CKE RESTAURANTS INC - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - CKE RESTAURANTS INC	ex312.htm
EX-32.1 - EXHIBIT 32.1 - CKE RESTAURANTS INC	ex321.htm
EX-32.2 - EXHIBIT 32.2 - CKE RESTAURANTS INC	ex322.htm
EX-31.1 - EXHIBIT 31.1 - CKE RESTAURANTS INC	ex311.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended November 1, 2010
	OR
o	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		(I.R.S. Employer Identification No.)
Of Incorporation or Organization)

6307 Carpinteria Avenue, Ste. A, Carpinteria, California		93013
(Address of Principal Executive Offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

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.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer þ

Smaller reporting company o

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

The number of outstanding shares of the registrant’s common stock was 100 shares as of December 2, 2010.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

INDEX

	Page No.
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of November 1, 2010 (Successor) and January 31, 2010 (Predecessor)	3
Condensed Consolidated Statements of Operations for the twelve weeks ended November 1, 2010 (Successor) and twelve weeks ended November 2, 2009 (Predecessor)	4
Condensed Consolidated Statements of Operations for the sixteen weeks ended November 1, 2010 (Successor), twenty-four weeks ended July 12, 2010 (Predecessor) and forty weeks ended November 2, 2009 (Predecessor)	5
Condensed Consolidated Statements of Stockholders’ Equity for the twenty-four weeks ended July 12, 2010 (Predecessor) and sixteen weeks ended November 1, 2010 (Successor)	6
Condensed Consolidated Statements of Cash Flows for the sixteen weeks ended November 1, 2010 (Successor), twenty-four weeks ended July 12, 2010 (Predecessor) and forty weeks ended November 2, 2009 (Predecessor)	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	48
Item 4. Controls and Procedures	48

Part II. Other Information
Item 1. Legal Proceedings	49
Item 1A. Risk Factors	50
Item 6. Exhibits	60
Signatures	61
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except shares and par values)

(Unaudited)

	Successor			Predecessor
	November 1, 2010			January 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	49,494		$	18,246
Accounts receivable, net of allowance for doubtful accounts of $46 as of November 1, 2010 and $358 as of January 31, 2010		34,995			35,016
Related party trade receivables		324			5,037
Inventories, net		14,077			24,692
Prepaid expenses		13,417			13,723
Assets held for sale		451			500
Advertising fund assets, restricted		18,510			18,295
Deferred income tax assets, net		17,183			26,517
Other current assets		4,032			3,829
Total current assets		152,483			145,855
Notes receivable, net of allowance for doubtful accounts of $0 as of November 1, 2010 and $379 as of January 31, 2010		473			1,075
Property and equipment, net of accumulated depreciation and amortization of $19,771 as of November 1, 2010 and $445,033 as of January 31, 2010		630,637			568,334
Property under capital leases, net of accumulated amortization of $1,741 as of November 1, 2010 and $46,090 as of January 31, 2010		31,761			32,579
Deferred income tax assets, net		—			40,299
Goodwill		193,443			24,589
Intangible assets, net		439,561			2,317
Other assets, net		23,006			8,495
Total assets	$	1,471,364		$	823,543

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of bank indebtedness and other long-term debt	$	29		$	12,262
Current portion of capital lease obligations		5,367			7,445
Accounts payable		38,908			65,656
Advertising fund liabilities		18,510			18,295
Other current liabilities		100,592			95,605
Total current liabilities		163,406			199,263
Bank indebtedness and other long-term debt, less current portion		589,765			266,202
Capital lease obligations, less current portion		31,924			43,099
Deferred income tax liabilities, net		172,913			—
Other long-term liabilities		85,246			78,804
Total liabilities		1,043,254			587,368

Commitments and contingencies (Notes 7, 9 and 15)
Subsequent events (Notes 7 and 9)

Stockholders’ equity:
Predecessor: Common stock, $0.01 par value; 100,000,000 shares authorized; 55,290,626 shares issued and outstanding as of January 31, 2010		—			553
Successor: Common stock, $0.01 par value; 100 shares authorized, issued and outstanding as of November 1, 2010		—			—
Additional paid-in capital		451,465			282,904
Accumulated deficit		(23,355	)		(47,282	)
Total stockholders’ equity		428,110			236,175
Total liabilities and stockholders’ equity	$	1,471,364		$	823,543

See Accompanying Notes to Condensed Consolidated Financial Statements

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

	Successor			Predecessor
	Twelve Weeks Ended November 1, 2010			Twelve Weeks Ended November 2, 2009
Revenue:
Company-operated restaurants	$	250,097		$	246,696
Franchised and licensed restaurants and other		34,430			77,521
Total revenue		284,527			324,217
Operating costs and expenses:
Restaurant operating costs:
Food and packaging		73,879			69,665
Payroll and other employee benefits		71,592			71,386
Occupancy and other		62,567			60,874
Total restaurant operating costs		208,038			201,925
Franchised and licensed restaurants and other		16,943			58,854
Advertising		14,880			15,679
General and administrative		29,977			30,977
Facility action charges, net		770			520
Other operating expenses, net		167			—
Total operating costs and expenses		270,775			307,955
Operating income		13,752			16,262
Interest expense		(17,685	)		(6,430	)
Other income, net		748			704
(Loss) income before income taxes		(3,185	)		10,536
Income tax (benefit) expense		(2,855	)		4,379
Net (loss) income	$	(330	)	$	6,157

See Accompanying Notes to Condensed Consolidated Financial Statements

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)

	Successor			Predecessor
	Sixteen Weeks Ended November 1, 2010			Twenty-Four Weeks Ended July 12, 2010			Forty Weeks Ended November 2, 2009
Revenue:
Company-operated restaurants	$	336,048		$	500,531		$	847,654
Franchised and licensed restaurants and other		45,419			151,588			259,334
Total revenue		381,467			652,119			1,106,988
Operating costs and expenses:
Restaurant operating costs:
Food and packaging		99,188			148,992			242,066
Payroll and other employee benefits		95,940			147,187			241,142
Occupancy and other		83,393			119,076			201,461
Total restaurant operating costs		278,521			415,255			684,669
Franchised and licensed restaurants and other		22,178			115,089			196,680
Advertising		19,728			29,647			51,451
General and administrative		49,641			58,806			103,061
Facility action charges, net		907			590			3,022
Other operating expenses, net		19,828			10,249			—
Total operating costs and expenses		390,803			629,636			1,038,883
Operating (loss) income		(9,336	)		22,483			68,105
Interest expense		(23,541	)		(8,617	)		(14,834	)
Other income (expense), net		896			(13,609	)		1,991
(Loss) income before income taxes		(31,981	)		257			55,262
Income tax (benefit) expense		(8,626	)		7,772			22,460
Net (loss) income	$	(23,355	)	$	(7,515	)	$	32,802

See Accompanying Notes to Condensed Consolidated Financial Statements

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except shares)

(Unaudited)

	Common Stock						Additional			Accumulated			Total Stockholders’
	Shares			Amount			Paid-In Capital			Deficit			Equity
Predecessor:
Balance as of January 31, 2010		55,290,626		$	553		$	282,904		$	(47,282	)	$	236,175
Forfeitures of restricted stock awards		(78,484	)		(1	)		1			—			—
Exercise of stock options		154,317			2			1,061			—			1,063
Share-based compensation expense		—			—			4,710			—			4,710
Repurchase and retirement of common stock		(178,800	)		(2	)		(2,070	)		—			(2,072	)
Net loss		—			—			—			(7,515	)		(7,515	)
Balance as of July 12, 2010		55,187,659		$	552		$	286,606		$	(54,797	)	$	232,361

	Common Stock				Additional		Accumulated			Total Stockholders’
	Shares		Amount		Paid-In Capital		Deficit			Equity
Successor:
Equity contribution		100	$	—	$	450,000	$	—		$	450,000
Share-based compensation expense		—		—		1,465		—			1,465
Net loss		—		—		—		(23,355	)		(23,355	)
Balance as of November 1, 2010		100	$	—	$	451,465	$	(23,355	)	$	428,110

See Accompanying Notes to Condensed Consolidated Financial Statements

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Successor			Predecessor
	Sixteen Weeks Ended November 1, 2010			Twenty-Four Weeks Ended July 12, 2010			Forty Weeks Ended November 2, 2009
Cash flows from operating activities:
Net (loss) income	$	(23,355	)	$	(7,515	)	$	32,802
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		23,721			33,703			54,317
Amortization of debt issuance costs and discount on notes		1,115			522			799
Share-based compensation expense		1,465			4,710			6,216
Provision for (recovery of) losses on accounts and notes receivable		62			(100	)		(346	)
Loss (gain) on sale of property and equipment and capital leases		351			(1,326	)		1,352
Facility action charges, net		907			590			3,022
Deferred income taxes		(8,150	)		8,241			19,078
Other non-cash charges		—			—			24
Net changes in operating assets and liabilities:
Receivables, inventories, prepaid expenses and other current and non-current assets		837			4,826			4,859
Estimated liability for closed restaurants and estimated liability for self-insurance		(825	)		(2,318	)		(2,782	)
Accounts payable and other current and long-term liabilities		(7,754	)		4,317			7,345
Net cash (used in) provided by operating activities		(11,626	)		45,650			126,686
Cash flows from investing activities:
Purchases of property and equipment		(18,565	)		(33,738	)		(77,549	)
Acquisition of Predecessor		(693,478	)		—			—
Proceeds from sale of property and equipment		46			1,011			3,836
Proceeds from sale of Distribution Center assets		1,992			19,203			—
Collections of non-trade notes receivable		282			673			2,330
Acquisition of restaurants, net of cash acquired		—			—			(485	)
Other investing activities		36			(284	)		111
Net cash used in investing activities		(709,687	)		(13,135	)		(71,757	)
Cash flows from financing activities:
Net change in bank overdraft		(5,247	)		(7,364	)		876
Borrowings under revolving credit facilities		—			138,500			98,000
Repayments of borrowings under revolving credit facilities		(34,000	)		(134,500	)		(131,500	)
Repayments of Predecessor Facility term loan		(236,487	)		(10,945	)		(3,633	)
Proceeds from issuance of senior secured second lien notes, net of original issue discount		588,510			—			—
Payment of debt issuance costs		(18,697	)		—			—
Repayments of other long-term debt		(9	)		(13	)		(17	)
Repayments of capital lease obligations		(1,628	)		(3,748	)		(5,637	)
Repurchase of common stock		—			(2,072	)		(1,690	)
Exercise of stock options		—			1,063			569
Tax impact of stock option and restricted stock award transactions		—			—			131
Dividends paid on common stock		—			(3,317	)		(9,829	)
Net advances from (to) affiliates of Apollo Management		2,641			(2,641	)		—
Equity contribution		450,000			—			—
Net cash provided by (used in) financing activities		745,083			(25,037	)		(52,730	)
Net increase in cash and cash equivalents		23,770			7,478			2,199
Cash and cash equivalents at beginning of period		25,724			18,246			17,869
Cash and cash equivalents at end of period	$	49,494		$	25,724		$	20,068

See Accompanying Notes to Condensed Consolidated Financial Statements

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Note 1 — Basis of Presentation and Description of Business

Description of Business:

CKE Restaurants, Inc. (“CKE” 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 1, 2010, our system-wide restaurant portfolio consisted of:

	Carl’s Jr.		Hardee’s		Other		Total
Company-operated		424		467		1		892
Franchised		675		1,222		11		1,908
Licensed		146		207		—		353
Total		1,245		1,896		12		3,153

As of November 1, 2010, 247 of our 424 company-operated Carl’s Jr. restaurants were dual-branded with Green Burrito, and 149 of our 467 company-operated Hardee’s restaurants were dual-branded with Red Burrito.

Merger and Related Transactions:

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

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

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

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Basis of Presentation and Fiscal Year:

Our accompanying unaudited Condensed Consolidated Financial Statements include the accounts of CKE, our wholly-owned subsidiaries and certain variable interest entities (“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, 2010. In our opinion, all adjustments considered necessary for a fair presentation of financial position and results of operations for this interim period have been included. The results of operations for such interim period are not necessarily indicative of results for the full year or for any future period.

We operate on a retail accounting calendar. Our fiscal year ends on the last Monday in January and typically has 13 four-week accounting periods. For clarity of presentation, we generally label all fiscal year ends as if the fiscal year ended January 31. The first quarter of our fiscal year has four periods, or 16 weeks. All other quarters generally have three periods, or 12 weeks. Our fiscal year ending January 31, 2011, which is also referred to as fiscal 2011, contains 53 weeks, whereby the one additional week will be included in our fourth quarter.

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

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

Within this Form 10-Q, we corrected an immaterial error in our previously presented statement of cash flows for the forty weeks ended November 2, 2009. The error related to the treatment and presentation of payments for previously accrued property and equipment purchases that were included within accounts payable or accrued liabilities at January 31, 2009. The effect of the correction on our condensed consolidated statement of cash flows for the forty weeks ended November 2, 2009 (Predecessor) was to increase net cash provided by operating activities from $118,536 to $126,686 and to increase net cash used in investing activities from $63,607 to $71,757.

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

Variable Interest Entities:

We consolidate one national and approximately 80 local co-operative advertising funds (“Hardee’s Funds”) as we have concluded that they are VIEs for which we are the primary beneficiary. We have included $18,510 and $18,295 of advertising fund assets, restricted, and advertising fund liabilities in our Condensed Consolidated Balance Sheets as of November 1, 2010 (Successor) and January 31, 2010 (Predecessor), respectively. Consolidation of the Hardee’s Funds had no impact on our accompanying Condensed Consolidated Statements of Operations and Cash Flows. We have no rights to the assets, nor do we have any obligation with respect to the liabilities, of the Hardee’s Funds, and none of our assets serve as collateral for the creditors of these VIEs.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Note 2 — Acquisition of CKE Restaurants, Inc.

