S-1/A 1 d350029ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
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As filed with the Securities and Exchange Commission on July 30, 2012

Registration No. 333-181504

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 3

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CKE INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5812   27-3026224

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification No.)

 

 

6307 Carpinteria Ave., Ste A.

Carpinteria, California 93013

(805) 745-7500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Andrew F. Puzder

Chief Executive Officer

CKE Inc.

6307 Carpinteria Ave., Ste A.

Carpinteria, California 93013

(805) 745-7500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Howard A. Kenny

Morgan, Lewis & Bockius LLP

101 Park Avenue

New York, New York 10178

(212) 309-6000

 

Charles A. Seigel III

Senior Vice President and

Assistant Secretary

CKE Inc.

6307 Carpinteria Ave., Ste. A

Carpinteria, California 93013

(805) 745-7500

 

Steven B. Stokdyk

Latham & Watkins LLP

355 South Grand Avenue

Los Angeles, California 90071

(213) 485-1234

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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

 

Large accelerated filer    

  ¨    Accelerated filer    ¨

Non-accelerated filer

  x  (Do not check if a smaller reporting company)    Smaller reporting company    ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of each Class of

Securities to be Registered

 

Amount to be
Registered(a)

 

Proposed

Maximum
Offering Price
Per Unit

 

Proposed

Maximum

Aggregate

Offering Price

 

Amount of

Registration Fee(b)(c)

Common stock, $0.01 par value per share

  15,333,334   $16.00   $245,333,344   $28,115.20

 

 

(a) Estimated pursuant to Rule 457(a) promulgated under the Securities Act of 1933. Includes additional shares the underwriters have the option to purchase.
(b) The amount of the filing fee is calculated in accordance with Rule 0-11 of the Securities Exchange Act of 1934, as amended, and Fee Advisory #3 for fiscal year 2012, issued September 29, 2011, by multiplying the transaction valuation by 0.00011460.
(c) The Registrant paid $26,358.00 with previous filings of this Registration Statement.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated July 30, 2012

PROSPECTUS

13,333,334 Shares

CKE INC.

Common Stock

 

 

This is our initial public offering. We are selling 6,666,667 of the shares being offered hereby. The selling stockholder identified in this prospectus is selling an additional 6,666,667 shares. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholder.

We expect the public offering price to be between $14.00 and $16.00 per share. Currently, no public market exists for our common stock. We have applied to list our common stock on the New York Stock Exchange under the symbol “CK.” Following this offering, we will remain a “controlled company” as defined under the New York Stock Exchange listing rules, and Apollo Management, L.P. and its affiliates will beneficially own 68.4% of our shares of outstanding common stock, assuming the underwriters do not exercise their option to purchase up to 2,000,000 additional shares from the selling stockholder.

 

 

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 19 of this prospectus.

 

 

 

     Per
Share
     Total  

Public offering price

   $                $            

Underwriting discounts and commissions

   $         $     

Proceeds, before expenses, to CKE Inc.

   $         $     

Proceeds, before expenses, to the selling stockholder

   $         $     

The underwriters also have an option to purchase up to an additional 2,000,000 shares from the selling stockholder at the initial public offering price less the underwriting discount.

The shares will be ready for delivery on or about                     , 2012.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

 

Morgan Stanley    Citigroup    Goldman, Sachs & Co.

 

 

Barclays    Credit Suisse    RBC Capital Markets

 

Apollo Global Securities       Cowen and Company   KeyBanc Capital Markets

The date of this prospectus is                     , 2012.


