e10vq

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 6, 2006


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 of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

(Check one): Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

As of December 5, 2006, 69,636,675 shares of the registrant’s common stock were outstanding.

PART 1. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

(Unaudited)


	November 6, 2006			January 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	25,565		$	21,343
Accounts receivable, net of allowance for doubtful accounts of $969 as of November 6, 2006 and $2,833 as of January 31, 2006		35,825			36,153
Related party trade receivables		4,867			4,987
Inventories, net		20,926			20,953
Prepaid expenses		13,121			13,101
Assets held for sale		1,882			—
Advertising fund assets, restricted		18,185			17,226
Deferred income tax assets, net		28,998			31,413
Other current assets		3,692			2,251

Total current assets		153,061			147,427
Notes receivable, net of allowance for doubtful accounts of $2,116 as of November 6, 2006 and $6,257 as of January 31, 2006		2,622			1,968
Property and equipment, net of accumulated depreciation and amortization of $453,961 as of November 6, 2006 and $431,002 as of January 31, 2006		480,036			460,083
Property under capital leases, net of accumulated amortization of $44,184 as of November 6, 2006 and $43,183 as of January 31, 2006		26,158			29,364
Deferred income tax assets, net		90,231			117,770
Goodwill		22,649			22,649
Other assets, net		19,724			25,519

Total assets	$	794,481		$	804,780


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of bank indebtedness and other long-term debt	$	2,015		$	9,247
Current portion of capital lease obligations		5,267			4,960
Accounts payable		58,124			53,883
Advertising fund liabilities		18,185			17,226
Other current liabilities		97,773			89,556

Total current liabilities		181,364			174,872
Bank indebtedness and other long-term debt, less current portion		70,133			98,731
Convertible subordinated notes due 2023		15,192			105,000
Capital lease obligations, less current portion		42,320			46,724
Other long-term liabilities		58,110			57,072

Total liabilities		367,119			482,399

Commitments and contingencies (Notes 6 and 14)
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000 shares authorized; none issued or outstanding		—			—
Series A Junior Participating Preferred stock, $.01 par value; 1,500 shares authorized; none issued or outstanding		—			—
Common stock, $.01 par value; 100,000 shares authorized; 69,819 shares issued and 69,663 shares outstanding as of November 6, 2006; 59,803 shares issued and outstanding as of January 31, 2006		698			598
Common stock held in treasury, at cost; 156 shares as of November 6, 2006 and none as of January 31, 2006		(3,060	)		—
Additional paid-in capital		546,851			472,834
Unearned compensation on restricted stock		—			(1,816	)
Accumulated deficit		(117,127	)		(149,235	)

Total stockholders’ equity		427,362			322,381

Total liabilities and stockholders’ equity	$	794,481		$	804,780

See Accompanying Notes to Condensed Consolidated Financial Statements

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)


	Twelve Weeks Ended						Forty Weeks Ended
	November 6, 2006			November 7, 2005			November 6, 2006			November 7, 2005
Revenue:
Company-operated restaurants	$	290,943		$	274,822		$	982,190		$	932,953
Franchised and licensed restaurants and other		73,975			69,291			247,251			236,852

Total revenue		364,918			344,113			1,229,441			1,169,805

Operating costs and expenses:
Restaurant operating costs:
Food and packaging		84,208			80,301			281,595			273,116
Payroll and employee benefits		84,494			81,952			285,831			277,700
Occupancy and other		64,759			62,068			211,989			210,692

Total restaurant operating costs		233,461			224,321			779,415			761,508
Franchised and licensed restaurants and other		55,191			53,521			185,221			182,648
Advertising		16,128			16,334			56,083			56,416
General and administrative		35,893			28,220			113,999			108,105
Facility action charges, net		(10	)		733			3,526			3,787

Total operating costs and expenses		340,663			323,129			1,138,244			1,112,464

Operating income		24,255			20,984			91,197			57,341
Interest expense		(3,804	)		(5,334	)		(15,916	)		(17,930	)
Conversion inducement expense		(2,807	)		—			(6,406	)		—
Other income, net		1,874			743			3,423			2,524

Income before income taxes		19,518			16,393			72,298			41,935
Income tax expense		10,061			570			32,457			1,665

Net income	$	9,457		$	15,823		$	39,841		$	40,270

Basic income per common share	$	0.14		$	0.27		$	0.64		$	0.68

Diluted income per common share	$	0.13		$	0.23		$	0.57		$	0.60

Dividends per common share	$	0.04		$	0.04		$	0.12		$	0.12

Weighted-average common shares outstanding:
Basic		68,001			59,440			62,233			59,154
Dilutive effect of stock options, warrants, convertible notes and restricted stock		4,004			13,514			10,481			14,266

Diluted		72,005			72,954			72,714			73,420

See Accompanying Notes to Condensed Consolidated Financial Statements

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except per share amounts)

(Unaudited)


	Forty Weeks Ended November 6, 2006
	Common Stock															Treasury Stock
										Unearned
							Additional			Compensation												Total
							Paid-In			On Restricted			Accumulated									Stockholders’
	Shares			Amount			Capital			Stock			Deficit			Shares			Amount			Equity
Balance at January 31, 2006		59,803		$	598		$	472,834		$	(1,816	)	$	(149,235	)		—		$	—		$	322,381
Cash dividends declared ($0.12 per share)		—			—			—			—			(7,733	)		—			—			(7,733	)
Issuance of restricted stock awards, net of forfeitures		634			6			(6	)		—			—			—			—			—
Reclassification of unearned compensation pursuant to SFAS 123R adoption		—			—			(1,816	)		1,816			—			—			—			—
Exercise of stock options		1,069			11			9,550			—			—			—			—			9,561
Conversion of 2023 Convertible Notes into common stock		10,222			102			88,350			—			—			—			—			88,452
Tax benefit from exercise of stock options		—			—			3,924			—			—			—			—			3,924
Share-based compensation expense		—			—			4,934			—			—			—			—			4,934
Repurchase of common stock		—			—			—			—			—			(2,065	)		(33,998	)		(33,998	)
Retirement of treasury stock		(1,909	)		(19	)		(30,919	)		—			—			1,909			30,938			—
Net income		—			—			—			—			39,841			—			—			39,841

Balance at November 6, 2006		69,819		$	698		$	546,851		$	—		$	(117,127	)		(156	)	$	(3,060	)	$	427,362

See Accompanying Notes to Condensed Consolidated Financial Statements

CKE RESTAURANTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Forty Weeks Ended
	November 6, 2006			November 7, 2005
Cash flows from operating activities:
Net income	$	39,841		$	40,270
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		47,245			49,962
Amortization of loan fees		2,349			2,705
Share-based compensation expense		4,934			57
Recovery of losses on accounts and notes receivable		(351	)		(494	)
Loss on sales of property and equipment, capital leases and extinguishment of debt		1,942			2,231
Facility action charges, net		3,526			3,787
Deferred income taxes		29,954			141
Other non-cash charges		56			38
Net changes in operating assets and liabilities:
Estimated liability for closing restaurants and estimated liability for self-insurance		(3,875	)		(5,218	)
Refundable income taxes		(8	)		423
Receivables, inventories, prepaid expenses and other current and non-current assets		(2,466	)		(1,008	)
Accounts payable and other current and long-term liabilities		11,723			6,159

Net cash provided by operating activities		134,870			99,053

Cash flows from investing activities:
Purchases of property and equipment		(85,020	)		(54,263	)
Proceeds from sales of property and equipment		19,312			5,953
Collections on notes receivable		2,725			588
Other investing activities		51			67

Net cash used in investing activities		(62,932	)		(47,655	)

Cash flows from financing activities:
Net change in bank overdraft		(774	)		(4,527	)
Borrowings under revolving credit facility		69,500			109,500
Repayments of borrowings under revolving credit facility		(76,500	)		(124,000	)
Repayment of credit facility term loan		(28,748	)		(26,650	)
Repayment of other long-term debt		(121	)		(148	)
Borrowing by consolidated variable interest entity		39			51
Repayments of capital lease obligations		(3,898	)		(4,135	)
Payment of deferred loan fees		—			(101	)
Repurchase of common stock		(30,938	)		(1,999	)
Proceeds from exercises of stock options and warrants		9,561			7,106
Tax benefit from exercise of stock options		1,527			—
Dividends paid on common stock		(7,364	)		(4,740	)

Net cash used in financing activities		(67,716	)		(49,643	)

Net increase in cash and cash equivalents		4,222			1,755
Cash and cash equivalents at beginning of period		21,343			18,432

Cash and cash equivalents at end of period	$	25,565		$	20,187

See Accompanying Notes to Condensed Consolidated Financial Statements

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

Note 1 — Basis of Presentation and 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 La Salsa Fresh Mexican Grill^® (“La Salsa”) 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. La Salsa restaurants are primarily located in California. As of November 6, 2006, our system-wide restaurant portfolio consisted of:


	Carl’s Jr.		Hardee’s		La Salsa		Other		Total
Company-operated		394		705		54		1		1,154
Franchised and licensed		685		1,218		41		15		1,959

Total		1,079		1,923		95		16		3,113

Our accompanying unaudited Condensed Consolidated Financial Statements include the accounts of CKE and our wholly-owned subsidiaries 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. 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, 2006. 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 periods are not necessarily indicative of results for the full year or for any future period.

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

Prior year amounts in the accompanying Condensed Consolidated Financial Statements have been reclassified to conform to current year presentation.

Variable Interest Entities

As required by Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) 46R, Consolidation of Variable Interest Entities, we consolidate one franchise entity that operates five Hardee’s restaurants since we have concluded that we are the primary beneficiary of this variable interest entity (“VIE”). The assets and liabilities of, and minority interest in, this VIE have been included in our accompanying Condensed Consolidated Balance Sheets and are not significant to our consolidated financial position. The operating results of this VIE have been included in our accompanying Condensed Consolidated Statements of Income for the twelve and forty weeks ended November 6, 2006 and November 7, 2005, and are not significant to our consolidated results of operations.

We also consolidate a national and approximately 82 local co-operative advertising funds (the “Hardee’s Funds”). We have included $18,185 of advertising fund assets, restricted, and advertising fund liabilities in our accompanying Condensed Consolidated Balance Sheet as of November 6, 2006, and $17,226 of advertising fund assets, restricted, and advertising fund liabilities in our accompanying Condensed Consolidated Balance Sheet as of January 31, 2006. Advertising fund assets, restricted, are comprised primarily of cash and receivables. Advertising fund liabilities are comprised primarily of accounts payable and deferred obligations. The Hardee’s Funds have been included in our accompanying Condensed Consolidated Statements of Income for the twelve and forty weeks ended November 6, 2006 and November 7, 2005, on a net basis, whereby, in accordance with Statement of Financial Accounting Standards (“SFAS”) 45, Accounting for Franchise Fee Revenue, we do not reflect franchisee contributions as revenue, but rather as an offset to reported advertising expenses.

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

Although the VIEs referred to above have been included in our accompanying Condensed Consolidated Financial Statements, we have no rights to the assets, nor do we have any obligation with respect to the liabilities, of these VIEs. None of our assets serve as collateral for the creditors of these VIEs.

Note 2 — Accounting Pronouncements Not Yet Adopted

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140. SFAS 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders’ election. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006, which for us is the beginning of fiscal 2008. We are currently evaluating the impact of SFAS 155 on our consolidated financial position and results of operations.

In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140. SFAS 156 provides guidance on the accounting for servicing assets and liabilities when an entity undertakes an obligation to service a financial asset by entering into a servicing contract. This statement is effective for all transactions in fiscal years beginning after September 15, 2006, which for us is the beginning of fiscal 2008. We are currently evaluating the impact of SFAS 156 on our consolidated financial position and results of operations.

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, Accounting for Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in financial statements. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires the recognition, in the financial statements, of the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006, which for us is the beginning of fiscal 2008. We are currently evaluating the impact of FIN 48 on our consolidated financial position and results of operations.

In June 2006, the FASB ratified Emerging Issues Task Force (“EITF”) consensus 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation). This EITF addresses the presentation of taxes in the income statement. Gross or net presentation may be elected for each different type of tax, but similar taxes should be presented consistently. Taxes within the scope of this EITF would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006, which for us is the first quarter of fiscal 2008. We are currently evaluating the impact of EITF 06-3 on our consolidated financial position and results of operations.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement for the purpose of the materiality assessment. SAB 108 is effective for fiscal years ending after November 15, 2006, which for us is the end of fiscal 2007. We are currently evaluating the impact SAB 108 may have on our consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurement. SFAS 157 also creates consistency and comparability in fair value measurements among the many accounting pronouncements that require fair value measurements but does not require any new fair value measurements. SFAS 157 is effective for fiscal

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

years (including interim periods) beginning after November 15, 2007, which for us is the first quarter of fiscal 2009. We are currently evaluating the impact of SFAS 157 on our consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS 158 requires the balance sheet recognition of the funded status of defined benefit pension and other postretirement plans, along with a corresponding after-tax adjustment to stockholders’ equity. The recognition of funded status provision of SFAS 158 applies prospectively and is effective for fiscal years ending after December 15, 2006, which for us is fiscal 2007. It also requires measurement of plan assets and benefit obligations for fiscal year ends ending after December 15, 2008, which for us is fiscal 2009. We are currently evaluating the impact of SFAS 158 on our consolidated financial position and results of operations.

Note 3 — Adoption of New Accounting Pronouncements

In November 2004, the FASB issued SFAS 151, Inventory Costs—an amendment of ARB No. 43, Chapter 4. SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Our adoption of SFAS 151 at the beginning of fiscal 2007 did not have a material impact on our consolidated financial position or results of operations.

In December 2004, the FASB issued SFAS 123 (Revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R requires that companies recognize compensation expense equal to the fair value of stock options or other share based payments. We adopted SFAS 123R at the beginning of fiscal 2007 using the modified prospective method. See Note 4 for a description of the impact of this adoption on our consolidated financial position and results of operations.

In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3. Previously, GAAP required that the cumulative effect of most changes in accounting principles be recognized in the period of the change. SFAS 154 requires companies to recognize changes in accounting principle, including changes required by a new accounting pronouncement when the pronouncement does not include specific transition provisions, retrospectively to prior periods’ financial statements. Our adoption of SFAS 154 at the beginning of fiscal 2007 did not have a material impact on our consolidated financial position or results of operations. We will apply the provisions of SFAS 154 in future periods, when applicable.

On October 6, 2005, the FASB issued FASB Staff Position (“FSP”) FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period, which requires that rental costs associated with ground or building operating leases that are incurred during a construction period must be recognized as rental expense and allocated over the lease term beginning on the date that the lessee is given control of the property. Our adoption of this FSP at the beginning of fiscal 2007 did not have a material impact on our consolidated financial position or results of operations.

Note 4 — Share-Based Compensation

As of the beginning of fiscal 2007, we adopted SFAS 123R using the modified prospective approach. SFAS 123R replaces SFAS 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (“APB 25”). SFAS 123R requires the cost of all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values measured at the grant date, or the date of later modification, over the requisite service period. In addition, under the modified prospective approach, SFAS 123R requires unrecognized cost (based on the amounts previously disclosed in pro forma footnote disclosures) related to awards vesting after the date of initial adoption to be recognized in the financial statements over the remaining requisite service period. Therefore, the amount of compensation costs to be recognized over the requisite service period on a prospective basis after January 31, 2006 will include: (i) previously unrecognized compensation cost for all share-based payments granted prior to, but not yet vested as of, January 31, 2006 based on their fair values measured at the grant date, (ii) compensation

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

cost of all share-based payments granted subsequent to January 31, 2006 based on their respective grant date fair value, and (iii) the incremental fair value of awards modified subsequent to January 31, 2006 measured as of the date of such modification.

When recording compensation cost for equity awards, SFAS 123R requires companies to estimate at the date of grant the number of equity awards granted that are expected to be forfeited and to subsequently adjust the estimated forfeitures to reflect actual forfeitures.

For tax purposes, we expect to be entitled to a tax deduction, subject to certain limitations, based on the fair value of certain equity awards when the restrictions lapse or stock options are exercised. SFAS 123R requires that compensation cost be recognized in the financial statements based on the fair value measured at the grant date, or the date of later modification, over the requisite service period. The cumulative compensation cost recognized for certain equity awards pursuant to SFAS 123R and amounts that ultimately will be deductible for tax purposes are temporary differences as prescribed by SFAS 109. The tax effect of compensation deductions for tax purposes in excess of compensation cost recognized in the financial statements, if any, will be recorded as an increase to additional paid-in capital when realized. A deferred tax asset recorded for compensation cost recognized in the financial statements that exceeds the amount that is ultimately realized on the tax return, if any, will be charged to income tax expense when the restrictions lapse or stock options are exercised or expire unless we have an available additional paid-in capital pool (“APIC Pool”), as defined pursuant to SFAS 123R. We are required to assess whether there is an available APIC Pool when the restrictions lapse or stock options are exercised or expire.