The acquisition of CKE Restaurants, Inc. is being accounted for as a business combination using the acquisition method of accounting, whereby the purchase price has been preliminarily allocated to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair market values. Fair-value measurements have been applied based on assumptions that market participants would use in the pricing of the asset or liability. The following table summarizes the fair values assigned to the net assets acquired as of the July 12, 2010 acquisition date:

Total Consideration:
Cash paid to shareholders	$	704,065
Less: Post-combination share-based compensation expense (see Note 11)		(10,587	)
Total purchase price consideration		693,478

Fair value of assets acquired and liabilities assumed:
Cash and cash equivalents		25,724
Accounts receivable (1)		39,712
Inventories		13,956
Deferred income tax assets, net - current		18,126
Other current assets		36,214
Notes receivable - current and long-term (2)		2,311
Property and equipment (3)		633,774
Property under capital leases		33,582
Intangible assets		444,150
Other assets		4,203
Bank indebtedness - current and long-term		(271,505	)
Capital lease obligations - current and long-term		(38,995	)
Accounts payable		(54,811	)
Deferred income tax liabilities, net - long-term		(182,004	)
Other liabilities - current and long-term (4)		(204,402	)
Net assets acquired		500,035
Excess purchase price attributed to goodwill acquired	$	193,443

_____________

(1) The gross amount due under accounts receivable acquired is $40,031, of which $319 was expected to be uncollectible.

(2) The gross amount due under notes receivable acquired is $5,947, of which $3,636 was expected to be uncollectible.

(3) The estimated fair value of property and equipment acquired consisted of $237,381 of land, $86,740 of leasehold improvements, $204,596 of buildings and improvements, and $105,057 of equipment, furniture and fixtures.

(4) The estimated fair value of unfavorable lease obligations assumed was $41,458 and is included in other long-term liabilities in our Condensed Consolidated Balance Sheet.

As of November 1, 2010, the purchase price allocation remains preliminary and could change materially in subsequent periods. Any subsequent changes to the purchase price allocation that result in material changes to our consolidated financial results will be adjusted retrospectively.

During the twelve weeks ended November 1, 2010, we obtained further information on the valuation of acquired property and equipment and, in accordance with the authoritative guidance for business combinations, retrospectively recorded purchase price adjustments at the acquisition date to reduce the fair value of property and equipment by $8,926, long-term deferred income tax liabilities, net by $3,799 and other current assets by $122. These adjustments to our purchase price allocation caused an increase to goodwill of $5,249. We have also retrospectively adjusted our consolidated results of operations and cash flows for the impacts of the purchase price adjustments.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

The final purchase price allocation is pending the receipt of valuation work and the completion of the Company’s internal review of such work, which is expected to be completed during fiscal 2011. The provisional items pending finalization are the valuation of our property and equipment, operating lease intangible assets and liabilities, capital lease assets and obligations, intangible assets, goodwill and income tax related matters.

At the time of the Merger, the Company believed its market position and future growth potential for both company-operated and franchised and licensed restaurants were the primary factors that contributed to a total purchase price that resulted in the recognition of goodwill. There was $45,135 of goodwill recognized in connection with the Merger that had carryover basis from previous acquisitions and was expected be deductible for federal income tax purposes.

Transaction Costs:

We recorded $167 and $19,828 in transaction-related costs for accounting, investment banking, legal and other costs in connection with the Transactions within other operating expenses, net in our Condensed Consolidated Statement of Operations for the Successor twelve and sixteen weeks ended November 1, 2010. Additionally, we have capitalized $18,697 in debt issuance costs related to the Notes and Credit Facility.

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

Pro Forma Financial Information:

The following unaudited pro forma results of operations assume that the Transactions had occurred on

February 1, 2009 for the twelve and forty weeks ended November 2, 2009 and on February 1, 2010 for the twelve and forty weeks ended November 1, 2010, after giving effect to acquisition accounting adjustments relating to depreciation and amortization of the revalued assets, interest expense associated with the Credit Facility and the Notes, and other acquisition-related adjustments in connection with the Transactions. These unaudited pro forma results exclude transaction costs incurred in connection with the Merger and share-based compensation expense related to the acceleration of stock options and restricted stock awards. Additionally, the following unaudited pro forma results of operations do not give effect to the sale of our Carl’s Jr. distribution facility operations, which was completed on July 2, 2010. This unaudited pro forma information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the Transactions had actually occurred on those dates, nor of the results that may be obtained in the future.

	Twelve Weeks Ended						Forty Weeks Ended
	November 1, 2010			November 2, 2009			November 1, 2010			November 2, 2009
Revenues	$	284,527		$	324,580		$	1,034,604		$	1,108,409
Net loss		(227	)		(2,405	)		(3,021	)		(1,049	)

Note 3 — Adoption of New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“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. We adopted the revised guidance for consolidation of VIEs, which did not have a significant effect on our unaudited Condensed Consolidated Financial Statements, as of the beginning of fiscal 2011.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

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

Note 4 — Assets Held For Sale

Surplus restaurant properties and company-operated restaurants that we expect to sell within one year are classified in our Condensed Consolidated Balance Sheets as assets held for sale. As of November 1, 2010, total assets held for sale were $451 and were comprised of three surplus properties in our Hardee’s operating segment. As of January 31, 2010, total assets held for sale were $500 and were comprised of two surplus properties in our Hardee’s operating segment.

Note 5 — Purchase and Sale of Assets

Purchase of Assets:

We did not purchase any restaurants from franchisees during the forty weeks ended November 1, 2010. 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.

Sale of Assets:

On July 2, 2010, we entered into an Asset Purchase Agreement (“APA”) with Meadowbrook Meat Company, Inc. (“MBM”) to sell to MBM our Carl’s Jr. distribution center assets located in Ontario, California and Manteca, California (“Distribution Centers”). In connection with the APA, we received total consideration of $21,195 from MBM for the Distribution Center assets, which included inventory, fixed assets, real property in Manteca, California, and other related assets. Additionally, we entered into sublease agreements with MBM to sublease the facility in Ontario, California, as well as certain leased vehicles and equipment. We will remain principally liable for the lease obligations. We also remain liable for all liabilities incurred prior to the sale, which include workers’ compensation claims, employment related matters and litigation, and other liabilities. Additionally, we entered into a transition services agreement, whereby, both we and MBM were required to provide certain services in connection with the transition of the Distribution Centers to MBM. As a result of the transaction, we recorded a gain of $3,442, which is included in other operating expenses, net in our Condensed Consolidated Statement of Operations for the Predecessor twenty-four weeks ended July 12, 2010.

On July 2, 2010, we and our franchisees entered into distribution agreements with MBM to provide distribution services to our Carl’s Jr. and Hardee’s restaurants through June 30, 2017.

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 Condensed Consolidated Statement of Operations for the Predecessor 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.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Note 6 — Intangible Assets, Net

The following table presents our indefinite and definite-lived intangible assets for each of the respective reporting periods. As of November 1, 2010, the fair value of our intangible assets is preliminary and could change materially in subsequent periods (see Note 2).

	Successor									Predecessor
	November 1, 2010									January 31, 2010
	Weighted Average Life (Years)		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Trademarks/Tradenames		Indefinite	$	278,000	$	—		$	278,000	$	3,166	$	(1,251	)	$	1,915
Favorable lease agreements		10		69,150		(3,097	)		66,053		1,076		(756	)		320
Franchise agreements		20		97,000		(1,492	)		95,508		90		(8	)		82
			$	444,150	$	(4,589	)	$	439,561	$	4,332	$	(2,015	)	$	2,317

Our estimated future amortization expense related to these intangible assets is set forth as follows:

November 2, 2010 through January 31, 2011	$	3,440
Fiscal 2012		14,809
Fiscal 2013		14,429
Fiscal 2014		12,961
Fiscal 2015		11,195
Fiscal 2016		10,089

Note 7 — Indebtedness and Interest Expense

Senior Secured Credit Facility:

On July 12, 2010, we entered into the Credit Facility, which provides for senior secured revolving facility loans, swingline loans and letters of credit, in an aggregate amount of up to $100,000. The Credit Facility bears interest at a rate equal to, at our option, either: (1) the higher of Morgan Stanley’s “prime rate” plus 2.75% or the federal funds rate, as defined in our Credit Facility, plus 3.25%, or (2) the London Interbank Offered Rate (“LIBOR”) plus 3.75%. The Credit Facility matures on July 12, 2015, at which time all outstanding revolving facility loans and accrued and unpaid interest must be repaid. As of November 1, 2010, we had no outstanding loan borrowings, $34,933 of outstanding letters of credit, and remaining availability of $65,067 under our Credit Facility.

Our obligations under the Credit Facility are unconditionally guaranteed by Parent, prior to an initial public offering of our stock, and our existing and future wholly-owned domestic subsidiaries. In addition, all obligations are secured by (1) our common stock, prior to an initial public offering of such common stock, and (2) substantially all of our material owned assets and the material owned assets of the subsidiary guarantors.

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

The terms of our Credit Facility also include financial performance covenants, which include a maximum secured leverage ratio and a specified minimum interest coverage ratio.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

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

Senior Secured Second Lien Notes:

In connection with the Merger, on July 12, 2010, we issued $600,000 aggregate principal amount of senior secured second lien notes in a private placement to qualified institutional buyers. The Notes bear interest at a rate of 11.375% per annum, payable semi-annually in arrears on January 15 and July 15, beginning on January 15, 2011. The Notes were issued with an original issue discount of 1.92%, or $11,490, and are recorded as long-term debt, net of original issue discount, in our Condensed Consolidated Balance Sheet as of November 1, 2010 (Successor). The original issue discount and debt issuance costs associated with the issuance of the Notes are amortized to interest expense over the term of the Notes. The Notes mature on July 15, 2018.

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

Our obligations and the obligations of the guarantors are secured on a second-priority lien on the assets that secure our and our subsidiary guarantors’ obligations under our Credit Facility, subject to certain exceptions and permitted liens.

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

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

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

In connection with the Notes, we entered into a registration rights agreement pursuant to which we agreed to file an exchange offer registration statement with the SEC for the Notes. We and our guarantor subsidiaries agreed to use our commercially reasonable efforts to file within 180 days and effect within 270 days a registration statement to offer to exchange the Notes for registered notes with identical terms, subject to certain exclusions of previously identified terms. A registration statement relating to the exchange offer of the Notes for registered notes was declared effective by the SEC on November 12, 2010, which is within the specified timelines. The exchange offer was commenced on November 15, 2010 and will expire on December 14, 2010, unless extended.

Repayment of Debt and Interest Rate Swap Agreements:

In connection with the Merger, we repaid at closing the total principal outstanding balance of the term loan portion of our senior credit facility (“Predecessor Facility”) of $236,487 and the total outstanding borrowings on the revolving portion of our Predecessor Facility of $34,000, as well as all incurred and unpaid interest on our Predecessor Facility. In connection with the Merger, the debt issuance costs related to the Predecessor Facility were removed from our Condensed Consolidated Balance Sheet through acquisition accounting. All outstanding letters of credit under the Predecessor Facility were terminated on July 12, 2010.

In connection with the Merger, we settled and paid in full all obligations related to our fixed rate interest rate swap agreements, which totaled $14,844. During the Predecessor twenty-four weeks ended July 12, 2010 we recorded interest expense of $3,113 under these interest rate swap agreements to adjust their carrying value to fair value and paid $3,750 for net settlements under our interest rate swap agreements. During the Predecessor twelve and forty weeks ended November 2, 2009, we recorded interest expense of $3,631 and $4,948, respectively, under these interest rate swap agreements to adjust their carrying value to fair value and paid $1,595 and $6,658, 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. See Note 8 for fair value measurement of derivatives.

Interest expense:

Interest expense consisted of the following:

	Successor				Predecessor
	Twelve Weeks Ended November 1, 2010		Sixteen Weeks Ended November 1, 2010		Twenty-Four Weeks Ended July 12, 2010		Twelve Weeks Ended November 2, 2009		Forty Weeks Ended November 2, 2009
Senior secured credit facility	$	144	$	191	$	—	$	—	$	—
Senior secured second lien notes		15,584		20,779		—		—		—
Predecessor Facility		—		—		2,338		1,124		4,137
Interest rate swap agreements		—		—		3,113		3,631		4,948
Capital lease obligations		924		1,234		2,318		1,281		4,069
Amortization of debt issuance costs and discount on notes		837		1,115		488		234		782
Letter of credit fees and other		196		222		360		160		898
	$	17,685	$	23,541	$	8,617	$	6,430	$	14,834

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Note 8 — Fair Value of Financial Instruments

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

	Successor				Predecessor
	November 1, 2010				January 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	49,494	$	49,494	$	18,246	$	18,246
Notes receivable		4,802		4,658		2,183		2,534

Financial liabilities:
Long-term debt and bank indebtedness, including current portion		589,794		643,009		278,464		250,798

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. As of November 1, 2010, the estimated fair value of the Notes was determined by using estimated market prices of our outstanding Notes. For all other long-term debt, the estimated fair value was determined by discounting future cash flows using rates available to us for debt with similar terms and remaining maturities.

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. Entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value based upon the following fair value hierarchy:

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 1, 2010 and January 31, 2010:

			Successor		Predecessor
	Level		November 1, 2010		January 31, 2010
Interest rate swap agreements (1)		2	$	—	$	15,482

___________

(1) On July 12, 2010, we settled and paid in full all obligations related to our fixed rate interest rate swap agreements.

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.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Note 9 — 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 Condensed Consolidated Statements of Operations. As of November 1, 2010, the present value of the lease obligations under the remaining master leases’ primary terms is $117,973. 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 $12,240.

Pursuant to our Credit Facility, we may borrow up to $100,000 for senior secured revolving facility loans, swingline loans and letters of credit (see Note 7). We have several standby letters of credit outstanding under our Credit Facility, which primarily secure our potential workers’ compensation, general and auto liability obligations. We are required to provide letters of credit each year, or set aside a comparable amount of cash or investment securities in a trust account, based on our existing claims experience. As of November 1, 2010, we had outstanding letters of credit of $34,933, expiring at various dates through August 2011.

As of November 1, 2010, we had unconditional purchase obligations in the amount of $73,023, which consisted primarily of contracts for goods and services related to restaurant operations and contractual commitments for marketing and sponsorship arrangements.