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TABLE OF CONTENTS

 

     Page  

INDUSTRY AND MARKET DATA

     ii   

TRADEMARKS, SERVICE MARKS AND TRADENAMES

     ii   

NON-GAAP FINANCIAL MEASURES

     ii   

SUMMARY

     1   

RISK FACTORS

     19   

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

     35   

USE OF PROCEEDS

     37   

DIVIDEND POLICY

     37   

CAPITALIZATION

     38   

DILUTION

     40   

SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA

     42   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     46   

BUSINESS

     95   

MANAGEMENT

     112   

EXECUTIVE COMPENSATION

     119   

PRINCIPAL AND SELLING STOCKHOLDERS

     144   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     146   

DESCRIPTION OF CAPITAL STOCK

     149   

DESCRIPTION OF INDEBTEDNESS

     153   

SHARES ELIGIBLE FOR FUTURE SALE

     157   

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK

     159   

UNDERWRITING (CONFLICTS OF INTERESTS)

     163   

LEGAL MATTERS

     169   

EXPERTS

     169   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     169   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

Dealer Prospectus Delivery Obligations

Until                     , 2012 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

 

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We have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

 

INDUSTRY AND MARKET DATA

We have obtained certain industry and market share data from third-party sources, such as Sandelman Quick-Track reports, QSR Magazine and other industry publications that we believe are reliable. In many cases, however, we have made statements in this prospectus regarding our industry and our position in the industry based on estimates made from our experience in the industry and our own investigation of market conditions. We believe the industry and market data and our estimates to be true and accurate, and we use such data and estimates in the operation of our business.

TRADEMARKS, SERVICE MARKS AND TRADENAMES

We own or have rights to trademarks, service marks or tradenames that we use in connection with the operation of our business, including our corporate names, brands, logos and product names. Other trademarks, service marks and tradenames appearing in this prospectus are the property of their respective owners. The trademarks we own include CKE Restaurants®, Carl’s Jr.® and Hardee’s® along with the names of various products offered at our restaurants. Solely for convenience, some of the trademarks, service marks and tradenames referred to in this prospectus are listed without the ® and TM symbols, but we assert, to the fullest extent under applicable law, our rights to our trademarks, service marks and tradenames.

NON-GAAP FINANCIAL MEASURES

To supplement our financial information presented in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), we use additional measures to clarify and enhance understanding of past performance and prospects for the future.

Adjusted EBITDA, Adjusted EBITDA margin, company-operated restaurant-level adjusted EBITDA, company-operated restaurant-level adjusted EBITDA margin, and franchise restaurant adjusted EBITDA (each as defined below) (“Non-GAAP Measures”), as presented in this prospectus, are supplemental measures of our performance that are not required by, or presented in accordance with, U.S. GAAP. They are not measurements of our financial performance under U.S. GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with U.S. GAAP or alternatives to net cash provided by operating activities as a measure of our liquidity.

“Adjusted EBITDA” represents net income (loss), adjusted to exclude income taxes, interest income and expense, asset impairments, facility action charges, depreciation and amortization, management fees, the effects of acquisition accounting adjustments, and certain non-cash and other items. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by total revenue. See Note 8 under “Summary—Summary Historical Financial and Other Data.”

 

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We define company-operated restaurant-level adjusted EBITDA as company-operated restaurants revenue (i) less restaurant operating costs, excluding depreciation and amortization expense, and (ii) less advertising expense. Restaurant operating costs exclude advertising costs, general and administrative expenses and facility action charges. Company-operated restaurant-level adjusted EBITDA margin is defined as company-operated restaurant-level adjusted EBITDA divided by company-operated restaurants revenue. We define franchise restaurant adjusted EBITDA as franchised restaurants and other revenue less franchised restaurants and other expense, plus depreciation and amortization expense. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Presentation of Non-GAAP Measures.”

We believe the Non-GAAP Measures provide investors with helpful information with respect to our operating performance and cash flows. In addition, our calculation of Adjusted EBITDA is consistent with the equivalent measurement in the covenants contained in agreements respecting certain of our indebtedness. See “Description of Indebtedness.” Our Non-GAAP Measures may not be comparable to those of other companies.

In addition, in evaluating these Non-GAAP Measures, you should be aware that in the future we will incur expenses such as those we have excluded in calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by any unusual or nonrecurring items.

