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EX-31.1 - EXHIBIT 31.1 - CKE RESTAURANTS INCex311.htm
EX-32.1 - EXHIBIT 32.1 - CKE RESTAURANTS INCex321.htm
EX-31.2 - EXHIBIT 31.2 - CKE RESTAURANTS INCex312.htm
EX-32.2 - EXHIBIT 32.1 - CKE RESTAURANTS INCex322.htm


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

FORM 10-Q

(Mark One)

R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
   
 
For the quarterly period ended November 2, 2009
   
OR
   
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
   
 
For the transition period from                                                                 to                      .

Commission file number 1-11313


CKE RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)

Delaware
33-0602639
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
   
6307 Carpinteria Avenue, Ste. A, Carpinteria, California
93013
(Address of Principal Executive Offices)
(Zip Code)

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

Former Name, Former Address and Former Fiscal Year, if changed since last report.

Indicate by 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 R No £

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

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

Large accelerated filer £
Accelerated filer R
Non-accelerated filer £
Smaller reporting company £
       

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

As of December 3, 2009, 55,186,442 shares of the registrant’s common stock were outstanding.



CKE RESTAURANTS, INC. AND SUBSIDIARIES

 
Page No.
Part I. Financial Information
 
Part II. Other Information
 
    Exhibit 31.2  
    Exhibit 32.1  
    Exhibit 32.2  
 

 

Part I. Financial Information


CKE RESTAURANTS, INC. AND SUBSIDIARIES
AS OF NOVEMBER 2, 2009 AND JANUARY 31, 2009
(In thousands, except par values)
(Unaudited)

 
 
November 2, 2009
   
January 31, 2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 20,068     $ 17,869  
Accounts receivable, net of allowance for doubtful accounts of $348 as of November 2, 2009 and $720 as of January 31, 2009
    35,859       40,738  
Related party trade receivables
    5,220       4,923  
Inventories, net
    22,319       24,215  
Prepaid expenses
    14,041       13,445  
Assets held for sale
    232       805  
Advertising fund assets, restricted
    19,527       16,340  
Deferred income tax assets, net
    17,510       20,781  
Other current assets
    2,903       1,843  
Total current assets
    137,679       140,959  
Notes receivable, net of allowance for doubtful accounts of $365 as of November 2, 2009 and $529 as of January 31, 2009
    1,293       3,259  
Property and equipment, net of accumulated depreciation and amortization of $439,999 as of November 2, 2009 and $420,375 as of January 31, 2009
    559,964       543,770  
Property under capital leases, net of accumulated amortization of $45,978 as of November 2, 2009 and $48,341 as of January 31, 2009
    33,658       23,403  
Deferred income tax assets, net
    41,377       57,832  
Goodwill
    24,106       23,688  
Intangible assets, net
    2,369       2,508  
Other assets, net
    8,503       9,268  
Total assets
  $ 808,949     $ 804,687  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Current portion of bank indebtedness and other long-term debt
  $ 2,709     $ 4,341  
Current portion of capital lease obligations
    7,696       6,389  
Accounts payable
    55,528       60,903  
Advertising fund liabilities
    19,527       16,340  
Other current liabilities
    100,727       91,765  
Total current liabilities
    186,187       179,738  
Bank indebtedness and other long-term debt, less current portion
    274,929       310,447  
Capital lease obligations, less current portion
    43,895       36,273  
Other long-term liabilities
    82,249       83,953  
Total liabilities
    587,260       610,411  
                 
Commitments and contingencies (Notes 5 and 7)
               
Subsequent events (Notes 8 and 15)
               
                 
Stockholders’ equity:
               
Preferred stock, $.01 par value; 5,000 shares authorized; none issued or outstanding
           
Series A Junior Participating Preferred stock, $.01 par value; 1,500 shares authorized; none issued or outstanding
           
Common stock, $.01 par value; 100,000 shares authorized; 55,179 shares issued and outstanding as of November 2, 2009; 54,653 shares issued and outstanding as of January 31, 2009
    552       546  
Additional paid-in capital
    280,506       276,068  
Accumulated deficit
    (59,369 )     (82,338 )
Total stockholders’ equity
    221,689       194,276  
Total liabilities and stockholders’ equity
  $ 808,949     $ 804,687  

See Accompanying Notes to Condensed Consolidated Financial Statements

 
3


CKE RESTAURANTS, INC. AND SUBSIDIARIES
 (In thousands, except per share amounts)
(Unaudited)

 
 
Twelve Weeks Ended
   
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
   
November 2, 2009
   
November 3, 2008
 
Revenue:
                       
Company-operated restaurants
  $ 246,696     $ 255,545     $ 847,654     $ 880,858  
Franchised and licensed restaurants and other
    77,521       81,050       259,334       274,398  
Total revenue
    324,217       336,595       1,106,988       1,155,256  
Operating costs and expenses:
                               
Restaurant operating costs:
                               
Food and packaging
    69,665       76,785       242,066       262,214  
Payroll and other employee benefits
    71,386       71,237       241,142       250,349  
Occupancy and other
    60,874       61,841       201,461       199,687  
Total restaurant operating costs
    201,925       209,863       684,669       712,250  
Franchised and licensed restaurants and other
    58,854       61,474       196,680       210,131  
Advertising
    15,679       15,105       51,451       51,902  
General and administrative
    30,977       31,156       103,061       108,037  
Facility action charges, net
    520       1,242       3,022       2,666  
Total operating costs and expenses
    307,955       318,840       1,038,883       1,084,986  
Operating income
    16,262       17,755       68,105       70,270  
Interest expense
    (6,430 )     (9,363 )     (14,834 )     (16,330 )
Other income, net
    704       769       1,991       2,290  
Income before income taxes
    10,536       9,161       55,262       56,230  
Income tax expense
    4,379       3,773       22,460       21,882  
Net income
  $ 6,157     $ 5,388     $ 32,802     $ 34,348  
                                 