We entered into employment agreements with certain key executives (the “Employment Agreements”), dated July 12, 2010. Pursuant to the terms of the Employment Agreements, each executive is entitled to receive certain payments that will be paid out over the next two to three years, in accordance with such executive’s Employment Agreement. In addition, each executive will be entitled to payments that may be triggered by the termination of employment under certain circumstances, as set forth in each Employment Agreement. If certain provisions are triggered, the affected executive will be entitled to receive an amount equal to his base salary for the remainder of the current employment term, except our Chief Executive Officer who shall be entitled to receive an amount equal to his minimum base salary multiplied by six, and our President and Chief Legal Officer and our Chief Financial Officer each of whom shall be entitled to receive an amount equal to the respective minimum base salary multiplied by three. The affected executive may also be entitled to receive additional cash payments consisting of a pro-rata portion of his current year bonus and a portion of his retention bonus. If all payment provisions of the Employment Agreements had been triggered as of November 1, 2010, we would have been required to make cash payments of approximately $16,705.

Putative consolidated stockholder class action lawsuits were filed in the Delaware Court of Chancery and in the Superior Court of California for the County of Santa Barbara regarding the Agreement and Plan of Merger, dated as of February 26, 2010, by and among the Company and affiliates of Thomas H. Lee Partners, L.P. (the “Prior Merger Agreement”). On May 12, 2010, the plaintiffs in the Delaware Court of Chancery action filed an amended complaint against the Company, each of its directors, Apollo Management, Parent and Merger Sub that dropped the challenge to the Prior Merger Agreement and instead sought to enjoin the Merger (the “Delaware Action”). On November 18, 2010, the Delaware Court of Chancery issued an Order and Final Judgment approving a settlement and resolving and releasing all claims. On November 30, 2010, the plaintiffs in the consolidated putative stockholder class action filed in the Superior Court of California for the County of Santa Barbara (the “California Action”) voluntarily filed a request for dismissal of their claims with prejudice. The settlements of the Delaware Action and the California Action are not expected to materially impact our consolidated financial position or results of operations.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

We are currently involved in other legal disputes related to employment claims, real estate claims and other business disputes. As of November 1, 2010, our accrued liability for litigation contingencies with a probable likelihood of loss was $244, with an expected range of losses from $244 to $394. With respect to employment matters, our most significant legal disputes relate to employee meal and rest break disputes, and wage and hour disputes. Several potential class action lawsuits have been filed in the State of California, regarding such employment matters, each of which is seeking injunctive relief and monetary compensation on behalf of current and former employees. The Company intends to vigorously defend against all claims in these lawsuits; however, we are presently unable to predict the ultimate outcome of these actions. As of November 1, 2010, we estimated the contingent liability of those losses related to litigation claims that are not accrued, but that we believe are reasonably possible to result in an adverse outcome and for which a range of loss can be reasonably estimated, to be in the range of $1,630 to $5,920. In addition, we are involved in legal matters where the likelihood of loss has been judged to be reasonably possible, but for which a range of the potential loss cannot be reasonably estimated.

Note 10 — Stockholders’ Equity

Successor:

In connection with the Merger, we authorized and issued a total of 100 shares of $0.01 par value common stock. Each share of common stock entitles the shareholder to one vote per share and is eligible to receive dividend payments when declared. Our ability to declare dividends is restricted by certain covenants contained our Credit Facility and Notes. Our common stock is not traded on any stock exchange or any organized market.

Predecessor:

During the twenty-four weeks ended July 12, 2010, we did not declare cash dividends. 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 $3,317 were included in other current liabilities in our accompanying Condensed Consolidated Balance Sheet as of January 31, 2010.

Note 11 — Share-Based Compensation

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

	Successor				Predecessor
	Twelve Weeks Ended November 1, 2010		Sixteen Weeks Ended November 1, 2010		Twenty-Four Weeks Ended July 12, 2010		Twelve Weeks Ended November 2, 2009		Forty Weeks Ended November 2, 2009
Share-based compensation expense related to restricted stock awards that contain market or performance conditions	$	—	$	—	$	717	$	322	$	1,301
Share-based compensation expense related to the acceleration of vesting of stock options and awards in connection with Merger		—		10,587		1,521		—		—
Share-based compensation expense related to Units that contain performance conditions		767		767		—		—		—
All other share-based compensation expense		524		698		2,472		1,678		4,941
Total share-based compensation expense	$	1,291	$	12,052	$	4,710	$	2,000	$	6,242
Associated tax benefits	$	—	$	—	$	1,804	$	656	$	2,121

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Successor:

In connection with the Merger, certain affiliates of Apollo Management, certain members of our senior management team and our board of directors formed Apollo CKE Holdings, L.P., a limited partnership (the “Partnership”) to fund the equity contribution to CKE Restaurants, Inc. The Partnership also granted 5,108,333 profit sharing interests (“Units”) in the Partnership to certain of our senior management team and directors in the form of time vesting and performance vesting Units. Under certain circumstances, a portion of the Units may become subject to both performance and market conditions.

The time vesting Units will vest in four equal annual installments from the date of grant. The performance vesting Units will vest or convert to a time vesting schedule upon achievement of certain financial or investment targets. Prior to a change in control or qualified initial public offering (“IPO”), our performance against such targets will be determined based upon a specified formula driven by our earnings before interest, income taxes, depreciation and amortization (“EBITDA”), subject to adjustments by the general partner of the Partnership. These performance criteria will be assessed on a quarterly basis beginning with the quarter ending August 13, 2012. Upon a change in control event or qualified IPO, our performance against the specified targets will be based upon a formula driven by the proceeds generated from such transaction. We recognize share-based compensation expense related to the performance vesting Units when we deem the achievement of performance goals to be probable.

The grant date fair value of the Units was estimated using the Black-Scholes option pricing model. The weighted average grant date fair value of the time and performance vesting Units granted in connection with the Merger was $3.52. We recorded $1,291 and $1,465 of share-based compensation expense related to the Units for the twelve and sixteen weeks ended November 1, 2010, respectively. The maximum unrecognized compensation cost for the time and performance vesting Units was $16,491 as of November 1, 2010.

In connection with the Merger, the vesting of all outstanding unvested options and restricted stock awards was accelerated immediately prior to closing. As a result of the acceleration, we recorded $10,587 in share-based compensation expense during the sixteen weeks ended November 1, 2010 within general and administrative expense in our Condensed Consolidated Statement of Operations related to the post-Merger service period for certain stock options and awards (see also Predecessor below).

Predecessor:

In connection with the Merger, all outstanding options became fully vested and exercisable immediately prior to closing, under our then existing stock incentive plans, which included the 2005 Omnibus Incentive Compensation Plan, 2001 Stock Incentive Plan, and 1999 Stock Incentive Plan (collectively “Predecessor Plans”). To the extent that such stock options had an exercise price less than $12.55 per share, the holders of such stock options were paid an amount in cash equal to $12.55 less the exercise price of the stock option. In addition, all outstanding restricted stock awards became fully vested immediately prior to the closing and were treated as a share of our common stock for all purposes under the Merger Agreement. We recorded $1,521 in stock compensation expense related to the acceleration of options and restricted stock awards from Predecessor Plans during the twenty-four weeks ended July 12, 2010.

During the twenty-four weeks ended July 12, 2010, the employment agreements of certain key executives were amended, resulting in certain modifications to the restricted stock awards outstanding under the Predecessor Plans. These amendments reallocated certain restricted stock awards that contained performance conditions to time-based restricted stock awards. Additionally, the employment agreements amended the vesting criteria for restricted stock awards that contained market or performance conditions. In connection with the Merger, the vesting of the outstanding restricted stock awards was accelerated and treated as a share of our common stock at closing.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Note 12 — Facility Action Charges, Net

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

	Successor				Predecessor
	Twelve Weeks Ended November 1, 2010		Sixteen Weeks Ended November 1, 2010		Twenty-Four Weeks Ended July 12, 2010			Twelve Weeks Ended November 2, 2009		Forty Weeks Ended November 2, 2009
Estimated liability for new restaurant closures	$	99	$	99	$	363		$	—	$	525
Adjustments to estimated liability for closed restaurants		371		405		60			323		5
Impairment of assets to be disposed of		75		75		156			—		—
Impairment of assets to be held and used		—		—		161			97		2,143
Loss (gain) on sales of restaurants and surplus properties, net		106		168		(348	)		25		47
Amortization of discount related to estimated liability for closed restaurants		119		160		198			75		302
	$	770	$	907	$	590		$	520	$	3,022

When an analysis of estimated future cash flows associated with a long-lived asset or asset group indicates that our long-lived assets may not be recoverable, we recognize an impairment loss. Assets are not deemed to be recoverable if their carrying value is less than the undiscounted future cash flows that we expect to generate from their use. Assets that are not deemed to be recoverable are written down to their estimated fair value. Fair value is typically determined using discounted cash flows to estimate the price that a franchisee would be expected to pay for a restaurant and its related assets. This fair value measurement is dependent upon level 3 significant unobservable inputs, as described by authoritative guidance (see Note 8).

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

	Successor				Predecessor
	Twelve Weeks Ended November 1, 2010		Sixteen Weeks Ended November 1, 2010		Twenty-Four Weeks Ended July 12, 2010		Twelve Weeks Ended November 2, 2009		Forty Weeks Ended November 2, 2009
Property and equipment:
Carl’s Jr.	$	—	$	—	$	49	$	97	$	1,976
Hardee’s		75		75		254		—		46
		75		75		303		97		2,022
Property under capital leases:
Carl’s Jr.		—		—		14		—		40
Hardee’s		—		—		—		—		81
		—		—		14		—		121
Total:
Carl’s Jr.		—		—		63		97		2,016
Hardee’s		75		75		254		—		127
	$	75	$	75	$	317	$	97	$	2,143

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Note 13 — Income Taxes

Income tax (benefit) expense consisted of the following:

	Successor						Predecessor
	Twelve Weeks Ended November 1, 2010			Sixteen Weeks Ended November 1, 2010			Twenty-Four Weeks Ended July 12, 2010		Twelve Weeks Ended November 2, 2009		Forty Weeks Ended November 2, 2009
Federal and state income taxes	$	(3,247	)	$	(9,099	)	$	7,173	$	4,118	$	21,696
Foreign income taxes		392			473			599		261		764
Income tax (benefit) expense	$	(2,855	)	$	(8,626	)	$	7,772	$	4,379	$	22,460

Successor:

Our effective income tax rate for the twelve and sixteen weeks ended November 1, 2010 differs from the federal statutory rate primarily as a result of non-deductible transaction costs, non-deductible share-based compensation expense and state income taxes. In addition, we released $1,501 of unrecognized tax benefits during the twelve and sixteen weeks ended November 1, 2010 due to statute closures. We had $2,711 of tax benefits as of November 1, 2010, that, if recognized, would affect our effective income tax rate. We believe that it is reasonably possible that decreases in unrecognized tax benefits of up to $812 may be necessary within the fiscal year 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 2011 and 2012.

As of November 1, 2010, we maintained a valuation allowance of $7,913 for state capital loss carryforwards, certain state net operating loss and income tax credit carryforwards. Realization of the tax benefit of such deferred income tax assets may remain uncertain for the foreseeable future, even though we expect to generate consolidated 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.

Predecessor:

Our effective income tax rate for the twenty-four weeks ended July 12, 2010 differs from the federal statutory rate primarily as a result of non-deductible transaction-related costs, state income taxes and certain other expenses that are non-deductible for income tax purposes. Our effective income tax rate for the twelve and forty weeks ended November 2, 2009 differs from the federal statutory rate primarily as a result of state income taxes and certain expenses that are non-deductible for income tax purposes. We had $4,212 of tax benefits as of July 12, 2010, that, if recognized, would affect our effective income tax rate.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Note 14 — Segment Information

We are principally engaged in developing, operating, franchising and licensing our Carl’s Jr. and Hardee’s quick-service restaurant concepts, each of which is considered an operating segment that is managed and evaluated separately. In addition to using consolidated results in evaluating our financial results, a primary measure used by executive management in assessing the performance of existing restaurant concepts is segment income. Segment income is defined as income from operations excluding general and administrative expenses, facility action charges, net, and other operating expenses, net. Our general and administrative expenses include allocations of corporate general and administrative expenses, such as share-based compensation expense, to each segment based on management’s analysis of the resources applied to each segment. Because facility action charges are associated with impaired, closed or subleased restaurants, these charges are excluded when assessing our ongoing operations. Other operating expenses, net consists of transaction-related costs and the gain on sale of our Distribution Center assets, and are also excluded when assessing our ongoing operations.

During the quarterly period ended August 9, 2010, we revised our measurement of segment profit to conform to the views of our executive management in light of the Transactions. To enhance comparability between periods presented, we have revised our segment information for previous periods to conform with the current presentation. Previously, we presented operating income as our measurement of segment profit. Other than the aforementioned change to our measurement of segment profit, 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, 2010).