 

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SUMMARY

The following summary highlights information contained elsewhere in this prospectus. It should be read together with the more detailed information and consolidated financial statements included elsewhere in this prospectus. You should read the entire prospectus, including the “Risk Factors” section and our consolidated financial statements and notes to those statements, before making an investment decision.

Unless otherwise noted, “we,” “us,” “our” and the “Company” mean, for periods after the Merger (as defined below), CKE Inc. and its consolidated subsidiaries, including CKE Restaurants, Inc. (“CKE Restaurants®”), and for the periods prior to the Merger, CKE Restaurants and its consolidated subsidiaries. “CKE” means CKE Inc. but not its subsidiaries.

We operate on a retail accounting calendar. Our fiscal year ends on the last Monday in January and typically has 13 four-week accounting periods. For clarity of presentation, we generally label all fiscal year ends as if the fiscal year ended January 31 (e.g., the fiscal year ended January 30, 2012 is referred to as fiscal 2012 or the fiscal year ended January 31, 2012). References made to our fiscal year ended January 31, 2011, or fiscal 2011, refer to the Predecessor twenty-four weeks ended July 12, 2010 and the Successor twenty-nine weeks ended January 31, 2011. The first quarter of our fiscal year has four periods, or 16 weeks. All other quarters generally have three periods, or 12 weeks. Our fiscal year ended January 31, 2011 contained 53 weeks, with the one additional week included in our fourth quarter. The first quarter of our fiscal 2013 and fiscal 2012 ended May 21, 2012 and May 23, 2011, respectively.

Unless otherwise indicated, the information contained in this prospectus assumes that (i) the underwriters’ option to purchase up to 2,000,000 additional shares will not be exercised, (ii) each of the 100 shares of our common stock outstanding as of the date of this prospectus will have been split into 492,444 shares of common stock and (iii) the number of our authorized shares of capital stock will have been increased to 100,000,000 shares of common stock and 10,000,000 shares of preferred stock pursuant to our amended and restated certificate of incorporation.

Our Company

We are one of the world’s largest operators and franchisors of quick service restaurants (“QSR”) with 3,263 owned or franchised locations operating in 42 states and 25 foreign countries primarily under our Carl’s Jr.® and Hardee’s® brands. We believe we offer innovative, premium products that we develop for a target demographic we refer to as “young, hungry guys” but that we believe also appeal to a broader customer base of individuals who aspire to be youthful. Our target demographic of 18 to 34 year old males who enjoy premium food at a reasonable price makes up a large portion of the global QSR market, which is currently estimated to generate $225 billion in sales annually ($141 billion in the United States). In our domestic markets, adult males under the age of 34 account for the most expenditures of any demographic group at approximately one-quarter of all QSR expenditures, and have the highest frequency of any demographic group at approximately 15 visits per month. We believe our focus on this customer type is anchored by our menu of high quality, premium products, and enhanced through edgy, breakthrough advertising. According to QSR Magazine (Top 50 Rankings, March 7, 2012), we are the fifth largest hamburger QSR operator globally. We have a large and rapidly growing international presence (consisting of 441 restaurants in 25 foreign countries, an 85% increase in the number of international restaurants since the end of fiscal 2007) and believe there are significant opportunities to continue to grow our brands in various markets around the world.