SFAS 123R also amends SFAS 95, Statement of Cash Flows, to require companies to change the classification in the statement of cash flows of any tax benefits realized upon the exercise of stock options or issuance of nonvested share unit awards in excess of that which is associated with the expense recognized for financial reporting purposes. These amounts are required to be reported as a financing cash inflow rather than as a reduction of income taxes paid in operating cash flows.

The incremental pre-tax share-based compensation expense recognized pursuant to the adoption of SFAS 123R for the twelve and forty weeks ended November 6, 2006 was $1,165 and $3,747, respectively. This incremental pre-tax share-based compensation expense had the following effects on the accompanying Condensed Consolidated Statements of Income for the periods ended November 6, 2006:


	Twelve Weeks		Forty Weeks
Decrease in income before income taxes	$	1,165	$	3,747
Decrease in net income		702		2,256
Decrease in basic net income per common share		0.01		0.04
Decrease in diluted net income per common share		0.01		0.03

Total share-based compensation expense recognized under SFAS 123R, including the incremental pre-tax share-based compensation expense above, was $2,009 and $4,934, with associated tax benefits of $370 and $1,534, respectively, and was included in general and administrative expense in our accompanying Condensed Consolidated Statements of Income for the twelve and forty weeks ended November 6, 2006.

Prior to January 31, 2006, we accounted for share-based compensation plans in accordance with the provisions of APB 25, as permitted by SFAS 123, and accordingly, did not recognize compensation expense for stock options with an exercise price equal to or greater than the market price of the underlying stock at the date of grant. Total share-based compensation expense was $47 and $57 for the twelve and forty weeks ended November 7, 2005, respectively.

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

Had the fair value-based method prescribed by SFAS 123 been applied, additional compensation expense would have been recognized for the periods ended November 7, 2005, and the effect on net income and net income per share would have been as follows:


	Twelve Weeks			Forty Weeks
Net income, as reported	$	15,823		$	40,270
Add: Share-based employee compensation expense included in reported net income, net of related tax effects		47			57
Deduct: Total share-based employee compensation expense determined under fair value based method, net of related tax effects		(913	)		(3,363	)

Net income — pro forma	$	14,957		$	36,964

Net income per common share:
Basic — as reported	$	0.27		$	0.68
Basic — pro forma		0.25			0.62
Diluted — as reported		0.23			0.60
Diluted — pro forma		0.22			0.55

Employee Stock Purchase Plan

In fiscal 1996, our stockholders approved an Employee Stock Purchase Plan (“ESPP”). Under the terms of the ESPP and subsequent amendments, eligible employees may voluntarily purchase, at current market prices, up to a total of 3,907,500 shares of our common stock through payroll deductions. Pursuant to the ESPP, employees may contribute an amount between 3% and 15% of their eligible compensation. The ESPP is considered to be a noncompensatory plan under SFAS 123R.

Stock Incentive Plans

The 2005 Omnibus Incentive Compensation Plan (“2005 Plan”) was approved by our stockholders in June 2005 and is an “omnibus” stock plan consisting of a variety of equity vehicles to provide flexibility in implementing equity awards, including incentive stock options, non-qualified stock options, restricted stock awards, unrestricted stock grants, stock appreciation rights and stock units. Participants in the 2005 Plan may be granted any one of the equity awards or any combination thereof, as determined by the Compensation Committee of our Board of Directors. A total of 2,500,000 shares were initially available for grant under the 2005 Plan. Options generally have a term of ten years from the date of grant and vest as prescribed by the Compensation Committee. Options are generally granted at a price equal to or greater than the fair market value of the underlying common stock on the date of grant. Restricted stock awards are generally awarded with an exercise price of $0. The 2005 Plan will terminate on March 22, 2015, unless the Board of Directors, at its discretion, terminates the Plan at an earlier date. For restricted stock awards prior to our adoption of SFAS 123R, the difference between the market price of the underlying common stock on the date of grant and the exercise price of restricted stock awards was initially recorded as unearned compensation on restricted stock within the stockholders’ equity section of our accompanying Condensed Consolidated Balance Sheet and was being subsequently amortized over the vesting period. The balance of unearned compensation related to the unearned portion of these awards was eliminated against additional paid-in capital upon our adoption of SFAS 123R as of the beginning of fiscal 2007. As of November 6, 2006, 1,172,500 shares are available for future grants of options or other awards under the 2005 Plan.

Our 2001 Stock Incentive Plan (“2001 Plan”) was approved by our Board of Directors in September 2001. The 2001 Plan has been established as a “broad based plan” as defined by the New York Stock Exchange, whereby at least a majority of the options awarded under the 2001 Plan must be awarded to employees of CKE who are not executive officers or directors within the first three years of the 2001 Plan’s existence. Awards granted to eligible employees under the 2001 Plan are not restricted as to any specified form or structure, with such form, vesting and pricing provisions determined by the Compensation Committee of our Board of Directors. Options generally have a term of ten years from the date of grant. Options are generally granted at a price equal to or greater than the fair market value of the underlying common stock on the date of grant. As of November 6, 2006, 89,201 shares are available for future grants of options or other awards under the 2001 Plan.

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

Our 1999 Stock Incentive Plan (“1999 Plan”) was approved by stockholders in June 1999 and amended and again approved in June 2000. Awards granted to eligible employees under the 1999 Plan are not restricted as to any specified form or structure, with such form, vesting and pricing provisions determined by the Compensation Committee of our Board of Directors. Options generally have a term of ten years from the date of grant, except for incentive stock options granted to 10% or greater stockholders of CKE, which have a term of five years from the date of grant. Options are generally at a price equal to or greater than the fair market value of the underlying common stock on the date of grant, except that incentive stock options granted to 10% or greater stockholders of CKE may not be granted at less than 110% of the fair market value of the common stock on the date of grant. Restricted stock awards are generally awarded with an exercise price of $0 per share. As of November 6, 2006, 28,951 shares are available for future grants of options or other awards under the amended 1999 Plan, with such amount of available shares increased by 350,000 shares on the date of each annual meeting of stockholders.

Our 1994 Stock Incentive Plan expired in April 1999, and all outstanding options under this plan are fully vested. Outstanding options generally have a term of five years from the date of grant for the non-employee directors and ten years from the date of grant for employees and were priced at the fair market value of the shares on the date of grant. As of November 6, 2006, there were no shares available for future grants of options or other awards under this plan.

In general, options issued under our stock incentive plans have a term of ten years and vest over a period of three years. We generally issue new shares of common stock for option exercises. The grant date fair value is calculated using a Black-Scholes option valuation model.

The weighted-average assumptions used for grants in the twelve and forty weeks ended November 6, 2006 and November 7, 2005, are as follows:


	Twelve Weeks Ended
	November 6, 2006			November 7, 2005
Annual dividend yield		1.09	%		1.24	%
Expected volatility		48.50	%		64.52	%
Risk-free interest rate (matched to the expected term of the outstanding option)		4.74	%		4.55	%
Expected life (years)		5.96			5.22
Weighted-average fair value of each option granted	$	9.06		$	7.30


	Forty Weeks Ended
	November 6, 2006			November 7, 2005
Annual dividend yield		1.09	%		1.24	%
Expected volatility		48.66	%		64.50	%
Risk-free interest rate (matched to the expected term of the outstanding option)		4.76	%		4.55	%
Expected life (years)		5.97			5.22
Weighted-average fair value of each option granted	$	8.95		$	7.19

The assumptions used to determine the fair value of each option granted are highly subjective. Changes in the assumptions used would increase (decrease) the fair value of the options granted in the twelve and forty weeks ended November 6, 2006 and November 7, 2005 as follows:


	Twelve Weeks Ended
Change in Assumption	November 6, 2006			November 7, 2005
10% increase in expected volatility	$	1.25		$	0.77
1% increase in risk-free interest rate		0.29			0.14
1 year increase in expected life		0.56			0.45
10% decrease in expected volatility		(1.33	)		(0.83	)
1% decrease in risk-free interest rate		(0.29	)		(0.15	)
1 year decrease in expected life		(0.66	)		(0.56	)

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


	Forty Weeks Ended
Change in Assumption	November 6, 2006			November 7, 2005
10% increase in expected volatility	$	1.23		$	0.82
1% increase in risk-free interest rate		0.28			0.15
1 year increase in expected life		0.55			0.48
10% decrease in expected volatility		(1.31	)		(0.89	)
1% decrease in risk-free interest rate		(0.28	)		(0.15	)
1 year decrease in expected life		(0.65	)		(0.59	)

Transactions under all plans for the forty weeks ended November 6, 2006, are as follows:

Stock options outstanding:


						Weighted-Average		Aggregate
				Weighted-Average		Remaining		Intrinsic
	Shares			Exercise Price		Contractual Life		Value
Outstanding at January 31, 2006		6,162,082		$	12.08		5.67
Granted		546,750			18.84
Exercised		(1,068,627	)		8.95
Forfeited		(53,480	)		12.68
Expired		(80,223	)		17.77

Outstanding at November 6, 2006		5,506,502		$	13.27		5.61	$	39,847

Exercisable at November 6, 2006		3,844,908		$	12.51		4.13	$	32,423

Expected to vest at November 6, 2006		1,546,096		$	14.96		9.02	$	7,023

Restricted stock awards:


				Weighted-Average
				Grant Date
	Shares			Fair Value
Restricted stock awards at January 31, 2006		150,000		$	13.33

Granted		638,543		$	18.30

Awards vested		(21,670	)	$	13.60

Forfeited		(5,000	)	$	13.53

Restricted stock awards at November 6, 2006		761,873		$	17.49

Unvested restricted stock awards as of November 6, 2006 consist of 401,873 restricted stock awards that have vesting periods ranging from two to four years and 360,000 performance-vested restricted stock awards that were awarded to certain key executives, pursuant to their amended employment agreements. Performance-vested awards vest upon the achievement of specific performance goals over specified performance periods. Such awards are subject to adjustment based on the final performance relative to the goals, resulting in a minimum award of no shares and a maximum award of 360,000 shares. We begin recognizing the share-based compensation expense related to these awards when we deem the achievement of performance goals to be probable. During the twelve and forty weeks ended November 6, 2006, we recognized $527 of share-based compensation expense related to performance-vested restricted stock awards.

The aggregate intrinsic value of the stock options exercised during the twelve weeks ended November 6, 2006 and November 7, 2005 was $7,749 and $177, respectively. The aggregate intrinsic value of the stock options exercised during the forty weeks ended November 6, 2006 and November 7, 2005 was $9,868 and $16,115, respectively. As of November 6, 2006, there was $8,794 of unamortized compensation expense related to stock options. We expect to recognize this expense over a weighted-average period of 1.26 years. As of November 6, 2006, there was $12,197 of unrecognized compensation expense related to restricted stock awards. We expect to recognize this expense over a weighted-average period of 1.90 years.

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

Note 5 — Other Assets

Other assets as of November 6, 2006 and January 31, 2006 consist of the following:


	November 6,		January 31,
	2006		2006
Intangible assets (see table below)	$	15,736	$	16,836
Deferred financing costs		1,728		5,708
Net investment in lease receivables, less current portion		621		748
Other		1,639		2,227

	$	19,724	$	25,519

As of November 6, 2006 and January 31, 2006, intangible assets with finite useful lives were primarily comprised of intangible assets obtained through our acquisition of Santa Barbara Restaurant Group in fiscal 2003 and our Hardee’s acquisition transactions in fiscal 1999 and 1998. Such intangible assets have amortization periods ranging from three to 20 years.

The table below presents identifiable, definite-lived intangible assets as of November 6, 2006 and January 31, 2006:


	Weighted-		November 6, 2006							January 31, 2006
	Average		Gross					Net		Gross					Net
	Life		Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
Intangible Assets	(Years)		Amount		Amortization			Amount		Amount		Amortization			Amount
Trademarks		20	$	17,171	$	(4,026	)	$	13,145	$	17,171	$	(3,365	)	$	13,806
Franchise agreements		20		1,780		(396	)		1,384		1,780		(328	)		1,452
Favorable lease agreements		16		3,241		(2,034	)		1,207		4,034		(2,456	)		1,578

			$	22,192	$	(6,456	)	$	15,736	$	22,985	$	(6,149	)	$	16,836

Amortization expense related to identifiable, definite-lived intangible assets was $284 and $960 for the twelve and forty weeks ended November 6, 2006, respectively, and was $349 and $1,205 for the twelve and forty weeks ended November 7, 2005, respectively.

Note 6 — Indebtedness and Interest Expense

We maintain a senior credit facility (the “Facility”) that provides for a $380,000 senior secured credit facility consisting of a $150,000 revolving credit facility and a $230,000 term loan. The revolving credit facility matures on May 1, 2007, and includes an $85,000 letter of credit sub-facility. The principal amount of the term loan is scheduled to be repaid in quarterly installments, with the remaining principal balance scheduled to mature on July 2, 2008. Subject to certain conditions as defined in the Facility, the maturity of the term loan may be extended to May 1, 2010.

During the twelve and forty weeks ended November 6, 2006, we voluntarily prepaid $9,112 and $28,112, respectively, of the $230,000 term loan, in addition to $636 of regularly scheduled principal payments for the forty weeks ended November 6, 2006. As of November 6, 2006, we had (i) borrowings outstanding under the term loan portion of the Facility of $70,000, (ii) borrowings outstanding under the revolving portion of the Facility of $1,000, (iii) outstanding letters of credit under the revolving portion of the Facility of $57,263, and (iv) availability under the revolving portion of the Facility of $91,737.

The terms of the Facility include certain restrictive covenants. Among other things, these covenants restrict our ability to incur debt, incur liens on our assets, make any significant change in our corporate structure or the nature of our business, dispose of assets in the collateral pool securing the Facility, prepay certain debt, engage in a change of control transaction without the member banks’ consents and make investments or acquisitions. The Facility is collateralized by a lien on all of our personal property assets and liens on certain restaurant properties.

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

As of November 6, 2006, the applicable interest rate on the term loan was the London Inter Bank Offering Rate (“LIBOR”) plus 2.00%, or 7.375%, per annum. For the revolving loan portion of the Facility, the applicable rate was Prime plus 1.00%, or 9.25%, per annum. We also incur fees on outstanding letters of credit under the Facility at a rate equal to the applicable margin for LIBOR revolving loans, which is currently 2.25% per annum.

The Facility required us to enter into interest rate protection agreements in an aggregate notional amount of at least $70,000 for a term of at least three years. Pursuant to this requirement, on July 26, 2004, we entered into two interest rate cap agreements in an aggregate notional amount of $70,000. Under the terms of each agreement, if LIBOR exceeds 5.375% on the measurement date for any quarterly period, we will receive payments equal to the amount LIBOR exceeds 5.375%, multiplied by (i) the notional amount of the agreement and (ii) the fraction of a year represented by the quarterly period. The agreements expire on July 28, 2007. The agreements were not designated as cash flow hedges under the terms of SFAS 133, Accounting for Derivative Instruments and Hedging Activities. Accordingly, the change in the fair value of the interest rate cap premiums is recognized quarterly in interest expense in our Consolidated Statements of Income. We recorded interest expense of $95 and $29 during the twelve and forty weeks ended November 6, 2006, respectively, and interest income of $20 and interest expense of $15 during the twelve and forty weeks ended November 7, 2005, respectively, to adjust the carrying value of the interest rate cap premiums to their fair values. The fair values of the interest rate cap premiums are included in other assets, net, in our accompanying Condensed Consolidated Balance Sheets, and were $28 and $56 at November 6, 2006 and January 31, 2006, respectively. As a matter of policy, we do not enter into derivative instruments unless there is an underlying exposure. However, if we were to continue to make voluntary prepayments on the term loan, the outstanding principal balance could drop below the notional amount of our existing interest rate caps.

The Facility permits us to repurchase our common stock and/or pay cash dividends in an aggregate amount up to $97,655 as of November 6, 2006. In addition, the amount that we may spend to repurchase our common stock and/or pay dividends is increased each year by a portion of excess cash flow (as defined in the Facility) during the term of the Facility. Based on the amount of cumulative repurchase of our common stock and payment of cash dividends, we are permitted to make additional common stock repurchases and/or cash dividend payments of $39,614, as of November 6, 2006.

Subject to the terms of the Facility, we may make annual capital expenditures in the amount of $45,000, plus 80% of the amount of actual Adjusted EBITDA (as defined in the Facility) in excess of $110,000. We may also carry forward certain unused capital expenditure amounts to the following year. Based on these terms, and assuming that Adjusted EBITDA in fiscal 2007 is equal to Adjusted EBITDA in fiscal 2006, the Facility would permit us to make capital expenditures of $108,276 in fiscal 2007, which could increase or decrease based on our performance versus the Adjusted EBITDA formula described above.