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

	Successor						Predecessor
	Twelve Weeks Ended November 1, 2010			Sixteen Weeks Ended November 1, 2010			Twenty-Four Weeks Ended July 12, 2010			Twelve Weeks Ended November 2, 2009			Forty Weeks Ended November 2, 2009
Revenue:
Carl’s Jr.	$	144,466		$	193,960		$	383,234		$	193,748		$	662,782
Hardee’s		139,891			187,283			268,523			130,231			443,472
Other		170			224			362			238			734
Total	$	284,527		$	381,467		$	652,119		$	324,217		$	1,106,988

Segment income:
Carl’s Jr.	$	18,118		$	25,351		$	43,666		$	24,877		$	93,086
Hardee’s		26,454			35,565			48,254			22,718			80,615
Other		94			124			208			164			487
Total		44,666			61,040			92,128			47,759			174,188
Less: General and administrative expense		(29,977	)		(49,641	)		(58,806	)		(30,977	)		(103,061	)
Less: Facility action charges, net		(770	)		(907	)		(590	)		(520	)		(3,022	)
Less: Other operating expenses, net		(167	)		(19,828	)		(10,249	)		—			—
Operating income (loss)		13,752			(9,336	)		22,483			16,262			68,105
Interest expense		(17,685	)		(23,541	)		(8,617	)		(6,430	)		(14,834	)
Other income (expense), net		748			896			(13,609	)		704			1,991
(Loss) income before income taxes	$	(3,185	)	$	(31,981	)	$	257		$	10,536		$	55,262

Depreciation and amortization:
Depreciation and amortization included in segment income:
Carl’s Jr.	$	8,570		$	11,429		$	15,586		$	7,651		$	25,206
Hardee’s		8,411			11,177			16,214			7,712			25,373
Other		—			—			—			—			—
Other depreciation and amortization (1)		836			1,115			1,903			1,142			3,738
Total depreciation and amortization	$	17,817		$	23,721		$	33,703		$	16,505		$	54,317

	Successor						Predecessor
	November 1, 2010						January 31, 2010
Total assets:
Carl’s Jr.	$	740,186					$	300,329
Hardee’s		655,572						368,889
Other		75,606						154,325
Total	$	1,471,364					$	823,543
Goodwill (2):
Carl’s Jr.	$	167,380					$	23,550
Hardee’s		26,063						1,039
Other		—						—
Total	$	193,443					$	24,589

___________

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

(2) As of November 1, 2010, the allocation of goodwill to our Carl’s Jr. and Hardee’s operating segments is preliminary and could change materially in future periods (see Note 2).

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Note 15 — Related Party Transactions

Transactions with Apollo Management:

In connection with the Merger, we entered into a management services agreement with Apollo Management. Pursuant to the management services agreement, Apollo Management received on the closing date cash consideration of $10,020 for services and reimbursable expenses in connection with the Merger. We recorded $5,010 of these costs to other operating expenses, net in our Condensed Consolidated Statement of Operations during the Successor sixteen weeks ended November 1, 2010 and capitalized $5,010 in debt issuance costs.

In addition, pursuant to the management services agreement and in exchange for on-going investment banking, management, consulting, and financial planning services that will be provided to us by Apollo Management and its affiliates, Apollo Management will receive an aggregate annual management fee of $2,500, which may be increased at Apollo Management’s sole discretion up to an amount equal to two percent of our Adjusted EBITDA, as defined in our Credit Facility. The management services agreement provides for a ten year term, which may be terminated earlier in the event of an IPO for fees remaining under the term of the agreement discounted at a 10% rate. We recorded $575 and $637 in management fees, which are included in general and administrative expense in our Condensed Consolidated Statements of Operations for the Successor twelve and sixteen weeks ended November 1, 2010, respectively.

The management services agreement also provides that affiliates of Apollo Management may receive future fees in connection with certain future financing and acquisition or disposition transactions. The management services agreement includes customary exculpation and indemnification provisions in favor of Apollo Management and its affiliates.

Transactions with Successor Board of Directors:

Certain members of our Successor Board of Directors are also our franchisees. These franchisees regularly pay royalties and purchase equipment and other products from us on the same terms and conditions as our other franchisees. During the sixteen weeks ended November 1, 2010, total revenue generated from related party franchisees was $2,043, which is included in franchised and licensed restaurants and other revenue in our Condensed Consolidated Statement of Operations. As of November 1, 2010, our related party trade receivables from franchisees were $324.

Transactions with Predecessor Board of Directors:

Certain members of our Predecessor Board of Directors were also our franchisees. These franchisees regularly paid royalties and purchased food, equipment and other products from us on the same terms and conditions as our other franchisees. During the twenty-four weeks ended July 12, 2010 and forty weeks ended November 2, 2009, total revenue generated from related party franchisees was $36,775 and $59,988, respectively, which is included in franchised and licensed restaurants and other revenue in our Condensed Consolidated Statements of Operations. As of January 31, 2010, our related party trade receivables from franchisees were $5,037.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

Note 16 — Supplemental Cash Flow Information

	Successor		Predecessor
	Sixteen Weeks Ended November 1, 2010		Twenty-Four Weeks Ended July 12, 2010		Forty Weeks Ended November 2, 2009
Cash paid for:
Interest, net of amounts capitalized (1)	$	16,785	$	8,299	$	15,070
Income taxes, net of refunds received		1,408		530		7,611
Non-cash investing and financing activities:
Proceeds receivable from sale of Distribution Center assets		—		1,992		—
Dividends declared, not paid		—		—		3,311
Capital lease obligations incurred to acquire assets		26		4,179		15,235
Accrued property and equipment purchases at quarter-end		3,161		4,593		5,149

___________

(1) Cash paid for interest, net of amounts capitalized, includes $14,844, $3,750, and $6,658 of payments related to our fixed rate interest rate swap agreements during the sixteen weeks ended November 1, 2010, twenty-four weeks ended July 12, 2010 and forty weeks ended November 2, 2009, respectively.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

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

Overview

CKE Restaurants, Inc. and its subsidiaries (collectively referred to herein as the “Company,” “we”, “us”, “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, 2010.

We have prepared our discussion of the results of operations for the forty weeks ended November 1, 2010 by adding the earnings and cash flows of the Successor sixteen weeks ended November 1, 2010 and the Predecessor twenty-four weeks ended July 12, 2010, as compared to the Predecessor forty weeks ended November 2, 2009. Although this combined presentation does not comply with United States generally accepted accounting principles (“GAAP”), we believe that it provides a meaningful method of comparison. The combined operating results have not been prepared on a pro forma basis under applicable regulations and may not reflect the actual results we would have achieved absent the Transactions, defined below, and may not be predictive of future results of operations.

Recent Developments

Merger and Related Transactions:

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

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

In connection with the Merger, we entered into Employment Agreements, dated as of July 12, 2010, with each of Andrew F. Puzder, our Chief Executive Officer, E. Michael Murphy, our President and Chief Legal Officer, and Theodore Abajian, our Chief Financial Officer, each of which have an initial term of four years, which term shall automatically be extended for successive one-year periods unless an Employment Agreement is terminated by either party with written notice six months prior to the termination of such agreement.

Also in connection with the Merger, we entered into a management services agreement with Apollo Management. Pursuant to the management services agreement, Apollo Management received on the closing date cash consideration of $10,020 for services and reimbursable expenses in connection with the Merger. We recorded $5,010 of these costs to other operating expenses, net in our Condensed Consolidated Statement of Operations during the Successor sixteen weeks ended November 1, 2010 and capitalized $5,010 in debt issuance costs.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

In addition, pursuant to the management services agreement and in exchange for on-going investment banking, management, consulting, and financial planning services that will be provided to us by Apollo Management and its affiliates, Apollo Management will receive an aggregate annual management fee of $2,500, which may be increased in accordance with the terms of the agreement. The management service agreement provides for a ten year term, which may be terminated earlier in the event of an IPO for fees remaining under the term of the agreement discounted at a 10% rate. The management services agreement also provides that affiliates of Apollo Management may receive future fees in connection with certain future financing and acquisition or disposition transactions. This agreement includes customary exculpation and indemnification provisions in favor of Apollo Management and its affiliates.

Sale of Carl’s Jr. Distribution Center Assets:

On July 2, 2010, we and our franchisees entered into distribution agreements with MBM to provide distribution services to our Carl’s Jr. and Hardee’s restaurants through June 30, 2017.

Operating Review

The following table shows the change in our restaurant portfolio for the trailing-13 periods ended November 1, 2010:

	Company-operated			Franchised			Licensed			Total
Open at November 2, 2009		898			1,911			338			3,147
New		8			31			27			66
Closed		(14	)		(34	)		(12	)		(60	)
Divested		(1	)		(1	)		—			(2	)
Acquired		1			1			—			2
Open at November 1, 2010		892			1,908			353			3,153

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Quarter:	Successor			Predecessor
	Twelve Weeks Ended November 1, 2010			Twelve Weeks Ended November 2, 2009
Revenue:
Company-operated restaurants	$	250,097		$	246,696
Franchised and licensed restaurants and other		34,430			77,521
Total revenue		284,527			324,217
Operating costs and expenses:
Restaurant operating costs		208,038			201,925
Franchised and licensed restaurants and other		16,943			58,854
Advertising		14,880			15,679
General and administrative		29,977			30,977
Facility action charges, net		770			520
Other operating expenses, net		167			—
Total operating costs and expenses		270,775			307,955
Operating income		13,752			16,262
Interest expense		(17,685	)		(6,430	)
Other income, net		748			704
(Loss) income before income taxes		(3,185	)		10,536
Income tax (benefit) expense		(2,855	)		4,379
Net (loss) income	$	(330	)	$	6,157

Company-operated restaurant-level adjusted EBITDA (1):
Company-operated restaurants revenue	$	250,097		$	246,696
Less: restaurant operating costs		(208,038	)		(201,925	)
Add: depreciation and amortization expense		15,006			14,602
Less: advertising expense		(14,880	)		(15,679	)
Company-operated restaurant-level adjusted EBITDA	$	42,185		$	43,694
Company-operated restaurant-level adjusted EBITDA margin		16.9	%		17.7	%

Franchise restaurant adjusted EBITDA (1):
Franchised and licensed restaurants and other revenue	$	34,430		$	77,521
Less: franchised and licensed restaurants and other expense		(16,943	)		(58,854	)
Add: depreciation and amortization expense		1,975			761
Franchise restaurant adjusted EBITDA	$	19,462		$	19,428

____________

(1)	Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise non-GAAP measures within subheading “Presentation of Non-GAAP Measures.”

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Year To Date:	Successor			Predecessor			Successor/ Predecessor			Predecessor
	Sixteen Weeks Ended November 1, 2010			Twenty-Four Weeks Ended July 12, 2010			Forty Weeks Ended November 1, 2010			Forty Weeks Ended November 2, 2009
Revenue:
Company-operated restaurants	$	336,048		$	500,531		$	836,579		$	847,654
Franchised and licensed restaurants and other		45,419			151,588			197,007			259,334
Total revenue		381,467			652,119			1,033,586			1,106,988
Operating costs and expenses:
Restaurant operating costs		278,521			415,255			693,776			684,669
Franchised and licensed restaurants and other		22,178			115,089			137,267			196,680
Advertising		19,728			29,647			49,375			51,451
General and administrative		49,641			58,806			108,447			103,061
Facility action charges, net		907			590			1,497			3,022
Other operating expenses, net		19,828			10,249			30,077			—
Total operating costs and expenses		390,803			629,636			1,020,439			1,038,883
Operating (loss) income		(9,336	)		22,483			13,147			68,105
Interest expense		(23,541	)		(8,617	)		(32,158	)		(14,834	)
Other income (expense), net		896			(13,609	)		(12,713	)		1,991
(Loss) income before income taxes		(31,981	)		257			(31,724	)		55,262
Income tax (benefit) expense		(8,626	)		7,772			(854	)		22,460
Net (loss) income	$	(23,355	)	$	(7,515	)	$	(30,870	)	$	32,802

Company-operated restaurant-level adjusted EBITDA (1):
Company-operated restaurants revenue	$	336,048		$	500,531		$	836,579		$	847,654
Less: restaurant operating costs		(278,521	)		(415,255	)		(693,776	)		(684,669	)
Add: depreciation and amortization expense		19,972			30,412			50,384			47,985
Less: advertising expense		(19,728	)		(29,647	)		(49,375	)		(51,451	)
Company-operated restaurant-level adjusted EBITDA	$	57,771		$	86,041		$	143,812		$	159,519
Company-operated restaurant-level adjusted EBITDA margin		17.2	%		17.2	%		17.2	%		18.8	%

Franchise restaurant adjusted EBITDA (1):
Franchised and licensed restaurants and other revenue	$	45,419		$	151,588		$	197,007		$	259,334
Less: franchised and licensed restaurants and other expense		(22,178	)		(115,089	)		(137,267	)		(196,680	)
Add: depreciation and amortization expense		2,634			1,388			4,022			2,594
Franchise restaurant adjusted EBITDA	$	25,875		$	37,887		$	63,762		$	65,248

___________

(1)	Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise non-GAAP measures within subheading “Presentation of Non-GAAP Measures.”

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Carl’s Jr. Quarter:	Successor			Predecessor
	Twelve Weeks Ended November 1, 2010			Twelve Weeks Ended November 2, 2009

Company-operated restaurants revenue	$	131,367		$	136,682
Franchised and licensed restaurants and other revenue		13,099			57,066
Total revenue		144,466			193,748
Restaurant operating costs:
Food and packaging		38,397			38,122
Payroll and other employee benefits		37,062			37,396
Occupancy and other		35,543			34,653
Total restaurant operating costs		111,002			110,171
Franchised and licensed restaurants and other expenses		7,453			49,593
Advertising expense		7,893			9,107
General and administrative expense		13,749			14,052
Facility action charges, net		118			313
Operating income	$	4,251		$	10,512

Company-operated average unit volume (trailing-13 periods)	$	1,375		$	1,468
Franchise-operated average unit volume (trailing-13 periods)	$	1,096		$	1,135
Company-operated same-store sales decrease		(5.0	)%		(5.2	)%
Franchise-operated same-store sales decrease		(4.3	)%		(4.8	)%
Company-operated same-store transaction decrease		(3.0	)%		(2.7	)%
Company-operated average check (actual $)	$	6.73		$	6.85
Restaurant operating costs as a percentage of company-operated restaurants revenue:
Food and packaging		29.2	%		27.9	%
Payroll and other employee benefits		28.2	%		27.4	%
Occupancy and other		27.1	%		25.4	%
Total restaurant operating costs		84.5	%		80.6	%
Advertising expense as a percentage of company-operated restaurants revenue		6.0	%		6.7	%

Company-operated restaurant-level adjusted EBITDA (1):
Company-operated restaurants revenue	$	131,367		$	136,682
Less: restaurant operating costs		(111,002	)		(110,171	)
Add: depreciation and amortization expense		7,664			7,216
Less: advertising expense		(7,893	)		(9,107	)
Company-operated restaurant-level adjusted EBITDA	$	20,136		$	24,620
Company-operated restaurant-level adjusted EBITDA margin		15.3	%		18.0	%

Franchise restaurant adjusted EBITDA (1):
Franchised and licensed restaurants and other revenue	$	13,099		$	57,066
Less: franchised and licensed restaurants and other expense		(7,453	)		(49,593	)
Add: depreciation and amortization expense		906			435
Franchise restaurant adjusted EBITDA	$	6,552		$	7,908

___________

(1)	Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise non-GAAP measures within subheading “Presentation of Non-GAAP Measures.”

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Carl’s Jr. Year To Date:	Successor			Predecessor			Successor/ Predecessor			Predecessor
	Sixteen Weeks Ended November 1, 2010			Twenty-Four Weeks Ended July 12, 2010			Forty Weeks Ended November 1, 2010			Forty Weeks Ended November 2, 2009

Company-operated restaurants revenue	$	176,512		$	271,379		$	447,891		$	472,301
Franchised and licensed restaurants and other revenue		17,448			111,855			129,303			190,481
Total revenue		193,960			383,234			577,194			662,782
Restaurant operating costs:
Food and packaging		51,427			80,105			131,532			132,894
Payroll and other employee benefits		49,486			76,624			126,110			127,719
Occupancy and other		47,094			67,654			114,748			113,511
Total restaurant operating costs		148,007			224,383			372,390			374,124
Franchised and licensed restaurants and other expenses		9,960			98,565			108,525			166,146
Advertising expense		10,642			16,620			27,262			29,426
General and administrative expense		22,785			26,909			49,694			46,505
Facility action charges, net		158			168			326			2,062
Gain on sale of Distribution Center assets		—			(3,442	)		(3,442	)		—
Operating income	$	2,408		$	20,031		$	22,439		$	44,519

Company-operated same-store sales decrease								(6.2	)%		(5.5	)%
Franchise-operated same-store sales decrease								(4.2	)%		(5.7	)%
Company-operated same-store transaction decrease								(3.9	)%		(4.1	)%
Company-operated average check (actual $)							$	6.80		$	6.94
Restaurant operating costs as a percentage of company-operated restaurants revenue:
Food and packaging								29.4	%		28.1	%
Payroll and other employee benefits								28.2	%		27.0	%
Occupancy and other								25.6	%		24.0	%
Total restaurant operating costs								83.1	%		79.2	%
Advertising expense as a percentage of company-operated restaurants revenue								6.1	%		6.2	%

Company-operated restaurant-level adjusted EBITDA (1):
Company-operated restaurants revenue	$	176,512		$	271,379		$	447,891		$	472,301
Less: restaurant operating costs		(148,007	)		(224,383	)		(372,390	)		(374,124	)
Add: depreciation and amortization expense		10,219			14,834			25,053			23,731
Less: advertising expense		(10,642	)		(16,620	)		(27,262	)		(29,426	)
Company-operated restaurant-level adjusted EBITDA	$	28,082		$	45,210		$	73,292		$	92,482
Company-operated restaurant-level adjusted EBITDA margin		15.9	%		16.7	%		16.4	%		19.6	%

Franchise restaurant adjusted EBITDA (1):
Franchised and licensed restaurants and other revenue	$	17,448		$	111,855		$	129,303		$	190,481
Less: franchised and licensed restaurants and other expense		(9,960	)		(98,565	)		(108,525	)		(166,146	)
Add: depreciation and amortization expense		1,210			752			1,962			1,475
Franchise restaurant adjusted EBITDA	$	8,698		$	14,042		$	22,740		$	25,810

___________

(1)	Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise non-GAAP measures within subheading “Presentation of Non-GAAP Measures.”

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

The following table shows the change in our restaurant portfolio for the trailing-13 periods ended November 1, 2010:

	Company-operated			Franchised			Licensed			Total
Open at November 2, 2009		421			667			133			1,221
New		7			23			17			47
Closed		(5	)		(14	)		(4	)		(23	)
Divested		—			(1	)		—			(1	)
Acquired		1			—			—			1
Open at November 1, 2010		424			675			146			1,245

Company-Operated Restaurants Revenue:

Revenue from company-operated Carl’s Jr. restaurants decreased $5,315, or 3.9%, to $131,367 during the twelve weeks ended November 1, 2010, as compared to the twelve weeks ended November 2, 2009. This decrease was primarily due to the 5.0% decrease in company-operated same-store sales for the quarter, partially offset by the revenues generated from new company-operated restaurants opened since the end of the third quarter of fiscal 2010.

Revenue from company-operated Carl’s Jr. restaurants decreased $24,410, or 5.2%, to $447,891 during the forty weeks ended November 1, 2010, as compared to the prior year period. This decrease was primarily due to the 6.2% decrease in company-operated same-store sales from the comparable prior year period, partially offset by the revenues generated from new company-operated restaurants opened since the end of the third quarter of fiscal 2010.

Company-Operated Restaurant-Level Adjusted EBITDA Margin:

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

	Twelve Weeks			Forty Weeks
Company-operated restaurant-level adjusted EBITDA margin for the period ended November 2, 2009		18.0	%		19.6	%
Increase in food and packaging costs		(1.3	)		(1.2	)
Payroll and other employee benefits:
Increase in labor costs, excluding workers’ compensation		(0.6	)		(0.9	)
Increase in workers’ compensation expense		(0.3	)		(0.2	)
Occupancy and other (excluding depreciation and amortization):
Increase in rent expense		(1.1	)		(0.8	)
Decrease in repairs and maintenance expense		0.3			0.1
Increase in utilities expense		(0.2	)		(0.2	)
Increase in property tax expense		(0.2	)		(0.2	)
Other, net		—			0.1
Advertising expense		0.7			0.1
Company-operated restaurant-level adjusted EBITDA margin for the period ended November 1, 2010		15.3	%		16.4	%

Food and Packaging Costs:

Food and packaging costs increased as a percentage of company-operated restaurants revenue during the twelve and forty weeks ended November 1, 2010, as compared to the prior year periods, due primarily to increased commodity costs for beef, pork and cheese products.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Labor Costs:

Labor costs, excluding workers’ compensation, increased as a percentage of company-operated restaurants revenue during the twelve and forty weeks ended November 1, 2010, from the comparable prior year periods, due primarily to the deleveraging impact of the decrease in same-store sales and the relatively fixed nature of restaurant management costs.

Workers’ compensation expense increased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 1, 2010, from the comparable prior year period, due primarily to favorable claims reserves adjustments in the prior year period which did not recur to the same extent in the current year.

Occupancy and Other Costs:

Rent expense increased as a percentage of company-operated restaurants revenue during the twelve and forty weeks ended November 1, 2010, from the comparable prior year periods, due mainly to impacts of acquisition accounting related to the Merger and the deleveraging impact of the decrease in same-store sales and the relatively fixed nature of rent expense.

Depreciation and amortization expense increased as a percentage of company-operated restaurants revenue during the twelve and forty weeks ended November 1, 2010, from the comparable prior year periods, mainly due to impacts of acquisition accounting related to the Merger, asset additions related to remodels, new store openings and equipment upgrades, as well as the deleveraging impact of the decrease in same-store sales and the relatively fixed nature of depreciation and amortization expense.

Repairs and maintenance expense decreased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 1, 2010, as compared to the prior year period, mainly due to decreased spending on contract services, landscaping and building repairs in the current year period.

Advertising Expense:

Advertising expense decreased $1,214, or 13.3%, to $7,893, during the twelve weeks ended November 1, 2010 as compared to the prior year period. Advertising expense as a percentage of company-operated restaurants revenue decreased from 6.7% to 6.0% during the twelve weeks ended November 1, 2010 as compared to the twelve weeks ended November 2, 2009. The decrease as a percentage of company-operated restaurants revenue was mainly due to incremental media spending incurred during the twelve weeks ended November 2, 2009 in connection with a marketing campaign in selected markets emphasizing the value-for-the-money of Carl’s Jr. premium products, which did not recur in the current year period.

Franchised and Licensed Restaurants:

Carl’s Jr. Quarter:	Successor		Predecessor
	Twelve Weeks Ended November 1, 2010		Twelve Weeks Ended November 2, 2009
Franchised and licensed restaurants and other revenue:
Royalties	$	7,527	$	7,616
Distribution centers		—		43,964
Rent and other occupancy		5,432		5,151
Franchise fees		140		335
Total franchised and licensed restaurants and other revenue	$	13,099	$	57,066
Franchised and licensed restaurants and other expenses:
Administrative expense (including provision for bad debts)	$	2,507	$	1,878
Distribution centers		—		43,313
Rent and other occupancy		4,946		4,402
Total franchised and licensed restaurants and other expenses	$	7,453	$	49,593

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Total franchised and licensed restaurants revenue decreased $43,967, or 77.0%, to $13,099 during the twelve weeks ended November 1, 2010, as compared to the twelve weeks ended November 2, 2009. Distribution center sales of food, packaging and supplies to franchisees decreased from $43,964 to zero, due to the outsourcing of our Carl’s Jr. distribution center operations on July 2, 2010. Royalty revenues remained consistent with the prior year, as the impact of a 4.3% decrease in franchise-operated same-store sales was largely offset by the net increase of 21 franchised and licensed restaurants since the end of the third quarter of fiscal 2010.

Franchised and licensed operating and other expenses decreased $42,140, or 85.0%, to $7,453 during the twelve weeks ended November 1, 2010, from the comparable prior year period. This decrease is due to a $43,313 decrease in distribution center costs resulting from the outsourcing of our Carl’s Jr. distribution center operations. This decrease was partially offset by an increase of $629 in administrative expense from the comparable prior year period, caused by an increase of $658 in amortization expense related to the franchise agreements intangible asset recorded in connection with the Merger.

Carl’s Jr. Year To Date:	Successor		Predecessor		Successor/ Predecessor		Predecessor
	Sixteen Weeks Ended November 1, 2010		Twenty-Four Weeks Ended July 12, 2010		Forty Weeks Ended November 1, 2010		Forty Weeks Ended November 2, 2009
Franchised and licensed restaurants and other revenue:
Royalties	$	10,019	$	15,068	$	25,087	$	24,903
Distribution centers		—		86,891		86,891		147,920
Rent and other occupancy		7,195		9,421		16,616		16,620
Franchise fees		234		475		709		1,038
Total franchised and licensed restaurants and other revenue	$	17,448	$	111,855	$	129,303	$	190,481
Franchised and licensed restaurants and other expenses:
Administrative expense (including provision for bad debts)	$	3,376	$	3,722	$	7,098	$	5,805
Distribution centers		—		86,170		86,170		145,725
Rent and other occupancy		6,584		8,673		15,257		14,616
Total franchised and licensed restaurants and other expenses	$	9,960	$	98,565	$	108,525	$	166,146

Total franchised and licensed restaurants revenue decreased $61,178, or 32.1%, to $129,303 during the forty weeks ended November 1, 2010, as compared to the forty weeks ended November 2, 2009. Distribution center sales of food, packaging and supplies to franchisees decreased by $61,029, due to the outsourcing of our Carl’s Jr. distribution center operations beginning July 2, 2010. Royalty revenues increased by $184, or 0.7%, due to a net increase of 21 franchised and licensed restaurants since the end of the second quarter of fiscal 2010, partially offset by a decrease of 4.2% in franchise-operated same-store sales.

Franchised and licensed operating and other expenses decreased $57,621, or 34.7%, to $108,525 during the forty weeks ended November 1, 2010, as compared to the prior year period. This decrease is mainly due to a $59,555 decrease in distribution center costs resulting from the outsourcing of our Carl’s Jr. distribution center operations. This decrease was partially offset by an increase of $1,293 in administrative expense from the comparable prior year period, caused primarily by an increase of $877 in amortization expense related to the franchise agreements intangible asset recorded in connection with the Merger.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Hardee’s Quarter:	Successor			Predecessor
	Twelve Weeks Ended November 1, 2010			Twelve Weeks Ended November 2, 2009

Company-operated restaurants revenue	$	118,680		$	109,957
Franchised and licensed restaurants and other revenue		21,211			20,274
Total revenue		139,891			130,231
Restaurant operating costs:
Food and packaging		35,461			31,521
Payroll and other employee benefits		34,499			33,960
Occupancy and other		27,000			26,199
Total restaurant operating costs		96,960			91,680
Franchised and licensed restaurants and other expenses		9,490			9,261
Advertising expense		6,987			6,572
General and administrative expense		16,229			16,887
Facility action charges, net		651			207
Operating income	$	9,574		$	5,624

Company-operated average unit volume (trailing-13 periods)	$	1,039		$	1,004
Franchise-operated average unit volume (trailing-13 periods)	$	1,002		$	981
Company-operated same-store sales increase (decrease)		8.3	%		(1.8	)%
Franchise-operated same-store sales increase (decrease)		7.4	%		(1.4	)%
Company-operated same-store transaction increase		3.3	%		1.3	%
Company-operated average check (actual $)	$	5.16		$	4.94
Restaurant operating costs as a percentage of company-operated restaurants revenue:
Food and packaging		29.9	%		28.7	%
Payroll and other employee benefits		29.1	%		30.9	%
Occupancy and other		22.8	%		23.8	%
Total restaurant operating costs		81.7	%		83.4	%
Advertising expense as a percentage of company-operated restaurants revenue		5.9	%		6.0	%

Company-operated restaurant-level adjusted EBITDA (1):
Company-operated restaurants revenue	$	118,680		$	109,957
Less: restaurant operating costs		(96,960	)		(91,680	)
Add: depreciation and amortization expense		7,342			7,386
Less: advertising expense		(6,987	)		(6,572	)
Company-operated restaurant-level adjusted EBITDA	$	22,075		$	19,091
Company-operated restaurant-level adjusted EBITDA margin		18.6	%		17.4	%

Franchise restaurant adjusted EBITDA (1):
Franchised and licensed restaurants and other revenue	$	21,211		$	20,274
Less: franchised and licensed restaurants and other expense		(9,490	)		(9,261	)
Add: depreciation and amortization expense		1,069			326
Franchise restaurant adjusted EBITDA	$	12,790		$	11,339

_________

(1)	Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise non-GAAP measures within subheading “Presentation of Non-GAAP Measures.”