 

 

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As of May 21, 2012, the end of our first quarter of fiscal 2013, our system-wide restaurant portfolio consisted of:

 

     Carl’s Jr.      Hardee’s      Other      Total  

Company-operated

     424         468         —           892   

Domestic franchised

     694         1,227         9         1,930   

International franchised

     204         237         —           441   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,322         1,932         9         3,263   
  

 

 

    

 

 

    

 

 

    

 

 

 

Our primary brands, Carl’s Jr. and Hardee’s, both have a rich heritage dating back over 50 years, when Carl Karcher opened the first Carl’s Jr. restaurant in 1956 and Wilbur Hardee opened the first Hardee’s restaurant in 1960. We believe Carl’s Jr. and Hardee’s are both well recognized for their high-quality product offerings. Sandelman Quick Track reports for the first calendar quarter of 2012 ranked each of our brands #1 or #2 in their markets among national or regional hamburger QSRs in taste or flavor of food, quality of ingredients and temperature of food. Although we operate under two brands, the management, menus, operations, marketing campaigns and logos of our two primary brands are substantially similar. We are evolving into a national chain operating under two banners because each has long-standing brand equity in its respective markets. The brands often market identical new products with identical advertising campaigns and use national cable to promote these products in ads that identify both brands.

Our business objective is to continue growing our average unit volumes (“AUV”), calculated as described below, and expanding both Carl’s Jr. and Hardee’s in new and existing markets throughout the world by leveraging what we believe to be distinct brand positioning, high-quality product offerings, compelling restaurant economics and an established global footprint. Our business strategy focuses on the growth of our franchise restaurant base, which provides a more stable, capital efficient income stream than company-operated restaurants. Franchise royalties are based on a percentage of our franchisees’ sales, and are thus not susceptible to fluctuations in restaurant operating costs. In addition, franchisees are responsible for making capital investments, enabling us to accelerate the growth of our restaurant system without incremental capital expenditures. From the end of fiscal 2007 through May 21, 2012, we have grown our franchise restaurants from 1,904 units (64% of total) to 2,371 units (73% of total), and we have grown our international restaurants by 85% from 238 units (8% of total) to 441 units (14% of total) over the same period.

For fiscal 2012 and the quarter ended May 21, 2012, we generated total revenue of $1.3 billion and $412.3 million, Adjusted EBITDA of $165.9 million and $61.6 million and a net (loss) income of $(19.3) million and $6.7 million, respectively. See Note 8 under “—Summary Historical Financial and Other Data” for an explanation of Adjusted EBITDA and a reconciliation to net (loss) income.

What We Have Accomplished

Guided by our revitalization plan and our management team, our recent accomplishments include:

 

   

Remodeled or developed over 90% of our company-operated restaurants since the end of fiscal 2005;

 

   

Achieved a 10 percentage point improvement in customer satisfaction scores across our concepts since the end of fiscal 2007;

 

   

Opened over 600 new restaurants system-wide since the end of fiscal 2007;

 

   

Signed over 875 franchise development commitments with a broad group of franchisees in the United States and internationally with over 600 of these commitments signed in the last three years;

 

 

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Increased franchised restaurants from 64% of total restaurants at the end of fiscal 2007 to 73% as of May 21, 2012;

 

   

Increased our international restaurant base by 85% from 238 restaurants in 13 foreign countries at the end of fiscal 2007 to 441 restaurants in 25 foreign countries as of May 21, 2012;

 

   

Achieved positive company-operated same-store sales for the most recent seven consecutive quarters, including an increase of 3.5% for fiscal 2012 and an increase of 2.6% for the first quarter of fiscal 2013. Through July 27, 2012, company-operated same-store sales during the second quarter of fiscal 2013 have increased 1.9% compared to the same period in the prior fiscal year. Prior to the economic downturn, we posted six consecutive fiscal years of company-operated same-store sales growth from fiscal 2004 to fiscal 2009; and

 

   

Exhibited a long track-record of AUV growth at company-operated restaurants. As shown in the table below, the AUV at company-operated restaurants has grown from $832,000 in fiscal 2001 to $1,257,000 in fiscal 2012, an increase of $425,000, and over the same period we have increased our AUV in every year except fiscal 2010. This trend has continued since the Merger, notwithstanding our reported net losses in the twenty-nine weeks ended January 31, 2011 and fiscal 2012.

Company-Operated Average Unit Volume

LOGO

We calculate AUV by dividing the aggregate revenues of all company-operated restaurants during a period by the number of company-operated restaurants open during that period. AUV is calculated on a trailing-52 week basis.