Income per common share:
                               
Basic
  $ 0.11     $ 0.10     $ 0.60     $ 0.65  
Diluted
  $ 0.11     $ 0.10     $ 0.60     $ 0.63  
                                 
Dividends per common share
  $ 0.06     $ 0.06     $ 0.18     $ 0.18  
                                 

See Accompanying Notes to Condensed Consolidated Financial Statements

 
4


CKE RESTAURANTS, INC. AND SUBSIDIARIES
 (In thousands)
(Unaudited)

   
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
 
Cash flows from operating activities:
           
Net income
  $ 32,802     $ 34,348  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    54,317       48,141  
Amortization of deferred loan fees
    799       948  
Share-based compensation expense
    6,216       9,515  
(Recovery of) provision for losses on accounts and notes receivable
    (346 )     15  
Loss on sale of property and equipment and capital leases
    1,352       1,914  
Facility action charges, net
    3,022       2,666  
Deferred income taxes
    19,078       17,723  
Other non-cash charges
    24       28  
Net changes in operating assets and liabilities:
               
Receivables, inventories, prepaid expenses and other current and non-current assets
    4,859       6,226  
Estimated liability for closed restaurants and estimated liability for self-insurance
    (2,782 )     (4,470 )
Accounts payable and other current and long-term liabilities
    (805 )     (8,680 )
Net cash provided by operating activities
    118,536       108,374  
Cash flows from investing activities:
               
Purchases of property and equipment
    (69,399 )     (82,658 )
Proceeds from sale of property and equipment
    3,836       21,042  
Collections of non-trade notes receivable
    2,330       2,799  
Acquisition of restaurants, net of cash acquired
    (485 )      
Other investing activities
    111       68  
Net cash used in investing activities
    (63,607 )     (58,749 )
Cash flows from financing activities:
               
Net change in bank overdraft
    876       (13,911 )
Borrowings under revolving credit facility
    98,000       133,500  
Repayments of borrowings under revolving credit facility
    (131,500 )     (135,000 )
Repayments of credit facility term loan
    (3,633 )     (15,815 )
Repayments of other long-term debt
    (17 )     (131 )
Repayments of capital lease obligations
    (5,637 )     (4,493 )
Payment of deferred loan fees
          (399 )
Repurchase of common stock
    (1,690 )     (4,296 )
Exercise of stock options
    569       1,626  
Excess tax benefits from exercise of stock options and vesting of restricted stock awards
    131       174  
Dividends paid on common stock
    (9,829 )     (9,449 )
Net cash used in financing activities
    (52,730 )     (48,194 )
Net increase in cash and cash equivalents
    2,199       1,431  
Cash and cash equivalents at beginning of period
    17,869       19,993  
Cash and cash equivalents at end of period
  $ 20,068     $ 21,424  
 
See Accompanying Notes to Condensed Consolidated Financial Statements

 
5

CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)

 

CKE Restaurants, Inc. (“CKE” or the “Company”), through its wholly-owned subsidiaries, owns, operates, franchises and licenses the Carl’s Jr.®, Hardee’s®, Green Burrito® and Red Burrito™ concepts. References to CKE Restaurants, Inc. throughout these Notes to Condensed Consolidated Financial Statements are made using the first person notations of “we,” “us” and “our.”

Carl’s Jr. restaurants are primarily located in the Western United States. Hardee’s restaurants are located throughout the Southeastern and Midwestern United States. Green Burrito restaurants are primarily located in dual-branded Carl’s Jr. restaurants. The Red Burrito concept is located in dual-branded Hardee’s restaurants. Generally, our franchisees are domestic and our licensees are international. As of November 2, 2009, our system-wide restaurant portfolio consisted of:

   
Carl’s Jr.
   
Hardee’s
   
Other
   
Total
 
Company-operated
    421       476       1       898  
Franchised
    667       1,232       12       1,911  
Licensed
    133       205             338  
Total
    1,221       1,913       13       3,147  

Our accompanying unaudited Condensed Consolidated Financial Statements include the accounts of CKE, our wholly-owned subsidiaries, and certain variable interest entities (“VIEs”) for which we are the primary beneficiary and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the instructions to Form 10-Q, and Article 10 of Regulation S-X. CKE does not have any non-controlling interests in other entities. These financial statements should be read in conjunction with the audited Consolidated Financial Statements presented in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009. In our opinion, all adjustments considered necessary for a fair presentation of financial position and results of operations for this interim period have been included. The results of operations for such interim period are not necessarily indicative of results for the full year or for any future period.

We operate on a retail accounting calendar. Our fiscal year has 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. For clarity of presentation, we generally label all fiscal year ends as if the fiscal year ended January 31.

Variable Interest Entities

We consolidate one national and approximately 80 local co-operative advertising funds (“Hardee’s Funds”) as we have concluded that they are VIEs for which we are the primary beneficiary. We have included $19,527 and $16,340 of advertising fund assets, restricted, and advertising fund liabilities in our accompanying Condensed Consolidated Balance Sheets as of November 2, 2009 and January 31, 2009, respectively. Consolidation of the Hardee’s Funds had no impact on our accompanying Condensed Consolidated Statements of Income and Cash Flows. We have no rights to the assets, nor do we have any obligation with respect to the liabilities, of the Hardee’s Funds, and none of our assets serve as collateral for the creditors of these VIEs.