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Hardee’s Year To Date:	Successor			Predecessor			Successor/ Predecessor			Predecessor
	Sixteen Weeks Ended November 1, 2010			Twenty-Four Weeks Ended July 12, 2010			Forty Weeks Ended November 1, 2010			Forty Weeks Ended November 2, 2009

Company-operated restaurants revenue	$	159,470		$	229,043		$	388,513		$	375,160
Franchised and licensed restaurants and other revenue		27,813			39,480			67,293			68,312
Total revenue		187,283			268,523			455,806			443,472
Restaurant operating costs:
Food and packaging		47,733			68,842			116,575			109,104
Payroll and other employee benefits		46,414			70,498			116,912			113,324
Occupancy and other		36,267			51,378			87,645			87,870
Total restaurant operating costs		130,414			190,718			321,132			310,298
Franchised and licensed restaurants and other expenses		12,218			16,524			28,742			30,534
Advertising expense		9,086			13,027			22,113			22,025
General and administrative expense		26,857			31,827			58,684			56,430
Facility action charges, net		748			369			1,117			960
Operating income	$	7,960		$	16,058		$	24,018		$	23,225

Company-operated same-store sales increase (decrease)								4.0	%		(0.4	)%
Franchise-operated same-store sales increase								3.1	%		0.7	%
Company-operated same-store transaction increase								1.7	%		1.2	%
Company-operated average check (actual $)							$	5.13		$	5.04
Restaurant operating costs as a percentage of company-operated restaurants revenue:
Food and packaging								30.0	%		29.1	%
Payroll and other employee benefits								30.1	%		30.2	%
Occupancy and other								22.6	%		23.4	%
Total restaurant operating costs								82.7	%		82.7	%
Advertising expense as a percentage of company-operated restaurants revenue								5.7	%		5.9	%

Company-operated restaurant-level adjusted EBITDA (1):
Company-operated restaurants revenue	$	159,470		$	229,043		$	388,513		$	375,160
Less: restaurant operating costs		(130,414	)		(190,718	)		(321,132	)		(310,298	)
Add: depreciation and amortization expense		9,753			15,578			25,331			24,254
Less: advertising expense		(9,086	)		(13,027	)		(22,113	)		(22,025	)
Company-operated restaurant-level adjusted EBITDA	$	29,723		$	40,876		$	70,599		$	67,091
Company-operated restaurant-level adjusted EBITDA margin		18.6	%		17.8	%		18.2	%		17.9	%

Franchise restaurant adjusted EBITDA (1):
Franchised and licensed restaurants and other revenue	$	27,813		$	39,480		$	67,293		$	68,312
Less: franchised and licensed restaurants and other expense		(12,218	)		(16,524	)		(28,742	)		(30,534	)
Add: depreciation and amortization expense		1,424			636			2,060			1,119
Franchise restaurant adjusted EBITDA	$	17,019		$	23,592		$	40,611		$	38,897

___________

(1)	Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise non-GAAP measures within subheading “Presentation of Non-GAAP Measures.”

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

The following table shows the change in our restaurant portfolio for the trailing-13 periods ended November 1, 2010:

	Company-operated			Franchised			Licensed			Total
Open at November 2, 2009		476			1,232			205			1,913
New		1			8			10			19
Closed		(9	)		(19	)		(8	)		(36	)
Divested		(1	)		—			—			(1	)
Acquired		—			1			—			1
Open at November 1, 2010		467			1,222			207			1,896

Company-Operated Restaurants Revenue:

Revenue from company-operated Hardee’s restaurants increased $8,723, or 7.9%, to $118,680 during the twelve weeks ended November 1, 2010, from the comparable prior year period. The increase is primarily due to the 8.3% increase in company-operated same-store sales, partially offset by the net decrease of nine restaurants since the end of the third quarter of fiscal 2010.

During the forty weeks ended November 1, 2010, revenue from company-operated restaurants increased $13,353, or 3.6%, to $388,513 as compared to the forty weeks ended November 2, 2009. The increase is primarily due to the 4.0% increase in company-operated same-store sales, partially offset by the net decrease of nine restaurants since the end of the third quarter of fiscal 2010.

Company-Operated Restaurant-Level Adjusted EBITDA Margin:

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

	Twelve Weeks			Forty Weeks
Company-operated restaurant-level adjusted EBITDA margin for the period ended November 2, 2009		17.4	%		17.9	%
Increase in food and packaging costs		(1.2	)		(0.9	)
Payroll and other employee benefits:
Decrease in labor costs, excluding workers’ compensation		2.0			0.3
Increase in workers’ compensation expense		(0.2	)		(0.2	)
Occupancy and other (excluding depreciation and amortization):
Decrease in repairs and maintenance		0.3			0.2
Decrease in utilities expense		0.3			0.5
Decrease in general liability insurance expense		0.2			0.2
Increase in rent expense		(0.2	)		(0.1	)
Other, net		(0.1	)		0.1
Advertising expense		0.1			0.2
Company-operated restaurant-level adjusted EBITDA margin for the period ended November 1, 2010		18.6	%		18.2	%

Food and Packaging Costs:

Food and packaging costs increased as a percentage of company-operated restaurants revenue during the twelve and forty weeks ended November 1, 2010, as compared to the prior year periods, mainly due to an increase in commodity costs for pork, beef and cheese products.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Labor Costs:

Labor costs, excluding workers’ compensation expense, decreased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 1, 2010, as compared to the prior year period, due primarily to sales leverage and the relatively fixed nature of restaurant management costs, as well as a temporary reduction in our employer payroll taxes due to recently enacted legislation. During the forty weeks ended November 1, 2010, the favorable impact from additional sales leverage and favorable employer payroll tax legislation was largely offset by the impact of minimum wage rate increases that took place in the second quarter of fiscal 2010.

Occupancy and Other Costs:

Depreciation and amortization expense decreased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 1, 2010, from the comparable prior year period, due primarily to sales leverage and impacts of acquisition accounting related to the Merger, partially offset by asset additions from remodels and equipment upgrades.

Repairs and maintenance expense decreased as a percentage of company-operated restaurants revenue during the twelve weeks ended November 1, 2010, as compared to the prior year period, mainly due to sales leverage caused by the increase in company operated same-store sales.

Utilities expense decreased as a percentage of company-operated restaurants during the twelve and forty weeks ended November 1, 2010, as compared to the prior year periods, mainly due a decrease in natural gas rates and sales leverage caused by the increase in company operated same-store sales.

Franchised and Licensed Restaurants:

Hardee’s Quarter:	Successor		Predecessor
	Twelve Weeks Ended November 1, 2010		Twelve Weeks Ended November 2, 2009
Franchised and licensed restaurants and other revenue:
Royalties	$	13,214	$	11,892
Distribution centers		4,729		5,457
Rent and other occupancy		3,081		2,711
Franchise fees		187		214
Total franchised and licensed restaurants and other revenue	$	21,211	$	20,274
Franchised and licensed restaurants and other expenses:
Administrative expense (including provision for bad debts)	$	2,125	$	1,808
Distribution centers		4,835		5,495
Rent and other occupancy		2,530		1,958
Total franchised and licensed restaurants and other expenses	$	9,490	$	9,261

Total franchised and licensed restaurants revenue increased $937 or 4.6%, to $21,211 during the twelve weeks ended November 1, 2010, as compared to the prior year period. This increase is mainly due to an increase of $1,322, or 11.1%, in royalty revenues resulting from an increase in our franchise-operated same-store sales partially offset by net decrease of 8 franchised and licensed restaurants since the end of the third quarter of fiscal 2010. Distribution center revenues decreased by $728 as a result of reductions in equipment sales to franchisees associated with new restaurants and equipment sales to third parties.

Franchised and licensed operating and other expenses increased $229, or 2.5%, to $9,490, during the twelve weeks ended November 1, 2010, as compared to the prior year period. This increase in costs is mainly due to an increase in rent and other occupancy costs of $572 caused by impacts of acquisition accounting related to the Merger, as well as an increase in administrative expense resulting from amortization expense related to intangible assets recorded in connection with the Merger. These increases were partially offset by a decrease of $660 in our distribution center costs resulting from the decrease in distribution center sales to franchisees and third parties.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Hardee’s Year To Date:	Successor		Predecessor		Successor/ Predecessor		Predecessor
	Sixteen Weeks Ended November 1, 2010		Twenty-Four Weeks Ended July 12, 2010		Forty Weeks Ended November 1, 2010		Forty Weeks Ended November 2, 2009
Franchised and licensed restaurants and other revenue:
Royalties	$	17,583	$	24,702	$	42,285	$	40,281
Distribution centers		5,869		9,220		15,089		18,067
Rent and other occupancy		4,074		5,187		9,261		9,119
Franchise fees		287		371		658		845
Total franchised and licensed restaurants and other revenue	$	27,813	$	39,480	$	67,293	$	68,312
Franchised and licensed restaurants and other expenses:
Administrative expense (including provision for bad debts)	$	2,864	$	3,320	$	6,184	$	5,727
Distribution centers		5,999		9,352		15,351		17,947
Rent and other occupancy		3,355		3,852		7,207		6,860
Total franchised and licensed restaurants and other expenses	$	12,218	$	16,524	$	28,742	$	30,534

Total franchised and licensed restaurants revenue decreased $1,019, or 1.5%, to $67,293 during the forty weeks ended November 1, 2010, as compared to the prior year period. This decrease is mainly due to the decline in distribution center revenues of $2,978 resulting from decreases in equipment sales to franchisees associated with new restaurants and equipment sales to third parties. This decrease was partially offset by an increase in royalty revenues of $2,004 which is due primarily to an increase in royalties resulting from the 3.1% increase in franchise-operated same-store sales.

Franchised and licensed operating and other expenses decreased $1,792, or 5.9%, to $28,742, during the forty weeks ended November 1, 2010, as compared to the prior year period. This decrease in costs is mainly due to a decrease of $2,596 in distribution center expenses resulting from the decrease in distribution center sales to franchisees and third parties. This decrease was partially offset by an increase of $457 in administrative expense resulting from an increase in amortization expense related to intangible assets recorded in connection with the Merger.

Consolidated Expenses

General and Administrative Expense:

General and administrative expenses decreased $1,000, or 3.2%, to $29,977, for the twelve weeks ended November 1, 2010, as compared to the twelve weeks ended November 2, 2009. This was mainly a result of implementing various cost-reduction initiatives causing a reduction in our general corporate expenses of $1,301. Additionally, share-based compensation expense decreased $704 which is attributable to changes in our share-based compensation plan in connection with the Merger. These decreases were partially offset by an increase of $641 in bonus expense, which is based on our performance relative to executive management and operations bonus criteria.

General and administrative expenses increased $5,386, or 5.2%, to $108,447 for the forty weeks ended November 1, 2010, as compared to the forty weeks ended November 2, 2009. This was mainly due to an increase of $10,490 in share-based compensation expense resulting primarily from the acceleration of vesting of stock options and restricted stock awards in connection with the Merger. This increase was partially offset by a decrease of $2,074 in bonus expense, which is based on our performance relative to executive management and operations bonus criteria. Additionally, as a result of implementing various cost-reduction initiatives, we reduced general corporate expenses by $3,065.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Other Operating Expenses, Net:

During the twelve and forty weeks ended November 1, 2010, we recorded transaction-related costs of $167 and $33,519, respectively, for accounting, investment banking, legal and other costs associated with the Transactions. During the forty weeks ended November 1, 2010, these transaction-related costs were partially offset by a gain of $3,442 on the sale of our Distribution Center assets.

See discussion of the termination of our prior merger agreement with an affiliate of Thomas H. Lee Partners, L.P. (“THL”) in “Other Income (Expense), Net.”

Interest Expense:

During the twelve weeks ended November 1, 2010, interest expense increased $11,255, to $17,685, as compared to the twelve weeks ended November 2, 2009. This increase was primarily caused by the interest incurred on our senior secured second lien notes. Interest expense during the twelve weeks ended November 2, 2009 included a charge of $3,631 to adjust the carrying value of our interest rate swap agreements to fair value. See Note 7 of the accompanying Notes to Condensed Consolidated Financial Statements for additional detail of the components of interest expense.

During the forty weeks ended November 1, 2010, interest expense increased $17,324, to $32,158, as compared to the forty weeks ended November 2, 2009. This increase was primarily caused by the interest incurred on our senior secured second lien notes, which was partially offset by a decrease of $1,835 in the charge recorded to adjust the carrying value of our interest rate swap agreements to fair value, as compared to the prior year period. See Note 7 of the accompanying Notes to Condensed Consolidated Financial Statements for additional detail of the components of interest expense.

Other Income (Expense), Net:

During the forty weeks ended November 1, 2010, we recorded $12,713 of other expense, net as compared to other income, net of $1,991 during the forty weeks ended November 2, 2009. The change in other income (expense), net is primarily attributable to the termination fee for a prior merger agreement with an affiliate of THL of $9,283 and $5,000 in reimbursable costs.

Income Tax (Benefit) Expense:

Our effective income tax rate for the twelve and forty weeks ended November 1, 2010 differs from the federal statutory rate primarily as a result of non-deductible transaction costs, non-deductible share-based compensation expense, state income taxes and the release of $1,501 of unrecognized tax benefits due to the statute closures. Our effective income tax rate for the twelve and forty weeks ended November 2, 2009 differs from the federal statutory rate primarily as a result of state income taxes and certain expenses that are non-deductible for income tax purposes.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Liquidity and Capital Resources

Overview:

Our operating cash requirements consist principally of our food and packaging purchases, labor, and occupancy costs; capital expenditures for restaurant remodels, new restaurant construction and replacement of equipment; debt service requirements; advertising expenditures; and general and administrative expenses. We expect that our cash on hand and future cash flows from operations will provide sufficient liquidity to allow us to meet our operating and capital requirements and service our existing debt. As of November 1, 2010, we have $49,494 in cash and cash equivalents and $65,067 in available commitments under our Credit Facility to help meet our operating and capital requirements.

We believe our most significant cash use during the next 12 months will be for capital expenditures and debt service requirements. Based on our current capital spending projections, we expect capital expenditures to be between $60,000 and $70,000 for fiscal 2011. We are required to make semi-annual interest payments on our Notes of approximately $34,125. As discussed below, our Credit Facility matures on July 12, 2015 and our Notes mature on July 15, 2018.

Credit Facility:

Our Credit Facility provides for senior secured revolving facility loans, swingline loans and letters of credit, in an aggregate amount of up to $100,000. The Credit Facility bears interest at a rate equal to, at our option, either: (1) the higher of Morgan Stanley’s “prime rate” plus 2.75% or the federal funds rate, as defined in our Credit Facility, plus 3.25%, or (2) the LIBOR plus 3.75%. The Credit Facility matures on July 12, 2015, at which time all outstanding revolving facility loans and accrued and unpaid interest must be repaid. As of November 1, 2010, we had no outstanding loan borrowings, $34,933 of outstanding letters of credit, and remaining availability of $65,067 under our Credit Facility.

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

The terms of our Credit Facility also include financial performance covenants, which include a maximum secured leverage ratio and a specified minimum interest coverage ratio.

We were in compliance with the covenants of our Credit Facility as of November 1, 2010.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

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

Senior Secured Second Lien Notes:

We have $600,000 aggregate principal amount of senior secured second lien notes outstanding. The Notes bear interest at a rate of 11.375% per annum, payable semi-annually in arrears on January 15 and July 15, beginning on January 15, 2011. The Notes were issued with an original issue discount of 1.92%, or $11,490, and are recorded as long-term debt, net of original issue discount, in our accompanying Condensed Consolidated Balance Sheet as of November 1, 2010 (Successor). The Notes mature on July 15, 2018.

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

We were in compliance with the covenants included in the indenture governing the Notes as of November 1, 2010.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Cash Flows:

During the forty weeks ended November 1, 2010, cash provided by operating activities totaled $34,024, a decrease of $92,662 from the comparable prior year period. This decrease is primarily attributable to the $63,672 decrease from net income of $32,802 for the forty weeks ended November 2, 2009 to a net loss of $30,870 for the forty weeks ended November 1, 2010 mainly due to the significant transaction-related costs incurred and post-combination share-based compensation expense recognized from the acceleration of stock options and restricted stock awards in connection with the Merger. Additionally, during the forty weeks ended November 1, 2010, we paid $14,844 to settle our interest rate swap agreements, which is included in the change in accounts payable and other current and long-term liabilities. The remainder of the cash flow changes are attributed primarily to changes in our working capital account balances, which can vary significantly from quarter to quarter, depending upon the timing of large customer receipts and payments to vendors, but they are not anticipated to be a significant source or use of cash over the long term.

Cash used in investing activities during the forty weeks ended November 1, 2010 totaled $722,822, which principally consisted of $693,478 for the acquisition of CKE Restaurants, Inc. in connection with the Merger. Additionally, we purchased $52,303 of property and equipment, and collected proceeds of $21,195 from the sale of the Carl’s Jr. Distribution Center assets.

Capital expenditures were as follows:

	Successor/ Predecessor		Predecessor
	Forty Weeks Ended November 1, 2010		Forty Weeks Ended November 2, 2009
Remodels:
Carl’s Jr.	$	2,582	$	6,634
Hardee’s		14,883		17,885
Capital Maintenance:
Carl’s Jr.		8,479		11,516
Hardee’s		11,749		12,795
New restaurants/rebuilds:
Carl’s Jr.		8,277		10,928
Hardee’s		2,607		3,905
Dual-branding:
Carl’s Jr.		672		641
Hardee’s		2,120		273
Real estate/franchise acquisitions		20		3,234
Corporate/other		914		9,802
Total	$	52,303	$	77,613

Capital expenditures for the forty weeks ended November 1, 2010 decreased $25,310, or 32.6%, from the comparable prior year period mainly due to a $8,888 decrease in corporate and other asset additions, a $7,054 decrease in restaurant remodels, a $4,083 decrease in capital maintenance a $3,949 decrease in new restaurants and rebuilds, and a $3,214 decrease in real estate and franchise additions.

Cash provided by financing activities during the forty weeks ended November 1, 2010 totaled $720,046 as compared to cash used in financing activities during the forty weeks ended November 2, 2009 of $52,730. During the forty weeks ended November 1, 2010, we received proceeds from the issuance of Notes, net of discount, of $588,510 and equity contributions of $450,000 in connection with the Transactions. Additionally, we made net payments of $277,432 to fully repay our Predecessor term loan and borrowings under our Predecessor revolving credit facility during the forty weeks ended November 1, 2010.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Critical Accounting Policies

Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our consolidated financial position and results of operations. See our Annual Report on Form 10-K for the year ended January 31, 2010 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.

Impairment of Goodwill:

As of January 31, 2010, we had $24,589 of goodwill recorded in our accompanying Condensed Consolidated Balance Sheet (Predecessor). During the first quarter of fiscal 2011, 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 substantially exceeded the carrying value, and thus no impairment charge was required in our accompanying Condensed Consolidated Statements of Operations (Predecessor).

We have recorded a preliminary estimate of our goodwill for Successor on the acquisition date of the Merger of $193,443 for the excess of the purchase price consideration over the fair value of the assets acquired and liabilities assumed in the Merger. The estimated purchase price allocation is subject to revision based on additional valuation work that is being conducted and could change materially. Any subsequent changes to the purchase price allocation that results in material changes to our consolidated financial results will be adjusted retrospectively.

We plan to perform an annual impairment test on our indefinite-lived intangible assets using a relief from royalty method to determine the fair value of each of our indefinite-lived trademarks/tradenames. We recognize an impairment loss for the indefinite-lived intangible assets if the carrying value exceeds the fair value. Significant management judgment is necessary to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates.

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.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

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 1, 2010 and January 31, 2010, our estimated liability for self-insured workers’ compensation, general and auto liability losses was $36,793 and $37,228, 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.

Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal 2011 Comparisons with Fiscal 2010

The factors discussed below impact comparability of operating performance for the twelve and forty weeks ended November 1, 2010 and November 2, 2009, and for the remainder of fiscal 2011.

Merger and Transactions:

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

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

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

As of November 1, 2010, the purchase price allocation is preliminary and could change materially in subsequent periods. Any subsequent changes to the purchase price allocation that result in material changes to our consolidated financial results will be adjusted retrospectively. The final purchase price allocation is pending the receipt of valuation work and the completion of our internal review of such work, which is expected to be completed during fiscal 2011. The provisional items pending finalization are the valuation of our property and equipment, operating lease intangible assets and liabilities, capital lease assets and obligations, intangible assets, goodwill and income tax related matters.

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

Sale of Carl’s Jr. Distribution Center Assets:

On July 2, 2010, we entered into an agreement to sell to MBM our Carl’s Jr. Distribution Center Assets. Simultaneously, on July 2, 2010, we and our franchisees entered into distribution agreements with MBM to provide distribution services to our Carl’s Jr. restaurants. As a result of the outsourcing of our Carl’s Jr. distribution services, we will no longer record distribution center revenues and the related expenses in our Carl’s Jr. operating segment. During the forty weeks ended November 1, 2010 and November 2, 2009, we recorded revenues of $86,891 and $147,920, respectively, from our Carl’s Jr. Distribution Center operations. Refer to further discussion of the Carl’s Jr. operating segment included within our “Operating Review” section of Management’s Discussion and Analysis.

Fiscal Year and Seasonality:

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

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

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

See Note 3 of Notes to Condensed Consolidated Financial Statements for a description of the adoption of new accounting pronouncements.

Presentation of Non-GAAP Measurements

We have included in this report measures of financial performance that are not defined by GAAP. Company-operated restaurant-level adjusted EBITDA, company-operated restaurant-level adjusted EBITDA margin and franchise restaurant adjusted EBITDA are non-GAAP measures utilized by management internally to evaluate and compare our operating performance for company-operated restaurants and franchised and licensed restaurants between periods. Because not all companies calculate these measures identically, our presentation of such measures may not be comparable to similarly titled measures of other companies. These non-GAAP measures should be viewed in addition to, and not in lieu of, the comparable GAAP measure. Each of these non-GAAP financial measures is derived from amounts reported within our Condensed Consolidated Financial Statements, and the computations of each of these measures have been included within our “Operating Review” section of Management’s Discussion and Analysis.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands)

Company-Operated Restaurant-Level Non-GAAP Measures:

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

Franchise Restaurant Adjusted EBITDA:

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

Safe Harbor Disclosure

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, are beyond our control, and may cause results to differ materially from expectations. Factors that could cause our results to differ materially from those described include, but are not limited to, our ability to compete with other restaurants, supermarkets and convenience stores for customers, employees, restaurant locations and franchisees; changes in consumer preferences, perceptions and spending patterns; the ability of our key suppliers to continue to deliver premium-quality products to us at moderate prices; our ability to successfully enter new markets, complete remodels of existing restaurants and complete construction of new restaurants; changes in general economic conditions and the geographic concentration of our restaurants, which may affect our business; our ability to attract and retain key personnel; our franchisees' willingness to participate in the our strategy; the operational and financial success of our franchisees; our ability to expand into international markets and the risks associated with operating in international locations; changes in the price or availability of commodities; the effect of the media's reports regarding food-borne illnesses, food tampering and other health-related issues on our reputation and our ability to procure or sell food products; the seasonality of our operations; the effect of increasing labor costs including healthcare related costs; increased insurance and/or self-insurance costs; our ability to comply with existing and future health, employment, environmental and other government regulations; the potentially conflicting interests of our sole stockholder and our creditors; our substantial leverage which could limit our ability to raise capital, react to economic changes or meet obligations under our indebtedness; the effect of restrictive covenants in our indenture and credit facility on our business; and other factors as discussed in our other filings with the SEC. Forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or circumstances arising after the date of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk:

Our principal exposures to financial market risks relate to the impact that interest rate changes could have on our senior secured revolving credit facility, which bears a floating interest rate and, therefore, our results of operations and cash flows will be exposed to changes in interest rates. As of November 1, 2010, our senior secured revolving credit facility remained undrawn. A hypothetical increase of 100 basis points in short-term interest rates in our floating rate would not have an impact on our interest expense. This sensitivity analysis assumes all other variables will remain constant in future periods.

Foreign Currency Risk:

Our objective in managing our exposure to foreign currency fluctuations is to limit the impact of such fluctuations on our results of operations and cash flows. Our business at company-operated restaurants is transacted in U.S. dollars. Exposure outside of the U.S. relates primarily to the effect of foreign currency rate fluctuations on royalties and other fees paid by international licensees. As of November 1, 2010, our most significant exposure related to the Mexican Peso. Foreign exchange rate fluctuations have not historically had a significant impact on our results of operations.

Commodity Price Risk:

We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our accompanying Condensed Consolidated Balance Sheets. Typically, we use these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, we believe we will be able to address material commodity cost increases by adjusting our menu pricing or changing our product delivery strategy. However, increases in commodity prices, without adjustments to our menu prices, could increase restaurant operating costs as a percentage of company-operated restaurants revenue.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

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

In connection with the preparation of this Quarterly Report on Form 10-Q, as of November 1, 2010, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter ended November 1, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Between March 1, 2010 and March 26, 2010, seven putative stockholder class actions were filed in the Delaware Court of Chancery (the “Delaware Court”) and the Superior Court of California for the County of Santa Barbara against the Company, each of its directors, Thomas H. Lee Partners, LP (“THL”) and its affiliates alleging the directors breached their fiduciary duties regarding a prior merger agreement (the “Prior Merger Agreement”) with an affiliate of THL and that THL and its affiliates aided and abetted those breaches. On March 26, 2010, the Superior Court of California for the County of Santa Barbara consolidated the four cases filed in that court as In re CKE Restaurants, Inc. Shareholder Litigation, Lead Case No. 1342245 (the “California Action”). On March 29, 2010, the Delaware Court consolidated the three cases filed in that court as In re CKE Restaurants, Inc. Shareholder Litigation, Consolidated C.A. No. 5290-VCP (the “Delaware Action”).

On May 12, 2010, the plaintiffs in the Delaware Action filed an amended consolidated complaint against the Company, its directors, Apollo Management and its affiliates, Parent and Merger Sub, that dropped the challenge to the Prior Merger Agreement and instead alleged the directors breached their fiduciary duties in connection with the Merger, including that the directors had breached their duty of disclosure in the preliminary proxy statement, and that Apollo and its affiliates aided and abetted those breaches.

On November 18, 2010, the Delaware Court held a hearing to consider the fairness, reasonableness, and adequacy of the settlement proposed in the Stipulation of Settlement. The Court issued an Order and Final Judgment finally approving the settlement, and resolving and releasing all claims in all actions that were or could have been brought by shareholders challenging any aspect of the Merger, the Merger Agreement, and any disclosure made in connection therewith (but excluding claims for appraisal under Section 262 of the Delaware General Corporation Law), pursuant to terms that were disclosed in a Notice of Pendency of Class Action, Proposed Settlement of Class Action, Settlement Hearing and Right to Appear mailed to stockholders prior to final approval of the settlement. While the Delaware Court’s Order and Final Judgment is final, it is subject to appeal for the next 30 days. In connection with the settlement, plaintiffs’ counsel filed a motion in the Delaware Court for an award of attorneys’ fees and expenses, which the Delaware Court granted. The attorneys’ fees and expenses the Delaware Court awarded have been paid by the Company’s insurer.

In addition, on November 30, 2010 the plaintiffs in the California Action filed a voluntary request for dismissal of their claims with prejudice, which is pending entry by the Court. The settlements of the Delaware Action and the California Action are not expected to materially impact our consolidated financial position or results of operations.

Item 1A. Risk Factors

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

Risk Factors Relating to our Company

Our success depends on our ability to compete with others.

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

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

The QSR industry is affected by changes in economic conditions, consumer preferences and spending patterns, demographic trends, consumer perceptions of food safety, weather, traffic patterns, the type, number and location of competing restaurants, and other factors. Multi-location foodservice businesses such as ours can also be materially and adversely affected by publicity resulting from poor food quality, food tampering, illness, injury or other health concerns or operating issues stemming from one or a limited number of restaurants. We can be similarly affected by consumer concerns with respect to the nutritional value of quick-service food.