 

 

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One Powerful Concept, Two Global Brands

We operate one global restaurant platform. The management, menus, operations, marketing campaigns and logos of our two primary brands are substantially similar. However, we have chosen to capitalize on the strong heritage and loyal customer base of Carl’s Jr. and Hardee’s by maintaining both brands. The brands often market identical new products with identical advertising campaigns and use national cable to promote these products in advertisements that identify both brands.

 

LOGO    Carl’s Jr. had a total of 1,322 company-operated and franchised restaurants located in 14 states and 14 foreign countries as of May 21, 2012. Domestic Carl’s Jr. restaurants are predominantly located in the Western United States, with a growing presence in Texas. International Carl’s Jr. restaurants are located primarily in Mexico, with a growing presence in the rest of Latin America, Russia and Asia. Carl’s Jr. focuses on selling its signature products, such as the Western Bacon Cheeseburger® and a full line of 100% Black Angus Beef Six Dollar Burgers®, and on developing what we believe to be innovative new products, including the Steakhouse Six Dollar Burger®, Hand-Breaded Chicken Tenders™ and its line of Charbroiled Turkey Burgers. As of May 21, 2012, 549 of the domestic Carl’s Jr. restaurants were dual-branded with our Green Burrito® concept, which offers Mexican-inspired products, such as burritos, tacos and quesadillas, from a separate Green Burrito menu. At dual-branded restaurants, customers can order both Carl’s Jr. and Green Burrito product offerings at the same counter. While the target market is substantially similar, the dual-branding broadens the restaurant’s product offering. In addition, there are nine stand-alone franchised Green Burrito restaurants.
   We believe, based on our internal market research, that Carl’s Jr. is widely regarded by our customers as the premium choice for lunch and dinner in the QSR industry, with approximately 82% of company-operated restaurants revenue in the 52 weeks ended May 21, 2012 coming from the lunch and dinner day parts. Recently, Carl’s Jr. expanded its breakfast offering through the launch of Hardee’s breakfast menu featuring its Made From Scratch Biscuits™. We believe that substantial opportunity exists to further build the brand by capturing greater market share during the breakfast day part at our existing restaurants through offering Hardee’s breakfast menu. We initially tested the biscuit rollout in select markets in fiscal 2011 and then launched a larger scale rollout of these products in the second half of fiscal 2012. As of May 21, 2012, approximately 49% of our domestic restaurants offered this breakfast product line, including 72% of our company-operated locations. The launch of Hardee’s breakfast menu, featuring Made From Scratch Biscuits, at Carl’s Jr. is another meaningful step in nationalizing our brands, and we expect the rollout to be essentially complete by the end of the first quarter of fiscal 2014.
   As of May 21, 2012, approximately 68% of Carl’s Jr. restaurants were franchised and the remaining 32% were company-operated. Approximately 15% of Carl’s Jr. restaurants were located outside of the U.S. as of May 21, 2012, compared to 8% at the end of fiscal 2007. We expect the Carl’s Jr. brand to be the primary driver of our international expansion in Asia, Latin America and Russia over the next several years.
LOGO    Hardee’s had a total of 1,932 company-operated and franchised restaurants located in 30 states and 11 foreign countries as of May 21, 2012. Domestic Hardee’s restaurants are located predominantly in the Southeastern and Midwestern United States, with a

 

 

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growing international presence in the Middle East and Central Asia. Hardee’s primarily focuses on selling its signature products, such as its line of 100% Black Angus Beef Thickburgers® and Made From Scratch Biscuits and on developing what we believe to be innovative new products, such as the Steakhouse Thickburger®, Hand-Breaded Chicken Tenders, the Monster Biscuit® and its line of Charbroiled Turkey Burgers.