The Facility contains financial performance covenants, which include a minimum Adjusted EBITDA requirement, a minimum fixed charge coverage ratio, and maximum leverage ratios. We were in compliance with these covenants and all other requirements of the Facility as of November 6, 2006.

The full text of the contractual requirements imposed by the Facility is set forth in the Sixth Amended and Restated Credit Agreement, dated as of June 2, 2004, and the amendments thereto, which we have filed with the SEC, and in the ancillary loan documents described therein. Subject to cure periods in certain instances, the lenders under our Facility may demand repayment of borrowings prior to stated maturity upon certain events of default, including, but not limited to, if we breach the terms of the agreement, suffer a material adverse change, engage in a change of control transaction, suffer certain adverse legal judgments, in the event of specified events of insolvency or if we default on other significant obligations. In the event the Facility is declared accelerated by the lenders (which can occur only upon certain events of default under the Facility), our 2023 Convertible Notes (described below) may also become accelerated under certain circumstances and after all cure periods have expired.

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

The 2023 Convertible Notes bear interest at 4.0% annually, payable in semiannual installments due April 1 and October 1 each year, are unsecured general obligations of ours, and are contractually subordinate in right of payment to certain other of our obligations, including the Facility. On October 1 of 2008, 2013 and 2018, the holders of the 2023 Convertible Notes have the right to require us to repurchase all or a portion of the notes at 100% of the face value plus accrued interest. On October 1, 2008 and thereafter, we have the right to call all or a portion of the notes at 100% of the face value plus accrued interest. The 2023 Convertible Notes became convertible into our common stock effective July 1, 2004, and will remain convertible throughout the remainder of their term.

During the twelve and forty weeks ended November 6, 2006, in response to unsolicited offers from the holders of $38,388 and $89,808, respectively, of the 2023 Convertible Notes, we made cash payments to the holders, comprised of accrued interest through the dates of conversion and inducements for the holders to convert and in lieu of payment of future interest on the converted notes. The inducement payments were $2,807 and $6,406, and are included in conversion inducement expense in our accompanying Condensed Consolidated Statements of Income for the twelve and forty weeks ended November 6, 2006, respectively. Pursuant to their terms, these notes converted into an aggregate of 4,369,165 and 10,221,579 shares of our common stock, respectively. As a result of these conversions, during the forty weeks ended November 6, 2006, bank indebtedness and other long-term debt decreased $89,808; other assets, net, decreased $1,356; common stock increased $102; and additional paid-in capital increased $88,350. The remaining $15,192 of the 2023 Convertible Notes are convertible into our common stock at a conversion price of approximately $8.79 per share, based on a conversion rate of 113.8160 shares per $1 of the notes.

The terms of the Facility are not dependent on any change 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 and cash flows from operations, asset collateral bases and the level of our equity capital relative to our debt obligations. In addition, as noted above, our existing debt agreements include 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.

Interest expense consisted of the following:


	Twelve Weeks Ended				Forty Weeks Ended
	November 6, 2006		November 7, 2005		November 6, 2006		November 7, 2005
Facility	$	1,421	$	1,743	$	5,288	$	5,868
Capital lease obligations		1,306		1,446		4,345		4,827
2023 Convertible Notes		202		969		2,428		3,230
Amortization of loan fees		570		820		2,349		2,705
Write-off of unamortized loan fees, term loan due July 2, 2008		69		125		240		354
Letter of credit fees and other		236		231		1,266		946

	$	3,804	$	5,334	$	15,916	$	17,930

Note 7 — Facility Action Charges, Net

The following transactions have been recorded in our accompanying Condensed Consolidated Statements of Income as facility action charges, net:

(i)		impairment of long-lived assets for under-performing restaurants to be disposed of or held and used;

(ii)		store closure costs, including sublease of closed facilities at amounts below our primary lease obligation;

(iii)		gain/(loss) on the sale of restaurants; and

(iv)		amortization of discount related to estimated liability for closing restaurants.

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

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


	Twelve Weeks Ended						Forty Weeks Ended
	November 6, 2006			November 7, 2005			November 6, 2006			November 7, 2005
Carl’s Jr.
New decisions regarding closing restaurants	$	74		$	—		$	74		$	—
(Favorable) unfavorable dispositions of leased and fee surplus properties, net		(196	)		305			916			795
Impairment of assets to be held and used		—			—			44			775
Loss (gain) on sales of restaurants and surplus properties, net		123			4			(706	)		(507	)
Amortization of discount related to estimated liability for closing restaurants		63			58			194			182

		64			367			522			1,245


Hardee’s
New decisions regarding closing restaurants		712			213			2,633			957
Unfavorable (favorable) dispositions of leased and fee surplus properties, net		6			187			(117	)		(357	)
Impairment of assets to be disposed of		182			14			634			23
Impairment of assets to be held and used		123			—			359			641
(Gain) loss on sales of restaurants and surplus properties, net		(2,688	)		74			(3,786	)		299
Amortization of discount related to estimated liability for closing restaurants		111			142			390			538

		(1,554	)		630			113			2,101


La Salsa and Other
New decisions regarding closing restaurants		617			—			617			157
Unfavorable (favorable) dispositions of leased and fee surplus properties, net		18			(342	)		156			(256	)
Impairment of assets to be held and used		—			—			1,054			243
Loss on sales of restaurants and surplus properties, net		844			75			1,059			292
Amortization of discount related to estimated liability for closing restaurants		1			3			5			5

		1,480			(264	)		2,891			441

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


	Twelve Weeks Ended					Forty Weeks Ended
	November 6, 2006			November 7, 2005		November 6, 2006			November 7, 2005
Total
New decisions regarding closing restaurants		1,403			213		3,324			1,114
(Favorable) unfavorable dispositions of leased and fee surplus properties, net		(172	)		150		955			182
Impairment of assets to be disposed of		182			14		634			23
Impairment of assets to be held and used		123			—		1,457			1,659
(Gain) loss on sales of restaurants and surplus properties, net		(1,721	)		153		(3,433	)		84
Amortization of discount related to estimated liability for closing restaurants		175			203		589			725

	$	(10	)	$	733	$	3,526		$	3,787

The following table summarizes the activity in our estimated liability for closing restaurants for the forty weeks ended November 6, 2006:


							La Salsa
	Carl’s Jr.			Hardee’s			and Other			Total
Balance at January 31, 2006	$	3,615		$	9,865		$	120		$	13,600
New decisions regarding closing restaurants		74			2,633			617			3,324
Usage		(1,032	)		(3,133	)		(32	)		(4,197	)
Unfavorable (favorable) dispositions of leased and fee surplus properties, net		916			(117	)		156			955
Amortization of discount		194			390			5			589

Balance at November 6, 2006		3,767			9,638			866			14,271
Less current portion		1,305			2,933			348			4,586

Long-term portion	$	2,462		$	6,705		$	518		$	9,685

The current and long-term portions of our estimated liability for closing restaurants are included in other current liabilities and other long-term liabilities, respectively, in our accompanying Condensed Consolidated Balance Sheets.

Note 8 — Income Taxes

Income tax expense consisted of the following:


	Twelve Weeks Ended						Forty Weeks Ended
	November 6, 2006			November 7, 2005			November 6, 2006			November 7, 2005
Foreign income taxes	$	222		$	200		$	844		$	666
Federal and state income taxes		9,839			370			31,613			999

Income tax expense	$	10,061		$	570		$	32,457		$	1,665

Effective income tax rate		51.5	%		3.5	%		44.9	%		4.0	%

Our effective income tax rates for the twelve and forty weeks ended November 6, 2006 differ from the federal statutory rate primarily as a result of state income taxes and certain expenses that are nondeductible for income tax purposes. Our effective income tax rates for the twelve and forty weeks ended November 7, 2005 differ from the federal statutory rate primarily as a result of state income taxes and changes in our valuation allowance for deferred tax assets.

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

Note 9 — Income Per Share

We present “basic” and “diluted” income per share. Basic income per share represents net income divided by weighted-average shares outstanding. Diluted income per share represents net income plus the interest and fees relating to any dilutive convertible debt outstanding, divided by weighted-average shares outstanding, including all potentially dilutive securities and excluding all potentially anti-dilutive securities.

The dilutive effect of stock options and warrants is determined using the “treasury stock” method, whereby exercise is assumed at the beginning of the reporting period and proceeds from such exercise, unamortized compensation on share-based awards, and tax benefits arising in connection with share-based compensation, are assumed to be used to purchase our common stock at the average market price during the period. The dilutive effect of convertible debt is determined using the “if-converted” method, whereby interest charges and amortization of debt issuance costs, net of taxes, applicable to the convertible debt are added back to income and the convertible debt is assumed to have been converted at the beginning of the reporting period, with the resulting common shares being included in weighted-average shares.

The table below presents the computation of basic and diluted earnings per share for the twelve and forty weeks ended November 6, 2006 and November 7, 2005:


	Twelve Weeks Ended				Forty Weeks Ended
	November 6, 2006		November 7, 2005		November 6, 2006		November 7, 2005
			(In thousands except per share amounts)
Net income for computation of basic earnings per share	$	9,457	$	15,823	$	39,841	$	40,270
Weighted-average shares for computation of basic earnings per share		68,001		59,440		62,233		59,154
Basic net income per share	$	0.14	$	0.27	$	0.64	$	0.68

Net income for computation of basic earnings per share	$	9,457	$	15,823	$	39,841	$	40,270
Add: Interest and amortization costs for Convertible Notes due 2023, net of related tax effect		152		1,125		1,743		3,750

Net income for computation of diluted earnings per share	$	9,609	$	16,948	$	41,584	$	44,020


Weighted-average shares for computation of basic earnings per share		68,001		59,440		62,233		59,154
Dilutive effect of stock options, warrants and restricted stock		1,515		1,703		1,501		2,455
Dilutive effect of 2023 convertible notes		2,489		11,811		8,980		11,811

Weighted-average shares for computation of diluted earnings per share		72,005		72,954		72,714		73,420

Diluted net income per share	$	0.13	$	0.23	$	0.57	$	0.60

The following table presents the number of potentially dilutive shares, in thousands, of our common stock equivalents excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive:

Twelve Weeks Ended

Forty Weeks Ended

November 6, 2006

November 7, 2005

November 6, 2006

November 7, 2005

Stock options and restricted stock

1,647

2,105

2,179

2,402

Note 10 — Segment Information

We are principally engaged in developing, operating and franchising our Carl’s Jr. and Hardee’s quick-service restaurants and La Salsa fast-casual restaurants, each of which is considered an operating segment that is managed and evaluated separately. Management evaluates the performance of our segments and allocates resources to them based on several factors, of which the primary financial measure is segment operating income or loss. General and

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

administrative expenses are allocated to each segment based on management’s analysis of the resources applied to each segment. Interest expense related to the Facility and 2023 Convertible Notes and conversion inducement expense related to the 2023 Convertible Notes have been allocated to Hardee’s based on the use of funds. Certain amounts that we do not believe would be proper to allocate to the operating segments are included in Other (e.g., gains or losses on sales of long-term investments and the results of operations of consolidated VIEs). 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, 2006).


	Carl’s Jr.		Hardee’s		La Salsa			Other		Total
Twelve Weeks Ended November 6, 2006
Revenue	$	187,194	$	166,154	$	10,531		$	1,039	$	364,918
Operating income (loss)		17,157		10,764		(3,669	)		3		24,255
Income (loss) before income taxes		17,124		5,918		(3,654	)		130		19,518
Goodwill (as of November 6, 2006)		22,649		—		—			—		22,649


	Carl’s Jr.		Hardee’s		La Salsa			Other			Total
Twelve Weeks Ended November 7, 2005
Revenue	$	181,041	$	150,822	$	11,200		$	1,050		$	344,113
Operating income (loss)		17,754		4,275		(904	)		(141	)		20,984
Income (loss) before income taxes		17,100		327		(897	)		(137	)		16,393
Goodwill (as of November 7, 2005)		22,649		—		—			—			22,649


	Carl’s Jr.		Hardee’s		La Salsa			Other			Total
Forty Weeks Ended November 6, 2006
Revenue	$	641,989	$	547,490	$	36,602		$	3,360		$	1,229,441
Operating income (loss)		66,397		31,864		(6,980	)		(84	)		91,197
Income (loss) before income taxes		64,927		14,701		(6,964	)		(366	)		72,298
Goodwill (as of November 6, 2006)		22,649		—		—			—			22,649


	Carl’s Jr.		Hardee’s		La Salsa			Other			Total
Forty Weeks Ended November 7, 2005
Revenue	$	612,443	$	515,083	$	38,392		$	3,887		$	1,169,805
Operating income (loss)		57,654		15,346		(4,379	)		(11,280	)		57,341
Income (loss) before income taxes		55,256		1,992		(4,352	)		(10,961	)		41,935
Goodwill (as of November 7, 2005)		22,649		—		—			—			22,649

Note 11 — Net Assets Held For Sale

As of November 6, 2006, assets of $1,882, which represents property, net, that we expect to sell within one year, were classified as held for sale in our Carl’s Jr. ($1,431) and Hardee’s ($451) operating segments, respectively. During the twelve and forty weeks ended November 6, 2006, impairment charges of $182 and $634, respectively, related to assets held for sale have been included in facility action charges, net, in our Hardee’s segment.

Note 12 — Purchase and Sale of Restaurant Assets

During March 2006, we purchased, for aggregate consideration of $15,762, 36 restaurant locations that we had previously leased from a commercial lessor. Five of these locations had previously been subleased to a Hardee’s franchisee that was operating under a temporary license agreement that was terminated in May 2006. As of November 6, 2006, we were operating 27 of these locations as company-operated restaurants, five of these locations were leased to a franchisee and operating as franchised restaurants, three of these locations were leased to third parties and one location was vacant.

During July 2006, we sold 38 company-operated Carl’s Jr. restaurants (36 of which are located in Oklahoma) with a net book value of $10,182 to a franchisee. We received aggregate consideration of $10,592, which included $777 in franchise fees, which are included in franchised and licensed restaurants and other revenues in our

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

accompanying Condensed Consolidated Statement of Income for the forty weeks ended November 6, 2006. The loss related to the sale of these restaurants was $407 and is included in facility action charges, net, in our Carl’s Jr. segment. As part of this transaction, the franchisee acquired the real property and/or leasehold interests in the real property related to most of those restaurant locations and also acquired a subleasehold interest in the real property related to the remaining restaurant locations.

Note 13 — Termination of Franchise Agreement

During February 2006, we terminated our franchise agreement with a Hardee’s franchisee that operated 90 franchised restaurants as a result of its inability to remedy, on a timely basis, certain defaults under the terms of the agreement. At that time, ten of the affected restaurants were located on property that we owned and leased to the franchisee, and 51 of the affected restaurants were located on leased premises that we sublet to the franchisee. During March 2006, we purchased five additional parcels that we had previously leased from a commercial lessor and sublet to the franchisee (see Note 12). The franchisee continued to operate the affected restaurants pursuant to a temporary license agreement until May 18, 2006, when we terminated the license agreement, leases and subleases and assumed full operational control of the aforementioned 61 restaurants. Since the termination of the license agreement, we have purchased $2,400 of existing equipment, closed 18 of the 61 restaurants and recorded facility action charges of $1,884 related to closing these restaurants. We currently operate the remaining 43 restaurants as company-operated restaurants. The former franchisee’s lenders (through a receiver) kept the remaining 29 restaurant locations, of which they subsequently closed 15. During October 2006, we purchased the remaining 14 restaurants for $6,538, of which we operate 11 as company-operated restaurants. The total purchase price included land, buildings and existing equipment. The remaining three restaurants are currently operated by an existing franchisee under a franchise agreement.

Note 14 — Commitments and Contingent Liabilities

In prior years, as part of our refranchising program, we sold restaurants to franchisees. In some cases, these restaurants 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 and the payments on the leases as rental expense in franchised and licensed restaurants and other expense. As of November 6, 2006, the present value of our lease obligations under the remaining master leases’ primary terms is $113,666. Franchisees may, from time to time, experience financial hardship and may cease payment on the sublease obligation to us. The present value of the exposure to us from franchisees characterized as under financial hardship is $2,238 of which $1,002 is reserved for in our estimated liability for closing restaurants as of November 6, 2006.

The Facility includes a letter of credit sub-facility in the amount of $85,000 (see Note 6). Several standby letters of credit are outstanding under this sub-facility, which 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 6, 2006, we had outstanding letters of credit of $57,263, expiring at various dates through November 2007.

As of November 6, 2006, we had unconditional purchase obligations in the amount of $51,635, which primarily include contracts for goods and services related to restaurant operations and contractual commitments for marketing and sponsorship arrangements.

We have employment agreements with certain key executives (the “Agreements”). These Agreements include provisions for lump sum payments to the executives that may be triggered by the termination of employment under certain conditions, as defined in each Agreement. If such provisions were triggered, each affected executive would receive an amount ranging from one to three times his base salary for the remainder of his employment term plus, in some instances, either all of or a pro-rata portion of the bonus in effect for the year in which the termination occurs. Additionally, all options granted and restricted stock awarded to the affected executives which have not vested as of the date of termination would vest immediately, and restricted stock awards which have not yet been awarded would be awarded immediately, if certain conditions are met. These Agreements have terms of three years, which renew daily, until termination. If all of these Agreements had been triggered as of November 6, 2006, we would have been required to make cash payments of approximately $14,212.

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

We are, from time to time, the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect us and our restaurants, regardless of whether such allegations are valid or whether we are liable. We are also, at times, the subject of complaints or allegations from current or former employees, franchisees, vendors, landlords and others.

As of November 6, 2006, we had recorded an accrued liability for contingencies related to litigation in the amount of $1,724, which relates to certain employment, real estate and other business disputes. Certain of the matters for which we maintain an accrued liability for litigation pose risk of loss significantly above the accrued amounts.

For several years, we offered a program whereby we guaranteed the loan obligations of certain franchisees to independent lending institutions. Franchisees have used the proceeds from such loans to acquire certain equipment and pay the costs of remodeling Carl’s Jr. restaurants. In the event a franchisee defaults under the terms of a program loan, we are obligated, within 15 days following written demand by the lending institution, to purchase such loan or assume the franchisee’s obligation thereunder by executing an assumption agreement and seeking a replacement franchisee for the franchisee in default. By purchasing such loan, we may seek recovery against the defaulting franchisee. As of November 6, 2006, the principal outstanding under program loans guaranteed by us totaled approximately $450, with maturity dates ranging from 2007 through 2009. As of November 6, 2006, we had no accrued liability for expected losses under this program and were not aware of any outstanding loans being in default.

Note 15 — Stockholders’ Equity

Repurchase of Common Stock

Pursuant to a program (the “Stock Repurchase Plan”) authorized by our Board of Directors, as modified during the forty weeks ended November 6, 2006, we are allowed to repurchase up to an aggregate of $100,000 of our common stock. During the twelve and forty weeks ended November 6, 2006, we repurchased 524,400 and 2,065,445 shares of our common stock at an average price of $19.04 and $16.43 per share, for a total cost, including trading commissions, of $9,999 and $33,998, and we retired 367,900 and 1,908,945 shares, respectively. As of November 6, 2006, we had 156,500 shares of common stock that had been repurchased but not yet retired and are shown as common stock held in treasury on the accompanying Condensed Consolidated Balance Sheet. These shares were retired subsequent to November 6, 2006. Based on the Board of Directors’ authorization and the amount of cumulative repurchase of our common stock that we have already made thereunder, we are permitted to make additional repurchases of our common stock up to $56,446 under the Stock Repurchase Plan as of November 6, 2006. As part of our Stock Repurchase Plan, we have implemented a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under which we are allowed to repurchase $5,000 of our common stock in the open market each fiscal quarter through the quarter ending January 28, 2008. Rule 10b5-1 allows us to repurchase our common stock when we might otherwise be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

Dividends

During the forty weeks ended November 6, 2006, we declared cash dividends of $0.12 per share of common stock, for a total of $7,733. Dividends payable of $2,794 and $2,394 have been included in other current liabilities in our accompanying Condensed Consolidated Balance Sheets as of November 6, 2006 and January 31, 2006, respectively. The dividends declared during the twelve weeks ended November 6, 2006 were subsequently paid on November 27, 2006.

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

Note 16 — Supplemental Cash Flow Information


	Forty Weeks Ended
	November 6,		November 5,
	2006		2005
Cash paid for:
Interest, net of amounts capitalized	$	14,787	$	16,388

Income taxes, net of refunds received	$	545	$	1,362


Non-cash investing and financing activities:
Gain recognized on sale and leaseback transactions	$	269	$	280

Dividends declared, not paid	$	2,794	$	2,379

Capital lease obligations incurred to acquire assets	$	102	$	344

The cash used in financing activities related to the repurchase of common stock for the forty weeks ended November 6, 2006, differs from the repurchase of common stock in the statement of stockholders’ equity, by $3,060, reflecting the timing difference between the recognition of share repurchase transactions and their settlement for cash. The $3,060 liability for unsettled repurchases of common stock is included in other current liabilities in the accompanying Condensed Consolidated Balance Sheet as of November 6, 2006.

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

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

Introduction and Safe Harbor Disclosure

CKE Restaurants, Inc. and its subsidiaries (collectively referred to as the “Company”) is comprised of the operations of Carl’s Jr., Hardee’s, La Salsa, and Green Burrito, which is primarily operated as a dual-branded concept with Carl’s Jr. 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, 2006. Unless otherwise indicated, all Note references herein refer to our accompanying Notes to Condensed Consolidated Financial Statements.

Matters discussed in this Form 10-Q contain forward-looking statements relating to future plans and developments, financial goals and operating performance that are based on our current beliefs and assumptions. Such statements are subject to risks and uncertainties that are often difficult to predict, are beyond our control and which may cause results to differ materially from expectations. Factors that could cause our results to differ materially from those described include, but are not limited to, whether or not restaurants will be closed and the number of restaurant closures, consumers’ concerns or adverse publicity regarding our products, the effectiveness of operating initiatives and advertising and promotional efforts (particularly at the Hardee’s brand), changes in economic conditions or prevailing interest rates, changes in the price or availability of commodities, availability and cost of energy, workers’ compensation and general liability premiums and claims experience, changes in our suppliers’ ability to provide quality and timely products, delays in opening new restaurants or completing remodels, severe weather conditions, the operational and financial success of our franchisees, franchisees’ willingness to participate in our strategies, the availability of financing for us and our franchisees, unfavorable outcomes in litigation, changes in accounting policies and practices, effectiveness of internal controls over financial reporting, new legislation or government regulation (including environmental laws), the availability of suitable locations and terms for the sites designated for development, and other factors as discussed in our filings with the Securities and Exchange Commission.

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

New Accounting Pronouncements Not Yet Adopted

See Note 2 for a description of the new accounting pronouncements that we have not yet adopted.

Adoption of New Accounting Pronouncements

See Note 3 for a description of the new accounting pronouncements that we have adopted.

Critical Accounting Policies

Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations and financial position. Specific risks associated with these critical accounting policies are described in the following paragraphs.

For all of these policies, we caution that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Our most significant accounting policies require:

•		estimation of future cash flows used to assess the recoverability of long-lived assets, including goodwill, and to establish the estimated liability for closing restaurants and subsidizing lease payments of franchisees;

•		estimation, using actuarially determined methods, of our self-insured claim losses under our workers’ compensation, general and auto liability insurance programs;

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

•		determination of appropriate estimated liabilities for loss contingencies;

•		determination of appropriate assumptions to use in evaluating leases for capital versus operating lease treatment, establishing depreciable lives for leasehold improvements and establishing straight-line rent expense periods;

•		estimation of the appropriate allowances associated with franchise and license receivables and liabilities for franchise subleases;

•		determination of the appropriate assumptions to use to estimate the fair value of share-based compensation; and

•		estimation of our deferred income tax asset valuation allowance and effective tax rate.

		Descriptions of these critical accounting policies follow.

Impairment of Property and Equipment and Other Amortizable Long-Lived Assets Held and Used, Held for Sale or To Be Disposed of Other Than By Sale

We evaluate the carrying value of individual restaurants when the results of operations have reasonably progressed to a point to adequately evaluate the probability of continuing operating losses or upon expectation that a restaurant will be sold or otherwise disposed of before the end of its previously estimated useful life. We generally estimate the useful life of restaurants on owned property to be 20 to 35 years and estimate the remaining useful life of restaurants subject to leases to range from the end of the lease term then in effect to the end of such lease term including all option periods. We then estimate the future estimated cash flows from operating the restaurant over its estimated useful life. In making these judgments, we consider the period of time since the restaurant was opened or remodeled, and the trend of operations and expectations for future sales growth. We also make assumptions about future same-store sales and operating expenses. Our approach incorporates a probability-weighted approach wherein we estimate the effectiveness of future sales and marketing efforts on same-store sales. If an estimate of the fair value of our assets becomes necessary, we typically base such estimate on forecasted cash flows discounted at the applicable restaurant concept’s weighted average cost of capital.

During the second and fourth quarter of each fiscal year, and whenever events and/or circumstances indicate that the carrying value of assets may be impaired, we perform an asset recoverability analysis through which we estimate future cash flows for each of our restaurants based upon experience gained, current intentions about refranchising restaurants and closures, expected sales trends, internal plans and other relevant information. As the operations of restaurants opened or remodeled in recent years progress to the point that their profitability and future prospects can adequately be evaluated, additional restaurants will become subject to review and to the possibility that impairments exist.

Same-store sales are a key assumption used to estimate future cash flow for evaluating recoverability. For each of our restaurant concepts, to evaluate recoverability of restaurant assets we estimate same-store sales will increase at an annual average rate of approximately 3.0% over the remaining useful life of the restaurant. We are also required to make assumptions regarding the rate 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.

Typically, restaurants are operated for three years before we test them for impairment. Also, restaurants typically are not tested for two years following a remodel. We believe this provides the restaurant sufficient time to establish its presence in the market and build a customer base. If we were to test all restaurants for impairment without regard to the amount of time the restaurants were operating, the total asset impairment could increase substantially. In addition, if recently opened or remodeled restaurants do not eventually establish stronger market presence and build a customer base, the carrying value of certain of these restaurants may prove to be unrecoverable and we may incur additional impairment charges in the future.

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

As of November 6, 2006, we had a total of 95 restaurants among our three major restaurant concepts that generated negative cash flows on a trailing one-year basis. These restaurants had combined net book values of $27,416. Included within these totals are 37 restaurants with combined net book values of $15,915 that have not been tested for impairment because they had not yet been operated for a sufficient period of time as of our most recent semi-annual asset recoverability analysis in the second quarter of fiscal 2007. If these negative cash flow restaurants were not to begin generating positive cash flows within a reasonable period of time, the carrying value of these restaurants may prove to be unrecoverable and we may recognize additional impairment charges in the future.

Impairment of Goodwill

At the reporting unit level, goodwill is tested for impairment annually during the first quarter of our fiscal year, and on an interim basis if events or circumstances indicate that it is more likely than not impairment may have occurred. We consider the reporting unit level to be the brand level since the components (e.g., restaurants) within each brand have similar economic characteristics, including products and services, production processes, types or classes of customers and distribution methods. The impairment, if any, is measured based on the estimated fair value of the brand. Fair value can be determined based on discounted cash flows, comparable sales or valuations of other restaurant brands. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value.

The most significant assumptions we use in this analysis are those made in estimating future cash flows. In estimating future cash flows, we use the assumptions in our strategic plan for items such as same-store sales, store count growth rates, and the discount rate we consider to be the market discount rate for acquisitions of restaurant companies and brands.

If the assumptions used in performing our impairment testing prove inaccurate, the fair value of the brand may ultimately prove to be significantly lower, thereby causing the carrying value to exceed the fair value and indicating that an impairment has occurred. During the first quarter of fiscal 2007, we evaluated the Carl’s Jr. brand, the only one of our brands for which goodwill is recorded. As a result of our evaluation, we concluded that the fair value of the net assets of Carl’s Jr. exceeded the carrying value, and thus no impairment charge was required. As of November 6, 2006, we had $22,649 in goodwill recorded on our accompanying Condensed Consolidated Balance Sheet, all of which relates to Carl’s Jr.

Estimated Liability for Closing Restaurants

We typically make decisions to close restaurants based on prospects for estimated future profitability. However, sometimes we are forced to close restaurants due to circumstances beyond our control (e.g., a landlord’s refusal to negotiate a new lease). Our restaurant operators evaluate each restaurant’s performance no less frequently than the second and fourth quarter of each fiscal year. When restaurants continue to perform poorly, we consider a number of factors, including the demographics of the location and the likelihood of being able to improve an unprofitable restaurant. Based on the operator’s judgment and a financial review, we estimate the future cash flows. If we determine that the restaurant will not, within a reasonable period of time, operate at break-even cash flow or be profitable, and we are not contractually obligated to continue operating the restaurant, we may close the restaurant.

The estimated liability for closing restaurants on properties vacated is based on the term of the lease and the lease termination fee, if any, that we expect to pay, as well as estimated maintenance costs until the lease has been abated. The amount of the estimated liability established is the present value of these estimated future payments, which approximates the fair value of such obligations. The interest rate used to calculate the present value of these liabilities is based on our incremental borrowing rate at the time the liability is established. The related discount is amortized and shown in facility action charges, net, in our Condensed Consolidated Statements of Income.

A significant assumption used in determining the amount of the estimated liability for closing restaurants is the amount of the estimated liability for future lease payments on vacant restaurants. We estimate the cost to maintain leased and owned vacant properties until the lease has been abated or the owned property has been sold. If the costs to maintain properties increase, or it takes longer than anticipated to sell properties or sublease or terminate leases, we may need to record additional estimated liabilities. If the leases on the vacant restaurants are not terminated or subleased on the terms we used to estimate the liabilities, we may be required to record losses in future periods.

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

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. As of November 6, 2006, the present value of our operating lease payment obligations on all closed restaurants was approximately $7,787, which represents the discounted amount we would be required to pay if we are unable to enter into sublease agreements or terminate the leases prior to the terms required in the lease agreements. However, it is our experience that we can often terminate those leases for less than that amount, or sublease the property and, accordingly, we have recorded an estimated liability for operating lease obligations of $4,085 as of November 6, 2006.

Estimated Liability for Self-Insurance

We are self-insured for a portion of our current and prior years’ losses related to workers’ compensation, general and auto liability insurance programs. We have obtained stop loss insurance for individual workers’ compensation, general and auto liability claims over $500. Accrued liabilities for self-insurance are recorded based on the present value of actuarial estimates of the amounts of incurred and unpaid losses, based on an estimated risk-free interest rate of 4.5% as of November 6, 2006. In determining our estimated liability, management, with the assistance of our actuary, develops assumptions based on the average historical losses on claims we have incurred and on actuarial observations of historical claim loss development. Our actual future loss development may be better or worse than the development we estimated in conjunction with the actuary, in which case our reserves would require adjustment. As such, if we experience a higher than expected number of claims or the costs of claims rise more than expected, then we would be required to adjust the expected losses upward and increase our future self-insurance expense.

Our actuary provides a range of estimated unpaid losses for each loss category, upon which our analysis is based. As of November 6, 2006, our estimated liability for self-insured workers’ compensation, general and auto liability losses ranged from a low of $33,831 to a high of $41,853. After adjusting to the actuarially determined best estimate, our recorded reserves for self-insurance liabilities were $37,655 as of November 6, 2006.

Loss Contingencies

We maintain accrued liabilities for contingencies related to litigation. We account for contingent obligations in accordance with SFAS 5, Accounting for Contingencies, which requires that we assess each loss contingency to determine estimates of the degree of probability and range of possible settlement. Those contingencies that are deemed to be probable and where the amount of such settlement is reasonably estimable are accrued in our Condensed Consolidated Financial Statements. If only a range of loss can be determined, with no amount in the range representing a better estimate than any other amount within the range, we accrue to the low end of the range. In accordance with SFAS 5, as of November 6, 2006, we have recorded an accrued liability for contingencies related to litigation in the amount of $1,724 (see Note 14 for further information). The assessment of contingencies is highly subjective and requires judgments about future events. Contingencies are reviewed at least quarterly to determine the adequacy of the recorded liabilities and related Condensed Consolidated Financial Statement disclosure. The ultimate resolution of such loss contingencies may differ materially from amounts we have accrued in our Condensed Consolidated Financial Statements.

Accounting for Lease Obligations

We lease a substantial portion of our restaurant properties. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The lease accounting evaluation may require significant exercise of judgment in estimating the fair value and useful life of the leased property and to establish the appropriate lease term. The lease term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured because failure to exercise such option would result in an economic penalty. Such economic penalty would typically result from our having to abandon buildings and other non-detachable improvements upon vacating the property. The lease term used for this evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements, as well as the period over which we recognize straight-line rent expense.

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

In addition, the lease term is calculated from the date we are given control of the leased premises through the lease termination date. There is potential for variability in the “rent holiday” period, which begins on the possession date and typically ends upon restaurant opening. Factors that may affect the length of the rent holiday period include construction-related delays. Extension of the rent holiday period due to such delays would result in greater rent expense recognized during the rent holiday period.