Our ability to anticipate and respond to trends and changes in consumer preferences may affect our future operating results. Additionally, current economic conditions may cause changes in consumer preferences, and if such economic conditions persist for an extended period of time, this may result in consumers making long-lasting changes to their spending behaviors. A number of our major competitors have been increasing their “value item” offerings and implementing certain pricing promotions for various other menu items. If consumer preference continues to shift towards these “value items,” it may become necessary for us to implement temporary promotional pricing offerings. If we implement such promotional offerings our operating margins may be adversely impacted. Any promotional offerings or temporary price cuts implemented by us are not expected to represent a permanent change in our business strategy, and would only be temporary in duration.

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

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

Our profitability is dependent on, among other things, our continuing ability to offer premium-quality food at moderate prices. Our Carl’s Jr. and Hardee’s restaurants depend on the distribution services of MBM, a third party national distributor of food and other products. MBM is responsible for delivering food, packaging and other products from our suppliers to our restaurants on a frequent and routine basis. MBM also provides distribution services to nearly all of our Carl’s Jr.’s and Hardee’s franchisees. Pursuant to the terms of our distribution agreement, we are obligated to purchase substantially all of our specified product requirements from MBM through June 30, 2017.

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

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

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

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

Our strategic plan, and a component of our business strategy, includes the construction of new restaurants and the remodeling of existing restaurants. We face competition from other restaurant operators, retail chains, companies and developers for desirable site locations, which may adversely affect the cost, implementation and timing of our expansion plans. If we experience delays in the construction or remodel processes, we may be unable to complete such activities at the planned cost, which would adversely affect our future results of operations. Additionally, we cannot guarantee that such remodels will increase the revenues generated by these restaurants or that any such increases will be sustainable. Likewise, we cannot be sure that the sites we select for new restaurants will result in restaurants whose sales results meet our expectations.

We lease a substantial number of our restaurant properties. The terms of our leases and subleases vary in length, with primary terms (i.e., before consideration of option periods) expiring on various dates through fiscal 2036. We do not expect the expiration of these leases to have a material impact on our operations in any particular year, as the expiration dates are staggered over a number of years and many of the leases contain renewal options. As our leases and available option periods expire, we will need to negotiate new leases with our landlords for those leased restaurants that we intend to continue operating. If we are unable to negotiate acceptable lease terms for them, we may decide to close the restaurants, or the new lease terms may negatively impact our consolidated results of operations.

Our business may be adversely impacted by economic conditions and the geographic concentration of our restaurants.

Our financial condition and results of operations are dependent upon consumer discretionary spending, which is influenced by general economic conditions. Worldwide economic conditions and consumer spending have deteriorated and may not fully recover for some time. Current economic conditions have resulted in higher levels of unemployment, reductions in disposable income for many consumers and lower levels of consumer confidence. If these economic conditions persist for an extended period of time, consumers may make long-lasting changes to their spending habits and behavior.

In addition, unfavorable macroeconomic trends or developments concerning factors such as increased food, fuel, utilities, labor and benefits costs may also adversely affect our financial condition and results of operations. Current economic conditions may prevent us from increasing prices to match increased costs without further harming our sales. If we were unable to raise prices in order to recover increased costs for food, packaging, fuel, utilities, wages, clothing and equipment, our profitability would be negatively affected.

We have a geographic concentration of restaurants in certain states and regions, which can cause economic conditions in particular areas to have a disproportionate impact on our overall results of operations. As of November 1, 2010, we and our franchisees operated restaurants in 42 states and 18 foreign countries. By number of restaurants, our domestic operations are most concentrated in California, North Carolina and Virginia, and our international licensees are most concentrated in Mexico and the Middle East. Adverse economic conditions in states or regions that contain a high concentration of Carl’s Jr. and Hardee’s restaurants could have a material adverse impact on our results of operations in the future.

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

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

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

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

Our financial results are affected by the financial results of our franchisees and international licensees.

We receive royalties from our franchisees. As a result, our financial results are impacted by the operational and financial success of our franchisees, including their implementation of our strategic plans, and their ability to secure adequate financing. If sales trends or economic conditions worsen for our franchisees, and they are unable to secure adequate sources of financing, their financial health may worsen, our collection rates may decline and we may be required to assume the responsibility for additional lease payments on franchised restaurants, offer extended payment terms or make other concessions. Additionally, refusal on the part of franchisees to renew their franchise agreements may result in decreased royalties. Entering into restructured franchise agreements may result in reduced franchise royalty rates in the future. Furthermore, if, our franchisees are not able to obtain the financing necessary to complete planned remodel and construction projects, they may be forced to postpone or cancel such projects.

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

Our business depends on the willingness of vendors and service providers to supply us with goods and services pursuant to customary credit arrangements which may not be available to us in the future caused by changes in our capital structure as a result of the Merger or other factors outside our control.

Like many companies in the foodservice industry, we purchase goods and services from trade creditors pursuant to customary credit arrangements. Changes in our capital structure or other factors outside our control may cause trade creditors to change our customary credit arrangements. If we are unable to maintain or obtain trade credit from vendors and service providers on terms favorable to us, or at all, or if vendors and service providers are unable to obtain trade credit or factor their receivables, then we may not be able to execute our business plan, develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse affect on our business. In addition, the tightening of trade credit could limit our available liquidity.

Our international operations are subject to various risks and uncertainties and there is no assurance that our international operations will be successful.

An important component of our growth strategy involves increasing our net restaurant count in international markets. The execution of this growth strategy depends upon the opening of new restaurants by our existing licensees and by new licensees. We and our current or future licensees face many risks and uncertainties in opening new international restaurants, including international economic and political conditions, differing cultures and consumer preferences, diverse government regulations and tax systems, securing acceptable suppliers, difficulty in collecting our royalties and longer payment cycles, uncertain or differing interpretations of rights and obligations in connection with international license agreements, the selection and availability of suitable restaurant locations, currency regulation and fluctuation, and other external factors.

In addition, our current licensees may be unwilling or unable to increase their investment in our system by opening new restaurants. Moreover, our international growth also depends upon the availability of prospective licensees or joint venture partners with the experience and financial resources to be effective operators of our restaurants. There can be no assurance that we will be able to identify future licensees who meet our criteria, or that, once identified, they will successfully implement their expansion plans.

We face commodity price and availability risks.

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

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

Reports, whether true or not, of food-borne illnesses, such as those caused by E. coli, Listeria or Salmonella, in addition to Avian Influenza (commonly known as bird flu) and Bovine Spongiform Encephalopathy (commonly known as BSE or mad cow disease), and injuries caused by food tampering have, in the past, severely impacted the production and supply of certain food products, including poultry and beef. A reduction in the supply of such food products could have a material effect on the price at which we could obtain them. Failure to procure food products, such as poultry or beef, at reasonable terms and prices or any reduction in consumption of such food products by consumers could have a material adverse effect on our consolidated financial condition and results of operations.

In addition, reports, whether or not true, of food-borne illnesses or the use of hormones, antibiotics or pesticides in the production of certain food products may cause consumers to reduce or avoid consumption of such food products. Our brands’ reputations are important assets to us, and any such reports could damage our brands’ reputations and immediately and severely hurt sales and profits. If customers become ill from food-borne illnesses or food tampering, we could be forced to temporarily close some, or all, of our restaurants. In addition, instances of food-borne illnesses or food tampering occurring at the restaurants of competitors, could, by resulting in negative publicity about the QSR industry, adversely affect our sales on a local, regional, or national basis.

Our operations are seasonal and heavily influenced by weather conditions.

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

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

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

Higher health care costs and labor costs could adversely affect our business.

We will be impacted by the recent passage of the U.S. Patient Protection and Affordable Care Act. Under this Act, we may be required to amend our health care plans to, among other things, provide affordable coverage, as defined in the Act, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the Act, cover adult children of our employees to age 26, delete lifetime limits, and delete pre-existing condition limitations. Many of these requirements will be phased in over a period of time. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care costs could have a material adverse effect on our business, financial condition and results of operations. In addition, changes in the federal or state minimum wage or living wage requirements or changes in other workplace regulations could adversely affect our ability to meet our financial targets.

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

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

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

We, and our franchisees, are subject to various federal, state and local laws. The successful development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations. Restaurant operations are also subject to licensing and regulation by state and local departments relating to health, food preparation, sanitation and safety standards, federal and state labor and immigration law, (including applicable minimum wage requirements, overtime pay practices, working and safety conditions and citizenship requirements), federal and state laws prohibiting discrimination and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990 (“ADA”). If we fail to comply with any of these laws, we may be subject to governmental action or litigation, and our reputation could be harmed. Injury to our reputation would, in turn, likely reduce revenues and profits.

In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry, particularly among restaurants. As a result, we may become subject to regulatory initiatives in the area of nutrition disclosure or advertising, such as requirements to provide information about the nutritional content of our food products, which could increase expenses. The operation of our franchise system is also subject to franchise laws and regulations enacted by a number of states and rules promulgated by the U.S. Federal Trade Commission. Any future legislation regulating franchise relationships may negatively affect our operations, particularly our relationship with our franchisees. Failure to comply with new or existing franchise laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales. Changes in applicable accounting rules imposed by governmental regulators or private governing bodies could also affect our reported results of operations.

We are subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions, along with the ADA, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated, by federal, state and local governmental authorities that govern these and other employment matters. We have experienced and expect further increases in payroll expenses as a result of federal and state mandated increases in the minimum wage. In addition, our vendors may be affected by higher minimum wage standards, which may increase the price of goods and services they supply to us. Additionally, we offer access to healthcare benefits to certain of our employees. The imposition of any requirement that we provide health insurance to all employees on terms that differ significantly from our existing programs could have a material adverse impact on our results of operations and financial condition.

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

We may not be able to adequately protect our intellectual property, which could decrease the value of our brands and products.

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

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

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

In addition, the restaurant industry has been subject to claims that relate to the nutritional content of food products, as well as claims that the menus and practices of restaurant chains have led to the obesity of some customers. We may also be subject to this type of claim in the future and, even if we are not specifically named, publicity about these matters may harm our reputation and have adverse impacts on our financial condition and results of operations.

A significant failure, interruption or security breach of our computer systems or information technology may adversely affect our business.

We are significantly dependent upon our computer systems and information technology to properly conduct our business. A significant failure or interruption of service, or a breach in security of our computer systems could cause reduced efficiency in operations, loss of data and business interruptions, and significant capital investment could be required to rectify the problems. In addition, any security breach involving our point of sale or other systems could result in loss of consumer confidence and potential costs associated with consumer fraud.

Catastrophic events may disrupt our business.

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

We are controlled by affiliates of Apollo, and its interests as an equity holder may conflict with the interests of our creditors.

We are controlled by affiliates of Apollo Global Management, LLC and its subsidiaries, including Apollo Management (collectively, “Apollo”), and Apollo has the ability to elect all of the members of our board of directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence of debt by us, amendments to our certificate of incorporation and bylaws and the entering into of significant transactions. The interests of Apollo may not in all cases be aligned with the interests of our creditors. For example, if we encounter financial difficulties or are unable to pay our indebtedness as it matures, the interests of Apollo as an equity holder may conflict with the interests of our creditors. In addition, Apollo may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investments, even though such transactions might involve risks to our creditors. Furthermore, Apollo may, in the future, own businesses that directly or indirectly compete with us. Apollo also may pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Apollo continues to own a significant amount of our combined voting power, even if such amount is less than 50%, it will continue to be able to strongly influence or effectively control our decisions.

Risks Relating to Our Indebtedness

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the Notes and Credit Facility. Our high degree of leverage could have important consequences for our creditors, including:

·	increasing our vulnerability to adverse economic, industry or competitive developments;

·	requiring a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

·	exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our Credit Facility, will be at variable rates of interest;

making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the Notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the indenture governing the Notes and the agreements governing such other indebtedness;

·	restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

·	limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and

limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.

Despite our high indebtedness level, we and our subsidiaries are still able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the indenture governing the Notes and the Credit Facility contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we now face would increase. In addition, the indenture governing the Notes does not prevent us from incurring obligations that do not constitute indebtedness under the indenture.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our Credit Facility and the indenture governing the Notes contain various covenants that limit our ability to engage in specified types of transactions. For example, the indenture contains covenants that will, among other things, restrict, subject to certain exceptions, our ability and the ability of our restricted subsidiaries to:

·	incur or guarantee additional debt or issue certain preferred equity;

·	pay dividends on or make distributions to holders of our common stock or make other restricted payments;

·	sell certain assets;

·	create or incur liens on certain assets to secure debt;

·	make certain investments;

·	designate subsidiaries as unrestricted subsidiaries;

·	consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; or

·	enter into certain transactions with affiliates.

If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal and interest on our indebtedness, or if we otherwise fail to comply with any of the covenants in the indenture or the Credit Facility, we could be in default under one or more of these agreements. In the event of such a default:

·	the lenders under our Credit Facility could elect to terminate their commitments thereunder and cease making further loans to us;

·	the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be immediately due and payable, together with accrued and unpaid interest, which would prevent us from using our cash flows for other purposes;

·	if we are unable to pay amounts outstanding and declared immediately due and payable, the holders of such indebtedness could proceed against the collateral granted to them to secure the indebtedness; and

·	we could ultimately be forced into bankruptcy or liquidation.

We and our subsidiaries may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. As a result, we may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness. In addition, because our subsidiaries conduct a significant portion of our operations, repayment of our indebtedness is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and their ability to make such cash available to us. While the indenture governing the Notes limits the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the Notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments and the indenture governing the Notes may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

Item 6. Exhibits

Exhibit No.		Description

	31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

	31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

	32.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

	32.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

SIGNATURES

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

		CKE RESTAURANTS, INC.

Date: December 8, 2010		/s/ Reese Stewart
		Reese Stewart
		Senior Vice President Chief Accounting Officer (Principal Accounting Officer)

Exhibit Index

Exhibit No.		Description

	31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

	31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

	32.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

	32.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

Attached files

CKE RESTAURANTS INC Reports

Also read