Certain of our franchisees, which combine to operate approximately 5.8% of all our franchised and licensed restaurants, are VIEs in which we hold a significant variable interest, but for which we are not the primary beneficiary. As of November 2, 2009, we have exposures of $12,197 related to these VIEs, which relate to the collection of accounts receivable and our lease obligations for properties subleased to these entities.

Note 2 — Accounting Pronouncements Not Yet Adopted and Adoption of New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance on the Accounting Standards Codification (“ASC” or “Codification”) and the Hierarchy of GAAP which establishes the Codification as the single source of authoritative guidance for nongovernmental financial statements prepared in accordance with GAAP, except for the Securities and Exchange Commission  (“SEC”) rules and interpretive releases, which is also authoritative guidance for SEC registrants. This guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and supersedes existing non-SEC accounting and reporting standards. We adopted the Codification during the quarter ended November 2, 2009, and there was no impact on our unaudited Condensed Consolidated Financial Statements other than the removal of specific references to GAAP accounting pronouncements.

6

CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


In September 2006, the FASB issued authoritative guidance for fair value measurements and disclosures which defines fair value, establishes a framework for measuring fair value and expands disclosures related to assets and liabilities measured at fair value. In February 2008, the FASB issued additional authoritative guidance which delayed the effective date for fair value measurements to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We adopted all provisions of the authoritative guidance as of the beginning of fiscal 2009 except for the guidance applicable to non-recurring nonfinancial assets and nonfinancial liabilities. As of the beginning of fiscal 2010, we adopted the remaining provisions of the authoritative guidance and there was no impact on our consolidated financial position or results of operations.

In December 2007, the FASB issued revised authoritative guidance for business combinations which establishes principles and requirements for how an acquirer in a business combination transaction recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date. The provisions of the guidance also establish disclosure requirements which will enable financial statement users to evaluate the nature and financial effects of the business combination. In April 2009, the FASB issued additional authoritative guidance for business combinations relating to the initial recognition and measurement, subsequent measurement and accounting and disclosures of assets and liabilities that arise from contingencies in a business combination. The effective date of the authoritative guidance is for fiscal years beginning after December 15, 2008. We adopted the provisions of the authoritative guidance as of the beginning of fiscal 2010 and there was no material impact on our consolidated financial position or results of operations.

In March 2008, the FASB issued authoritative guidance for derivatives and hedging which requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under the guidance, and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash. This guidance is effective for fiscal years and interim periods beginning after November 15, 2008. We adopted the authoritative guidance as of the beginning of fiscal 2010 and provided the required expanded disclosures (see Notes 5 and 6).

In June 2008, the FASB issued authoritative guidance for earnings per share. The guidance addresses whether instruments granted in share-based payment transactions may be participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic earnings per share pursuant to the two-class method of the guidance for earnings per share. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. We adopted the authoritative guidance as of the beginning of fiscal 2010 and presented income per share for the current and prior periods in accordance with the guidance (see Note 12).

In April 2009, the FASB issued authoritative guidance for interim disclosures for financial instruments. This guidance amends prior authoritative guidance by requiring disclosures of the fair value of financial instruments included within the scope of the prior guidance whenever a public company issues summarized financial information for interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009. We adopted the authoritative guidance during the quarter ended August 10, 2009 and have included the required additional disclosures (see Note 6).

In May 2009, the FASB issued authoritative guidance for subsequent events which provides rules on recognition and disclosure for events and transactions occurring after the balance sheet date but before the financial statements are issued or available to be issued. In addition, the guidance requires a reporting entity to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements are issued or the date the financial statements are available to be issued. This guidance is effective for interim and annual periods ending after June 15, 2009. We adopted the authoritative guidance during the quarter ended August 10, 2009 and have included the required additional disclosures (see Note 15).

 

 
7

CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)

 
In June 2009, the FASB issued authoritative guidance that changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated and requires companies to more frequently assess whether they must consolidate VIEs. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities that most significantly impact the other entity’s economic performance. The provisions are effective for annual periods beginning after November 15, 2009, which for us is fiscal 2011. We have not yet evaluated the impact of adopting the requirements of the authoritative guidance on our consolidated financial position or results of operations.

Note 3 — Assets Held For Sale

Surplus restaurant properties and company-operated restaurants that we expect to sell within one year are classified in our accompanying Condensed Consolidated Balance Sheets as assets held for sale. As of November 2, 2009, total assets held for sale were $232 and were comprised of two surplus properties in our Hardee’s operating segment. As of January 31, 2009, total assets held for sale were $805 and were comprised of four surplus properties in our Hardee’s operating segment.

Note 4 — Purchase and Sale of Assets

Purchase of Assets

During the forty weeks ended November 2, 2009, we purchased one Carl’s Jr. restaurant from one of our franchisees for $485. As a result of this transaction, we recorded property and equipment of $64 and goodwill of $418 in our Carl’s Jr. segment. We did not purchase any restaurants from franchisees during the forty weeks ended November 3, 2008.

Related Party Transactions

During the forty weeks ended November 2, 2009, we sold three company-operated Carl’s Jr. restaurants and related real property with a net book value of $965 to a former executive and new franchisee. In connection with this transaction, we received aggregate consideration of $1,300, including $100 in initial franchise fees, which is included in franchised and licensed restaurants and other revenue, and we recognized a net gain of $233, which is included in facility action charges, net, in our accompanying Condensed Consolidated Statements of Income for the forty weeks ended November 2, 2009, in our Carl’s Jr. segment. As part of this transaction, the franchisee acquired the real property and/or subleasehold interest in the real property related to the restaurant locations.