Franchised and Licensed Operations

We monitor the financial condition of certain franchisees and record provisions for estimated losses on receivables when we believe that our franchisees are unable to make their required payments to us. Each quarter, we perform an analysis to estimate bad debts for each franchisee. We then compare the aggregate result of that analysis to the amount recorded in our Condensed Consolidated Financial Statements as the allowance for doubtful accounts and adjust the allowance as appropriate. Additionally, we cease accruing royalties and rental income from franchisees that are materially delinquent in paying or in default for other reasons and reverse any royalties and rent income accrued during the fiscal quarter in which such delinquency or default occurs. Over time our assessment of individual franchisees may change. For instance, we have had some franchisees, who in the past we had determined required an estimated loss equal to the total amount of the receivable, who have paid us in full or established a consistent record of payments (generally six months) such that we determined an allowance was no longer required.

Depending on the facts and circumstances, there are a number of different actions we and/or our franchisees may take to resolve franchise collections issues. These actions may include the purchase of franchise restaurants by us or by other franchisees, a modification to the franchise agreement (which may include a provision to defer certain royalty payments or reduce royalty rates in the future), a restructuring of the franchisee’s business and/or finances (including the restructuring of leases for which we are the primary obligee — see further discussion below) or, if necessary, the termination of the franchise agreement. The allowance established is based on our assessment of the most probable course of action that will occur.

Many of the restaurants that we sold to Hardee’s and Carl’s Jr. franchisees as part of our refranchising program were on leased sites. Generally, we remain principally liable for the lease and have entered into a sublease with the franchisee on the same terms as the primary lease. In such cases, we account for the sublease payments received as franchising rental income and the lease payments we make as rental expense in franchised and licensed restaurants and other expense in our Condensed Consolidated Statements of Income. As of November 6, 2006, the present value of our total obligation on lease arrangements with Hardee’s and Carl’s Jr. franchisees (including subsidized leases –see further discussion below) was $23,607 and $90,059, respectively. We do not expect Carl’s Jr. franchisees to experience the same level of financial difficulties as Hardee’s franchisees have encountered in the past, however, we can provide no assurance that this will not occur.

In addition to the sublease arrangements with franchisees described above, we also lease land and buildings to franchisees. As of November 6, 2006, the net book value of property under lease to Hardee’s and Carl’s Jr. franchisees was $13,657 and $5,103, respectively. Financially troubled franchisees include those with whom we have entered into workout agreements and who may have liquidity problems in the future. In the event that a financially troubled franchisee closes a restaurant for which we own the property, our options are to operate the restaurant as a company-operated restaurant, lease the property to another tenant or sell the property. These circumstances would cause us to consider whether the carrying value of the land and building was impaired. If we determined the property value was impaired, we would record a charge to operations for the amount the carrying value of the property exceeds its fair value. As of November 6, 2006, the net book value of property under lease to Hardee’s franchisees that are considered to be financially troubled franchisees was approximately $332 and is included in the amount above. During fiscal 2007 or thereafter, some of these franchisees may close restaurants and, accordingly, we may record an impairment loss in connection with some of these closures.

In accordance with SFAS 146, an estimated liability for future lease obligations on restaurants operated by franchisees for which we are the primary obligee is established on the date the franchisee closes the restaurant. Also, we record an estimated liability for subsidized lease payments when we sign a sublease agreement committing us to the subsidy. The liability includes an estimation related to the risk that certain lease payments from the franchisee may ultimately be uncollectible.

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

The amount of the estimated liability is established using the methodology described in “Estimated Liability for Closing Restaurants” above. Because losses are typically not probable and/or reasonably estimable, we have not established an additional estimated liability for potential losses not yet incurred under a significant portion of our franchise sublease arrangements. The present value of future sublease obligations from financially troubled franchisees is approximately $2,238 (two financially troubled franchisees represent all of this amount). If sales trends or economic conditions worsen for our franchisees, their financial health may worsen, our collection rates may decline and we may be required to assume the responsibility for additional lease payments on franchised restaurants. Entering into restructured franchise agreements may result in reduced franchise royalty rates in the future (see discussion above). The likelihood of needing to increase the estimated liability for future lease obligations is primarily related to the success of our Hardee’s concept.

Share-Based Compensation

We have various share-based compensation plans that provide stock options and restricted stock awards for certain employees and non-employee directors to acquire shares of our common stock. Prior to our adoption of SFAS 123R at the beginning of fiscal 2007, we accounted for share-based compensation in accordance with APB 25, which utilizes the intrinsic value method of accounting, as opposed to using the fair-value method prescribed in SFAS 123R. During the twelve and forty weeks ended November 6, 2006, we recorded share-based compensation expense of $2,009 and $4,934, respectively. (See Note 4 for analysis of the effect of certain changes in assumptions used to determine the fair value of share-based compensation.) Total share-based compensation expense was $47 and $57 for the twelve and forty weeks ended November 7, 2005, respectively.

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.

As of January 31, 2006, and November 6, 2006, we maintained a valuation allowance of $30,220 for deferred tax assets related to federal and state capital loss carryforwards, foreign tax credits and certain state net operating loss and income tax credit carryforwards. Even though we expect to generate taxable income, realization of the tax benefit of such deferred tax assets may remain uncertain for the foreseeable future, since they are subject to various limitations and may only be used to offset income of certain entities or of a certain character.

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 2007 Comparisons with Fiscal 2006

The factors discussed below impact comparability of operating performance for the twelve and forty weeks ended November 6, 2006 and November 7, 2005, or could impact comparisons for the remainder of fiscal 2007.

Fiscal Year and Seasonality

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

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.

Business Strategy

We remain focused on vigorously pursuing our comprehensive business strategy. The main components of our strategy are as follows:

	•		increase revenues, average unit volumes and operating income at our major brands;

	•		remain focused on restaurant fundamentals — quality, service and cleanliness;

	•		capitalize on our unique brand positioning and cutting-edge advertising;

	•		offer premium products that compete on quality, innovation and taste;

	•		continue to capitalize on dual-branding opportunities available with Green Burrito and Red Burrito^TM;

	•		control costs and improve the capital structure while increasing shareholder distributions;

	•		leverage our infrastructure and marketing presence to build out existing core markets;

	•		remodel our existing store base to remain competitive; and

	•		strengthen our franchise system and pursue further franchising opportunities, including new franchisees.

Franchise Operations

Like others in the quick-service restaurant industry, some of our franchisees experience financial difficulties from time to time with respect to their operations. Our approach to dealing with financial and operational issues that arise from these situations is described under Critical Accounting Policies above, under the heading “Franchised and Licensed Operations.” Some franchisees in the Hardee’s system have experienced significant financial problems and, as discussed above, there are a number of potential resolutions of these financial issues.

We continue to work with franchisees in an attempt to maximize our future franchising income. Our franchising income is dependent on both the number of restaurants operated by franchisees and their operational and financial success, such that they can make their royalty and lease payments to us. Although we review the allowance for doubtful accounts and the estimated liability for closed franchise restaurants, there can be no assurance that the number of franchisees or franchised restaurants experiencing financial difficulties will not increase from our current assessments, nor can there be any assurance that we will be successful in resolving financial issues relating to any specific franchisee. As of November 6, 2006, our consolidated allowance for doubtful accounts on notes receivable was 48.6% of the gross balance of notes receivable and our consolidated allowance for doubtful accounts on accounts receivable was 1.3% of the gross balance of accounts receivable. When appropriate, we establish notes receivable pursuant to completing workout agreements with troubled franchisees. As of November 6, 2006, we have not recognized, on a cumulative basis, $176 in accounts receivable and $6,087 in notes receivable, nor the royalty and rent revenue associated with these accounts and notes receivable, due from franchisees that are in default under the terms of their franchise agreements. We still experience specific problems with troubled franchisees (see Critical Accounting Policies — Franchise and Licensed Operations) and may be required to increase the amount of our allowances for doubtful accounts and/or increase the amount of our estimated liability for future lease obligations.

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

Operating Review

The following tables are presented to facilitate Management’s Discussion and Analysis of Financial Condition and Results of Operations and are classified in the same way as we present segment information (see Note 10).


	Twelve Weeks Ended November 6, 2006
	Carl’s Jr.			Hardee’s			La Salsa			Other(A)		Elimination(B)		Total
Company-operated revenue	$	132,068		$	148,668		$	10,122		$	85	$	—	$	290,943

Restaurant operating costs:
Food and packaging		38,599			42,912			2,669			28		—		84,208
Payroll and employee benefits		34,522			46,535			3,407			30		—		84,494
Occupancy and other operating costs		29,197			31,965			3,571			26		—		64,759

Total restaurant operating costs		102,318			121,412			9,647			84		—		233,461

Franchising and licensed restaurants and other revenues:
Royalties		6,984			11,793			409			128		4		19,318
Distribution centers		42,883			4,051			—			—		—		46,934
Rent		4,979			1,531			—			—		—		6,510
Retail sales of variable interest entity		—			—			—			822		—		822
Other		280			111			—			—		—		391

Total franchising and licensed restaurants and other revenues		55,126			17,486			409			950		4		73,975

Franchising and licensed restaurants and other expenses:
Administrative expense (including provision for bad debts)		1,168			556			313			—		—		2,037
Distribution centers		42,695			4,290			—			—		—		46,985
Rent and other occupancy		4,238			1,126			—			—		—		5,364
Operating costs of variable interest entity		—			—			—			801		4		805

Total franchising and licensed restaurants and other expenses		48,101			5,972			313			801		4		55,191

Advertising		7,140			8,684			303			1		—		16,128

General and administrative		12,414			20,876			2,523			80		—		35,893

Facility action charges, net		64			(1,554	)		1,414			66		—		(10	)

Operating income (loss)	$	17,157		$	10,764		$	(3,669	)	$	3	$	—	$	24,255


Company-operated average unit volume (trailing-13 periods)	$	1,416		$	907		$	793
Franchise-operated average unit volume (trailing-13 periods)	$	1,192		$	924		$	844
Company-operated same-store sales increase		6.2	%		5.6	%		2.0	%
Franchise-operated same-store sales increase		5.7	%		4.1	%		1.7	%
Company-operated same-store transaction increase (decrease)		1.0	%		2.5	%		(4.1	)%
Average check (actual $)	$	6.49		$	4.83		$	10.79
Restaurant operating costs as a % of company-operated revenue:
Food and packaging		29.2	%		28.9	%		26.4	%
Payroll and employee benefits		26.1	%		31.3	%		33.7	%
Occupancy and other operating costs		22.1	%		21.5	%		35.3	%
Total restaurant operating costs		77.5	%		81.7	%		95.3	%
Advertising as a percentage of company-operated revenue		5.4	%		5.8	%		3.0	%

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


	Twelve Weeks Ended November 7, 2005
	Carl’s Jr.			Hardee’s			La Salsa			Other(A)			Elimination(B)			Total
Company-operated revenue	$	129,548		$	134,420		$	10,770		$	84		$	—		$	274,822

Restaurant operating costs:
Food and packaging		37,708			39,648			2,916			29			—			80,301
Payroll and employee benefits		34,467			43,720			3,729			36			—			81,952
Occupancy and other operating costs		28,491			29,835			3,714			28			—			62,068

Total restaurant operating costs		100,666			113,203			10,359			93			—			224,321

Franchising and licensed restaurants and other revenues:
Royalties		5,941			9,836			400			116			(20	)		16,273
Distribution centers		40,028			5,304			—			—			(133	)		45,199
Rent		5,113			1,081			—			—			—			6,194
Retail sales of variable interest entity		—			—			—			1,003			—			1,003
Other		411			181			30			—			—			622

Total franchising and licensed restaurants and other revenues		51,493			16,402			430			1,119			(153	)		69,291

Franchising and licensed restaurants and other expenses:
Administrative expense (including provision for bad debts)		995			1,152			291			—			—			2,438
Distribution centers		39,210			5,514			—			—			—			44,724
Rent and other occupancy		4,258			1,307			—			—			—			5,565
Operating costs of variable interest entity		—			—			—			995			(201	)		794

Total franchising and licensed restaurants and other expenses		44,463			7,973			291			995			(201	)		53,521

Advertising		7,801			8,208			323			2			—			16,334

General and administrative		9,990			16,533			1,409			288			—			28,220

Facility action charges, net		367			630			(278	)		14			—			733

Operating income (loss)	$	17,754		$	4,275		$	(904	)	$	(189	)	$	48		$	20,984


Company-operated average unit volume (trailing-13 periods)	$	1,324		$	869		$	765
Franchise-operated average unit volume (trailing-13 periods)	$	1,150		$	880		$	890
Company-operated same-store sales (decrease) increase		(0.1	)%		(3.5	)%		2.6	%
Franchise-operated same-store sales (decrease) increase		(1.1	)%		(4.0	)%		2.0	%
Company-operated same-store transaction decrease		(4.7	)%		(5.1	)%		(1.3	)%
Average check (actual $)	$	6.10		$	4.69		$	10.06
Restaurant operating costs as a % of company-operated revenue:
Food and packaging		29.1	%		29.5	%		27.1	%
Payroll and employee benefits		26.6	%		32.5	%		34.6	%
Occupancy and other operating costs		22.0	%		22.2	%		34.5	%
Total restaurant operating costs		77.7	%		84.2	%		96.2	%
Advertising as a percentage of company-operated revenue		6.0	%		6.1	%		3.0	%

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


	Forty Weeks Ended November 6, 2006
	Carl’s Jr.			Hardee’s			La Salsa			Other(A)			Elimination(B)			Total
Company-operated revenue	$	457,572		$	489,234		$	35,111		$	273		$	—		$	982,190

Restaurant operating costs:
Food and packaging		131,337			141,187			8,981			90			—			281,595
Payroll and employee benefits		119,991			154,261			11,476			103			—			285,831
Occupancy and other operating costs		96,321			103,707			11,875			86			—			211,989

Total restaurant operating costs		347,649			399,155			32,332			279			—			779,415

Franchising and licensed restaurants and other revenues:
Royalties		22,478			38,070			1,491			382			(38	)		62,383
Distribution centers		144,201			13,531			—			—			—			157,732
Rent		16,196			6,101			—			—			—			22,297
Retail sales of variable interest entity		—			—			—			2,743			—			2,743
Other		1,542			554			—			—			—			2,096

Total franchising and licensed restaurants and other revenues		184,417			58,256			1,491			3,125			(38	)		247,251

Franchising and licensed restaurants and other expenses:
Administrative expense (including provision for bad debts)		4,000			3,100			1,087			—			—			8,187
Distribution centers		142,026			14,222			—			—			—			156,248
Rent and other occupancy		13,948			4,173			—			—			—			18,121
Operating costs of variable interest entity		—			—			—			2,695			(30	)		2,665

Total franchising and licensed restaurants and other expenses		159,974			21,495			1,087			2,695			(30	)		185,221

Advertising		26,253			28,772			1,053			5			—			56,083

General and administrative		41,194			66,091			6,493			221			—			113,999

Facility action charges, net		522			113			2,617			274			—			3,526

Operating income (loss)	$	66,397		$	31,864		$	(6,980	)	$	(76	)	$	(8	)	$	91,197


Company-operated same-store sales increase		5.5	%		4.8	%		1.6	%
Franchise-operated same-store sales increase		6.0	%		4.4	%		1.6	%
Company-operated same-store transaction increase (decrease)		1.5	%		1.3	%		(4.5	)%
Average check (actual $)	$	6.42		$	4.89		$	10.87
Restaurant operating costs as a % of company-operated revenue:
Food and packaging		28.7	%		28.9	%		25.6	%
Payroll and employee benefits		26.2	%		31.5	%		32.7	%
Occupancy and other operating costs		21.1	%		21.2	%		33.8	%
Total restaurant operating costs		76.0	%		81.6	%		92.1	%
Advertising as a percentage of company-operated revenue		5.7	%		5.9	%		3.0	%

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


	Forty Weeks Ended November 7, 2005
	Carl’s Jr.			Hardee’s			La Salsa			Other(A)			Elimination(B)			Total
Company-operated revenue	$	439,530		$	456,057		$	37,012		$	354		$	—		$	932,953

Restaurant operating costs:
Food and packaging		127,460			135,713			9,822			121			—			273,116
Payroll and employee benefits		118,225			147,095			12,221			159			—			277,700
Occupancy and other operating costs		94,964			102,816			12,788			124			—			210,692

Total restaurant operating costs		340,649			385,624			34,831			404			—			761,508

Franchising and licensed restaurants and other revenues:
Royalties		19,760			32,949			1,349			338			(68	)		54,328
Distribution centers		136,201			19,613			—			—			(133	)		155,681
Rent		15,874			5,820			—			—			—			21,694
Retail sales of variable interest entity		—			—			—			3,396			—			3,396
Other		1,078			644			31			—			—			1,753

Total franchising and licensed restaurants and other revenues		172,913			59,026			1,380			3,734			(201	)		236,852

Franchising and licensed restaurants and other expenses:
Administrative expense (including provision for bad debts)		3,610			3,762			1,008			—			—			8,380
Distribution centers		132,603			20,047			—			—			—			152,650
Rent and other occupancy		13,795			4,651			—			—			—			18,446
Operating costs of variable interest entity		—			—			—			3,421			(249	)		3,172

Total franchising and licensed restaurants and other expenses		150,008			28,460			1,008			3,421			(249	)		182,648

Advertising		28,228			27,139			1,042			7			—			56,416

General and administrative		34,659			56,413			5,479			11,554			—			108,105

Facility action charges, net		1,245			2,101			411			30			—			3,787

Operating income (loss)	$	57,654		$	15,346		$	(4,379	)	$	(11,328	)	$	48		$	57,341


Company-operated same-store sales increase (decrease)		1.2	%		(1.1	)%		2.3	%
Franchise-operated same-store sales (decrease) increase		(0.4	)%		(3.1	)%		3.1	%
Company-operated same-store transaction decrease		(3.8	)%		(3.5	)%		(2.1	)%
Average check (actual $)	$	6.16		$	4.75		$	10.15
Restaurant operating costs as a % of company-operated revenue:
Food and packaging		29.0	%		29.8	%		26.5	%
Payroll and employee benefits		26.9	%		32.3	%		33.0	%
Occupancy and other operating costs		21.6	%		22.5	%		34.6	%
Total restaurant operating costs		77.5	%		84.6	%		94.1	%
Advertising as a percentage of company-operated revenue		6.4	%		6.0	%		2.8	%


(A)		“Other” consists of Green Burrito and amounts that we do not believe would be proper to allocate to the operating segments.

(B)		“Eliminations” consists of the elimination of royalty revenues and expenses generated between Hardee’s and a consolidated variable interest entity franchisee included in our Condensed Consolidated Financial Statements.

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

Presentation of Non-GAAP Measurements

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure used by our senior lenders under the Facility to evaluate our ability to service debt. Adjusted EBITDA is not a recognized term under GAAP and does not purport to be an alternative to income from operations, an indicator of cash flow from operations or a measure of liquidity. As shown in the table below and defined in the Facility, Adjusted EBITDA is calculated as earnings before cumulative effect of accounting changes, discontinued operations, interest expense, income taxes, depreciation and amortization, facility action charges, impairment of goodwill and impairment of assets held for sale. Because not all companies calculate Adjusted EBITDA identically, this presentation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Adjusted EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest expense, income taxes, debt service payments and cash costs arising from facility actions.

The Facility includes a number of financial covenants, including a current requirement that we generate a minimum Adjusted EBITDA of $125,000 on a trailing four quarter basis. In addition, our maximum annual capital expenditures are limited by the Facility, based on a sliding scale driven by our Adjusted EBITDA.


	Twelve Weeks Ended November 6, 2006
	Carl’s Jr.		Hardee’s			La Salsa			Other			Total
Net income (loss)	$	9,162	$	2,142		$	(2,099	)	$	252		$	9,457
Interest expense (income)		875		2,937			(8	)		—			3,804
Income tax expense (benefit)		7,962		3,776			(1,555	)		(122	)		10,061
Depreciation and amortization		6,100		7,722			677			46			14,545
Facility action charges, net		64		(1,554	)		1,414			66			(10	)

Adjusted EBITDA	$	24,163	$	15,023		$	(1,571	)	$	242		$	37,857


	Twelve Weeks Ended November 7, 2005
	Carl’s Jr.		Hardee’s		La Salsa			Other			Total
Net income (loss)	$	16,667	$	287	$	(879	)	$	(252	)	$	15,823
Interest expense		1,006		4,323		5			—			5,334
Income tax expense (benefit)		433		40		(18	)		115			570
Depreciation and amortization		5,634		7,582		799			38			14,053
Facility action charges, net		367		630		(278	)		14			733

Adjusted EBITDA	$	24,107	$	12,862	$	(371	)	$	(85	)	$	36,513


	Forty Weeks Ended November 6, 2006
	Carl’s Jr.		Hardee’s		La Salsa			Other			Total
Net income (loss)	$	38,182	$	5,997	$	(4,092	)	$	(246	)	$	39,841
Interest expense (income)		3,146		12,654		(2	)		118			15,916
Income tax expense (benefit)		26,745		8,704		(2,872	)		(120	)		32,457
Depreciation and amortization		19,532		25,183		2,378			152			47,245
Facility action charges, net		522		113		2,617			274			3,526

Adjusted EBITDA	$	88,127	$	52,651	$	(1,971	)	$	178		$	138,985


	Forty Weeks Ended November 7, 2005
	Carl’s Jr.		Hardee’s		La Salsa			Other			Total
Net income (loss)	$	53,869	$	1,886	$	(4,265	)	$	(11,220	)	$	40,270
Interest expense		3,305		14,512		21			92			17,930
Income tax expense (benefit)		1,387		106		(87	)		259			1,665
Depreciation and amortization		19,268		27,805		2,761			128			49,962
Facility action charges, net		1,245		2,101		411			30			3,787

Adjusted EBITDA	$	79,074	$	46,410	$	(1,159	)	$	(10,711	)	$	113,614

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


	Trailing Four Quarters Ended November 6, 2006
	Carl’s Jr.		Hardee’s		La Salsa			Other			Total
Net income (loss)	$	61,378	$	329	$	(6,682	)	$	139,128		$	194,153
Interest expense		4,096		16,783		5			118			21,002
Income tax expense (benefit)		27,313		8,598		(2,923	)		(139,527	)		(106,539	)
Depreciation and amortization		25,222		32,851		3,175			190			61,438
Facility action charges, net		1,069		2,665		3,750			280			7,764

Adjusted EBITDA	$	119,078	$	61,226	$	(2,675	)	$	189		$	177,818

The following tables reconcile Adjusted EBITDA (a non-GAAP measure) to net cash provided by operating activities (a GAAP measure):


	Twelve Weeks Ended
	November 6, 2006			November 7, 2005
Net cash provided by operating activities	$	37,209		$	31,330
Interest expense		3,804			5,334
Income tax expense		10,061			570
Amortization of loan fees		(571	)		(820	)
Share-based compensation expense		(2,009	)		(47	)
Recovery of (provision for) losses on accounts and notes receivable		645			(5	)
Loss on sales of property and equipment, capital leases and extinguishment of debt		(953	)		(410	)
Deferred income taxes		(8,683	)		(44	)
Other non-cash (charges) credits		(103	)		14
Net changes in operating assets and liabilities:
Estimated liability for closing restaurants and estimated liability for self-insurance		1,789			2,136
Refundable income taxes		10			221
Receivables, inventories, prepaid expenses and other current and non-current assets		(144	)		571
Accounts payable and other current and long-term liabilities		(3,198	)		(2,337	)

Adjusted EBITDA	$	37,857		$	36,513


	Forty Weeks Ended
	November 6, 2006			November 7, 2005
Net cash provided by operating activities	$	134,870		$	99,053
Interest expense		15,916			17,930
Income tax expense		32,457			1,665
Amortization of loan fees		(2,349	)		(2,705	)
Share-based compensation expense		(4,934	)		(57	)
Recovery of losses on accounts and notes receivable		351			494
Loss on sales of property and equipment, capital leases and extinguishment of debt		(1,942	)		(2,231	)
Deferred income taxes		(29,954	)		(141	)
Other non-cash charges		(56	)		(38	)
Net changes in operating assets and liabilities:
Estimated liability for closing restaurants and estimated liability for self-insurance		3,875			5,218
Refundable income taxes		8			(423	)
Receivables, inventories, prepaid expenses and other current and non-current assets		2,466			1,008
Accounts payable and other current and long-term liabilities		(11,723	)		(6,159	)

Adjusted EBITDA	$	138,985		$	113,614

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


	Trailing Four Quarters
	Ended November 6, 2006
Net cash provided by operating activities	$	151,990
Interest expense		21,002
Income tax benefit		(106,539	)
Amortization of loan fees		(2,956	)
Share-based compensation expense		(5,066	)
Provision for losses on accounts and notes receivable		(319	)
Loss on sales of property and equipment, capital leases and extinguishment of debt		(2,891	)
Deferred income taxes		109,108
Other non-cash charges		(105	)
Net changes in operating assets and liabilities:
Estimated liability for closing restaurants and estimated liability for self-insurance		12,551
Refundable income taxes		(181	)
Receivables, inventories, prepaid expenses and other current and non-current assets		6,460
Accounts payable and other current and long-term liabilities		(5,236	)

Adjusted EBITDA	$	177,818

Carl’s Jr.

During the twelve weeks ended November 6, 2006, we closed one company-operated restaurant, and Carl’s Jr. franchisees and licensees closed three and opened ten restaurants. During the forty weeks ended November 6, 2006, we closed one and opened four company-operated restaurants, and Carl’s Jr. franchisees and licensees closed four and opened 30 restaurants. During the same period, we also divested 38 company-operated restaurants to a franchisee. The following tables show the change in the Carl’s Jr. restaurant portfolio for the trailing four quarters, as well as the change in revenue, for the current quarter and year-to-date period:


	Restaurant Portfolio							Revenue
	Third Fiscal Quarter							Third Fiscal Quarter						Year-To-Date
	2007		2006		Change			2007		2006		Change		2007		2006		Change
Company-operated		394		428		(34	)	$	132,068	$	129,548	$	2,520	$	457,572	$	439,530	$	18,042
Franchised and licensed(a)		685		614		71			55,126		51,493		3,633		184,417		172,913		11,504

Total		1,079		1,042		37		$	187,194	$	181,041	$	6,153	$	641,989	$	612,443	$	29,546


(a)		Includes $42,883, $40,028, $144,201 and $136,201 of revenues from distribution of food, packaging and supplies to franchised and licensed restaurants during the twelve weeks ended November 6, 2006, and November 7, 2005, and the forty weeks ended November 6, 2006 and November 7, 2005, respectively.

Company-Operated Restaurants

Revenue from company-operated Carl’s Jr. restaurants increased $2,520, or 1.9%, to $132,068 during the twelve weeks ended November 6, 2006, as compared to the twelve weeks ended November 7, 2005. This increase was primarily due to increases in same-store sales of 6.2% and in the average check by 6.4% over the prior year period. In addition, the average unit volume for the trailing 13 periods ended November 6, 2006, reached $1,416, an increase of 6.9% over the comparable period ended November 7, 2005. We believe this increase is due to the successful promotion of the popular “meat-as-a-condiment” Pastrami Burger™, the latest Hand-Scooped Ice Cream Shakes and Malts™ flavor featuring M&M’s Chocolate Candies™, and the introduction of the Smoked Sausage Breakfast Sandwich™. These increases were partially offset by the net impact of the opening of five new company- operated restaurants, the closing of one restaurant and the divestiture of 38 restaurants to a franchisee, as compared to the same prior year period.

During the forty weeks ended November 6, 2006, revenue from company-operated Carl’s Jr. restaurants increased $18,042, or 4.1%, to $457,572. The increases are mainly due to the impacts of a 5.5% increase in same-store sales and a 4.2% increase in the average guest check, partially offset by a decrease in the number of company-operated restaurants, as described in the preceding paragraph.

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

The changes in the restaurant operating costs as a percentage of company-operated revenue are explained as follows:


	Twelve			Forty
	Weeks			Weeks
Restaurant operating costs as a percentage of company-operated revenue for the period ended November 7, 2005		77.7	%		77.5	%
Decrease in labor costs, excluding workers’ compensation		(0.7	)		(0.5	)
Decrease in utilities expense		(0.5	)		—
Increase (decrease) in workers’ compensation expense		0.2			(0.1	)
Increase (decrease) in asset retirement expense		0.2			(0.1	)
Increase in banking/ATM expense		0.2			0.1
Increase (decrease) in depreciation expense		0.2			(0.1	)
Increase (decrease) in food and packaging costs		0.1			(0.3	)
Decrease in cost of promotional items		—			(0.3	)
Decrease in rent expense		—			(0.2	)
Other, net		0.1			—

Restaurant operating costs as a percentage of company-operated revenue for the period ended November 6, 2006		77.5	%		76.0	%

Labor costs, excluding workers’ compensation, as a percent of company-operated revenue decreased during the twelve and forty weeks ended November 6, 2006, as compared to the twelve and forty weeks ended November 7, 2005, due mainly to the benefit of sales leverage.

Utilities expense as a percent of company-operated revenue decreased during the twelve weeks ended November 6, 2006, as compared to the twelve weeks ended November 7, 2005, due to a reduction in rates for electricity and natural gas and the benefit of sales leverage.

Workers’ compensation expense increased as a percent of company-operated revenue during the twelve weeks ended November 6, 2006, due to the impact of a favorable claims reserves adjustment recorded in the third quarter of fiscal 2006, as a result of a quarterly actuarial analysis of outstanding claims reserves, that did not recur to the same extent in the current year quarter, partially offset by the benefit of sales leverage and continued favorable actuarial trends in claim frequency and severity. On a year-to-date basis, workers’ compensation expense has decreased as a percent of company-operated revenue due to the benefit of sales leverage and continued favorable actuarial trends in claim frequency and severity, partially offset by the impact of favorable claims reserves adjustments recorded in the prior year period that did not recur to the same extent in the current year period.

Asset retirement expense as a percent of company-operated revenue increased during the twelve weeks ended November 6, 2006, as compared to the twelve weeks ended November 7, 2005, due to the write-off of assets that were damaged in a restaurant fire during the current year quarter with no similar occurrences in the prior year period. Asset retirement expense as a percent of company-operated revenue decreased during the forty weeks ended November 6, 2006, as compared to the forty weeks ended November 7, 2005, due to the write-off of leased point of sale equipment during the first quarter of fiscal 2006 for which there was no comparable write-off in the current year period, partially offset by the write-off of fire-damaged equipment described above.

Banking/ATM expense as a percent of company-operated revenue increased during the twelve and forty weeks ended November 6, 2006, as compared to the twelve and forty weeks ended November 7, 2005, due mainly to increased fees related to higher credit card and ATM usage during the current year periods.

Depreciation and amortization as a percent of company-operated revenue increased during the twelve weeks ended November 6, 2006, from the comparable prior year period, mainly due to the addition of new assets related to the rollout of new POS software and related hardware.

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

Food and packaging costs as a percent of company-operated revenue increased during the twelve weeks ended November 6, 2006, as compared to the prior year period, due primarily to increases in distribution costs, related to the on-going relocation of our main distribution center, and in fuel and labor costs, which were partially offset by decreases in the cost of several commodities, such as beef, pork, poultry and cheese. Food and packaging costs as a percent of company-operated revenue decreased during the forty weeks ended November 6, 2006, as compared to the prior year period, due primarily to decreases in the cost of several commodities such as beef, pork, poultry and cheese, which were partially offset by an increase in distribution costs related to the on-going relocation of our main distribution center.

Cost of promotional items as a percent of company-operated revenue decreased during the forty weeks ended November 6, 2006, from the comparable prior year period, mainly due to the bobblehead promotion in the prior year period for which there was no comparable expense in the current year period.

Rent expense as a percent of company-operated revenue decreased during the forty weeks ended November 6, 2006, as compared to the prior year period, due mainly to the benefit of sales leverage.

Franchised and Licensed Restaurants

Total franchising revenue increased $3,633, or 7.1%, to $55,126 during the twelve weeks ended November 6, 2006, as compared to the twelve weeks ended November 7, 2005. Franchise royalties grew $1,043, or 17.6%, during the twelve weeks ended November 6, 2006, as compared to the twelve weeks ended November 7, 2005 due to the net increase of 71 domestic and international franchised restaurants during the trailing 13 periods ended November 6, 2006, and the impact of a 5.7% increase in same-store sales. Food, paper and supplies sales to franchisees increased by $2,855, or 7.1%, due to the increase in the franchise store base over the comparable prior year period, and the food purchasing volume impact of the increase in franchise same-store sales.

Total franchising revenue increased $11,504, or 6.7%, to $184,417 during the forty weeks ended November 6, 2006, as compared to the forty weeks ended November 7, 2005. The increase is comprised mainly of an increase of $8,000, or 5.9%, in food, paper and supplies sales to franchisees, increased franchise royalties of $2,718, or 13.8%, and increased franchise fees of $600, or 55.7%, primarily for reasons noted in the third fiscal quarter discussion above.

Franchised and licensed operating and other expenses increased $3,638, or 8.2%, to $48,101 during the twelve weeks ended November 6, 2006, as compared to the prior year period. This increase is mainly due to an increase in distribution center costs of $3,485, which can be attributed mainly to the increase in the cost of food, paper and supplies due to a corresponding increase in sales to franchisees and an increase in costs related to the on-going relocation of our main distribution center.

Franchised and licensed operating and other expenses increased $9,966, or 6.6%, to $159,974 during the forty weeks ended November 6, 2006, as compared to the prior year period. This increase is mainly due to an increase in distribution center costs of $9,423, which can be attributed mainly to the increase in the cost of food, paper and supplies due to a corresponding increase in sales to franchisees and an increase in costs related to the on-going relocation of our main distribution center.

Although not required to do so, as of November 6, 2006, approximately 87.5% of Carl’s Jr. franchised and licensed restaurants purchase food, paper and other supplies from us.

Hardee’s

During the twelve weeks ended November 6, 2006, we opened two and closed 12 company-operated restaurants, and Hardee’s franchisees and licensees opened seven and closed 19 restaurants. During the same period, we acquired 14 restaurants from the lender of a former franchisee, of which three are currently being operated by an existing franchisee. During the forty weeks ended November 6, 2006, we opened four and closed 19 company-operated restaurants. During the same period, we also terminated our franchise agreement, leases and subleases with one franchisee and acquired 61 of their restaurants, of which we subsequently closed 18 and currently operate 43 as company-operated restaurants (see Note 13 for additional discussion). During the same period, we acquired 14 restaurants from the lender of a former franchisee, of which three are currently being operated by an existing franchisee. During the forty weeks ended November 6, 2006, Hardee’s franchisees and licensees opened 20 and closed 57 restaurants; they also divested 75 restaurants (including those divested by a lender of a former franchisee) to us. We closed 18 of those restaurants, and three of the restaurants are currently being operated by an existing

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

franchisee. The following table shows the change in the Hardee’s restaurant portfolio during the trailing four quarters, as well as the change in revenue for the current quarter and year-to-date period:


	Restaurant Portfolio							Revenue
	Third Fiscal Quarter							Third Fiscal Quarter						Year-To-Date
	2007		2006		Change			2007		2006		Change		2007		2006		Change
Company-operated		705		664		41		$	148,668	$	134,420	$	14,248	$	489,234	$	456,057	$	33,177
Franchised and licensed		1,218		1,340		(122	)		17,486		16,402		1,084		58,256		59,026		(770	)

Total		1,923		2,004		(81	)	$	166,154	$	150,822	$	15,332	$	547,490	$	515,083	$	32,407

Company-Operated Restaurants

Revenue from company-operated Hardee’s restaurants increased $14,248, or 10.6%, to $148,668 during the twelve weeks ended November 6, 2006, as compared to the twelve weeks ended November 7, 2005. The increase is mostly due to an increase in same-store sales of 5.6% and a net increase of 41 restaurants since the third quarter of fiscal 2006, including 43 restaurants acquired from a former franchisee during fiscal 2007. Average unit volume for the trailing 13 periods ended November 6, 2006, reached $907, an increase of 4.4% over the comparable period ended November 7, 2005. During the same period, the average check increased by 3.0% due to the continued promotion of premium products such as our Big Chicken Fillet™, Red Burrito Taco Salad™, Steak ‘N’ Egg Burrito™ and Philly Cheesesteak Thickburger™.

During the forty weeks ended November 6, 2006, revenue from company-operated Hardee’s restaurants increased $33,177, or 7.3%, to $489,234 as compared to the same prior year period. The increase is mainly due to a 4.8% increase in same store sales, a 2.9% increase in average guest check and an increase in the number of company-operated restaurants.

The changes in the restaurant operating costs as a percentage of company-operated revenue are explained as follows:


	Twelve			Forty
	Weeks			Weeks
Restaurant operating costs as a percentage of company-operated revenue for the period ended November 7, 2005		84.2	%		84.6	%
Decrease in labor costs, excluding workers’ compensation		(1.5	)		(1.0	)
Decrease in food and packaging costs		(0.6	)		(0.9	)
Decrease in rent expense		(0.4	)		(0.4	)
Decrease in depreciation and amortization expense		(0.3	)		(0.8	)
Increase in workers’ compensation expense		0.3			0.3
Increase in repairs and maintenance expense		0.4			—
Decrease in utilities expense		(0.3	)		—
Decrease in supplies and uniform expense		—			(0.2	)
Other, net		(0.1	)		—

Restaurant operating costs as a percentage of company-operated revenue for the period ended November 6, 2006		81.7	%		81.6	%

Labor costs, excluding workers’ compensation, as a percent of company-operated revenue decreased during the twelve and forty weeks ended November 6, 2006, as compared to the prior year periods, primarily attributable to the benefit of greater sales leverage.

Food and packaging costs as a percent of company-operated revenue decreased during the twelve and forty weeks ended November 6, 2006, compared to the comparable prior year periods, due to reduced costs for commodities such as beef, pork, poultry and cheese. This was partially offset by slightly higher paper costs and increased vending expenses due to the reopening of two toll road restaurants with company-operated gift shops.

Rent expense as a percent of company-operated revenue decreased during the twelve and forty weeks ended November 6, 2006, as compared to the prior year periods, due to the March 2006 purchase of 36 restaurant locations that had previously been leased from a commercial lessor and the benefit of greater sales leverage.

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

Depreciation and amortization expense as a percent of company-operated revenue decreased during the twelve and forty weeks ended November 6, 2006, as compared to the prior year periods, mostly due to the expiration of certain equipment capital leases during fiscal 2006, as well as the continued use of certain fully depreciated assets and the benefit of sales leverage, partially offset by additional depreciation related to the purchase of 36 restaurant locations during March 2006.

Workers’ compensation expense increased as a percent of company-operated revenue during the twelve and forty weeks ended November 6, 2006, due to the impact of favorable claims reserves adjustments recorded in the prior year periods, as a result of actuarial analyses of outstanding claims reserves, that did not recur to the same extent in the current year periods. The impact of these increases was partially offset by the benefit of sales leverage during the current year periods.

Repairs and maintenance expense increased as a percent of company-operated revenue during the twelve weeks ended November 6, 2006, as compared to the prior year period, mainly due to higher repairs and maintenance costs for the restaurants acquired in connection with the termination of a franchise agreement. There were also higher maintenance costs for a new POS system support contract with no similar costs during the same prior year period.

Utilities expense as a percent of company-operated revenue decreased during the twelve weeks ended November 6, 2006, as compared to the prior year period, mostly due to the benefit of sales leverage.

Supplies and uniform expense as a percent of company-operated revenue decreased during the forty weeks ended November 6, 2006, as compared to the prior year period, due mainly to the rollout of new uniforms in the prior year period and the benefit of greater sales leverage.

Franchised and Licensed Restaurants

Total franchising revenue increased $1,084, or 6.6%, to $17,486 during the twelve weeks ended November 6, 2006, as compared to the twelve weeks ended November 7, 2005. This increase is mainly due to an increase in royalty revenues of $1,957, or 19.9%, which is primarily due to the increase in domestic same-store sales and in royalty collections from financially troubled franchisees. During the twelve weeks ended November 6, 2006, we collected $1,794 of previously unrecognized royalties from significantly past due franchisees, compared to collections of $696 in the prior year quarter. The incremental revenue resulting from such collections is not expected to recur, to the same extent, in future quarters. This increase is partially offset by a $1,253, or 23.6%, decrease in distribution center revenues related to decreased franchise remodel activity in the current quarter and a $450, or 41.6%, increase in rental income due to the collection of previously unrecognized rental income, partially offset by the decrease due to the termination of a franchise agreement with a franchisee that had previously leased ten of our owned locations and subleased 51 of our leased locations.

Total franchising revenue decreased $770, or 1.3%, to $58,256 during the forty weeks ended November 6, 2006, as compared to the forty weeks ended November 7, 2005. The decrease is primarily due to a $6,082, or 31.0%, decrease in distribution center revenues related to decreased franchise remodel activity in the current fiscal year and the ice cream equipment rollout in the prior year period. This decrease is partially offset by an increase in royalty revenues of $5,121, or 15.5%, which is primarily due to the increase in domestic same-store sales and in royalty collections from financially troubled franchisees. During the forty weeks ended November 6, 2006, we collected $4,693 of previously unrecognized royalties from significantly past due franchisees, compared to collections of $1,608 in the prior year period. The incremental revenue resulting from such collections is not expected to recur, to the same extent, in future periods.

Franchised and licensed operating and other expenses decreased $2,001, or 25.1%, to $5,972, during the twelve weeks ended November 6, 2006, as compared to the prior year period. This decrease in costs is mainly due to a reduction in bad debt expense, a decrease in cost of equipment sales due to a corresponding decrease in equipment sales and the closure of 18 of the restaurant locations we acquired upon the termination of a franchise agreement.

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

Franchised and licensed operating and other expenses decreased $6,965, or 24.5%, to $21,495, during the forty weeks ended November 6, 2006, as compared to the prior year period. This decrease in costs is mainly due to a reduction in bad debt expense, a decrease in cost of equipment sales due to a corresponding decrease in equipment sales, and a decrease in rent expense due to the closure of 18 of the restaurant locations we acquired upon the termination of a franchise agreement.

La Salsa

During the twelve weeks ended November 6, 2006, we opened one and closed two company-operated restaurants, and La Salsa franchisees and licensees closed two restaurants. During the forty weeks ended November 6, 2006, we opened one and closed six company-operated restaurants, and La Salsa franchisees and licensees opened two and closed four restaurants. The following table shows the change in the La Salsa restaurant portfolio for the trailing four quarters, as well as the change in revenue for the current quarter and year-to-date period:


	Restaurant Portfolio							Revenue
	Third Fiscal Quarter							Third Fiscal Quarter							Year-To-Date
	2007		2006		Change			2007		2006		Change			2007		2006		Change
Company-operated		54		61		(7	)	$	10,122	$	10,770	$	(648	)	$	35,111	$	37,012	$	(1,901	)
Franchised and licensed		41		40		1			409		430		(21	)		1,491		1,380		111

Total		95		101		(6	)	$	10,531	$	11,200	$	(669	)	$	36,602	$	38,392	$	(1,790	)

Same-store sales for company-operated La Salsa restaurants increased 2.0% during the twelve weeks ended November 6, 2006, as compared to the same period in the prior year. Revenue from company-operated La Salsa restaurants decreased $648, or 6.0%, as compared to the twelve weeks ended November 7, 2005, primarily due to the closure of seven company-operated restaurants in the trailing 13 periods ended November 6, 2006. For the forty weeks ended November 6, 2006, same-store sales for company-operated La Salsa restaurants increased 1.6%, as compared to the same period in the prior year; and revenue from company-operated La Salsa restaurants decreased $1,901, or 5.1%, as compared to the same period in the prior year, primarily due to the closure of seven company-operated restaurants in the trailing 13 periods ended November 6, 2006.

Restaurant operating costs as a percentage of company-operated revenue were 95.3% and 96.2% for the twelve weeks ended November 6, 2006 and November 7, 2005, respectively. Restaurant operating costs as a percentage of company-operated revenue were 92.1% and 94.1% for the forty weeks ended November 6, 2006 and November 7, 2005, respectively. Food and packaging costs decreased by 0.7% and 0.9% as a percent of revenue for the twelve and forty weeks ended November 6, 2006, respectively, as compared to the same periods in the prior year, primarily due to reduced costs for dairy, poultry and seafood products. Occupancy and other costs increased 0.8% as a percent of revenues for the twelve weeks ended November 6, 2006, as compared to the same period in the prior year, mainly due to higher rent and repairs and maintenance costs. Occupancy and other costs decreased 0.8% as a percent of revenues for the forty weeks ended November 6, 2006, as compared to the same period in the prior year, driven primarily by a reduction in depreciation and asset retirement expenses. Labor costs decreased 0.9% and 0.3% as a percent of revenues for the twelve and forty weeks ended November 6, 2006, respectively, as compared to the same periods in the prior year, mainly due to the benefit of sales leverage.

Consolidated Expenses

Consolidated Variable Interest Entities

We consolidate the results of one franchise VIE, which operates five Hardee’s restaurants. We do not possess any ownership interest in the franchise VIE. Retail sales and operating expenses of the franchise VIE are included within franchised and licensed restaurants and other. The assets and liabilities of, and minority interest in, this entity are included in our accompanying Condensed Consolidated Balance Sheets and are not significant to our consolidated financial position. The results of operations of this entity are included within our accompanying Condensed Consolidated Statements of Income and are not significant to our consolidated results of operations. The minority interest in the income or loss of this franchise entity is classified in other income, net, in our accompanying Condensed Consolidated Statements of Income. We have no rights to the assets, nor do we have any obligation with respect to the liabilities, of this franchise entity. None of our assets serve as collateral for the creditors of this franchisee or any of our other franchisees. (See Note 1 for further discussion of the franchise VIE.)

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

We also consolidate the Hardee’s cooperative advertising funds, which consist of the Hardee’s National Advertising Fund and approximately 82 local advertising cooperative funds because we have determined we are the primary beneficiaries of these funds. Each of these funds is a separate non-profit association with all the proceeds segregated and managed by a third-party accounting service company. The group of funds has been reported in our accompanying Condensed Consolidated Balance Sheets as advertising fund assets, restricted, and advertising fund liabilities within current assets and current liabilities, respectively. The funds are reported as of the latest practicable date, which is the last day of the calendar quarter immediately preceding the balance sheet date.

Advertising Expense

Advertising expenses decreased $206, or 1.3%, to $16,128, and also decreased 0.4%, to 5.5%, as a percentage of company-operated revenue, during the twelve weeks ended November 6, 2006, as compared to the comparable period in the prior year. Advertising expenses decreased $333, or 0.6%, to $56,083, and also decreased 0.3%, to 5.7%, as a percentage of company-operated revenue, during the forty weeks ended November 6, 2006, as compared to the comparable period in the prior year. The decrease as a percentage of revenue is mainly due to the benefit of sales leverage and increased contribution rates from Carl’s Jr. franchisees, which defray costs to produce advertising and marketing materials.

General and Administrative Expense

General and administrative expenses increased $7,673, or 27.2%, to $35,893, and also increased 1.6%, to 9.8%, of total revenue, for the twelve weeks ended November 6, 2006, as compared to the twelve weeks ended November 7, 2005. This increase was mainly due to higher management bonus expense of $1,335, based on our performance relative to executive management and operations bonus criteria; an increase of $1,962 in share-based compensation expense, as a result of the adoption of SFAS 123R and issuance of additional options and awards; increased information technologies expense primarily related to higher consulting fees related to various systems implementations and upgrades; increases in our accrued liability for litigation; and increases in professional services and various other expenses.

General and administrative expenses increased $5,894, or 5.5%, to $113,999, and also increased 0.1%, to 9.3% of total revenue, for the forty weeks ended November 6, 2006, as compared to the same prior year period. This increase was mainly due to higher management bonus expense of $5,335, based on our performance relative to executive management and operations bonus criteria; an increase of $4,877 in share-based compensation expense, as a result of the adoption of SFAS 123R and issuance of additional options and awards; increased information technologies expense of $1,316, primarily related to higher consulting fees related to various systems implementations and upgrades; increases in our accrued liability for litigation; and increases in professional services and various other expenses. These increases were partially offset by the fact that general and administrative expenses for the forty weeks ended November 7, 2005 included $11,000 to purchase and retire the outstanding options of our retired Chairman of the Board of Directors, and there was no comparable expense in the current year period.

Facility Action Charges

Facility action charges arise from closure of company-operated restaurants, sublease of closed facilities at amounts below our primary lease obligation, impairments of long-lived assets to be disposed of or held and used, gains or losses upon disposal of surplus property, and discount amortization for obligations related to closed or subleased facilities to their future costs.

Net facility action charges decreased $743, or 101.4%, to $(10) during the twelve weeks ended November 6, 2006, as compared to the twelve weeks ended November 7, 2005. This decrease is mainly due to an increase in gains on the sales of restaurants and surplus properties of $1,874 over the prior year period, partially offset by an increase in new decisions to close restaurants of $1,190.

Net facility action charges decreased $261, or 6.9%, to $3,526, remaining a flat 0.3% as a percentage of total revenue, during the forty weeks ended November 6, 2006, as compared to the same prior year period. This decrease is mainly due to an increase in gains on the sales of restaurants and surplus properties of $3,517 over the prior year

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

period. This decrease was partially offset by increases in new decisions regarding closing restaurants of $2,210, in asset impairment of $409 and in unfavorable dispositions of leases and fee surplus properties of $773.

See Note 7 for additional detail of the components of facility action charges.

Interest Expense

During the twelve weeks ended November 6, 2006, interest expense decreased $1,530, or 28.7%, to $3,804, as compared to the twelve weeks ended November 7, 2005, primarily as a result of lower average borrowing, the conversion of a significant portion of our 2023 Convertible Notes into shares of our common stock during fiscal 2007 and further reduction of our capital lease obligations since the prior year comparable period. During the forty weeks ended November 6, 2006, interest expense decreased $2,014, or 11.2%, to 15,916, as compared to the comparable prior year period primarily for reasons similar to those noted in the third fiscal quarter discussion.

See Note 6 for additional detail of the components of interest expense.

Conversion Inducement Expense

During the twelve and forty weeks ended November 6, 2006, we recorded conversion inducement expense of $2,807 and $6,406 as a result of payments made, in response to unsolicited offers, to induce the holders of $38,388 and $89,808 of our 2023 Convertible Notes to convert their notes into 4,369,165 and 10,221,579 shares of our common stock, respectively. No comparable expense was recorded during the twelve and forty weeks ended November 7, 2005, and we do not expect to incur comparable conversion inducement expense in future quarterly or annual periods.

Other Income, Net

Other income, net, consisted of the following:


	Twelve Weeks Ended				Forty Weeks Ended
	November 6,		November 7,		November 6,		November 7,
	2006		2005		2006		2005
Interest income on notes receivable from franchisees, disposition properties and capital leases	$	243	$	277	$	872	$	886
Rental income from properties leased to third parties, net		375		347		1,361		986
Other, net		1,256		119		1,190		652

Total other income, net	$	1,874	$	743	$	3,423	$	2,524

Other income, net, typically consists of lease and sublease income from non-franchisee tenants, interest income on notes receivable, and other non-operating items. Other income, net, increased $1,131 and $899 during the twelve and forty weeks ended November 6, 2006, as compared to the comparable periods in the prior year, respectively, due mainly to the favorable resolution of a gain contingency and the collection of a non-trade receivable that had previously been determined to be uncollectible.

Income Taxes

Income tax expense for the twelve and forty weeks ended November 6, 2006 consisted of the following:


	Twelve Weeks Ended						Forty Weeks Ended
	November 6,			November 7,			November 6,			November 7,
	2006			2005			2006			2005
Foreign income taxes	$	222		$	200		$	844		$	666
Federal and state income taxes		9,839			370			31,613			999

Income tax expense	$	10,061		$	570		$	32,457		$	1,665

Effective income tax rate		51.5	%		3.5	%		44.9	%		4.0	%

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

As a result of our net operating loss (“NOL”) carryforwards, tax credit carryforwards and expected favorable book/tax differences from depreciation and amortization, we expect that our cash requirements for U.S. federal and state income taxes will approximate 2.0% of our taxable earnings in fiscal 2007 and until such time that our various NOLs and credits are utilized. The 2.0% rate results primarily from alternative minimum tax (“AMT”), under which 10% of taxable earnings cannot be offset by NOL carryforwards and is subject to the AMT rate of 20%. The actual cash requirements for income taxes could vary significantly from our expectations for a number of reasons, including, but not limited to, unanticipated fluctuations in our deferred tax assets and liabilities, unexpected gains from significant transactions, unexpected outcomes of income tax audits, and changes in tax law. We expect to continue to incur foreign taxes on our income earned outside the U.S.

Liquidity and Capital Resources

We currently finance our business through cash flows from operations and borrowings under our credit facility. We believe our most significant cash use during the next 12 months will be for capital expenditures. Based on our current capital spending projections, we expect capital expenditures for fiscal 2007 to be between $100,000 and $110,000. We amended and restated the Facility on June 2, 2004, and amended the Facility again on November 4, 2004 and April 21, 2005 (see below). We anticipate that existing cash balances, borrowing capacity under the Facility, and cash provided by operations will be sufficient to service existing debt and to meet our operating and capital requirements for at least the next 12 months. We have no potential mandatory payments of principal on our 4% Convertible Subordinated Notes due 2023 until October 1, 2008.

We, and the restaurant industry in general, maintain relatively low levels of accounts receivable and inventories, and vendors grant trade credit for purchases such as food and supplies. We also continually invest in our business through the addition of new sites and the refurbishment of existing sites, which are reflected as long-term assets and not as part of working capital. As a result, we typically maintain current liabilities in excess of current assets, resulting in a working capital deficit. As of November 6, 2006, our current ratio was 0.84 to 1.

The Facility provides for a $380,000 senior secured credit facility consisting of a $150,000 revolving credit facility and a $230,000 term loan. The revolving credit facility matures on May 1, 2007, and includes an $85,000 letter of credit sub-facility. The principal amount of the term loan is scheduled to be repaid in quarterly installments, with the remaining principal balance scheduled to mature on July 2, 2008. Subject to certain conditions as defined in the Facility, the maturity of the term loan may be extended to May 1, 2010.

As of November 6, 2006, the applicable interest rate on the term loan was LIBOR plus 2.00%, or 7.375%, per annum. For the revolving loan portion of the Facility, the applicable rate was Prime plus 1.00%, or 9.25%, per annum. We also incur fees on outstanding letters of credit under the Facility at a rate equal to the applicable margin for LIBOR revolving loans, which is currently 2.25% per annum.

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

The Facility required us to enter into interest rate protection agreements in an aggregate notional amount of at least $70,000 for a term of at least three years. Pursuant to this requirement, on July 26, 2004, we entered into two interest rate cap agreements in an aggregate notional amount of $70,000. Under the terms of each agreement, if LIBOR exceeds 5.375% on the measurement date for any quarterly period, we will receive payments equal to the amount LIBOR exceeds 5.375%, multiplied by (i) the notional amount of the agreement and (ii) the fraction of a year represented by the quarterly period. The agreements expire on July 28, 2007. The agreements were not designated as cash flow hedges under the terms of SFAS 133. Accordingly, the change in the fair value of the interest rate cap premiums is recognized quarterly in interest expense in our Consolidated Statements of Income. We recorded interest expense of $95 and $29 during the twelve and forty weeks ended November 6, 2006, respectively, and interest income of $20 and interest expense of $15 during the twelve and forty weeks ended November 7, 2005, respectively, to adjust the carrying value of the interest rate cap premiums to their fair values. The fair values of the interest rate cap premiums are included in other assets, net, in our accompanying Condensed Consolidated Balance Sheets, and were $28 and $56 at November 6, 2006 and January 31, 2006, respectively. As a matter of policy, we do not enter into derivative instruments unless there is an underlying exposure. However, if we were to continue to make voluntary prepayments on the term loan, the outstanding principal balance could drop below the notional amount of our existing interest rate caps.

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

Pursuant to the Stock Repurchase Plan authorized by our Board of Directors, as modified during the forty weeks ended November 6, 2006, we are allowed to repurchase up to an aggregate of $100,000 of our common stock. During the twelve and forty weeks ended November 6, 2006, we repurchased 524,400 and 2,065,445 shares of our common stock at an average price of $19.04 and $16.43 per share, for a total cost, including trading commissions, of $9,999 and $33,998, and we retired 367,900 and 1,908,945 shares, respectively. As of November 6, 2006, we had 156,500 shares of common stock that had been repurchased but not yet retired and are shown as common stock held in treasury on the accompanying Condensed Consolidated Balance Sheet. Based on the Board of Directors’ authorization and the amount of cumulative repurchase of our common stock that we have already made thereunder, we are permitted to make additional repurchases of our common stock up to $56,446 under the Stock Repurchase Plan as of November 6, 2006. As part of our Stock Repurchase Plan, we have implemented a share repurchase plan pursuant to Rule 10b5-1 of the Exchange Act, under which we are allowed to repurchase $5,000 of our common stock in the open market each fiscal quarter through the quarter ending January 28, 2008. Rule 10b5-1 allows us to repurchase our common stock when we might otherwise be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

During the forty weeks ended November 6, 2006, cash provided by operating activities was $134,870, an increase of $35,817 or 36.2% from the prior year comparable period. The current period included significantly more non-cash charges than the prior year period, primarily increases of $29,813 in deferred income taxes and $4,877 in share-based compensation expense, which were partially offset by lower depreciation and amortization. Working capital account balances, including accounts receivable and accounts payable, 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 6, 2006 totaled $62,932, which principally consisted of purchases of property and equipment, partially offset by proceeds from the sale of property and equipment, and collections on notes receivable.

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

Capital expenditures were as follows:


	Forty Weeks Ended
	November 6,		November 7,
	2006		2005
New restaurants (including restaurants under development)
Carl’s Jr.	$	8,263	$	6,921
Hardee’s		3,280		8,714
La Salsa		1,055		307
Remodels/Dual-branding (including construction in process)
Carl’s Jr.		4,775		3,902
Hardee’s		4,557		4,260
La Salsa		210		123
Other restaurant additions
Carl’s Jr.		17,760		7,298
Hardee’s		37,412		16,515
La Salsa		382		380
Corporate/other		7,326		5,843

Total	$	85,020	$	54,263

Capital expenditures for the forty weeks ended November 6, 2006, increased $30,757, or 56.7%, over the comparable prior year period mainly due to the acquisition of real property at 36 restaurant locations that we had previously leased from a commercial lessor, the purchase of 14 restaurant properties from a former franchisee’s lender, the rollout of new POS software and related hardware at our restaurants and additions, which include a new warehouse management software system, related to the on-going relocation of our main distribution center, partially offset by a decrease in new construction.

Cash used in financing activities during the forty weeks ended November 6, 2006 was $67,716, which principally consisted of repayment of $28,748 of term loans under our Facility (of which $28,112 represented voluntary prepayment thereof), net repayments of $7,000 under the revolving portion of our Facility, repayment of $3,898 of capital lease obligations, payment of $7,364 of dividends, payment of $30,938 for the repurchase of common stock, and a $774 decrease in our bank overdraft position (which is generally not a significant source or use of cash over the long term), partially offset by proceeds from exercises of stock options of $9,561.

Contractual Obligations

We enter into purchasing contracts and pricing arrangements to control costs for commodities and other items that are subject to price volatility. We also enter into contractual commitments for marketing and sponsorship arrangements. These arrangements, in addition to any unearned supplier funding and distributor inventory obligations, result in unconditional purchase obligations, which totaled $51,635 as of November 6, 2006.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
(Dollars in thousands)

Interest Rate Risk

Our principal exposure to financial market risks relates to the impact that interest rate changes could have on our Facility. As of November 6, 2006, we had $71,000 of borrowings and $57,263 of letters of credit outstanding under the Facility. Borrowings under the Facility bear interest at the prime rate or LIBOR plus an applicable margin. A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction in our annual pre-tax earnings of $710. The estimated reduction is based upon the outstanding balance of the borrowings under the Facility and the weighted-average interest rate for the quarter and assumes no change in the volume, index or composition of debt as in effect on November 6, 2006. As of November 6, 2006, a hypothetical increase of 100 basis points in short-term interest rates would also cause the fair value of our convertible subordinated notes due 2023 to decrease approximately $340, and a hypothetical decrease of 100 basis points in short-term interest rates would cause the fair value of our convertible subordinated notes due 2023 to increase approximately $350. The changes in fair value were determined by discounting the projected cash flows assuming redemption on October 1, 2008.

Substantially all of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have not had a significant impact on us and are not expected to in the foreseeable future.

Commodity Price Risk

We purchase certain products which 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 many of the products purchased 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 the 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 revenue for our restaurant concepts.

Derivative Financial Instruments

On July 26, 2004, we entered into two interest rate cap agreements in an aggregate notional amount of $70,000. Under the terms of each agreement, if LIBOR exceeds 5.375% on the measurement date for any quarterly period, we will receive payments equal to the amount LIBOR exceeds 5.375%, multiplied by (i) the notional amount of the agreement and (ii) the fraction of a year represented by the quarterly period. The agreements expire on July 28, 2007. The agreements were not designated as cash flow hedges under the terms of SFAS 133. Accordingly, the change in the fair value of the interest rate cap premiums will be recognized quarterly in interest expense in our Consolidated Statements of Income. We recorded interest expense of $95 and $29 during the twelve and forty weeks ended November 6, 2006, respectively, and interest income of $20 and interest expense of $15 during the twelve and forty weeks ended November 7, 2005, respectively, to adjust the carrying value of the interest rate cap premiums to their fair values. The fair values of the interest rate cap premiums are included in other assets, net, in our accompanying Condensed Consolidated Balance Sheets, and were $28 and $56 at November 6, 2006 and January 31, 2006, respectively. As a matter of policy, we do not enter into derivative instruments unless there is an underlying exposure. However, if we were to continue to make voluntary prepayments on the term loan, the outstanding principal balance could drop below the notional amount of our existing interest rate caps.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls 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 6, 2006, 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 (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q report 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 Securities and Exchange Commission’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control

There have been no changes in our internal control over financial reporting during the fiscal quarter ended November 6, 2006, 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.

See Note 14 for information regarding legal proceedings.

Item 1A. Risk Factors.

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(Dollars in thousands, except per share amounts)

Issuer Purchase of Equity Securities

pursuant to Rule 10b5-1 of the Exchange Act, under which we are allowed to repurchase $5,000 of our common stock in the open market each fiscal quarter through the quarter ending January 28, 2008. Rule 10b5-1 allows us to repurchase our common stock when we might otherwise be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

The following table provides information as of November 6, 2006, with respect to shares of common stock repurchased by us during the fiscal quarter then ended (dollars in thousands, except per share amounts):

(a)

(b)

(c)

(d)

Maximum

Dollar

Value of

Total

Shares that

Number of Shares

May Yet Be

Average

Purchased as Part

Purchased

Total

Price

of Publicly

Under the

Number of Shares

Paid per

Announced Plans

Plans or

Period

Purchased

Share

or Programs

Programs

August 15 — September 11, 2006

42,000

15.31

42,000

15,801

September 12, 2006 — October 9, 2006

40,000

16.96

40,000

15,121

October 10, 2006 — November 6, 2006

442,400

19.58

442,400

56,446

Total

524,400

19.04

524,400

56,446

Item 3. Defaults upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.


Exhibit #
3.1		Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement Form S-4 filed with the Securities and Exchange Commission on March 7, 1994).

3.2		Certificate of Amendment of Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on December 9, 1997 (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 26, 1998 filed with the Securities and Exchange Commission on April 24, 1998).

3.3		Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement Form S-4 filed with the Securities and Exchange Commission on March 7, 1994).

3.4		Certificate of Amendment of Bylaws of the Company (incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 26, 2004 filed with the Securities and Exchange Commission on April 7, 2004).

4.1		Rights Agreement, dated as of October 10, 2005, between the Company and Mellon Investor Services, LLC, which includes as Exhibit A thereto a form of Certificate of Designation for the Series A Junior Participating Preferred Stock, as Exhibit B thereto the Form of Rights Certificate and as Exhibit C thereto a Summary of Rights to Purchase Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on October 11, 2005).

10.1		Amendment No. 3 to Employment Agreement between CKE Restaurants, Inc. and Andrew F. Puzder, effective as of October 12, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 2006).


Exhibit #
10.2		Amendment No. 2 to Employment Agreement between CKE Restaurants, Inc. and E. Michael Murphy, effective as of October 12, 2006 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 2006).

10.3		Amendment No. 2 to Employment Agreement between CKE Restaurants, Inc. and Theodore Abajian, effective as of October 12, 2006 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 2006).

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit Index


Exhibit #
3.1		Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement Form S-4 filed with the Securities and Exchange Commission on March 7, 1994).

3.2		Certificate of Amendment of Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on December 9, 1997 (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 26, 1998 filed with the Securities and Exchange Commission on April 24, 1998).

3.3		Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement Form S-4 filed with the Securities and Exchange Commission on March 7, 1994).

3.4		Certificate of Amendment of Bylaws of the Company (incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 26, 2004 filed with the Securities and Exchange Commission on April 7, 2004).

4.1		Rights Agreement, dated as of October 10, 2005, between the Company and Mellon Investor Services, LLC, which includes as Exhibit A thereto a form of Certificate of Designation for the Series A Junior Participating Preferred Stock, as Exhibit B thereto the Form of Rights Certificate and as Exhibit C thereto a Summary of Rights to Purchase Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on October 11, 2005).

10.1		Amendment No. 3 to Employment Agreement between CKE Restaurants, Inc. and Andrew F. Puzder, effective as of October 12, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 2006).

10.2		Amendment No. 2 to Employment Agreement between CKE Restaurants, Inc. and E. Michael Murphy, effective as of October 12, 2006 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 2006).

10.3		Amendment No. 2 to Employment Agreement between CKE Restaurants, Inc. and Theodore Abajian, effective as of October 12, 2006 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 17, 2006).

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	Page No.
Part I. Financial Information

Item 1 Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of November 6, 2006 and January 31, 2006		3
Condensed Consolidated Statements of Income for the twelve and forty weeks ended November 6, 2006 and November 7, 2005		4
Condensed Consolidated Statement of Stockholders’ Equity for the forty weeks ended November 6, 2006		5
Condensed Consolidated Statements of Cash Flows for the forty weeks ended November 6, 2006 and November 7, 2005		6
Notes to Condensed Consolidated Financial Statements		7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3 Quantitative and Qualitative Disclosures About Market Risk		49
Item 4 Controls and Procedures		50

Part II. Other Information

Item 1 Legal Proceedings		50
Item 1A Risk Factors		50
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		50
Item 3 Defaults Upon Senior Securities		51
Item 4 Submission of Matters to a Vote of Security Holders		51
Item 5 Other Information		51
Item 6 Exhibits		51
Signatures		53
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2



		CKE RESTAURANTS, INC.
		(Registrant)

Date: December 12, 2006		/s/ Theodore Abajian

		Theodore Abajian
		Executive Vice President
		Chief Financial Officer