 

We believe, based on our internal market research, that Hardee’s is widely regarded by our customers as the best choice for breakfast in the QSR industry, with approximately 48% of company-operated restaurants revenue in the 52 weeks ended May 21, 2012 coming from breakfast. We also believe that substantial opportunity exists to further build the brand by capturing greater market share during the lunch and dinner day parts at our existing restaurants through offering new, high-quality products in conjunction with Carl’s Jr. and expanding the number of dual-branded locations with our Red Burrito® Mexican-inspired concept. As of May 21, 2012, 326 of the domestic Hardee’s restaurants were dual-branded with Red Burrito. As at our Carl’s Jr. restaurants, dual-branding offers Hardee’s customers broader menu choices from a separate Red Burrito menu.

   As of May 21, 2012, approximately 76% of Hardee’s restaurants were franchised and the remaining 24% were company-operated. From the end of fiscal 2007 to May 21, 2012, Hardee’s international restaurants grew from 8% to 12% of the system primarily as a result of continued expansion in the Middle East and Central Asia, where we expect growth.

Our Competitive Strengths

We attribute our success in the QSR industry to the following strengths:

Leader in the Premium Segment of the QSR Industry with Two Strong, Global Brands

We believe our two primary brands, Carl’s Jr. and Hardee’s, are well positioned to appeal to the target audience we refer to as “young, hungry guys” and those who aspire to be youthful. We believe that our intense focus on our target audience affords us a competitive advantage, as many competitors in the QSR industry focus on the family market, which we view as more competitive and over saturated. We believe we are known for high-quality, great-tasting products that serve the premium segment of the QSR industry. Sandelman Quick-Track reports for the first calendar quarter of 2012 ranked each of our brands #1 or #2 in their markets among national or regional hamburger QSRs in taste or flavor of food, quality of ingredients and temperature of food. We have a strong market position in all day parts with Hardee’s, we believe, very popular at breakfast and both Carl’s Jr. and Hardee’s having strong lunch and dinner offerings. Hardee’s breakfast offerings are differentiated by its signature Made From Scratch Biscuits, which we believe have helped make the brand known as the best choice for breakfast in the QSR industry. We recently introduced Hardee’s breakfast menu and its Made From Scratch Biscuits at Carl’s Jr. In markets where biscuits were introduced at least one year ago, breakfast sales have increased from 12% of total sales in fiscal 2010 prior to the rollout to 18% of total sales in fiscal 2012 and in the first quarter of fiscal 2013. We believe our menu innovation, focus on our targeted audience and emphasis on quality and value have allowed us to maintain our differentiated, premium position and avoid extensive price discounting. We use what we believe to be edgy advertising campaigns to help build our brands. Our advertising is generally intended to create buzz around our promotional product offerings as well as emphasize the quality and taste of our menu items.

 

 

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Established and Rapidly Growing International Presence

Since establishing our first international restaurant in 1978, our international strategy has been focused on development in countries where we believe there are significant opportunities to grow our brands rapidly. We have been particularly focused on growing our international presence since our CEO took the leadership position in fiscal 2001. We had 441 restaurants franchised in 25 foreign countries as of May 21, 2012, which compares to 238 franchised restaurants in 13 foreign countries at the end of fiscal 2007. During fiscal 2012, our international franchisees opened a total of 72 restaurants outside of the United States, eclipsing our domestic development totals for the first time in our history. This included the opening of locations in seven countries in which we had not previously operated. In the first quarter of fiscal 2013, our international franchisees opened a total of 20 restaurants outside of the United States. We expect this trend to continue and the number of international restaurant openings to continue to grow. Currently, we have franchise development commitments to build over 500 new international restaurants. As of May 21, 2012, we had Carl’s Jr. franchised restaurants in American Samoa, Canada, China, Costa Rica, Ecuador, Indonesia, Malaysia, Mexico, New Zealand, Panama, Russia, Singapore, Turkey and Vietnam and Hardee’s franchised restaurants in Bahrain, