conditions and other factors that are not predictable or within our control. Increases in commodity prices could result in higher restaurant operating costs for our restaurant concepts. Occasionally, the availability of commodities can be limited due to circumstances beyond our control. If we are unable to obtain such commodities, we may be unable to offer related products, which would have a negative impact on our profitability.
 
We depend on our suppliers to deliver quality products to us timely.
 
Our profitability is dependent on, among other things, our continuing ability to offer fresh, high-quality food at moderate prices. While we continue to operate our own distribution business for most of our Carl’s Jr. system, we rely upon independent distributors for our Hardee’s and La Salsa restaurants. Our Hardee’s restaurants depend on the distribution services of MBM, an independent supplier and distributor of food and other products. MBM is responsible for delivering food, paper and other products from our vendors to our Hardee’s restaurants on a regular basis. MBM also provides distribution services to a large number of our Hardee’s franchisees. Pursuant to the terms of our distribution agreements, we are obligated to purchase substantially all of our specified product requirements from MBM through July 14, 2010. We purchase most of the food, packaging and supplies used in our La Salsa restaurants from McLane. We have distribution agreements with both McLane, which services restaurants in California, Nevada and Arizona, and Sysco, which distributes to a small number of our franchise restaurants outside these states. The agreements with McLane and Sysco expire on September 30, 2007 and August 31, 2008, respectively. In addition, our dependence on frequent deliveries of food and paper products subjects our restaurants to the risk that shortages or interruptions in supply, caused by adverse weather or other conditions, could adversely affect the availability, quality and cost of ingredients. Any disruption in these distribution services could have a material adverse effect on our consolidated financial position and results of operations.
 
Adverse publicity regarding poultry or beef could negatively impact our business.
 
Given the events regarding afflictions affecting livestock in various parts of the world, such as “avian flu” and “mad cow” disease, it is possible that the respective production and supply of U.S. poultry or beef could be negatively impacted. A reduction in the supply of poultry or beef could have a material effect on the price at which we could obtain it. In addition, concerns regarding hormones, steroids and antibiotics may cause consumers to reduce or avoid consumption of poultry or beef. Failure to procure poultry or beef at reasonable terms and prices, or any reduction in consumption of poultry or beef by consumers, could have a material adverse effect on our consolidated financial condition and results of operations.
 
Consumer preferences and perceptions may have significant effects on our business.
 
Foodservice businesses are often affected by changes in consumer tastes and perceptions. Traffic patterns, demographics and the type, number and locations of competing restaurants may adversely affect the performance of individual restaurants. Multi-unit foodservice businesses such as ours can also be materially and adversely affected by publicity resulting from poor food quality, illness, injury or other health concerns or operating issues stemming from one or a limited number of restaurants. We can be similarly affected by consumer concerns with respect to the nutritional value of quick-service food.
 
Our operations are seasonal and heavily influenced by weather conditions.
 
Weather, which is unpredictable, can adversely impact our sales. Harsh weather conditions that discourage customers from dining out result in lost opportunities for our restaurants. A heavy snowstorm can leave an entire metropolitan area snowbound, resulting in a reduction in sales. Our first and fourth quarters, most notably the fourth quarter, include winter months when there is historically a lower level of sales. Because a significant portion of our restaurant operating costs is fixed or semi-fixed in nature, the loss of sales during these periods adversely impacts our profitability. These adverse, weather-driven events principally arise at our Hardee’s restaurants. For these reasons, a sequential quarter-to-quarter comparison may not be a good indication of our performance or how we may perform in the future.


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Our business may suffer due to our inability to hire and retain qualified personnel and due to higher labor costs.
 
Given that our restaurant-level workforce requires large numbers of both entry-level and skilled employees, low levels of unemployment could compromise our ability to provide quality service in our restaurants. From time to time, we have had difficulty hiring and maintaining qualified restaurant management personnel. Increases in the minimum wage have impacted our labor costs. Due to the labor-intensive nature of our business, a continuing shortage of labor or increases in minimum wage levels could have a negative effect on our consolidated results of operations.
 
Our sales and profits may be materially and adversely affected by our inability to integrate acquisitions successfully.
 
Our future consolidated results of operations and cash flow may depend in part upon our ability to integrate any future acquisitions and mergers. If we are unable to achieve the strategic operating objectives we anticipate from any such acquisitions we may experience increased costs or decreased sales which would have a negative impact on our consolidated results from operations. Strategic operating initiatives that we may be unable to achieve include economies of scale in operations, cost reductions, sales increases and marketing initiatives.
 
Our business may be impacted by increased insurance and/or self-insurance costs.
 
In the past, we have been negatively affected by increases in both workers’ compensation and general liability insurance and claims expense due to our claims experience and rising healthcare costs. Although we seek to manage our claims to prevent increases, such increases can occur unexpectedly and without regard to our efforts to limit them. If such increases occur, we may be unable to pass them along to the consumer through product price increases, resulting in decreased operating results.
 
Our financial results may be impacted by our ability to select appropriate restaurant locations, construct new restaurants or complete remodels.
 
In recent years, we have not opened a significant number of new restaurants, as available cash was used to repay indebtedness, repurchase common stock and pay dividends. Our strategic plan, and a component of our business strategy, includes the construction of new restaurants and the remodeling of existing restaurants. We and our franchisees face competition from other restaurant operators, retail chains, companies and developers for desirable site locations, which may adversely affect the cost, implementation and timing of our expansion plans. If we experience delays in the construction process we may be unable to complete such construction activities at the planned cost, which would adversely affect our future results from operations. Additionally, we cannot assure you that such remodels and conversions will increase the revenues generated by these restaurants or be sustainable. Likewise, we cannot be sure that the sites we select for new restaurants will result in restaurants whose sales results meet our expectations.
 
The nature of our business exposes us to potential litigation.
 
We have thousands of interactions or transactions each day with vendors, franchisees, customers, employees and others. In the ordinary course of business, disputes may arise for a number of reasons. We cannot be certain that we will prevail in every legal action brought against us.
 
Governmental regulations may change and require us to incur substantial expenditures to comply.
 
We are subject to governmental regulation at the federal, state and local level in many areas of our business, such as food safety and sanitation, the sale of alcoholic beverages, environmental issues and minimum wage. Governmental entities may change regulations that may require us to incur substantial cost increases in order to comply with such laws and regulations. While we endeavor to comply with all applicable laws and regulations, we cannot assure you that we are in full compliance with all laws and regulations at all times or that we will be able to comply with any future laws or regulations. If we fail to comply with applicable laws and regulations, we may be


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subject to sanctions or civil remedies, including fines and injunctions. The cost of compliance or the consequences of non-compliance could have a material adverse effect on our business and consolidated results of operations.
 
Compliance with environmental laws may affect our financial condition.
 
We are subject to various federal, state and local environmental laws. These laws govern discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes. These laws may also impose liability for damages from and the costs of cleaning up sites of spills, disposals or other releases of hazardous materials. We may be responsible for environmental conditions or contamination relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or own the restaurant or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. The costs of any cleanup could be significant and have a material adverse effect on our consolidated financial position and results of operations.
 
Provisions of our Certificate of Incorporation and Bylaws could limit the ability of our stockholders to effect a change in control.
 
Our certificate of incorporation and bylaws include several provisions and features intended to render more difficult certain unsolicited or hostile attempts to acquire our business. In addition, our Board of Directors has the authority, without further action by our stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series, and to fix the rights, preferences and restrictions of such preferred stock.
 
These provisions may discourage a third party from attempting to acquire control of us and could limit the price that investors might be willing to pay in the future for shares of our common stock.
 
We face risks related to interest rates.
 
Our principal exposure to financial market risks is the impact that interest rate changes could have on our Facility, the magnitude of which depends on the amount of borrowings we have outstanding. As of January 31, 2007, under the revolving portion of the Facility, we had $43,500 in borrowings that we locked in at a rate of 7.625%, and $2,000 in borrowings that bore interest at Prime plus an applicable margin, or 9.25%. As of January 31, 2007, we also had $69,821 outstanding under the term loan portion of the Facility, which bore interest at LIBOR plus an applicable margin, or 7.375%, and $57,263 in outstanding letters of credit, which bore fees at 2.25%.
 
Our financial results may be impacted by changes in accounting policies and practices.
 
In the first quarter of fiscal 2005, we began to include in our Consolidated Financial Statements the operations of one of our Hardee’s franchisees, the Hardee’s National Advertising Fund and approximately 82 Hardee’s local advertising cooperative funds as a result of the adoption of Financial Accounting Standards Board (“FASB”) Interpretation 46R, Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51 (“FIN 46R”).
 
As of the beginning of fiscal 2007, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which required us to measure and record compensation cost for all share-based payments, including employee stock options, at fair value.
 
Future changes to U.S. generally accepted accounting principles may materially adversely affect our consolidated financial position and results of operations if we are required to change our methods of accounting for transactions. See Note 2 of Notes to Consolidated Financial Statements for a discussion of accounting pronouncements not yet adopted.
 
Item 1B.   Unresolved Staff Comments
 
None.


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Item 2.   Properties
 
The following table sets forth information regarding our restaurant properties at January 31, 2007:
 
                                 
    Land and
    Land Leased
    Land and
       
    Building
    and Building
    Building
       
    Owned     Owned     Leased     Total  
 
Carl’s Jr.:
                               
Company-operated
    16       111       266       393  
Franchise-operated(1)
    10       47       171       228  
Third party-operated/vacant(2)
    4       3       17       24  
                                 
Subtotal
    30       161       454       645  
                                 
Hardee’s:
                               
Company-operated
    357       150       189       696  
Franchise-operated(1)
    27       39       73       139  
Third party-operated/vacant(2)
    24       15       54       93  
                                 
Subtotal
    408       204       316       928  
                                 
La Salsa:
                               
Company-operated
          4       51       55  
Third party-operated/vacant(2)
    1             6       7  
                                 
Subtotal
    1       4       57       62  
                                 
Other:
                               
Company-operated
                1       1  
Third party-operated/vacant(2)
          2       1       3  
                                 
Subtotal
          2       2       4  
                                 
Total:
                               
Company-operated
    373       265       507       1,145  
Franchise-operated(1)
    37       86       244       367  
Third party-operated/vacant(2)
    29       20       78       127  
                                 
Total
    439       371       829       1,639  
                                 
 
 
(1) “Franchise-operated” properties are those which we own and lease to franchisees, or lease and sublease to franchisees.
 
(2) “Third party-operated/vacant” properties are those we own or lease that are either leased or subleased by unaffiliated entities or are currently vacant.
 
The terms of our leases and subleases vary in length, with primary terms (i.e., before consideration of option periods) expiring on various dates through 2044. We do not expect the expiration of these leases to have a material impact on our operations in any particular year, as the expiration dates are staggered over a number of years and many of the leases contain renewal options.
 
Our corporate headquarters and Carl’s Jr. brand headquarters are both located in Carpinteria, California and contain approximately 65,000 square feet of space. Our primary administrative service center is located in Anaheim, California and contains approximately 78,000 square feet of space. Our primary distribution center is located in Ontario, California and contains approximately 201,000 square feet of space. A secondary distribution center for the Carl’s Jr. brand is located in Manteca, California, and contains approximately 52,000 square feet of space. Our Hardee’s corporate facility is located in St. Louis, Missouri, and contains approximately 33,000 square


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feet of space. Our Hardee’s equipment distribution center is located in Rocky Mount, North Carolina, in a facility that contains approximately 81,000 square feet of space.
 
Item 3.   Legal Proceedings
 
There are currently a number of claims and lawsuits pending against us. These claims and lawsuits cover a variety of allegations spanning our entire business. The following is a brief description of the more significant of these categories of claims and lawsuits. In addition, we are subject to various federal, state and local regulations that affect our business. We do not believe that any such claims, lawsuits or regulations will have a material adverse effect on our consolidated financial position or results of operations.
 
Employees
 
We employ many thousands of persons, both by us and in restaurants owned and operated by subsidiaries of ours. 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 and promotion practices.
 
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 grants or 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.
 
Summary of Significant Litigation
 
We are, from time to time, the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect us and our restaurants, regardless of whether such allegations are valid or whether we are liable. We are also, at times, the subject of complaints or allegations from current or former employees, franchisees, vendors, landlords and others.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
None.


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PART II
 
Item 5.   Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is listed on the New York Stock Exchange under the symbol “CKR”. As of March 22, 2007, there were approximately 1,753 record holders of our common stock. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock, as reported on the New York Stock Exchange Composite Tape:
 
                 
    High     Low  
 
Fiscal 2007
               
First Quarter
  $ 18.50     $ 15.17  
Second Quarter
    17.37       14.00  
Third Quarter
    20.00       14.55  
Fourth Quarter
    20.04       17.57  
Fiscal 2006
               
First Quarter
  $ 17.15     $ 14.53  
Second Quarter
    16.77       12.11  
Third Quarter
    13.87       11.51  
Fourth Quarter
    15.69       12.45  
 
On January 22, 2007, we amended the Facility to increase the aggregate amount that we are permitted to expend for common stock repurchases and dividend payments by $130,000. During fiscal 2007, we declared aggregate cash dividends of $0.16 per share of common stock, for a total of $10,397.
 
Pursuant to the Stock Repurchase Plan authorized by our Board of Directors, as modified during fiscal 2007, we are allowed to repurchase up to an aggregate of $200,000 of our common stock. During the fiscal quarter and fiscal year ended January 31, 2007, we repurchased 2,541,992 and 4,607,437 shares of our common stock at an average price of $18.51 and $17.59 per share, for a total cost, including trading commissions, of $47,059 and $81,057, of which we retired 2,523,692 and 4,589,137 shares, respectively. As of January 31, 2007, we had 18,300 shares of common stock that had been repurchased but not yet retired and are shown as common stock held in treasury on the accompanying Consolidated Balance Sheet. These shares were retired subsequent to January 31, 2007. There was no common stock held in treasury at January 31, 2006.
 
Based on the Board of Directors’ authorization and the amount of cumulative repurchase of our common stock that we have already made thereunder, we are permitted to make additional repurchases of our common stock up to $109,387 under the Stock Repurchase Plan as of January 31, 2007. As part of our Stock Repurchase Plan, we have implemented a share repurchase plan pursuant to Rule 10b5-1 of the Exchange Act, under which we are allowed to repurchase $5,000 of our common stock in the open market each fiscal quarter through the quarter ending January 28, 2008. Rule 10b5-1 allows us to repurchase our common stock when we might otherwise be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.


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The following table provides information as of January 29, 2007, with respect to shares of common stock repurchased by us during the fiscal quarter then ended (in thousands, except share and per share amounts):
 
                                 
    (a)     (b)     (c)     (d)  
                Total Number of
    Maximum Dollar
 
                Shares Purchased
    Value of Shares
 
    Total
    Average
    as Part of
    that May Yet Be
 
    Number of
    Price
    Publicly
    Purchased Under
 
    Shares
    Paid per
    Announced Plans
    the Plans or
 
Period
  Purchased     Share     or Programs     Programs  
 
November 7, 2006 — December 4, 2006
    89,400     $ 18.92       89,400     $ 54,752  
December 5, 2006 — December 29, 2006
    2,364,192       18.47       2,364,192       11,085  
December 30, 2006 — January 29, 2007
    88,400       19.18       88,400       109,387  
                                 
Total
    2,541,992     $ 18.51       2,541,992     $ 109,387  
                                 
 
The graph below shows the cumulative total stockholder return of an investment of $100 (and the reinvestment of any dividends thereafter) on January 31, 2002 in (i) our common stock, (ii) the QSR Peer Group and (iii) the Standard and Poor (S&P) Small Cap 600 Index. Our stock price performance shown in the graph below is not indicative of future stock price performance.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among CKE Restaurants, Inc. — CKR, QSR Peer Group
And The S&P Small Cap 600 Index
 
(PERFORMANCE GRAPH)
 
                                                             
      2002     2003     2004     2005     2006     2007
CKE Restaurants, Inc
    $ 100.00       $ 37.13       $ 78.77       $ 139.18       $ 162.15       $ 206.15  
QSR Peer Group(1)
    $ 100.00       $ 63.93       $ 104.84       $ 129.38       $ 147.09       $ 170.75  
S&P Small Cap 600
    $ 100.00       $ 81.22       $ 123.90       $ 133.88       $ 163.47       $ 174.17  
                                                             
 
 
$100 invested on January 31, 2002 in stock or index-including reinvestment of dividends.
 
 
(1) The QSR Peer Group is comprised of the following companies: Jack in the Box Inc., McDonalds Corp., Wendy’s International, Inc. and Yum! Brands, Inc.


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Item 6.   Selected Financial Data
 
The information set forth below should be read in conjunction with the Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. All amounts, except per share amounts, presented in Item 6 are in thousands.
 
Selected Financial and Operating Data
 
                                         
    Fiscal Year Ended January 31,(1)(2)  
    2007     2006(7)     2005     2004(6)     2003(4)(5)  
          (as restated)                    
 
Consolidated Statements of Operations Data:
                                       
Revenue:
                                       
Company-operated restaurants
  $ 1,269,687     $ 1,209,456     $ 1,217,273     $ 1,142,929     $ 1,109,646  
Franchised and licensed restaurants and other
    318,723       308,891       302,608       270,491       253,715  
                                         
Total revenue
  $ 1,588,410     $ 1,518,347     $ 1,519,881     $ 1,413,420     $ 1,363,361  
                                         
Operating income (loss)
  $ 104,492     $ 77,880     $ 56,780     $ (8,268 )   $ 35,617  
Interest expense
    19,751       23,016       36,748       39,962       39,924  
Income tax expense (benefit)
    31,899       (123,888 )     (1,592 )     2,417       (7,093 )
Income (loss) from continuing operations
    50,172       181,139       18,662       (50,430 )     19,214  
Loss from discontinued operations
                (646 )     (2,790 )     (53 )
Income (loss) before cumulative effect of accounting change
    50,172       181,139       18,016       (53,220 )     19,161  
Cumulative effect of accounting change(5)
                            (175,780 )
Net income (loss)
    50,172       181,139       18,016       (53,220 )     (156,619 )
Net income (loss) per share — basic
    0.79       3.06       0.31       (0.92 )     (2.76 )
Income (loss) from continuing operations per share — diluted
    0.72       2.51       0.31       (0.88 )     0.33  
Loss from discontinued operations per share — diluted
                (0.01 )     (0.04 )      
Income (loss) before cumulative effect of accounting change per share — diluted
    0.72       2.51       0.30       (0.92 )     0.33  
Cumulative effect of accounting change per share — diluted(5)
                            (3.02 )
Net income (loss) per share — diluted
  $ 0.72     $ 2.51     $ 0.30     $ (0.92 )   $ (2.69 )
Weighted-average shares outstanding — diluted
    72,377       73,250       59,583       57,536       58,124  
Cash dividends declared per common share
  $ 0.16     $ 0.16     $     $     $  
Ratio of earnings to fixed charges(3)
    2.6 x     2.0 x     1.2 x           1.2x  


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    Fiscal Year Ended January 31,(1)(2)  
    2007     2006(7)     2005     2004(6)     2003(4)(5)  
          (as restated)                    
 
Segment Operating Data:
                                       
Carl’s Jr.:
                                       
Total revenue
  $ 830,961     $ 802,761     $ 792,829     $ 725,055     $ 693,692  
Operating income
    83,525       82,773       61,656       55,109       52,577  
Hardee’s:
                                       
Total revenue
    706,884       661,509       673,172       642,694       627,785  
Operating income (loss)
    32,547       13,393       5,293       (26,336 )     (16,361 )
La Salsa:
                                       
Total revenue
    46,339       49,156       48,794       43,933       39,959  
Operating loss(6)
    (11,381 )     (7,007 )     (10,270 )     (37,304 )     (397 )
Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 18,680     $ 21,343     $ 18,432     $ 54,355     $ 18,440  
Working capital deficit
    (32,861 )     (27,038 )     (74,907 )     (43,820 )     (69,586 )
Total assets
    794,422       791,337       668,883       730,404       804,937  
Total long-term debt and capital lease obligations, including current portion
    178,055       264,662       317,048       418,176       423,275  
Stockholders’ equity
    378,846       308,938       119,668       100,658       152,660  
 
 
(1) Our fiscal year is 52 or 53 weeks, ending the last Monday in January. For clarity of presentation, we generally label all fiscal years presented as if the fiscal year ended January 31. Fiscal 2007 and 2006 include 52 weeks. Fiscal 2005 includes 53 weeks. Fiscal 2004 and 2003 include 52 weeks.
 
(2) Fiscal 2007, 2006, 2005, 2004 and 2003, include $8,546, $8,025, $14,320, $17,776 and $5,194, respectively, of facility action charges, net, which are included in operating income (loss).
 
(3) For purposes of calculating the ratio of earnings to fixed charges (a) earnings represent income (loss) before income taxes, discontinued operations and cumulative effect of accounting change and fixed charges, and (b) fixed charges consist of interest on all indebtedness, interest related to capital lease obligations, amortization of debt issuance costs and a portion of rental expense that is representative of the interest factor (deemed by us to be one-third). Earnings were sufficient to cover fixed charges for fiscal 2007, 2006, 2005 and 2003, and insufficient to cover fixed charges for fiscal 2004 by $48,013.
 
(4) Fiscal 2003 includes operating results of SBRG from the date of acquisition, March 1, 2002.
 
(5) During fiscal 2003, we adopted SFAS 142, Goodwill and Other Intangible Assets, resulting in a transitional impairment charge of $175,780 (or $3.02 per diluted common share).
 
(6) Fiscal 2004 includes a $34,059 impairment charge to reduce the carrying value of La Salsa goodwill to $0.
 
(7) Fiscal 2006 has been restated to correct a $13,443 overstatement of our income tax benefit and deferred income tax assets. Fiscal 2006 (as restated) includes an income tax benefit of $123,888 attributable primarily to the reversal of a previously recorded valuation allowance against deferred tax assets.

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Selected Financial and Operating Data by Segment
 
                                         
    Fiscal Year Ended January 31,(1)  
    2007     2006     2005     2004     2003(3)  
 
Carl’s Jr. Restaurants
                                       
Restaurants open (at end of fiscal year):
                                       
Company-operated
    393       428       428       426       440  
Franchised and licensed
    694       621       586       580       547  
                                         
Total
    1,087       1,049       1,014       1,006       987  
                                         
Restaurant sales:
                                       
Company-operated restaurants
  $ 590,613     $ 574,663     $ 567,960     $ 523,945     $ 507,526  
Franchised and licensed restaurants(2)
    795,520       700,590       679,734       596,318       567,048  
Average unit volume per company-operated restaurant
    1,440       1,341       1,301       1,187       1,152  
Percentage increase in comparable company-operated restaurant sales
    4.9 %     2.2 %     7.7 %     2.9 %     0.7 %
Restaurant operating costs as a percentage of company-operated revenue
    76.3 %     76.6 %     78.9 %     79.8 %     79.2 %
Hardee’s Restaurants
                                       
Restaurants open (at end of fiscal year):
                                       
Company-operated
    696       663       677       721       730  
Franchised and licensed
    1,210       1,330       1,357       1,400       1,499  
                                         
Total
    1,906       1,993       2,034       2,121       2,229  
                                         
Restaurant sales:
                                       
Company-operated restaurants
  $ 634,264     $ 587,082     $ 601,068     $ 575,238     $ 562,010  
Franchised and licensed restaurants(2)
    1,156,201       1,173,442       1,203,750       1,186,490       1,251,526  
Average unit volume per company-operated restaurant
    916       874       862       792       763  
Percentage increase (decrease) in comparable company-operated restaurant sales
    4.8 %     (0.2 )%     7.0 %     2.5 %     (2.2 )%
Restaurant operating costs as a percentage of company-operated revenue
    81.9 %     84.5 %     85.7 %     90.7 %     89.5 %


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    Fiscal Year Ended January 31,(1)  
    2007     2006     2005     2004     2003(3)  
 
La Salsa Restaurants
                                       
Restaurants open (at end of fiscal year):
                                       
Company-operated
    55       59       62       61       57  
Franchised and licensed
    41       43       39       41       42  
                                         
Total
    96       102       101       102       99  
                                         
Restaurant sales:
                                       
Company-operated restaurants
  $ 44,460     $ 47,277     $ 46,950     $ 42,310     $ 38,550  
Franchised and licensed restaurants(2)
    36,630       34,457       34,170       28,176       23,802  
Average unit volume per company-operated restaurant
    797       772       748       723       751  
Percentage increase (decrease) in comparable company-operated restaurant sales
    1.2 %     2.6 %     5.2 %     (1.3 )%     0.8 %
Restaurant operating costs as a percentage of company-operated revenue
    93.5 %     95.0 %     97.6 %     94.7 %     87.9 %
 
 
(1) Our fiscal year is 52 or 53 weeks, ending on the last Monday in January. For clarity of presentation, we generally label all fiscal years presented as if the fiscal year ended January 31. Fiscal 2007 and 2006 include 52 weeks. Fiscal 2005 includes 53 weeks. Fiscal 2004 and 2003 include 52 weeks.
 
(2) Franchisee restaurant operations are not included in our Consolidated Financial Statements; however, franchisee sales result in royalties and rental income, which are included in franchised and licensed revenues.
 
(3) Fiscal 2003 includes operating results of La Salsa from the date of the SBRG acquisition, March 1, 2002.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes and Selected Financial and Operating Data included elsewhere in this Annual Report on Form 10-K.
 
Overview
 
Highlights from fiscal 2007 include:
 
  •  Consolidated revenue increased 4.6%, to $1,588,410 in fiscal 2007 from $1,518,347 in fiscal 2006.
 
  •  Carl’s Jr. same-store sales increased for the seventh consecutive year in fiscal 2007, growing 4.9% at company-operated restaurants, following a 2.2% increase in fiscal 2006.
 
  •  Hardee’s same-store sales increased 4.8% at company-operated restaurants in fiscal 2007, following a 0.2% decrease in fiscal 2006.
 
  •  Annual average unit volume increased 7.4%, to $1,440, for Carl’s Jr. company-operated restaurants and increased 4.8%, to $916, for Hardee’s company-operated restaurants.
 
  •  Carl’s Jr. total restaurant operating costs as a percent of company-operated revenue decreased 30 basis points to 76.3% in fiscal 2007, as compared to 76.6% in fiscal 2006.
 
  •  Hardee’s total restaurant operating costs as a percent of company-operated revenue decreased 260 basis points to 81.9% in fiscal 2007, as compared to 84.5% in fiscal 2006.
 
  •  Income before income taxes and discontinued operations increased $24,820, or 43.4%, reaching $82,071 in fiscal 2007, as compared to $57,251 in fiscal 2006.
 
  •  Net income decreased to $50,172, or $0.72 per diluted share. This represents a decrease of $130,967 from the prior year net income. Net income in fiscal 2006 (as restated) includes an income tax benefit of $123,888 attributable primarily to the reversal of a previously recorded valuation allowance against deferred tax assets, while net income in fiscal 2007 includes income tax expense of $31,899.
 
  •  During fiscal 2007, we repaid a total of $28,928 of the term loan portion of the Facility.
 
  •  During fiscal 2007, we repurchased 4,607,437 shares of our common stock for $81,057 under our Stock Repurchase Plan.
 
  •  On January 22, 2007, we amended the Facility to increase the aggregate amount that we are permitted to expend for stock repurchases and dividend payments by $130,000, and increase the total amount available to us for revolving loans under the Facility by $100,000 to $250,000. As of January 31, 2007, we are permitted to make additional repurchases of our common stock up to $109,387 under the Stock Repurchase Plan.
 
  •  During fiscal 2007, we declared cash dividends of $0.04 per share of our common stock each quarter for a total of $0.16 per share.
 
We are a nationwide owner, operator and franchisor of QSRs, operating principally under the Carl’s Jr. and Hardee’s brand names. Based on United States system-wide sales, our Hardee’s and Carl’s Jr. chains are the tenth and twelfth largest quick-service hamburger restaurant chains in the United States of America, respectively, according to the June 26, 2006 issue of Nation’s Restaurant News. As of January 31, 2007, the Carl’s Jr. system included 1,087 restaurants, of which we operated 393 restaurants and our franchisees and licensees operated 694 restaurants. Carl’s Jr. restaurants are located in the Western United States, predominantly in California. As of January 31, 2007, the Hardee’s system consisted of 1,906 restaurants, of which we operated 696 restaurants and our franchisees and licensees operated 1,210 restaurants. Hardee’s restaurants are located primarily throughout the Southeastern and Midwestern United States.
 
We derive our revenue primarily from sales at company-operated restaurants and revenue from franchisees, including franchise and royalty fees, sales to Carl’s Jr. franchisees and licensees of food and packaging products, rentals under real property leases and revenue from the sale of equipment to our franchisees. Restaurant operating expenses consist primarily of food and packaging costs, payroll and other employee benefits and occupancy and


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

other operating expenses of company-operated restaurants. Franchise operating costs include the cost of food and packaging products sold to Carl’s Jr. franchisees and licensees, lease payments or depreciation expense on properties leased or subleased to our franchisees, the cost of equipment sold to franchisees, and franchise administrative support. Our revenue and expenses are directly affected by the number and sales volume of company-operated restaurants and, to a lesser extent, franchised and licensed restaurants.
 
From time to time, we experience increases in our general operating costs. In the past, we have been successful at passing on such increases through price increases, but it has likely had an impact on transaction counts. If we were unable to pass along such price increases, and at the same time could not increase our transaction counts, the recoverability of the carrying value of our restaurants could be impacted.
 
Restatement of Previously Issued Financial Statements
 
In connection with the preparation and review of our income tax provision for fiscal 2007, we identified errors in our income tax provision for fiscal 2006, which resulted primarily from mistakes made in summarizing various computations utilized to determine the cumulative difference between our book and tax bases in our fixed assets.
 
These errors resulted in an overstatement of our income tax benefit for the fiscal year ended January 31, 2006, by $13,443. For the Consolidated Financial Statements presented herein, we have restated our current and non-current deferred income tax assets; income tax benefit; net income; earnings per share and accumulated deficit as of and for the fiscal year ended January 31, 2006, to reflect the correction of the $13,443 overstatement of income tax benefit noted above. (See Note 20 of Notes to Consolidated Financial Statements for additional information.)
 
We did not amend our previously filed Annual Report on Form 10-K for the fiscal year ended January 31, 2006. Accordingly, readers of the financial statements should rely upon the restated information in this Annual Report on Form 10-K as opposed to the previously filed information.
 
See Note 1 of Notes to Consolidated Financial Statements for additional information.
 
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. Specific risks associated with these critical accounting policies are described in the following paragraphs.
 
For all of these policies, we caution that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Our most significant accounting policies require:
 
  •  estimation of future cash flows used to assess the recoverability of long-lived assets and to establish the estimated liability for closing restaurants and subsidizing lease payments of franchisees;
 
  •  estimation, using actuarially determined methods, of our self-insured claim losses under our workers’ compensation, general and auto liability insurance programs;
 
  •  determination of appropriate estimated liabilities for loss contingencies;
 
  •  determination of appropriate assumptions to use in evaluating leases for capital versus operating lease treatment, establishing depreciable lives for leasehold improvements and establishing straight-line rent expense periods;
 
  •  estimation of the appropriate allowances associated with franchise and license receivables and liabilities for franchise subleases;


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
  •  determination of the appropriate assumptions to use to estimate the fair value of stock-based compensation; and
 
  •  estimation of our net deferred income tax asset valuation allowance and effective tax rate.
 
Descriptions of these critical accounting policies follow.
 
Impairment of Property and Equipment and Other Amortizable Long-Lived Assets Held and Used, Held for Sale or To Be Disposed of Other Than By Sale
 
We evaluate the carrying value of individual restaurants when the results of operations have reasonably progressed to a point to adequately evaluate the probability of continuing operating losses or upon expectation that a restaurant will be sold or otherwise disposed of before the end of its previously estimated useful life. We generally estimate the useful life of restaurants on owned property to be 20 to 35 years and estimate the remaining useful life of restaurants subject to leases to range from the end of the lease term then in effect to the end of such lease term including all option periods. We then estimate the future cash flows from operating the restaurant over its estimated useful life. In making these judgments, we consider the period of time since the restaurant was opened or remodeled, and the trend of operations and expectations for future sales growth. We also make assumptions about future same-store sales and operating expenses. Our approach incorporates a probability-weighted approach wherein we estimate the effectiveness of future sales and marketing efforts on same-store sales. If an estimate of the fair value of our assets becomes necessary, we typically base such estimate on forecasted cash flows discounted at an estimated weighted-average cost of capital.
 
During the second and fourth quarter of each fiscal year, and whenever events and/or circumstances indicate that the carrying value of assets may be impaired, we perform an asset recoverability analysis through which we estimate future cash flows for each of our restaurants based upon experience gained, current intentions about refranchising restaurants and closures, expected sales trends, internal plans and other relevant information. As the operations of restaurants opened or remodeled in recent years progress to the point that their profitability and future prospects can adequately be evaluated, additional restaurants will become subject to review and to the possibility that impairments exist.
 
Same-store sales and the rates at which restaurant operating costs will increase in the future are key assumptions used to estimate future cash flow for evaluating recoverability. If our same-store sales do not perform at or above our forecasted level, 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.
 
Typically, restaurants are operated for three years before we test them for impairment. Also, restaurants typically are not tested for two years following a remodel. We believe this provides the restaurant sufficient time to establish its presence in the market and build a customer base. If we were to test all restaurants for impairment without regard to the amount of time the restaurants were operating, the total asset impairment could increase substantially. In addition, if recently opened or remodeled restaurants do not eventually establish stronger market presence and build a customer base, the carrying value of certain of these restaurants may prove to be unrecoverable and we may incur additional impairment charges in the future.
 
As of January 31, 2007, we had a total of 91 restaurants among our three major restaurant concepts that generated negative cash flows on a trailing-13 period basis. These restaurants had combined net book values of $23,202. Included within these totals are 37 restaurants with combined net book values of $15,397 that have not been tested for impairment because they had not yet been operated for a sufficient period of time as of our most recent comprehensive semi-annual asset recoverability analysis in the fourth quarter of fiscal 2007. If these negative cash flow restaurants were not to begin generating positive cash flows within a reasonable period of time, the


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

carrying value of these restaurants may prove to be unrecoverable and we may recognize additional impairment charges in the future.
 
Impairment of Goodwill
 
In accordance with SFAS 142, goodwill is tested annually for impairment, or more frequently if events or circumstances indicate that the asset might be impaired. We perform our annual impairment test during the first quarter of our fiscal year. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The impairment test is performed at the reporting unit level. We consider the reporting unit level to be the brand level as the components (e.g., restaurants) within each brand have similar economic characteristics, including products and services, production processes, types or classes of customers and distribution methods. The impairment test consists of two steps. First, we determine the fair value of a reporting unit and compare it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit’s goodwill.
 
During the first quarter of fiscal year 2007, we evaluated the Carl’s Jr. brand, the only one of our brands for which goodwill is recorded. As a result of our evaluation, we concluded that the fair value of the net assets of Carl’s Jr. exceeded the carrying value, and thus no impairment charge was required. As of January 31, 2007, we had $22,649 in goodwill recorded in our accompanying Consolidated Balance Sheet, all of which relates to Carl’s Jr.
 
Estimated Liability for Closing Restaurants
 
We typically make decisions to close restaurants based on prospects for estimated future profitability. However, sometimes we are forced to close restaurants due to circumstances beyond our control (e.g., a landlord’s refusal to negotiate a new lease). Our restaurant operators evaluate each restaurant’s performance no less frequently than the second and fourth quarter of each fiscal year. When restaurants continue to perform poorly, we consider a number of factors, including the demographics of the location and the likelihood of being able to improve an unprofitable restaurant. Based on the operators’ judgment and a financial review, we estimate the future cash flows. If we determine that the restaurant will not, within a reasonable period of time, operate at break-even cash flow or be profitable, and we are not contractually obligated to continue operating the restaurant, we may decide to close the restaurant.
 
The estimated liability for closing restaurants on properties vacated is based on the terms of the lease and the lease termination fee, if any, that we expect to pay, as well as estimated maintenance costs until the lease has been abated. The amount of the estimated liability established is the present value of these estimated future payments, net of the present value of expected lease or sublease income, which approximates the fair value of such obligations. The interest rate used to calculate the present value of these liabilities is based on an estimated credit-adjusted risk-free rate at the time the liability is established. The related discount is amortized and shown in facility action charges, net in our accompanying Consolidated Statements of Income.
 
A significant assumption used in determining the amount of the estimated liability for closing restaurants is the amount of the estimated liability for future lease payments on vacant restaurants. We estimate the cost to maintain leased and owned vacant properties until the lease can be abated or the owned property can be sold. If the costs to maintain properties increase, or it takes longer than anticipated to sell properties or sublease or terminate leases, we may need to record additional estimated liabilities. If the leases on the vacant restaurants are not terminated or subleased on the terms 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


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

operating income. As of January 31, 2007, the present value of our operating lease payment obligations on all closed restaurants was approximately $8,470, which represents the discounted amount we would be required to pay if we are unable to enter into sublease agreements or terminate the leases prior to the terms required in the lease agreements. However, it is our experience that we can often terminate those leases for less than that amount, or sublease the property and accordingly, we have recorded an estimated liability for operating lease obligations of $4,492 as of January 31, 2007.
 
Estimated Liability for Self-Insurance
 
We are self-insured for a portion of our current and prior years’ losses related to workers’ compensation, general and auto liability insurance programs. We have obtained stop loss insurance for individual workers’ compensation, general and auto liability claims over $500. Accrued liabilities for self-insurance are recorded based on the present value of actuarial estimates of the amounts of incurred and unpaid losses, based on an estimated risk-free interest rate of 4.5% as of January 31, 2007. In determining our estimated liability, management, with the assistance of our actuary, develops assumptions based on the average historical losses on claims we have incurred and on actuarial observations of historical claim loss development. Our actual future loss development may be better or worse than the development we estimated in conjunction with the actuary, in which case our reserves would require adjustment. As such, if we experience a higher than expected number of claims or the costs of claims rise more than expected, then we would be required to adjust the expected losses upward and increase our future self-insurance expense.
 
Our actuary provides us with estimated unpaid losses for each loss category, upon which our analysis is based. As of January 31, 2007, our estimated liability for self-insured workers’ compensation, general and auto liability losses was $37,833.
 
Loss Contingencies
 
We maintain accrued liabilities for contingencies related to litigation. We account for contingent obligations in accordance with SFAS 5, Accounting for Contingencies, which requires that we assess each loss contingency to determine estimates of the degree of probability and range of possible settlement. Those contingencies that are deemed to be probable and where the amount of such settlement is reasonably estimable are accrued in our Consolidated Financial Statements. If only a range of loss can be determined, with no amount in the range representing a better estimate than any other amount within the range, we accrue to the low end of the range. In accordance with SFAS 5, as of January 31, 2007, we have recorded an accrued liability for contingencies related to litigation in the amount of $630 (see Notes 10 and 27 of Notes to Consolidated Financial Statements for further information). The assessment of contingencies is highly subjective and requires judgments about future events. Contingencies are reviewed at least quarterly to determine the adequacy of the recorded liabilities and related Consolidated Financial Statement disclosure. The ultimate resolution of such loss contingencies may differ materially from amounts we have accrued in our Consolidated Financial Statements.
 
Accounting for Lease Obligations
 
We lease a substantial portion of our restaurant properties. At the inception of the lease, each property is evaluated to determine whether the lease is an operating or capital lease. The lease accounting evaluation may require significant exercise of judgment in estimating the fair value and useful life of the leased property and to establish the appropriate lease term. The lease term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured because failure to exercise such option would result in an economic penalty. Such economic penalty would typically result from our having to abandon buildings and other non-detachable improvements upon vacating the property. The lease term used for this


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements, as well as the period over which we recognize straight-line rent expense.
 
In addition, the lease term is calculated from the date we are given control of the leased premises through the end of the lease term. There is potential for variability in the “rent holiday” period, which begins on the date we are given control of the leased premises and typically ends upon restaurant opening. Factors that may affect the length of the rent holiday period include construction-related delays. Extension of the rent holiday period due to such delays would result in greater rent expense recognized during the rent holiday period.
 
Franchised and Licensed Operations
 
We monitor the financial condition of certain franchisees and record provisions for estimated losses on receivables when we believe that our franchisees are unable to make their required payments to us. Each quarter, we perform an analysis to estimate bad debts for each franchisee. We then compare the aggregate result of that analysis to the amount recorded in our Consolidated Financial Statements as the allowance for doubtful accounts and adjust the allowance as appropriate. Additionally, we cease accruing royalties and rental income from franchisees that are materially delinquent in paying or in default for other reasons and reverse any royalties and rent income accrued during the fiscal quarter in which such delinquency or default occurs. Over time, our assessment of individual franchisees may change. For instance, we have had some franchisees, who in the past we had determined required an estimated loss equal to the total amount of the receivable, who have paid us in full or established a consistent record of payments (generally six months) such that we determined an allowance was no longer required.
 
Depending on the facts and circumstances, there are a number of different actions we and/or our franchisees may take to resolve franchise collections issues. These actions may include the purchase of franchise restaurants by us or by other franchisees, a modification to the franchise agreement (which may include a provision to defer certain royalty payments or reduce royalty rates in the future), a restructuring of the franchisee’s business and/or finances (including the restructuring of leases for which we are the primary obligee — see further discussion below) or, if necessary, the termination of the franchise agreement. The allowance established is based on our assessment of the most likely course of action that will occur.
 
Many of the restaurants that we sold to Hardee’s and Carl’s Jr. franchisees as part of our refranchising program were on leased sites. Generally, we remain principally liable for the lease and have entered into a sublease with the franchisee on the same terms as the primary lease. In such cases, we account for the sublease payments received as franchising rental income and the lease payments we make as rental expense in franchised and licensed restaurants and other expense in our Consolidated Statements of Income. As of January 31, 2007, the present value of our total obligation on lease arrangements with Hardee’s and Carl’s Jr. franchisees (including subsidized leases — see further discussion below) was $21,900 and $85,093, respectively. We do not expect Carl’s Jr. franchisees to experience the same level of financial difficulties as Hardee’s franchisees have encountered in the past, however, we can provide no assurance that this will not occur.
 
In addition to the sublease arrangements with franchisees described above, we also lease land and buildings to franchisees. As of January 31, 2007, the net book value of property under lease to Hardee’s and Carl’s Jr. franchisees was $15,132 and $5,015, respectively. Financially troubled franchisees include those with whom we have entered into workout agreements and who may have liquidity problems in the future. In the event that a financially troubled franchisee closes a restaurant for which we own the property, our options are to operate the restaurant as a company-operated restaurant, transfer the restaurant to another franchisee, lease the property to another tenant or sell the property. These circumstances would cause us to consider whether the carrying value of the land and building was impaired. If we determined the property’s carrying value was impaired, we would record a charge to operations for the amount the carrying value of the property exceeds its fair value. As of January 31, 2007, the net book value of property under lease to Hardee’s franchisees that are considered to be financially troubled franchisees was approximately $332 and is included in the amount above.


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
In accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, an estimated liability for future lease obligations on restaurants operated by franchisees for which we are the primary obligee is established on the date the franchisee closes the restaurant. Also, we record an estimated liability for subsidized lease payments when we sign a sublease agreement committing us to the subsidy. The liability includes an estimation related to the risk that certain lease payments from the franchisee may ultimately be uncollectible.
 
The amount of the estimated liability is established using the methodology described in “Estimated Liability for Closing Restaurants” above. Because losses are typically not probable and/or able to be reasonably estimated, we have not established an additional estimated liability for potential losses not yet incurred under a significant portion of our franchise sublease arrangements. The present value of future sublease obligations from financially troubled franchisees is approximately $1,078 (three financially troubled franchisees represent approximately 95.7% of this amount). If sales trends or economic conditions worsen for our franchisees, their financial health may worsen, our collection rates may decline and we may be required to assume the responsibility for additional lease payments on franchised restaurants. The likelihood of needing to increase the estimated liability for future lease obligations is primarily related to the success of our Hardee’s concept.
 
During February 2006, we terminated our franchise agreement with a Hardee’s franchisee that operated 90 franchised restaurants as a result of its inability to remedy, on a timely basis, certain defaults under the terms of the agreement. At that time, ten of the affected restaurants were located on property that we owned and leased to the franchisee, and 51 of the affected restaurants were located on leased premises that we sublet to the franchisee. During March 2006, we purchased five additional parcels that we had previously leased from a commercial lessor and sublet to the franchisee. The franchisee continued to operate the affected restaurants pursuant to a temporary license agreement until May 18, 2006, when we terminated the license agreement, leases and subleases and assumed full operational control of the aforementioned 61 restaurants. Since the termination of the license agreement, we have purchased $2,400 of existing equipment, closed 19 of the 61 restaurants and recorded facility action charges of $1,959 related to closing these restaurants. We currently operate the remaining 42 restaurants as company-operated restaurants. The former franchisee’s lenders (through a receiver) kept the remaining 29 restaurant locations, of which they subsequently closed 15. During October 2006, we purchased 11 of these restaurants for $6,538 and an existing franchisee, under a franchise agreement, purchased the remaining three restaurants. The total purchase price included land, buildings and existing equipment.
 
Share-Based Compensation
 
As discussed in Notes 1 and 23 of Notes to Consolidated Financial Statements, we have various share-based compensation plans that provide stock options and restricted awards for certain employees and non-employee directors to acquire shares of our common stock. Prior to our adoption of SFAS 123R at the beginning of fiscal 2007, we accounted for share-based compensation in accordance with APB 25, which utilizes the intrinsic value method of accounting, as opposed to using the fair-value method prescribed in SFAS 123R. During fiscal years ended January 31, 2007 and 2006, we recorded share-based compensation expense of $8,368 and $188, respectively. (See Note 23 for analysis of the effect of certain changes in assumptions used to determine the fair value of share-based compensation.)
 
Valuation Allowance for Net Deferred Tax Assets
 
Deferred income taxes are provided for the estimated income tax effect of temporary differences between the financial and tax bases of assets and liabilities using the liability method. Deferred tax assets are also provided for net operating loss and income tax credit carryforwards. A valuation allowance to reduce the carrying amount of deferred tax assets is established when it is more likely than not that we will not realize some portion or all of the tax benefit of our deferred tax assets. We evaluate, on a quarterly basis, whether it is more likely than not that our deferred income tax assets are realizable. In performing this analysis, we consider all available evidence, both


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

positive and negative, including historical operating results, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies that may be employed to prevent operating loss or tax credit carryforwards from expiring unused.
 
As of January 31, 2005, we maintained a valuation allowance of $190,179 against our net deferred tax assets, since we had determined, based primarily on a history of cumulative losses in recent years and uncertainty regarding the timing and amounts of future taxable income, that realization of our deferred tax assets was not more likely than not. During the fourth quarter of fiscal 2006, after considering a number of factors, including a three-year history of cumulative earnings, utilization of net operating loss carryforwards in fiscal 2006, and estimated taxable income in future years, we determined we would more likely than not realize substantial future tax benefits from our deferred tax assets. As a result of this analysis, we reduced our valuation allowance by $159,959 at January 31, 2006, resulting in a net deferred tax asset of $135,740, as restated. Of the total tax benefit from the reversal of the valuation allowance, $11,971 was recorded to additional paid-in capital for the tax benefit from the exercise of stock options during both the current and prior years.
 
During the fourth quarter of fiscal 2007, we determined that we would more likely than not realize additional future tax benefits from our deferred tax assets. This determination was based on a number of factors, including our ability, for the first time in several years, to utilize more foreign tax credits than we generated in fiscal 2007 and our projected future foreign source income. As a result of our analysis, we reduced our valuation allowance by $4,884 at January 31, 2007. As of January 31, 2007, our remaining valuation allowance of $27,257 relates to federal and state capital loss carryforwards and certain state net operating loss and income tax credit carryforwards. Realization of the tax benefit of such deferred tax assets may remain uncertain for the foreseeable future, even though we expect to generate taxable income, since they are subject to various limitations and may only be used to offset income of certain entities or of a certain character.
 
Business Strategy
 
We remain focused on vigorously pursuing a comprehensive business strategy. The main components of our strategy are as follows:
 
  •  increase revenues, average unit volumes and operating income at our major brands;
 
  •  remain focused on restaurant fundamentals — quality, service and cleanliness;
 
  •  capitalize on our unique brand positioning and cutting-edge advertising;
 
  •  offer premium products that compete on quality, innovation and taste;
 
  •  continue to capitalize on dual-branding opportunities available with Green Burrito and Red Burritotm;
 
  •  control costs and improve capital structure while increasing shareholder distributions;
 
  •  leverage our infrastructure and marketing presence to build out existing core markets;
 
  •  remodel our existing store base to remain competitive; and
 
  •  strengthen our franchise system and pursue further franchising opportunities, including new franchisees.
 
Franchise Operations
 
Like others in the quick-service restaurant industry, some of our franchisees experience financial difficulties from time to time with respect to their operations. Our approach to dealing with financial and operational issues that arise from these situations is described under Critical Accounting Policies above, under the heading “Franchised


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

and Licensed Operations.” Some franchisees in the Hardee’s system have experienced significant financial problems and, as discussed above, there are a number of potential resolutions of these financial issues.
 
We continue to work with franchisees in an attempt to maximize our future franchising income. Our franchising income is dependent on both the number of restaurants operated by franchisees and their operational and financial success, such that they can make their royalty and lease payments to us. Although we review the allowance for doubtful accounts and the estimated liability for closed franchise restaurants, there can be no assurance that the number of franchisees or franchised restaurants experiencing financial difficulties will not increase from our current assessments, nor can there be any assurance that we will be successful in resolving financial issues relating to any specific franchisee. As of January 31, 2007, our consolidated allowance for doubtful accounts on notes receivable was 77.9% of the gross balance of notes receivable and our consolidated allowance for doubtful accounts on accounts receivable was 0.9% of the gross balance of accounts receivable. When appropriate, we establish notes receivable pursuant to completing workout agreements with financially troubled franchisees. As of January 31, 2007, we have not recognized, on a cumulative basis, $151 in accounts receivable and $5,955 in notes receivable, nor the royalty and rent revenue associated with these accounts and notes receivable, due from franchisees that are in default under the terms of their franchise agreements. We still experience specific problems with troubled franchisees (see Critical Accounting Policies — Franchise and Licensed Operations) and may be required to increase the amount of our allowances for doubtful accounts and/or increase the amount of our estimated liability for future lease obligations.


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
Operating Review
 
The following table sets forth the percentage relationship to total revenue, unless otherwise indicated, of certain items included in our accompanying Consolidated Statements of Income for the years indicated:
 
                         
    Fiscal Year Ended January 31,  
    2007     2006     2005  
    (as restated)  
 
Revenue:
                       
Company-operated restaurants
    79.9 %     79.7 %     80.1 %
Franchised and licensed restaurants and other
    20.1       20.3       19.9  
                         
Total revenue
    100.0       100.0       100.0  
                         
Operating costs and expenses:
                       
Restaurant operating costs(1):
                       
Food and packaging
    28.7       29.3       29.6  
Payroll and other employee benefits
    29.2       29.5       31.0  
Occupancy and other
    21.8       22.4       22.5  
                         
Total restaurant operating costs
    79.7       81.2       83.0  
                         
Franchised and licensed restaurants and other(2)
    75.6       77.2       75.2  
Advertising(1)
    5.7       5.9       5.9  
General and administrative
    9.5       9.3       9.1  
Facility action charges, net
    0.5       0.5       0.9  
                         
Operating income
    6.6       5.1       3.7  
Interest expense
    (1.2 )     (1.5 )     (2.4 )
Conversion inducement expense
    (0.4 )            
Other income (expense), net
    0.2       0.2       (0.2 )
                         
Income before income taxes and discontinued operations
    5.2       3.8       1.1  
Income tax expense (benefit)
    2.0       (8.2 )     (0.1 )
                         
Income from continuing operations
    3.2 %     12.0 %     1.2 %
                         
 
 
(1) As a percent of revenue from company-operated restaurants.
 
(2) As a percent of revenue from franchised and licensed restaurants and other.


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

The following tables are presented to facilitate Management’s Discussion and Analysis of Financial Condition and Results of Operations and are classified in the same way as we present segment information (see Note 22 of Notes to Consolidated Financial Statements).
 
                                                 
    Fiscal 2007  
    Carl’s Jr.     Hardee’s     La Salsa     Other(A)     Eliminations(B)     Total  
 
Company-operated revenue
  $ 590,613     $ 634,264     $ 44,460     $ 350     $     $ 1,269,687  
                                                 
Restaurant operating costs:
                                               
Food and packaging
    170,142       182,695       11,423       115             364,375  
Payroll and employee benefits
    154,791       201,008       14,791       134             370,724  
Occupancy and other operating costs
    125,574       135,716       15,353       110             276,753  
                                                 
Total restaurant operating costs
    450,507       519,419       41,567       359             1,011,852  
                                                 
Franchised and licensed restaurants and other revenue:
                                               
Royalties
    29,692       47,546       1,844       487       (70 )     79,499  
Distribution centers
    187,533       16,995                   (8 )     204,520  
Rent
    21,371       7,426                         28,797  
Retail sales of variable interest entity
                      3,467             3,467  
Other
    1,752       653       35                   2,440  
                                                 
Total franchised and licensed restaurants and other revenue
    240,348       72,620       1,879       3,954       (78 )     318,723  
                                                 
Franchised and licensed restaurants and other expenses:
                                               
Administrative expense (including provision for bad debts)
    5,281       4,336       1,437                   11,054  
Distribution centers
    185,271       17,840                         203,111  
Rent and other occupancy
    18,280       5,117                         23,397  
Operating costs of variable interest entity
                      3,437       (47 )     3,390  
                                                 
Total franchised and licensed restaurants and other expenses
    208,832       27,293       1,437       3,437       (47 )     240,952  
                                                 
Advertising
    33,318       37,589       1,339       7             72,253  
                                                 
General and administrative
    54,115       87,542       8,374       284             150,315  
                                                 
Facility action charges, net
    664       2,494       5,003       385             8,546  
                                                 
Operating income (loss)
  $ 83,525     $ 32,547     $ (11,381 )   $ (168 )   $ (31 )   $ 104,492  
                                                 
Company-operated average unit volume (trailing-13 periods)
  $ 1,440     $ 916     $ 797                          
Franchise-operated average unit volume (trailing-13 periods)
  $ 1,205     $ 949     $ 869                          
Company-operated same-store sales increase
    4.9 %     4.8 %     1.2 %                        
Franchise-operated same-store sales increase
    5.4 %     4.3 %     2.2 %                        
Company-operated same-store transaction increase (decrease)
    0.7 %     1.4 %     (4.5 )%                        
Average check (actual $)
  $ 6.49     $ 4.89     $ 10.84                          
Restaurant operating costs as a % of company-operated revenue:
                                               
Food and packaging
    28.8 %     28.8 %     25.7 %                        
Payroll and employee benefits
    26.2 %     31.7 %     33.3 %                        
Occupancy and other operating costs
    21.3 %     21.4 %     34.5 %                        
Total restaurant operating costs
    76.3 %     81.9 %     93.5 %                        
Advertising as a % of company-operated revenue
    5.6 %     5.9 %     3.0 %                        
 


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Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

                                                 
    Fiscal 2006  
    Carl’s Jr.     Hardee’s     La Salsa     Other(A)     Eliminations(B)     Total  
 
Company-operated revenue
  $ 574,663     $ 587,082     $ 47,277     $ 434     $     $ 1,209,456  
                                                 
Restaurant operating costs:
                                               
Food and packaging
    166,863       174,611       12,617       148             354,239  
Payroll and employee benefits
    150,559       190,486       15,722       193             356,960  
Occupancy and other operating costs
    122,859       131,149       16,559       149             270,716  
                                                 
Total restaurant operating costs
    440,281       496,246       44,898       490             981,915  
                                                 
Franchised and licensed restaurants and other revenue:
                                               
Royalties
    26,224       42,050       1,754       433       (86 )     70,375  
Distribution centers
    179,222       24,458                   (139 )     203,541  
Rent
    20,968       7,121                         28,089  
Retail sales of variable interest entity
                      4,279             4,279  
Other
    1,684       798       125                   2,607  
                                                 
Total franchised and licensed restaurants and other revenue
    228,098       74,427       1,879       4,712       (225 )     308,891  
                                                 
Franchised and licensed restaurants and other expenses:
                                               
Administrative expense (including provision for bad debts)
    4,609       5,169       1,389                   11,167  
Distribution centers
    174,149       24,930                         199,079  
Rent and other occupancy
    18,213       5,959                         24,172  
Operating costs of variable interest entity
                      4,299       (256 )     4,043  
                                                 
Total franchised and licensed restaurants and other expenses
    196,971       36,058       1,389       4,299       (256 )     238,461  
                                                 
Advertising
    34,660       35,282       1,014       8             70,964  
                                                 
General and administrative
    46,284       75,877       7,318       11,623             141,102  
                                                 
Facility action charges, net
    1,792       4,653       1,544       36             8,025  
                                                 
Operating income (loss)
  $ 82,773     $ 13,393     $ (7,007 )   $ (11,310 )   $ 31     $ 77,880  
                                                 
Company-operated average unit volume (trailing-13 periods)
  $ 1,341     $ 874     $ 772                          
Franchise-operated average unit volume (trailing-13 periods)
  $ 1,160     $ 897     $ 897                          
Company-operated same-store sales increase (decrease)
    2.2 %     (0.2 )%     2.6 %                        
Franchise-operated same-store sales increase (decrease)
    0.7 %     (2.2 )%     3.9 %                        
Company-operated same-store transaction decrease
    (3.0 )%     (2.7 )%     (1.7 )%                        
Average check (actual $)
  $ 6.22     $ 4.76     $ 10.15                          
Restaurant operating costs as a % of company-operated revenue:
                                               
Food and packaging
    29.0 %     29.7 %     26.7 %                        
Payroll and employee benefits
    26.2 %     32.4 %     33.3 %                        
Occupancy and other operating costs
    21.4 %     22.4 %     35.0 %                        
Total restaurant operating costs
    76.6 %     84.5 %     95.0 %                        
Advertising as a % of company-operated revenue
    6.0 %     6.0 %     2.1 %                        

 

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Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

                                                 
    Fiscal 2005  
    Carl’s Jr.     Hardee’s     La Salsa     Other(A)     Eliminations(B)     Total  
 
Company-operated revenue
  $ 567,960     $ 601,068     $ 46,950     $ 1,295     $     $ 1,217,273  
                                                 
Restaurant operating costs:
                                               
Food and packaging
    166,120       180,515       12,848       456             359,939  
Payroll and employee benefits
    160,240       200,349       16,285       531             377,405  
Occupancy and other operating costs
    121,779       134,387       16,711       417             273,294  
                                                 
Total restaurant operating costs
    448,139       515,251       45,844       1,404             1,010,638  
                                                 
Franchised and licensed restaurants and other revenue:
                                               
Royalties
    25,426       43,414       1,732       351       (66 )     70,857  
Distribution centers
    176,304       18,181                         194,485  
Rent
    22,172       9,985                         32,157  
Retail sales of variable interest entity
                      3,506             3,506  
Other
    967       524       112                   1,603  
                                                 
Total franchised and licensed restaurants and other revenue
    224,869       72,104       1,844       3,857       (66 )     302,608  
                                                 
Franchised and licensed restaurants and other expenses:
                                               
Administrative expense (including provision for bad debts)
    4,006       4,758       1,111                   9,875  
Distribution centers
    171,363       18,379                         189,742  
Rent and other occupancy
    18,040       6,540                         24,580  
Operating costs of variable interest entity
                      3,457       (66 )     3,391  
                                                 
Total franchised and licensed restaurants and other expenses
    193,409       29,677       1,111       3,457       (66 )     227,588  
                                                 
Advertising
    34,413       36,023       1,377       26             71,839  
                                                 
General and administrative
    52,418       79,840       6,388       70             138,716  
                                                 
Facility action charges, net
    2,794       7,088       4,344       94             14,320  
                                                 
Operating income (loss)
  $ 61,656     $ 5,293     $ (10,270 )   $ 101     $     $ 56,780  
                                                 
Company-operated average unit volume (trailing-13 periods)
  $ 1,301     $ 862     $ 748                          
Franchise-operated average unit volume (trailing-13 periods)
  $ 1,146     $ 891     $ 823                          
Company-operated same-store sales increase
    7.7 %     7.0 %     5.2 %                        
Franchise-operated same-store sales increase
    6.6 %     3.6 %     3.7 %                        
Company-operated same-store transaction increase
    1.3 %     0.2 %     1.0 %                        
Average check (actual $)
  $ 5.89     $ 4.63     $ 9.65                          
Restaurant operating costs as a % of company-operated revenue:
                                               
Food and packaging
    29.3 %     30.0 %     27.4 %                        
Payroll and employee benefits
    28.2 %     33.3 %     34.6 %                        
Occupancy and other operating costs
    21.4 %     22.4 %     35.6 %                        
Total restaurant operating costs
    78.9 %     85.7 %     97.6 %                        
Advertising as a % of company-operated revenue
    6.1 %     6.0 %     2.9 %                        

 

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

                                                 
    Fourth Quarter Fiscal 2007  
    Carl’s Jr.     Hardee’s     La Salsa     Other(A)     Eliminations(B)     Total  
 
Company-operated revenue
  $ 133,041     $ 145,030     $ 9,349     $ 77     $     $ 287,497  
                                                 
Restaurant operating costs:
                                               
Food and packaging
    38,805       41,508       2,442       25             82,780  
Payroll and employee benefits
    34,800       46,747       3,315       31             84,893  
Occupancy and other operating costs
    29,253       32,009       3,478       24             64,764  
                                                 
Total restaurant operating costs
    102,858       120,264       9,235       80             232,437  
                                                 
Franchised and licensed restaurants and other revenue:
                                               
Royalties
    7,214       9,476       386       105       (37 )     17,144  
Distribution centers
    43,332       3,464                   (2 )     46,794  
Rent
    5,175       1,326                         6,501  
Retail sales of variable interest entity
                      724             724  
Other
    210       98       2                   310  
                                                 
Total franchised and licensed restaurants and other revenue
    55,931       14,364       388       829       (39 )     71,473  
                                                 
Franchised and licensed restaurants and other expenses:
                                               
Administrative expense (including provision for bad debts)
    1,281       1,236       350                   2,867  
Distribution centers
    43,245       3,618                         46,863  
Rent and other occupancy
    4,332       944                         5,276  
Operating costs of variable interest entity
                      742       (16 )     726  
                                                 
Total franchised and licensed restaurants and other expenses
    48,858       5,798       350       742       (16 )     55,732  
                                                 
Advertising
    7,065       8,817       286       2             16,170  
                                                 
General and administrative
    12,921       21,450       1,882       63             36,316  
                                                 
Facility action charges, net
    142       2,381       2,386       111             5,020  
                                                 
Operating income (loss)
  $ 17,128     $ 684     $ (4,402 )   $ (92 )   $ (23 )   $ 13,295  
                                                 
Company-operated same-store sales increase (decrease)
    2.8 %     4.8 %     (0.2 )%                        
Franchise-operated same-store sales increase
    2.6 %     4.1 %     1.1 %                        
Company-operated same-store transaction (decrease) increase
    (2.1 )%     1.9 %     (4.5 )%                        
Average check (actual $)
  $ 6.77     $ 4.94     $ 10.72                          
Restaurant operating costs as a % of company-operated revenue:
                                               
Food and packaging
    29.2 %     28.6 %     26.1 %                        
Payroll and employee benefits
    26.1 %     32.2 %     35.5 %                        
Occupancy and other operating costs
    22.0 %     22.1 %     37.2 %                        
Total restaurant operating costs
    77.3 %     82.9 %     98.8 %                        
Advertising as a % of company-operated revenue
    5.3 %     6.1 %     3.1 %                        

 

37


Table of Contents

CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

                                                 
    Fourth Quarter Fiscal 2006  
    Carl’s Jr.     Hardee’s     La Salsa     Other(A)     Eliminations(B)     Total  
 
Company-operated revenue
  $ 135,133     $ 131,025     $ 10,265     $ 80     $     $ 276,503  
                                                 
Restaurant operating costs:
                                               
Food and packaging
    39,403       38,899       2,795       26             81,123  
Payroll and employee benefits
    32,334       43,391       3,501       34             79,260  
Occupancy and other operating costs
    27,895       28,333       3,772       24             60,024  
                                                 
Total restaurant operating costs
    99,632       110,623       10,068       84             220,407  
                                                 
Franchised and licensed restaurants and other revenue:
                                               
Royalties
    6,464       9,101       405       95       (18 )     16,047  
Distribution centers
    43,021       4,845                   (6 )     47,860  
Rent
    5,094       1,301                         6,395  
Retail sales of variable interest entity
                      883             883  
Other
    606       154       94                   854  
                                                 
Total franchised and licensed restaurants and other revenue
    55,185       15,401       499       978       (24 )     72,039  
                                                 
Franchised and licensed restaurants and other expenses:
                                               
Administrative expense (including provision for bad debts)
    998       1,407       381                   2,786  
Distribution centers
    41,546       4,883                         46,429  
Rent and other occupancy
    4,418       1,308                         5,726  
Operating costs of variable interest entity
                      878       (6 )     872  
                                                 
Total franchised and licensed restaurants and other expenses
    46,962       7,598       381       878       (6 )     55,813  
                                                 
Advertising
    6,433       8,141       (30 )     4             14,548  
                                                 
General and administrative
    11,625       19,465       1,840       67             32,997  
                                                 
Facility action charges, net
    547       2,552       1,133       6             4,238  
                                                 
Operating income (loss)
  $ 25,119     $ (1,953 )   $ (2,628 )   $ 19     $ (18 )   $ 20,539  
                                                 
Company-operated same-store sales increase
    5.3 %     2.9 %     3.7 %                        
Franchise-operated same-store sales increase
    4.3 %     2.9 %     5.1 %                        
Company-operated same-store transaction (decrease) increase
    (0.4 )%     0.4 %     (0.5 )%                        
Average check (actual $)
  $ 6.41     $ 4.83     $ 10.16                          
Restaurant operating costs as a % of company-operated revenue:
                                               
Food and packaging
    29.2 %     29.7 %     27.2 %                        
Payroll and employee benefits
    23.9 %     33.1 %     34.1 %                        
Occupancy and other operating costs
    20.6 %     21.6 %     36.8 %                        
Total restaurant operating costs
    73.7 %     84.4 %     98.1 %                        
Advertising as a % of company-operated revenue
    4.8 %     6.2 %     (0.3 )%                        

 
 
(A) “Other” consists of Green Burrito and amounts that we do not believe would be proper to allocate to the operating segments.
 
(B) “Eliminations” consists of the elimination of royalty revenues and expenses generated between Hardee’s and a variable interest entity franchisee included in our Consolidated Financial Statements.

38


Table of Contents

 
CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
Presentation of Non-GAAP Measurements
 
Adjusted EBITDA
 
Adjusted EBITDA is a non-GAAP measure used by our senior lenders under our Facility to evaluate our ability to service debt and fund capital expenditures. Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to income from operations, an indicator of cash flow from operations or a measure of liquidity. As shown in the table below and defined in the Facility, Adjusted EBITDA is calculated as earnings before cumulative effect of accounting changes, discontinued operations, interest expense, income taxes, depreciation and amortization, facility action charges, impairment of goodwill and impairment of assets held for sale. Because not all companies calculate Adjusted EBITDA identically, this presentation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Adjusted EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest expense, income taxes, debt service payments and cash costs arising from facility actions.
 
The Facility includes a number of financial covenants, including a current requirement that we generate a minimum Adjusted EBITDA of $125,000 on a trailing-13 period basis. In addition, our maximum annual capital expenditures are limited by the Facility, based on a sliding scale driven by our Adjusted EBITDA.
 
The Adjusted EBITDA amounts presented in the tables below are calculated using the definition in our Facility as of January 31, 2007. On March 27, 2007, we amended and restated our Facility. The Amended Facility modifies the definition of Adjusted EBITDA to include an adjustment for share-based compensation expense. Total share-based compensation expense was $8,368, $188 and $0 for fiscal 2007, 2006 and 2005, respectively.
 
                                         
    2007  
    Carl’s Jr.     Hardee’s     La Salsa     Other     Total  
 
Net income (loss)
  $ 52,146     $ 5,956     $ (7,255 )   $     (675 )   $  50,172  
Interest expense (income)
    3,991       15,491       (17 )     286       19,751  
Income tax expense (benefit)
    29,388       6,966       (4,089 )     (366 )     31,899  
Depreciation and amortization
    26,328       32,821       3,050       219       62,418  
Facility action charges, net
    664       2,494       5,003       385       8,546  
                                         
Adjusted EBITDA
  $ 112,517     $ 63,728     $ (3,308 )   $ (151 )   $ 172,786  
                                         
 
                                         
    2006 (as restated)  
    Carl’s Jr.     Hardee’s     La Salsa     Other     Total  
 
Net income (loss)
  $ 77,065     $ (3,782 )   $ (6,855 )   $ 114,711     $ 181,139  
Interest expense
    4,255       18,641       28       92       23,016  
Income tax expense (benefit)
    1,955             (138 )     (125,705 )     (123,888 )
Depreciation and amortization
    24,958       35,473       3,558       166       64,155  
Facility action charges, net
    1,792       4,653       1,544       36       8,025  
                                         
Adjusted EBITDA
  $ 110,025     $ 54,985     $ (1,863 )   $ (10,700 )   $ 152,447  
                                         
 


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

                                         
    2005  
    Carl’s Jr.     Hardee’s     La Salsa     Other     Total  
 
Net income (loss)
  $ 58,490     $ (32,750 )   $ (10,314 )   $ 2,590     $ 18,016  
Discontinued operations, excluding impairment
                      (252 )     (252 )
Interest expense (income)
    5,071       31,510       (27 )     194       36,748  
Income tax expense (benefit)
    498       73       2       (2,165 )     (1,592 )
Depreciation and amortization
    23,875       38,782       3,965       171       66,793  
Facility action charges, net
    2,794       7,088       4,344       94       14,320  
Premium on early redemption of Senior Notes
          9,126                   9,126  
Impairment of Timber Lodge
                      898       898  
                                         
Adjusted EBITDA
  $ 90,728     $ 53,829     $ (2,030 )   $ 1,530     $ 144,057  
                                         

 
The following table reconciles Adjusted EBITDA (a non-GAAP measurement) to cash flows provided by operating activities (a GAAP measurement) for the fiscal years ended January 31, 2007, 2006 and 2005:
 
                         
    2007     2006     2005  
    (as restated)  
 
Cash flows provided by operating activities
  $ 164,145     $ 116,173     $ 112,222  
Interest expense
    19,751       23,016       36,748  
Income tax expense (benefit)
    31,899       (123,888 )     (1,592 )
Premium on early redemption of Senior Notes
                9,126  
Amortization of loan fees
    (3,097 )     (3,312 )     (3,637 )
Share-based compensation expense
    (8,308 )     (188 )      
Recovery of (provision for) losses on accounts and notes receivable
    192       (176 )     1,940  
Loss on sale of property and equipment, capital leases and extinguishment of debt
    (3,449 )     (3,180 )     (9,676 )
Deferred income taxes
    (25,961 )     125,478       (295 )
Other non-cash charges
    (77 )     (88 )     (79 )
Change in estimated liability for closing restaurants and estimated liability for self-insurance
    5,204       13,701       5,905  
Net change in refundable income taxes
    4,356       (612 )     3,366  
Net change in receivables, inventories, prepaid expenses and other current assets
    3,739       5,002       (1,766 )
Net change in accounts payable and other current liabilities
    (15,608 )     521       (8,086 )
Adjusted EBITDA from discontinued operations
                262  
Net cash flows from discontinued operations
                (119 )
                         
Adjusted EBITDA, including discontinued operations
    172,786       152,447       144,319  
Less: Adjusted EBITDA from discontinued operations
                (262 )
                         
Adjusted EBITDA
  $ 172,786     $ 152,447     $ 144,057  
                         

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Table of Contents

 
CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

Fiscal 2007 Compared with Fiscal 2006 and Fiscal 2006 Compared with Fiscal 2005
 
Carl’s Jr.
 
During fiscal 2007, we opened seven and closed two company-operated restaurants, and divested 40 company-operated restaurants to franchisees; Carl’s Jr. franchisees and licensees opened 38 and closed five restaurants, and acquired 40 former company-operated restaurants. As of January 31, 2007, 2006 and 2005, the Carl’s Jr. system consisted of the following:
 
                                                                                 
    Restaurant Portfolio     Fiscal Year Revenue  
                      2007-2006
    2006-2005
                      2007-2006
    2006-2005
 
    2007     2006     2005     Change     Change     2007     2006     2005     Change     Change  
 
Company
    393       428       428       (35 )         $ 590,613     $ 574,663     $ 567,960     $ 15,950     $ 6,703  
Franchised and licensed(a)
    694       621       586       73       35       240,348       228,098       224,869       12,250       3,229  
                                                                                 
Total
    1,087       1,049       1,014       38       35     $ 830,961     $ 802,761     $ 792,829     $ 28,200     $ 9,932  
                                                                                 
 
 
(a) Includes $187,533, $179,222 and $176,304 of revenues from distribution of food, packaging and supplies to franchised and licensed restaurants in fiscal 2007, 2006 and 2005, respectively.
 
Company-Operated Restaurants
 
Revenue from company-operated restaurants increased $15,950, or 2.8%, to $590,613 during fiscal 2007 as compared to the prior year, mainly due to increases in same-store sales of 4.9%, partially offset by the net impact of the opening of seven new company-operated restaurants, the closing of two restaurants and the divestiture of 40 restaurants to franchisees. Same-store sales were positively impacted by the successful promotion of the popular “meat-as-a-condiment” Pastrami Burger, Jalapeño Burgertm and Philly Cheesesteak Burgertm, the latest Hand-Scooped Ice Cream Shakes and Malts mint chip flavor and the introduction of the Smoked Sausage Breakfast Sandwich. AUV for the trailing-13 periods ended January 31, 2007, reached $1,440, a 7.4% increase over the prior year. During the same period, the average guest check increased by 4.3%.
 
Revenue from company-operated restaurants increased $6,703, or 1.2%, to $574,663 during fiscal 2006 as compared to fiscal 2005, despite the inclusion of a 53rd week in fiscal 2005. This increase resulted primarily from a 2.2% increase in same-store sales driven by a 5.6% increase in the average guest check, partially offset by a decrease in transaction counts.


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
The changes in restaurant operating costs as a percent of company-operated revenue are explained as follows:
 
                 
    2007     2006  
 
Restaurant operating costs as a percent of company-operated revenue for the prior year
    76.6 %     78.9 %
Increase (decrease) in workers’ compensation expense
    0.6       (1.6 )
Decrease in labor costs, excluding workers’ compensation
    (0.5 )     (0.4 )
Increase (decrease) in general liability expense
    0.2       (0.3 )
Decrease in food and packaging costs
    (0.2 )     (0.3 )
Increase in depreciation and amortization expense
    0.1       0.1  
Increase in repair and maintenance expense
          0.1  
(Decrease) increase in utilities expense
    (0.1 )     0.2  
(Decrease) increase in rent expense, property taxes and licenses
    (0.1 )     0.1  
(Decrease) increase in asset retirement expense
    (0.1 )     0.1  
Decrease in equipment lease expense
          (0.2 )
Other, net
    (0.2 )     (0.1 )
                 
Restaurant operating costs as a percent of company-operated revenue for the current year
    76.3 %     76.6 %
                 
 
Workers’ compensation expense increased by $3,272 during fiscal 2007 as compared to fiscal 2006 due to the impact of favorable claims reserves adjustments recorded in fiscal 2006, as a result of actuarial analyses of outstanding claims reserves, that did not recur to the same extent in the current year, partially offset by the benefit of greater sales leverage and continued favorable actuarial trends in claim frequency and severity. Workers’ compensation expense decreased by $8,720 during fiscal 2006 as compared to fiscal 2005. The significant decrease in workers’ compensation expense during fiscal 2006 can be largely attributed to favorable actuarial trends related to maturation of various policy periods, within the context of a more favorable, post-reform environment.
 
Labor costs, excluding workers’ compensation, as a percent of company-operated revenue decreased during fiscal 2007 as compared to fiscal 2006, and in fiscal 2006 as compared to fiscal 2005, mainly due to more effective management of direct labor costs and the benefit of greater sales leverage.
 
General liability expense increased by $1,101 during fiscal 2007 as compared to fiscal 2006 due to the impact of favorable actuarial adjustments recorded in fiscal 2006 that did not recur to the same extent in the current year. General liability expense decreased by $1,635 during fiscal 2006 as compared with fiscal 2005 due to favorable loss development trends, which resulted in reduced actuarially estimated ultimate losses.
 
Food and packaging costs as a percent of company-operated revenue decreased during fiscal 2007 as compared to the prior year due primarily to decreases in the cost of several commodities such as beef, pork, poultry and cheese, which were partially offset by an increase in packaging costs and in distribution costs related to the relocation of our main distribution center. Food and packaging costs decreased as a percent of company-operated revenue in fiscal 2006 from fiscal 2005, primarily due to decreases in the cost of several commodities, including bacon, poultry, cheese and frying oil.
 
Utilities expense as a percent of company-operated revenue decreased during fiscal 2007 as compared to fiscal 2006 mainly due to decreases in the prices of electricity and natural gas. Utilities expense as a percent of company-operated revenue increased during fiscal 2006 as compared to fiscal 2005 mainly due to increases in the prices of electricity and natural gas.
 
Equipment lease expense as a percent of company-operated revenue decreased during fiscal 2006 as compared to fiscal 2005 mainly due to the expiration of certain operating leases in point-of-sale equipment, which was replaced with purchased equipment.


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
Franchised and Licensed Restaurants
 
Total franchised and licensed restaurants and other revenue increased by $12,250, or 5.4%, to $240,348 in fiscal 2007, as compared to the prior year. Franchise royalties grew $3,468, or 13.2%, during fiscal 2007 as compared to fiscal 2006 due to the net increase of 73 domestic and international franchised restaurants during the trailing-13 periods ended January 31, 2007, and the impact of a 5.4% increase in franchise-operated same-store sales. Food, paper and supplies sales to franchisees increased by $8,311, or 4.6%, due to the increase in the franchise store base over the comparable prior year period, and the food purchasing volume impact of the increase in franchise same-store sales.
 
Total franchised and licensed restaurants and other revenue increased by $3,229, or 1.4%, to $228,098 in fiscal 2006, as compared to the prior year, despite the inclusion of a 53rd week in fiscal 2005, mainly due to an increase of $2,918, or 1.7%, in sales of food, paper and supplies to franchisees. This increase is primarily due to a net increase of 22 domestic franchised restaurants during fiscal 2006, as well as the impact of a slight increase in franchise-operated same-store sales. Franchise royalties also grew $798, or 3.1%, during fiscal 2006 due to a net increase of 35 domestic and international franchised restaurants and the increase in same store sales discussed above. Franchise fees, which are included in other franchise revenue, increased $717, or 74.1%, also due to the opening of new franchise units discussed above and the renewal of franchise agreements. Rental income decreased $1,204, or 5.4%, due to the expiration of certain leases on property we had previously sublet to franchisees. For most of these leases, the franchisees directly negotiated lease renewals with the landlord.
 
Total franchised and licensed operating and other expenses increased by $11,861, or 6.0%, to $208,832 in fiscal 2007, as compared to fiscal 2006. This increase is primarily due to higher distribution center costs of $11,122, or 6.4%, which can be attributed mainly to the increase in the cost of food, paper and supplies due to a corresponding increase in sales to franchisees and an increase in costs related to the relocation of our main distribution center.
 
Total franchised and licensed operating and other expenses increased by $3,562, or 1.8%, to $196,971 in fiscal 2006, as compared to fiscal 2005, primarily due to an increase of $2,786, or 1.6%, in the cost of food, paper and supplies sold to franchisees. Franchising administrative expense increased by $603, or 15.1%, primarily as a result of increased provision for doubtful accounts due to prior year recoveries of bad debts that did not recur in fiscal 2006.
 
Although not required to do so, approximately 86.8% of Carl’s Jr. franchised and licensed restaurants purchase food, paper and other supplies from us.
 
Hardee’s
 
During fiscal 2007, we opened four and closed 43 company-operated restaurants. During the same period, we also terminated our franchise agreement, leases and subleases with one franchisee and acquired 61 of their restaurants, of which we subsequently closed 19 and currently operate 42 as company-operated restaurants. During the same period, we acquired 11 restaurants from the lender of a former franchisee. Hardee’s franchisees and licensees opened 22 and closed 70 restaurants; they also divested 72 restaurants (including those divested by a lender of a former franchisee) to us, of which we closed 19. As of January 31, 2007, 2006 and 2005, the Hardee’s system consisted of the following:
 
                                                                                 
    Restaurant Portfolio     Fiscal Year Revenue  
                      2007-2006
    2006-2005
                      2007-2006
    2006-2005
 
    2007     2006     2005     Change     Change     2007     2006     2005     Change     Change  
 
Company
    696       663       677       33       (14 )   $ 634,264     $ 587,082     $ 601,068     $ 47,182     $ (13,986 )
Franchised and licensed
    1,210       1,330       1,357       (120 )     (27 )     72,620       74,427       72,104       (1,807 )     2,323  
                                                                                 
Total
    1,906       1,993       2,034       (87 )     (41 )   $ 706,884     $ 661,509     $ 673,172     $ 45,375     $ (11,663 )
                                                                                 


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

Company-Operated Restaurants
 
Revenue from company-operated restaurants increased $47,182 or 8.0%, to $634,264 in fiscal 2007 from fiscal 2006. The increase is mostly due to an increase in same-store sales of 4.8% and a net increase of 33 restaurants during the fiscal year. Same-store sales in fiscal 2006 were significantly affected by three named tropical storms and hurricanes that occurred during the third fiscal quarter, which contributed to record high gasoline prices during late summer. We believe these factors had a negative impact on consumers’ discretionary spending in the prior fiscal year. AUV for the trailing-13 periods ended January 31, 2007, reached $916, an increase of 4.8% over the similar period ended January 31, 2006. During the same period, the average guest check increased by 2.7% due to the introduction of several new premium products such as our Philly Cheesesteak Thickburger, Smoked Sausage Biscuit, Jalapeño Thickburger, and our new Monster Biscuit, as well as the continued promotion of premium products such as our Hand-Scooped Ice Cream Shakes & Malts, Monster Thickburger and Loaded Breakfast Burritotm.
 
Revenue from company-operated Hardee’s restaurants decreased $13,986, or 2.3%, to $587,082 in fiscal 2006 from fiscal 2005, primarily due to the inclusion of a 53rd week in fiscal 2005, a net decrease of 14 restaurants and to a reduction of 0.2% in same-store sales.
 
The changes in restaurant operating costs as a percent of company-operated revenue are explained as follows:
 
                 
    2007     2006  
 
Restaurant operating costs as a percent of company-operated revenue for the prior year
    84.5 %     85.7 %
Decrease in labor costs, excluding workers’ compensation
    (1.0 )     (0.2 )
Decrease in food and packaging costs
    (0.9 )     (0.3 )
Decrease in depreciation and amortization expense
    (0.7 )     (0.3 )
(Decrease) increase in rent expense, property taxes and licenses
    (0.4 )     0.1  
Increase (decrease) in workers’ compensation expense
    0.3       (0.7 )
Increase (decrease) in general liability expense
    0.3       (0.4 )
(Decrease) increase in utilities expense
    (0.1 )     0.4  
Other, net
    (0.1 )     0.2  
                 
Restaurant operating costs as a percent of company-operated revenue for the current year
    81.9 %     84.5 %
                 
 
Labor costs, excluding workers’ compensation, decreased as a percent of company-operated revenue in fiscal 2007 as compared to fiscal 2006 primarily due to the benefit of greater sales leverage. Labor costs, excluding workers’ compensation, decreased as a percent of company-operated revenue in fiscal 2006 as compared to fiscal 2005 mainly due to the benefit of adjustments to our labor management system that were designed to use labor more efficiently, partially offset by the impact of a slight decrease in same-store sales.
 
Food and packaging costs as a percent of company-operated revenue decreased during fiscal 2007 as compared to fiscal 2006 partially due to reduced costs for beef, pork, poultry and cheese. These reductions were partially offset by slightly higher packaging costs and increased vending expenses due to the reopening of two toll road restaurants with company-operated gift shops. Food and packaging costs as a percent of company-operated revenue decreased in fiscal 2006, as compared to fiscal 2005, partially due to reduced costs for pork, cheese and frying oil, as well as a rebate of food costs that we received from our major supplier that resulted from a reconciliation of pricing differences.
 
Depreciation and amortization expense as a percent of company-operated revenue decreased during fiscal 2007 as compared to fiscal 2006 primarily due to the expiration of certain equipment capital leases during fiscal


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

2006, as well as the continued use of certain fully depreciated assets and the benefit of greater sales leverage, partially offset by additional depreciation related to the purchase of 36 restaurant locations in March 2006. Depreciation expense decreased in fiscal 2006, as compared to fiscal 2005, due to the expiration of certain point-of-sale equipment capital leases during fiscal 2006, as well as the continued use of certain fully depreciated assets, partially offset by increased depreciation for new company-operated restaurants and the impact of a slight reduction in same-store sales.
 
Rent, property taxes and license expense decreased as a percent of company-operated revenue in fiscal 2007, as compared to fiscal 2006, primarily due to the March 2006 purchase of 36 restaurant locations that we had previously leased from a commercial lessor and, to a lesser extent, the benefit of greater sales leverage.
 
Workers’ compensation expense increased by $2,032 during fiscal 2007 as compared to fiscal 2006 due to the impact of favorable claims reserves adjustments recorded in the prior year, as a result of actuarial analyses of outstanding claims reserves, which did not recur to the same extent in the current year. The impact of these increases was partially offset by the benefit of greater sales leverage during the current year. Workers’ compensation expense decreased by $4,091 in fiscal 2006, as compared to fiscal 2005, mainly due to favorable loss development trends which resulted in reduced actuarially estimated ultimate losses.
 
General liability expense increased by $2,145 during fiscal 2007 as compared to fiscal 2006 due to the impact of favorable actuarial adjustments recorded in fiscal 2006 that did not recur to the same extent in the current year. General liability expense decreased by $2,638 during fiscal 2006 as compared with fiscal 2005 due to favorable loss development trends, which resulted in reduced actuarially estimated ultimate losses.
 
Utilities expense as a percent of company-operated revenue decreased during fiscal 2007 as compared to fiscal 2006 mostly due to the benefit of greater sales leverage and the normalization of rates that had spiked in fiscal 2006 after Hurricane Katrina. Utilities expense increased as a percent of company-operated revenue in fiscal 2006, as compared to fiscal 2005, due mainly to higher prices for natural gas and electricity.
 
Franchised and Licensed Restaurants
 
Total franchised and licensed restaurants and other revenue decreased $1,807, or 2.4%, to $72,620 during fiscal 2007 as compared to fiscal 2006. The decrease is primarily due to a $7,463, or 30.5%, decrease in distribution center revenues related to reduced franchise remodel activity in the current fiscal year and the ice cream equipment rollout in the prior year, partially offset by franchise royalties, which increased by $5,496, or 13.1%, and franchise rental income, which increased $305, or 4.3%. The increase in royalty revenue is mainly due to a 4.3% increase in franchise-operated same-store sales and greater collections of previously unrecognized royalties, partially offset by the reduction in the number of franchise restaurants discussed above. During fiscal 2007, we collected $4,747 of previously unrecognized royalties from significantly past due franchisees, compared to $1,621 of collections in the prior year. We expect minimal collections of previously unrecognized royalties in fiscal 2008. The increase in rental income is primarily due to collection of previously unrecognized rental income, partially offset by a decrease due to the termination of a franchise agreement with a franchisee that had previously leased ten of our owned locations and subleased 51 of our leased locations.
 
Total franchised and licensed restaurants and other revenue increased $2,323, or 3.2%, in fiscal 2006 from fiscal 2005. The increase was primarily due to a $6,277, or 34.5%, increase in distribution center revenues related to equipment sales to franchisees and increased franchise remodel activity, partially offset by franchise royalties, which decreased by $1,364, or 3.1%, and franchise rental income, which decreased $2,864, or 28.7%. The $1,364 decrease in royalty revenue was primarily due to a reduction in the number of franchise restaurants and a 2.2% decline in domestic franchise-operated same-store sales, partially offset by an increase in international royalties. The decrease in rental income was primarily due a $2,144 reduction in rent collections from financially troubled


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Table of Contents

 
CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

franchisees during fiscal 2006 and the expiration of certain leases on property we previously sublet to franchisees that are now leased directly from the landlord.
 
Total franchised and licensed restaurants and other expenses decreased by $8,765, or 24.3%, to $27,293 in fiscal 2007, as compared to fiscal 2006, mainly due to a decrease of $7,090, or 28.4%, in the cost of equipment sales as the result of a corresponding decrease in equipment sales to franchisees and the closure of several franchise restaurant locations. Decreases of $842, or 14.1%, in rent expense and $833, or 16.1%, in administrative expenses also contributed to the reduction in franchising expense.
 
Total franchised and licensed restaurants and other expenses increased by $6,381, or 21.5%, to $36,058 in fiscal 2006, as compared to fiscal 2005, primarily due to an increase of $6,551, or 35.6%, in the cost of equipment sold to franchisees, which was a direct result of the increased distribution center revenues.
 
La Salsa
 
During fiscal 2007, we opened two and closed six company-operated restaurants; during the same period La Salsa franchisees and licensees opened two and closed four restaurants. As of January 31, 2007, 2006 and 2005, the La Salsa system consisted of the following:
 
                                                                                 
    Restaurant Portfolio     Fiscal Year Revenue  
                      2007-2006
    2006-2005
                      2007-2006
    2006-2005
 
    2007     2006     2005     Change     Change     2007     2006     2005     Change     Change  
 
Company
    55       59       62       (4 )     (3 )   $ 44,460     $ 47,277     $ 46,950     $ (2,817 )   $ 327  
Franchised and licensed
    41       43       39       (2 )     4       1,879       1,879       1,844             35  
                                                                                 
Total
    96       102       101       (6 )     1     $ 46,339     $ 49,156     $ 48,794     $ (2,817 )   $ 362  
                                                                                 
 
Revenue from company-operated La Salsa restaurants decreased $2,817, or 6.0%, during fiscal 2007 as compared to the prior year, primarily due to the impact of closing six company-operated restaurants, partially offset by 1.2% increase in company-operated same-store sales, resulting from the net impact of a 6.8% increase in average guest check and a 4.5% decrease in transaction counts, and the opening of two new company-operated restaurants.
 
Revenue from company-operated La Salsa restaurants increased $327, or 0.7%, during fiscal 2006 as compared to the prior year, despite the inclusion of a 53rd week in fiscal 2005, primarily due to a 2.6% increase in company-operated same-store sales, partially offset by the impact of closing three company-operated restaurants. The increase in same-store sales resulted primarily from a 5.2% increase in the average guest check, partially offset by a 1.7% decrease in transaction counts.
 
Restaurant operating costs as a percent of company-operated revenue were 93.5% and 95.0% for fiscal 2007 and fiscal 2006, respectively. Food and packaging costs decreased by 1.0% as a percent of company-operated revenue for fiscal 2007 as compared to fiscal 2006 primarily due to reduced costs for dairy, avocado and seafood products. Payroll and employee benefits remained flat as a percent of company-operated revenue for fiscal 2007. Occupancy and other costs decreased 0.5% as a percent of company-operated revenue for fiscal 2007 as compared to fiscal 2006, mainly due to lower depreciation and asset retirement expense.
 
Restaurant operating costs as a percent of company-operated revenue were 95.0% and 97.6% for fiscal 2006 and fiscal 2005, respectively. Operating costs decreased by 1.7% as a percent of company-operated revenue due to reduced depreciation and amortization expense that resulted from the impairment of 16 La Salsa restaurants during fiscal 2006. Workers’ compensation and general liability expenses decreased 1.6% as a percent of company-operated revenue as a result of favorable actuarial claims development trends. Since our company-operated La Salsa restaurants are located predominantly in California, our workers’ compensation expense was favorably impacted by California legislative reform. These cost reductions were partially offset by a 0.4% increase in asset retirement expense due to the retirement of certain point-of-sale equipment.


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Table of Contents

 
CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
Consolidated Expenses
 
Consolidated Variable Interest Entities
 
We consolidate the results of one franchise variable interest entity (“VIE”), which operates five Hardee’s restaurants. We do not possess any ownership interest in the franchise VIE. Retail sales and operating expenses of the franchise VIE are included within franchised and licensed restaurants and other. The assets and liabilities of, and minority interest in, this entity are included in our accompanying Consolidated Balance Sheets, and are not significant to our consolidated financial position. The results of operations of this entity are included within our accompanying Consolidated Statements of Income and are not significant to our consolidated results of operations. The minority interest in the income or loss of this franchise entity is classified in other income (expense), net, in our accompanying Consolidated Statements of Income, and in other long-term liabilities in the accompanying Consolidated Balance Sheets. We have no rights to the assets, nor do we have any obligation with respect to the liabilities, of this franchise entity. None of our assets serve as collateral for the creditors of this franchisee or any of our other franchisees. (See Note 1 of Notes to Consolidated Financial Statements for further discussion of the franchise VIE.)
 
We also consolidate the Hardee’s cooperative advertising funds, which consist of the Hardee’s National Advertising Fund and approximately 82 local advertising cooperative funds because we have determined we are the primary beneficiaries of these funds. Each of these funds is a separate non-profit association with all the proceeds segregated and managed by a third-party accounting service company. The group of funds has been reported in our accompanying Consolidated Balance Sheets as advertising fund assets, restricted, and advertising fund liabilities within current assets and current liabilities, respectively. The funds are reported as of the latest practicable date, which is the last day of the calendar quarter immediately preceding the balance sheet date.
 
Advertising Expense
 
Advertising expense increased $1,289, or 1.8%, to $72,253 in fiscal 2007 from fiscal 2006. Advertising expense, as a percent of company-operated revenue, decreased by 0.2% to 5.7% in fiscal 2007 as compared to fiscal 2006. Advertising expense decreased $875, or 1.2%, to $70,964 during fiscal 2006 from fiscal 2005. Advertising expense, as a percent of company-operated revenue, remained constant at 5.9% in fiscal 2006 as compared to fiscal 2005.
 
General and Administrative Expenses
 
General and administrative expenses increased $9,213, or 6.5%, to $150,315 in fiscal 2007 from fiscal 2006. This increase was mainly due to an increase of $8,180 in share-based compensation expense, as a result of the adoption of SFAS 123R and issuance of additional options and awards; higher management bonus expense of $4,650, based on our performance relative to executive management and operations bonus criteria; increased information technologies expense primarily related to higher consulting fees related to various systems implementations and upgrades; increases in our accrued liability for litigation; and increases in professional services and various other expenses. These increases were partially offset by the fact that general and administrative expenses for fiscal 2006 included $11,000 to purchase and retire the outstanding options of our retired Chairman of the Board of Directors, and there was no comparable expense in the current year period. General and administrative expenses were 9.5% of total revenue in fiscal 2007, as compared to 9.3% in fiscal 2006.
 
General and administrative expenses increased $2,386 or 1.7% to $141,102 during fiscal 2006, as compared to the prior fiscal year. This increase is primarily due to an $11,000 charge incurred in fiscal 2006 to purchase and cancel the options of our former Chairman, partially offset by the impact of legal settlement charges incurred during fiscal 2005 that did not recur in fiscal 2006. General and administrative expenses were 9.3% of total revenue in fiscal 2006, as compared to 9.1% in fiscal 2005.


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
Facility Action Charges
 
Facility action charges arise from closure of company-operated restaurants, sublease of closed facilities at amounts below our primary lease obligation, impairment of long-lived assets to be disposed of or held and used, gains or losses upon disposal of surplus property, and discount amortization for obligations related to closed or subleased facilities to their future costs.
 
Net facility action charges increased $521 or 6.5%, to $8,546 during fiscal 2007, as compared to the prior fiscal year. The increase is mainly due to an increase of $2,615 in new decisions to close restaurants, of which $1,948 relates to Hardee’s restaurants that we acquired from a terminated franchisee and subsequently decided to close; an increase in unfavorable dispositions of surplus properties of $1,087; and an increase in asset impairments of $453, which were mostly offset by an increase in gains on sales of closed restaurants of $3,459.
 
Facility action charges decreased $6,295 or 44.0%, to $8,025 during fiscal 2006, as compared to the prior fiscal year. The decrease was primarily due to a $4,290 reduction in charges required to establish liabilities for remaining lease payments for Hardee’s restaurants that closed during fiscal 2006 as compared to fiscal 2005. In addition, asset impairment charges decreased by $3,708 in fiscal 2006 as compared to fiscal 2005, primarily as a result of lower impairments at Carl’s Jr. and La Salsa. The foregoing decreases were partially offset by a decrease of $1,621 in favorable dispositions of closed restaurants, as there were fewer previously closed restaurants to be disposed of.
 
See Note 5 of Notes to Consolidated Financial Statements included herein for additional detail of the components of facility action charges.
 
Interest Expense
 
Interest expense for fiscal 2007, 2006 and 2005 was as follows:
 
                         
    2007     2006     2005  
 
Facility
  $ 6,895     $ 7,522     $ 6,310  
Senior subordinated notes due 2009
                7,855  
Capital lease obligations
    5,665       6,257       6,950  
2004 convertible subordinated notes
                73  
2023 convertible subordinated notes
    2,553       4,200       4,258  
Amortization of loan fees
    3,096       3,312       3,637  
Write-off of unamortized loan fees, term loan due July 2, 2008
    242       500       1,452  
Write-off of unamortized loan fees, term loan repaid June 2, 2004
                664  
Write-off of unamortized loan fees, senior subordinated notes due 2009
                3,068  
Letter of credit fees and other
    1,300       1,225       2,481  
                         
Total interest expense
  $ 19,751     $ 23,016     $ 36,748  
                         
 
The decrease from 2006 to 2007 was primarily due to lower average borrowings, further reduction of our capital lease obligations and the conversion of a significant portion of our 2023 Convertible Notes into shares of our common stock during fiscal year 2007.
 
The decrease from 2005 to 2006 was primarily due to lower average borrowings, lower interest rates upon refinancing our Senior Notes with a lower cost bank term loan, and further amortization of our capital lease obligations, as well as the write-off in fiscal 2005 of unamortized loan fees related to our Senior Notes, for which there was no comparable write-off in fiscal 2006.


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
Conversion Inducement Expense
 
During fiscal 2007, we recorded conversion inducement expense of $6,406 as a result of payments made, in response to unsolicited offers, to induce the holders of $89,833 of our 2023 Convertible Notes to convert their notes into 10,224,424 shares of our common stock, respectively. No comparable expense was recorded during fiscal 2006 or 2005, and we do not expect to incur comparable conversion inducement expense in future periods.
 
Other Income (Expense), Net
 
Other income (expense), net, consists of the following:
 
                         
    Fiscal Year Ended January 31,  
    2007     2006     2005  
 
Premium incurred upon early redemption of debt
  $     $     $ (9,126 )
Interest income on notes receivable from franchisees, disposition properties and capital leases
    1,042       1,116       1,784  
Rental income from properties leased to third parties, net
    1,813       1,352       2,060  
Other, net
    881       (81 )     2,320  
                         
Total other income (expense), net
  $ 3,736     $ 2,387     $ (2,962 )
                         
 
Income Taxes
 
We recorded income tax expense for the fiscal year ended January 31, 2007 of $31,899, which is comprised of current provisions for foreign income taxes of $1,124 and federal and state income taxes of $4,814, and a deferred tax provision of $25,961. During the fourth quarter of fiscal 2007, we determined that we would more likely than not realize future tax benefits from certain of our deferred tax assets for which we previously maintained a valuation allowance. This determination was based on a number of factors, including our ability, for the first time in several years, to utilize more foreign tax credits than we generated in fiscal 2007 and our projected future foreign source income. As a result of our analysis, we reduced our valuation allowance by $4,884 at January 31, 2007, resulting in a net deferred tax asset of $109,779.
 
We recorded income tax benefit for the fiscal year ended January 31, 2006 of $123,888, which is comprised of current provisions for foreign income taxes of $905 and federal and state income taxes of $685, and a benefit from deferred taxes of $125,478, as restated. During the fourth quarter of fiscal 2006, after considering a number of factors, including a three-year history of cumulative earnings, expected utilization of net operating loss (“NOL”) carryforwards in fiscal 2006, and estimated taxable income in future years, we determined we would more likely than not realize substantial future tax benefits from our deferred tax assets. As a result of this analysis, we reduced our valuation allowance by $159,959 at January 31, 2006, resulting in a net deferred tax asset of $135,740, as restated. Of the total tax benefit from the reversal of the valuation allowance, $11,971 was recorded to additional paid-in capital for the tax benefit from the exercise of stock options during both the current and prior years. We generated income for tax purposes during fiscal 2006, before utilization of NOL carryforwards.
 
Our effective rate differs from the federal statutory rate primarily as a result of changes in our valuation allowance, the impact of state income taxes and certain expenses that are nondeductible for income tax purposes. During fiscal 2008, we expect our effective tax rate to be approximately 40%. As a result of our income tax credit carryforwards and expected reversals of temporary differences, we expect that our cash requirements for U.S. federal and state income taxes will be approximately 15% to 20% of our taxable earnings in fiscal 2008. This rate results primarily from U.S. federal tax reduced by available alternative minimum tax (“AMT”) and general business tax credits.


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
Our actual cash requirements for income taxes could vary significantly from our expectations for a number of reasons, including, but not limited to, unanticipated fluctuations in our deferred tax assets and liabilities, unexpected gains from significant transactions, unexpected outcomes of income tax audits, and changes in tax law. We expect to continue to incur foreign taxes on our income earned outside the U.S., which we expect to result in a credit against our U.S. federal income tax liability.
 
During fiscal 2007, we utilized all of our federal NOL carryforwards and a portion of our federal tax credit carryforwards. At January 31, 2007, we have federal AMT credit, general business tax credit and foreign tax credit carryforwards of approximately $18,446. Our AMT credits will be carried forward until utilized, and our general business tax credits and foreign tax credits would expire, if unused, in varying amounts in the years 2012 through 2027. At January 31, 2007, we have state NOL carryforwards in the amount of approximately $329,207, which expire in varying amounts in the years 2008 through 2027. As of January 31, 2007, we have recognized $859 of net deferred tax assets related to our state NOL carryforwards, which represents our expected future tax savings from such NOL carryforwards.
 
We have recognized a net deferred tax asset of $109,779 as of January 31, 2007, which resulted from our net deferred tax assets and valuation allowance of approximately $137,036 and $27,257, respectively.
 
Fiscal Fourth Quarter 2007 Compared with Fiscal Fourth Quarter 2006
 
Carl’s Jr.
 
Company-Operated Restaurants
 
Company-operated restaurant revenue decreased by $2,092, or 1.5%, for the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006, due mainly to the divestiture of 40 company-operated restaurants to franchisees. This decrease was partially offset by the addition of two company-operated restaurants and a 2.8% increase in same-store sales.
 
The changes in the restaurant operating costs as a percent of company-operated revenue from the fiscal fourth quarter 2006 to the fiscal fourth quarter 2007 are explained as follows:
 
         
Restaurant operating costs as a percent of company-operated revenue for the prior year
    73.7 %
Increase in workers’ compensation expense
    2.7  
Increase in depreciation and amortization expense
    0.6  
Increase in general liability insurance expense
    0.5  
Decrease in utilities expense
    (0.5 )
Increase in rent and property taxes
    0.4  
Decrease in labor costs, excluding workers’ compensation
    (0.4 )
Increase in banking expenses
    0.1  
Increase in equipment lease expense
    0.1  
Increase in repairs and maintenance expense
    0.1  
         
Restaurant operating costs as a percent of company-operated revenue for the current year
    77.3 %
         
 
Workers’ compensation expense increased by $3,578 during the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006, due to the impact of a favorable claims reserves adjustment recorded in the prior year period, as a result of a quarterly actuarial analysis of outstanding claims reserves, that did not recur to the same extent in the current year period, partially offset by the benefit of sales leverage and continued favorable actuarial trends in claim frequency and severity.


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
Depreciation expense increased as a percent of company-operated revenue during the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006 primarily due to the addition of new assets related to the rollout of new POS software and related hardware and the addition of new assets for newly opened and newly remodeled restaurants.
 
General liability expense increased by $614 or 0.5% as a percent of company-operated revenue during the fourth quarter of fiscal 2007 as compared to fiscal 2006 as a result of favorable actuarial adjustments recorded in the prior year period that did not recur to the same extent in the current year period.
 
Utilities expense as a percent of company-operated revenue decreased during the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006 mainly due to decreases in the prices of electricity and natural gas.
 
Rent and property tax expense increased as a percent of company-operated revenue in the fourth quarter of fiscal 2007 as compared to fiscal 2006, primarily due to rental rate increases resulting from Consumer Price Index related rental adjustments.
 
Labor costs, excluding workers’ compensation, as a percent of company-operated revenue decreased during the fourth quarter of fiscal 2007 compared to fiscal 2006, mainly due to more effective management of direct labor costs and the benefit of greater sales leverage.
 
Banking expenses increased as a percent of company-operated revenue in the fourth quarter of fiscal 2007 from the fourth quarter of fiscal 2006 primarily due to increased credit card usage by our guests during the fourth quarter of fiscal 2007.
 
Franchised and Licensed Restaurants
 
Total franchised and licensed restaurants and other revenue increased $746, or 1.4%, in the fourth quarter of fiscal 2007 from the comparable fiscal 2006 period primarily due to an increase of $750, or 11.6%, in royalties received from franchisees and licensees due to new franchised and licensed restaurants coupled with an increase in AUV. Food, paper and supplies sales to franchisees increased by $311, or 0.7%, due to the increase in the franchise store base over the comparable prior year period, and the food purchasing volume impact of the increase in franchise same-store sales.
 
Total franchised and licensed restaurants and other expenses increased $1,896, or 4.0%, in the fourth quarter of fiscal 2007 from the comparable fiscal 2006 period due primarily to an increase in distribution center costs of $1,699, or 4.1%, which can be attributed mainly to increases in the cost of food, paper and supplies as a result of a corresponding increase in sales to franchisees and an increase in costs related to the relocation of our main distribution center.
 
Hardee’s
 
Company-Operated Restaurants
 
Revenue from company-operated restaurants increased $14,005 or 10.7%, in the fourth quarter of fiscal 2007 compared to the fourth quarter of fiscal 2006. $9,467 of this increase arose as a result of the net increase in the number of company-operated restaurants from prior year and a 4.8% increase in same-store sales.


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

 
The changes in the restaurant operating costs as a percent of company-operated revenue from the fiscal fourth quarter 2006 to the fiscal fourth quarter 2007 are explained as follows:
 
         
Restaurant operating costs as a percent of company-operated revenue
    84.4 %
Increase in general liability insurance expense
    1.4  
Decrease in labor costs, excluding workers’ compensation
    (1.2 )
Decrease in food and packaging costs
    (1.1 )
Decrease in utilities expense
    (0.7 )
Decrease in rent and property taxes
    (0.5 )
Decrease in depreciation and amortization expense
    (0.5 )
Increase in repair and maintenance expense
    0.4  
Increase in asset retirement expense
    0.3  
Increase in workers’ compensation expense
    0.3  
Other, net
    0.1  
         
Restaurant operating costs as a percent of company-operated revenue for the current year
    82.9 %
         
 
General liability expense increased by $1,970 during the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006 as a result of favorable actuarial adjustments recorded in the prior year period that did not recur to the same extent in the current year period.
 
Labor costs, excluding workers’ compensation, decreased as a percent of company-operated revenue in the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006 mainly due to the benefit of greater sales leverage.
 
Food and packaging costs as a percent of company-operated revenue decreased in the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006 primarily due to reduced costs for beef, pork, poultry and cheese.
 
Utilities expense as a percent of company-operated revenue decreased in the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006 mostly due to the benefit of greater sales leverage and the normalization of rates that had spiked in fiscal 2006 after Hurricane Katrina.
 
Rent and property tax expense as a percent of company-operated revenue decreased in the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006 due to the March 2006 purchase of 36 restaurant locations that had previously been leased from a commercial lessor and the benefit of greater sales leverage.
 
Depreciation and amortization expense as a percent of company-operated revenue decreased in the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006 primarily due to the expiration of certain equipment capital leases during fiscal 2006, as well as the continued use of certain fully depreciated assets and the benefit of greater sales leverage, partially offset by additional depreciation related to the purchase of 36 restaurant locations in March 2006.
 
Repair and maintenance costs increased as a percent of company-operated revenue in the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006 mainly due to higher repairs and maintenance costs for the restaurants acquired in connection with the termination of a franchise agreement. There were also higher maintenance costs for a new POS system support contract, while no similar costs were incurred during the same prior year period.
 
Asset retirement expense as a percent of company-operated revenue increased in the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006 mainly due to increased write-offs for a restaurant that closed


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CKE RESTAURANTS, INC. AND SUBSIDIARIES
 
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

during the quarter so that it could be demolished and rebuilt in early fiscal 2008. There were no similar costs in the prior year period.
 
Workers’ compensation expense increased by $518 during the fourth quarter of fiscal 2007 as compared to the fourth quarter of fiscal 2006, due to the impact of a favorable claims reserves adjustment recorded in the prior year period, as a result of a quarterly actuarial analysis of outstanding claims reserves, that did not recur to the same extent in the current year period, partially offset by the benefit of greater sales leverage and continued favorable actuarial trends in claim frequency and severity.
 
Franchised and Licensed Restaurants
 
Total franchised and licensed restaurants and other revenue decreased by $1,037, or 6.7%, in the fourth quarter of fiscal 2007 from the fourth quarter of fiscal 2006 as a result of a $1,381, or 28.5%, decrease in distribution center revenues related to reduced franchise remodel activity in the current fiscal year and the ice cream equipment rollout in the prior year, partially offset by franchise royalties, which increased by $375, or 4.1%.
 
Total franchised and licensed restaurants and other expenses decreased $1,800 or 23.7% during the fourth quarter of fiscal 2007 from the fourth quarter of fiscal 2006 primarily due to a $1,265, or 25.9%, decrease in the cost of equipment sales due to a corresponding decrease in equipment sales and the closure of several franchised restaurant locations.
 
La Salsa
 
Revenue from company-operated La Salsa restaurants decreased $916, or 8.9%, during the fourth quarter of fiscal 2007 as compared to the prior year quarter, primarily due to the impact of a reduction in the number of company-operated restaurants and a slight decrease in same-store sales.
 
La Salsa restaurant operating costs as a percent of company-operated revenue increased to 98.8% in the fourth quarter of fiscal 2007, from 98.1% in the fourth quarter of fiscal 2006. Payroll and employee benefits costs increased 1.4% as a percent of company-operated revenue due to an inc