During the forty weeks ended November 3, 2008, we sold three company-operated Carl’s Jr. restaurants and related real property with a net book value of $1,068 to a former executive and new franchisee. In connection with this transaction, we received aggregate consideration of $2,173, including $100 in initial franchise fees, which is included in franchised and licensed restaurants and other revenue, and we recognized a net gain of $983, which is included in facility action charges, net, in our accompanying Condensed Consolidated Statements of Income for the forty weeks ended November 3, 2008, in our Carl’s Jr. segment. As part of this transaction, the franchisee acquired the real property and/or subleasehold interest in the real property related to the restaurant locations.

Hardee’s Refranchising Program

During the twelve weeks ended November 3, 2008, we sold 23 company-operated Hardee’s restaurants and related real property with a net book value of $2,560 to one franchisee. In connection with this transaction, we received aggregate consideration of $4,075, including $605 in initial franchise fees, which is included in franchised and licensed restaurants and other revenue, and we recognized a net loss of $1,070, which is included in facility action charges, net, in our accompanying Condensed Consolidated Statement of Income for the twelve weeks ended November 3, 2008, in our Hardee’s segment. During the forty weeks ended November 3, 2008, we sold 88 company-operated Hardee’s restaurants and related real property with a net book value of $12,682 to three franchisees. In connection with these transactions, we received aggregate consideration of $16,428, including $2,290 in initial franchise fees, which is included in franchised and licensed restaurants and other revenue, and we recognized a net loss of $1,682, which is included in facility action charges, net, in our accompanying Condensed Consolidated Statement of Income for the forty weeks ended November 3, 2008, in our Hardee’s segment. As part of these transactions, the franchisees acquired the real property and/or subleasehold interest in the real property related to the restaurant locations. We completed our refranchising program for our Hardee’s concept during fiscal 2009.


 
8

CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Note 5 — Indebtedness and Interest Expense

As of November 2, 2009, we had borrowings outstanding under the term loan portion of our senior credit facility (“Facility”) of $248,103 and under the revolving portion of our Facility of $28,500. We also had outstanding letters of credit under the revolving portion of our Facility of $35,363, with remaining availability of $136,137 under the revolving portion of our Facility.

As of November 2, 2009, the applicable interest rate on the term loan was the London Inter Bank Offered Rate (“LIBOR”) plus 1.38% per annum. Our outstanding borrowings under the revolving loan portion of our Facility bore interest at rates that were locked in for fixed terms of approximately 30 days, at LIBOR plus 1.50% per annum, at November 2, 2009 and January 31, 2009. As of November 2, 2009 and January 31, 2009, borrowings under the revolving loan bore interest at weighted-average rates of 1.79% and 1.93% per annum, respectively. We also incur fees on outstanding letters of credit under our Facility at a per annum rate equal to 1.50% times the stated amounts.

The principal amount of the term loan is scheduled to be repaid in the following manner: quarterly installments of $671 through January 1, 2012; three quarterly payments of $63,762, beginning on April 1, 2012; and a final payment of $50,778 due on January 1, 2013. Our Facility also requires additional principal payments on the term loan based on annual excess cash flows, as defined, which are determined at the end of each fiscal year. During the twelve and forty weeks ended November 2, 2009, we made aggregate principal payments of $671 and $3,633 on the term loan, respectively, which included a payment during the first quarter of fiscal 2010 of $1,616 based on excess cash flows for fiscal 2009, as required by the terms of our Facility.  The revolving credit facility matures on March 27, 2012.

We utilize derivative instruments to manage interest rate risk. We have fixed rate swap agreements with various counterparties to effectively fix future interest payments on $200,000 of our term loan debt at 6.12%. These agreements will expire on March 12, 2012. These derivative instruments were not designated as cash flow hedges in accordance with the authoritative guidance. Accordingly, the change in the fair value of the interest rate swap agreements is recognized as interest expense in our accompanying Condensed Consolidated Statements of Income. During the twelve weeks ended November 2, 2009 and November 3, 2008, we recorded interest expense of $3,631 and $4,911, respectively, under these interest rate swap agreements to adjust their carrying value to fair value. During the twelve weeks ended November 2, 2009 and November 3, 2008, we paid $1,595 and $1,474 respectively, for net settlements under our interest rate swap agreements. During the forty weeks ended November 2, 2009 and November 3, 2008, we recorded interest expense of $4,948 and $658, respectively, under these interest rate swap agreements to adjust their carrying value to fair value. During the forty weeks ended November 2, 2009 and November 3, 2008, we paid $6,658 and $1,690, respectively, for net settlements under our interest rate swap agreements.  As a matter of policy, we do not enter into derivative instruments unless there is an underlying exposure.
 

 
9

CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


The following table identifies our derivative instruments and their location in our accompanying Condensed Consolidated Balance Sheets:

 
November 2, 2009
 
January 31, 2009
 
 
Balance Sheet Location 
 
Fair Value
 
Balance Sheet Location 
 
Fair Value
 
Derivatives not designated as hedging instruments:
               
Interest rate swap agreements
Other current liabilities
  $ 8,284  
Other current liabilities
  $ 7,234  
Interest rate swap agreements
Other long-term liabilities
    7,596  
Other long-term liabilities
    10,356  
      $ 15,880       $ 17,590  

Our Facility permits us to make annual capital expenditures in the amount of $85,000, plus 80% of the amount of actual Adjusted EBITDA (as defined in our Facility) in excess of $150,000. In addition, we may reinvest proceeds from the sale of assets and carry forward certain unused capital expenditure amounts to the following year. Our Facility also contains financial performance covenants, which include a maximum leverage ratio, and certain restrictive covenants. Our Facility is collateralized by a lien on all of our personal property assets and liens on certain restaurant properties.

Interest expense consisted of the following:

   
Twelve Weeks Ended
   
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
   
November 2, 2009
   
November 3, 2008
 
Facility
  $ 1,124     $ 2,864     $ 4,137     $ 10,216  
Interest rate swap agreements
    3,631       4,911       4,948       658  
Capital lease obligations
    1,281       1,039       4,069       3,418  
Amortization of deferred loan fees
    234       244       782       847  
2023 Convertible Notes
          81             404  
Letter of credit fees and other
    160       224       898       787  
    $ 6,430     $ 9,363     $ 14,834     $ 16,330  

Note 6 — Fair Value of Financial Instruments

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

   
November 2, 2009
   
January 31, 2009
 
 
 
Carrying Value
   
Estimated Fair Value
   
Carrying Value
   
Estimated Fair Value
 
Financial assets:
                       
Cash and cash equivalents
  $ 20,068     $ 20,068     $ 17,869     $ 17,869  
Notes receivable
    2,598       2,816       5,406       5,171  
Financial liabilities:
                               
Long-term debt and bank indebtedness, including current portion
    277,638       254,294       314,788       269,186  
 
The fair value of cash and cash equivalents approximates its carrying value due to its short maturity. The estimated fair value of notes receivable was determined by discounting future cash flows using current rates at which similar loans might be made to borrowers with similar credit ratings.  The estimated fair value of long-term debt was determined by discounting future cash flows using rates currently available to us for debt with similar terms and remaining maturities.


 
10

CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)

 
In accordance with the authoritative guidance, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 —
Quoted prices in active markets for identical assets or liabilities;

Level 2 —
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3 —
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table summarizes the financial liabilities measured at fair value on a recurring basis as of November 2, 2009:
 
   
Total
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Interest rate swap agreements
   $ 15,880      $      $ 15,880      $  

The interest rate swap agreements are recorded at fair value based upon valuation models which utilize relevant factors such as the contractual terms of our interest rate swap agreements, credit spreads for the contracting parties and interest rate curves.

Note 7 — Commitments and Contingent Liabilities

Under various past and present refranchising programs, we have sold restaurants to franchisees, some of which were on leased sites. We entered into sublease agreements with these franchisees but remained principally liable for the lease obligations. We account for the sublease payments received as franchising rental income in franchised and licensed restaurants and other revenue, and the payments on the leases as rental expense in franchised and licensed restaurants and other expense, in our accompanying Condensed Consolidated Statements of Income. As of November 2, 2009, the present value of the lease obligations under the remaining master leases’ primary terms is $113,716. Franchisees may, from time to time, experience financial hardship and may cease payment on their sublease obligations to us. The present value of the exposure to us from franchisees characterized as under financial hardship is $1,152, of which $8 is included in our estimated liability for closed restaurants in our accompanying Condensed Consolidated Balance Sheet as of November 2, 2009.

Pursuant to our Facility, a letter of credit sub-facility in the amount of $85,000 was established (see Note 5). Several standby letters of credit are outstanding under this sub-facility, which primarily secure our potential workers’ compensation, general and auto liability obligations. We are required to provide letters of credit each year, or set aside a comparable amount of cash or investment securities in a trust account, based on our existing claims experience. As of November 2, 2009, we had outstanding letters of credit of $35,363, expiring at various dates through November 2010.

As of November 2, 2009, we had unconditional purchase obligations in the amount of $62,260, which consisted primarily of contracts for goods and services related to restaurant operations and contractual commitments for marketing and sponsorship arrangements.

We have employment agreements with certain key executives (“Agreements”). These Agreements include provisions for lump sum payments to the executives that may be triggered by the termination of employment under certain conditions, as set forth in each Agreement. If such provisions were triggered, each affected executive would receive an amount equal to his base salary for the remainder of his employment term. In addition, depending on the executive that has been terminated, the executive may be entitled to additional cash payments ranging from a pro-rata portion of the current year bonus to, in the case of the Chief Executive Officer, an additional payment equal to his base salary for the remainder of his employment term. Furthermore, all options awarded to the affected executives which have not vested as of the date of termination would vest immediately. For certain of the key executives, all unvested restricted stock awards as of the date of termination would vest immediately and restricted stock awards which have not yet been awarded would be awarded and would vest immediately. If all of these Agreements had been triggered as of November 2, 2009, we would have been required to make cash payments of approximately $15,229.


 
11

CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


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.

As of November 2, 2009, our accrued liability for litigation contingencies was $150. We are currently involved in legal matters related to employment, real estate and other business disputes.  The matters for which we maintain an accrued liability for litigation pose risk of loss significantly above the accrued amounts. In addition, as of November 2, 2009, we estimated the contingent liability of those losses related to other litigation claims that, in accordance with the authoritative guidance, are not accrued, but that we believe are reasonably possible to result in an adverse outcome, to be in the range of $905 to $2,995.

Note 8 — Stockholders’ Equity

During the forty weeks ended November 2, 2009, we declared cash dividends of $0.18 per share of common stock, for a total of $9,861. Dividends payable of $3,311 and $3,279 have been included in other current liabilities in our accompanying Condensed Consolidated Balance Sheets as of November 2, 2009 and January 31, 2009, respectively. The dividends declared during the twelve weeks ended November 2, 2009 were subsequently paid on November 23, 2009.

Subsequent to November 2, 2009, we declared cash dividends of $0.06 per share of common stock, payable to the stockholders of record as of January 25, 2010.

Note 9 — Share-Based Compensation

We have various share-based compensation plans that provide restricted stock awards and stock options for certain employees, non-employee directors and external service providers to acquire shares of our common stock. The total number of shares available under all of our stock incentive plans was 2,934,730 as of November 2, 2009.

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

   
Twelve Weeks Ended
   
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
   
November 2, 2009
   
November 3, 2008
 
Share-based compensation expense related to performance-vested restricted stock awards
  $ 322     $ 993     $ 1,301     $ 3,271  
All other share-based compensation expense
    1,678       1,665       4,941       6,253  
Total share-based compensation expense
  $ 2,000     $ 2,658     $ 6,242     $ 9,524  
Associated tax benefits
  $ 656     $ 760     $ 2,121     $ 2,794  



 
12

CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


Note 10 — Facility Action Charges, Net

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

   
Twelve Weeks Ended
   
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
   
November 2, 2009
   
November 3, 2008
 
Estimated liability for new restaurant closures
  $     $ 10     $ 525     $ 601  
Adjustments to estimated liability for closed restaurants
    323       370       5       73  
Impairment of assets to be disposed of
          35             1,150  
Impairment of assets to be held and used
    97       96       2,143       876  
Loss (gain) on sales of restaurants and surplus properties, net
    25       627       47       (393 )
Amortization of discount related to estimated liability for closed restaurants
    75       104       302       359  
    $ 520     $ 1,242     $ 3,022     $ 2,666  

When an analysis of estimated future cash flows associated with a long-lived asset or asset group indicates that our long-lived assets might be impaired, we recognize an impairment loss equal to the amount by which the carrying value exceeds the fair value of the assets. We typically estimate fair value based on the forecasted cash flows for the long-lived asset or asset group, discounted at a weighted-average cost of capital. This fair value measurement is dependent upon level 3 significant unobservable inputs, as described by the authoritative guidance (see Note 6). Impairment charges recognized in facility action charges, net were recorded against the following asset categories:

   
Twelve Weeks Ended
   
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
   
November 2, 2009
   
November 3, 2008
 
Property and equipment:
                       
Carl’s Jr.
  $ 97     $ 96     $ 1,976     $ 212  
Hardee’s
          35       46       1,814  
      97       131       2,022       2,026  
Property under capital leases:
                               
Carl’s Jr.
                40        
Hardee’s
                81        
                  121        
Total:
                               
Carl’s Jr.
    97       96       2,016       212  
Hardee’s
          35       127       1,814  
    $ 97     $ 131     $ 2,143     $ 2,026  

Note 11 — Income Taxes

Income tax expense consisted of the following:

   
Twelve Weeks Ended
   
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
   
November 2, 2009
   
November 3, 2008
 
Federal and state income taxes
  $ 4,118     $ 3,384     $ 21,696     $ 20,642  
Foreign income taxes
    261       389       764       1,240  
Income tax expense
  $ 4,379     $ 3,773     $ 22,460     $ 21,882  
Effective income tax rate
    41.6 %     41.2 %     40.6 %     38.9 %

Our effective income tax rates for the twelve and forty weeks ended November 2, 2009 and November 3, 2008 differ from the federal statutory rate primarily as a result of state income taxes and certain expenses that are nondeductible for income tax purposes. We had $4,027 of unrecognized tax benefits as of January 31, 2009, that, if recognized, would affect our effective income tax rate. There were no material changes in the unrecognized tax benefits for the twelve and forty weeks ended November 2, 2009. We believe that it is reasonably possible that decreases in unrecognized tax benefits of up to $4,060 may be necessary within the next twelve months as a result of statutes closing on such items. In addition, we believe that it is reasonably possible that our unrecognized tax benefits may increase as a result of tax positions that may be taken during fiscal 2010.

 
13

CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


As of November 2, 2009, we maintained a valuation allowance of $27,128 for state capital loss carryforwards, certain state net operating loss and income tax credit carryforwards and other temporary differences related to various states in which one or more of our entities file separate income tax returns. Realization of the tax benefit of such deferred income 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.

Note 12 — Income Per Share

The table below presents the computation of basic and diluted income per share:
 
   
Twelve Weeks Ended
   
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
   
November 2, 2009
   
November 3, 2008
 
   
(In thousands except per share amounts)
 
Numerator:
                       
Net income
  $ 6,157     $ 5,388     $ 32,802     $ 34,348  
Less: Distributed and undistributed income attributable to unvested restricted stock awards
    (104 )     (106 )     (538 )     (577 )
Income attributable to common shareholders for basic income per share
    6,053       5,282       32,264       33,771  
Add: Interest and amortization costs for 2023 Convertible Notes, net of related tax effect
          56             292  
Add: Undistributed income attributable to unvested restricted stock awards
    52       36       383       410  
Less: Undistributed income reallocated to unvested restricted stock awards
    (51 )     (35 )     (380 )     (393 )
Income attributable to common shareholders for diluted income per share
  $ 6,054     $ 5,339     $ 32,267     $ 34,080  
                                 
Denominator:
                               
Weighted-average shares for computation of basic income per share
    53,779       52,574       53,738       51,898  
Dilutive effect of stock options
    438       484       427       701  
Dilutive effect of 2023 Convertible Notes
          1,004             1,545  
Weighted-average shares for computation of diluted income per share
    54,217       54,062       54,165       54,144  
                                 
Basic income per share
  $ 0.11     $ 0.10     $ 0.60     $ 0.65  
Diluted income per share 
  $ 0.11     $ 0.10     $ 0.60     $ 0.63  



 
 
14

CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)


Note 13 — Segment Information

We are principally engaged in developing, operating, franchising and licensing our Carl’s Jr. and Hardee’s quick-service restaurant concepts, each of which is considered an operating segment that is managed and evaluated separately. The accounting policies of the segments are the same as those described in our summary of significant accounting policies (see Note 1 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009).

Twelve Weeks Ended November 2, 2009                                                                                
 
Carl’s Jr.
   
Hardee’s
   
Other
   
Total
 
Revenue
  $ 193,748     $ 130,231     $ 238     $ 324,217  
Operating income
    10,512       5,624       126       16,262  
Income (loss) before income taxes
    10,152       4,995       (4,611 )     10,536  


Twelve Weeks Ended November 3, 2008                                                                                
 
Carl’s Jr.
   
Hardee’s
   
Other
   
Total
 
Revenue
  $ 199,314     $ 137,066     $ 215     $ 336,595  
Operating income
    12,871       4,801       83       17,755  
Income (loss) before income taxes
    12,769       3,773       (7,381 )     9,161  

Forty Weeks Ended November 2, 2009                                                                                
 
Carl’s Jr.
   
Hardee’s
   
Other
   
Total
 
Revenue
  $ 662,782     $ 443,472     $ 734     $ 1,106,988  
Operating income
    44,519       23,225       361       68,105  
Income (loss) before income taxes
    43,411       20,648       (8,797 )     55,262  

Forty Weeks Ended November 3, 2008                                                                                
 
Carl’s Jr.
   
Hardee’s
   
Other
   
Total
 
Revenue
  $ 686,380     $ 468,195     $ 681     $ 1,155,256  
Operating income
    53,594       16,394       282       70,270  
Income (loss) before income taxes
    52,912       12,692       (9,374 )     56,230  

Note 14 — Supplemental Cash Flow Information

 
 
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
 
Cash paid for:
           
Interest, net of amounts capitalized
  $ 15,070     $ 17,476  
Income taxes, net of refunds received
    7,611       1,863  
Non-cash investing and financing activities:
               
Dividends declared, not paid
    3,311       3,279  
Capital lease obligations incurred to acquire assets
    15,235       761  
Accrued property and equipment purchases at quarter-end
    5,149       5,802  

Note 15 – Subsequent Events
 
We evaluated the period from November 3, 2009 through December 8, 2009, the date that our unaudited Condensed Consolidated Financial Statements were issued, and noted that there have been no material subsequent events or transactions which would impact our accompanying unaudited Condensed Consolidated Financial Statements for the twelve and forty weeks ended November 2, 2009, other than as disclosed in Note 8.


 
15

CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share amounts)

 

Introduction and Safe Harbor Disclosure

CKE Restaurants, Inc. and its subsidiaries (collectively referred to herein as the “Company”, “we”, “us” or “our”) is comprised of the operations of Carl’s Jr., Hardee’s, Green Burrito (which is primarily operated as a dual-branded concept with Carl’s Jr. quick-service restaurants) and Red Burrito (which is operated as a dual-branded concept with Hardee’s quick-service restaurants). The following Management’s Discussion and Analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements contained herein, and our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

Matters discussed in this Form 10-Q contain forward-looking statements relating to future plans and developments, financial goals and operating performance and are based on our current beliefs and assumptions. Such statements are subject to risks and uncertainties that are often difficult to predict and are beyond our control. Factors that could cause our results to differ materially from those described include, but are not limited to, our ability to compete with other restaurants, supermarkets and convenience stores; changes in economic conditions which may affect our business and stock price; the effect of restrictive covenants in our credit facility on our business; our ability to attract and retain key personnel; our franchisees’ willingness to participate in our strategy; the operational and financial success of our franchisees; changes in consumer preferences and perceptions; changes in the price or availability of commodities; changes in our suppliers’ ability to provide quality products to us in a timely manner; the effect of the media’s reports regarding food-borne illnesses and other health-related issues on our reputation and our ability to obtain products; the seasonality of our operations; increased insurance and/or self-insurance costs; our ability to select appropriate restaurant locations, construct new restaurants, complete remodels of existing restaurants and renew leases with favorable terms; our ability to comply with existing and future health, employment, environmental and other government regulations; and other factors as discussed in our filings with the Securities and Exchange Commission (“SEC”).

Forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law or the rules of the New York Stock Exchange.

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

See Note 2 of Notes to Condensed Consolidated Financial Statements for a description of the new accounting pronouncements that we have and have not yet adopted.

Critical Accounting Policies

Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our consolidated financial position and results of operations. See our Annual Report on Form 10-K for the year ended January 31, 2009 for a description of our critical accounting policies. Specific risks associated with these critical accounting policies are described in the following paragraphs.

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

In connection with analyzing long-lived assets to determine if they have been impaired, 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. These estimates utilize key assumptions, such as same-store sales and the rates at which restaurant operating costs will increase in the future. 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.

 

 
16

CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share amounts)


Impairment of Goodwill

During the first quarter of fiscal 2010, we evaluated our goodwill at the Carl’s Jr. and Hardee’s brands. As a result of our annual impairment test, we concluded that the fair value of the Carl’s Jr. and Hardee’s reporting units exceeded the carrying value, and thus no impairment charge was required. As of November 2, 2009 and January 31, 2009, we had $24,106 and $23,688, respectively, of goodwill recorded in our accompanying Condensed Consolidated Balance Sheets.

Estimated Liability for Closed Restaurants

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

Estimated Liability for Self-Insurance

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

Our actuary provides us with estimated unpaid losses for each loss category, upon which our analysis is based. As of November 2, 2009 and January 31, 2009, our estimated liability for self-insured workers’ compensation, general and auto liability losses was $37,171 and $36,972, respectively.

Franchised and Licensed Operations

We have sublease agreements with some of our franchisees on properties for which we remain principally liable for the lease obligations. If sales trends or economic conditions 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, although we can provide no assurance that our Carl’s Jr. franchisees will not experience a similar level of financial difficulties as our Hardee’s franchisees.

Income Taxes

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

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


 
17

CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share amounts)


Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal 2010 Comparisons with Fiscal 2009

The factors discussed below impact comparability of operating performance for the twelve and forty weeks ended November 2, 2009 and November 3, 2008, or could impact comparisons for the remainder of fiscal 2010.

Fiscal Year and Seasonality

We operate on a retail accounting calendar. Our fiscal year has 13 four-week accounting periods and ends the last Monday in January. The first quarter of our fiscal year has four periods, or 16 weeks. All other quarters have three periods, or 12 weeks.

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.

Operating Review

The following table sets forth the percentage relationship to total revenue, unless otherwise indicated, of certain items included in our accompanying Condensed Consolidated Statements of Income:

   
Twelve Weeks Ended
   
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
   
November 2, 2009
   
November 3, 2008
 
Revenue:
                       
Company-operated restaurants
    76.1 %     75.9 %     76.6 %     76.2 %
Franchised and licensed restaurants and other
    23.9       24.1       23.4       23.8  
Total revenue
    100.0       100.0       100.0       100.0  
Operating costs and expenses:
                               
Restaurant operating costs (1):
                               
Food and packaging
    28.2       30.0       28.6       29.8  
Payroll and other employee benefits
    28.9       27.9       28.4       28.4  
Occupancy and other
    24.7       24.2       23.8       22.7  
Total restaurant operating costs
    81.9       82.1       80.8       80.9  
Franchised and licensed restaurants and other (2)
    75.9       75.8       75.8       76.6  
Advertising (1)
    6.4       5.9       6.1       5.9  
General and administrative
    9.6       9.3       9.3       9.4  
Facility action charges, net
    0.2       0.4       0.3       0.2  
Operating income
    5.0       5.3       6.2       6.1  
Interest expense
    (2.0 )     (2.8 )     (1.3 )     (1.4 )
Other income, net
    0.2       0.2       0.2       0.2  
Income before income taxes
    3.2       2.7       5.0       4.9  
Income tax expense
    1.4       1.1       2.0       1.9  
Net income
    1.9 %     1.6 %     3.0 %     3.0 %
____________

(1)
As a percent of company-operated restaurants revenue.
(2)
As a percent of franchised and licensed restaurants and other revenue.



 
18

CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share amounts)


The following table is presented to facilitate Management’s Discussion and Analysis of Financial Condition and Results of Operations.

   
Twelve Weeks Ended
   
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
   
November 2, 2009
   
November 3, 2008
 
                                 
Company-operated restaurants revenue
  $ 246,696     $ 255,545     $ 847,654     $ 880,858  
Restaurant operating costs:
                               
Food and packaging
    69,665       76,785       242,066       262,214  
Payroll and other employee benefits
    71,386       71,237       241,142       250,349  
Occupancy and other
    60,874       61,841       201,461       199,687  
Total restaurant operating costs
    201,925       209,863       684,669       712,250  
Franchised and licensed restaurants and other revenue:
                               
Royalties
    19,641       19,592       65,608       64,757  
Distribution centers
    49,421       51,858       165,986       178,693  
Rent
    7,911       8,257       25,858       26,105  
Franchise fees
    548       1,343       1,882       4,843  
Total franchised and licensed restaurants and other revenue
    77,521       81,050       259,334       274,398  
Franchised and licensed restaurants and other expenses:
                               
Administrative expense (including provision for bad debts)
    3,686       3,236       11,533       11,145  
Distribution centers
    48,807       51,955       163,671       178,518  
Rent and other occupancy
    6,361       6,283       21,476       20,468  
Total franchised and licensed restaurants and other expenses
    58,854       61,474       196,680       210,131  
Advertising expense
    15,679       15,105       51,451       51,902  
General and administrative expense
    30,977       31,156       103,061       108,037  
Facility action charges, net
    520       1,242       3,022       2,666  
Operating income
  $ 16,262     $ 17,755     $ 68,105     $ 70,270  

The following table shows the change in our restaurant portfolio for the trailing-13 periods ended November 2, 2009:

 
 
Company-operated
   
Franchised and licensed
   
Total
 
Open at November 3, 2008                                                                                  
    903       2,207       3,110  
New
    20       66       86  
Closed
    (14 )     (35 )     (49 )
Divested
    (17 )     (6 )     (23 )
Acquired
    6       17       23  
Open at November 2, 2009
    898       2,249       3,147  

 
 
 
19

CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share amounts)


Carl’s Jr.

   
Twelve Weeks Ended
   
Forty Weeks Ended
 
 
 
November 2, 2009
   
November 3, 2008
   
November 2, 2009
   
November 3, 2008
 
                                 
Company-operated restaurants revenue
  $ 136,682     $ 140,307     $ 472,301     $ 482,669  
Restaurant operating costs:
                               
Food and packaging
    38,122       41,319       132,894       141,753  
Payroll and other employee benefits
    37,396       36,842       127,719       128,343  
Occupancy and other
    34,653       34,024       113,511       110,130  
Total restaurant operating costs
    110,171       112,185       374,124       380,226  
Franchised and licensed restaurants and other revenue:
                               
Royalties
    7,616       7,623       24,903       26,003  
Distribution centers
    43,964       45,984       147,920       159,876  
Rent
    5,151       4,957       16,620       16,315  
Franchise fees
    335       443       1,038       1,517  
Total franchised and licensed restaurants and other revenue
    57,066       59,007       190,481       203,711  
Franchised and licensed restaurants and other expenses:
                               
Administrative expense (including provision for bad debts)
    1,878       1,677       5,805       5,553  
Distribution centers
    43,313       45,966       145,725       159,297  
Rent and other occupancy
    4,402       4,326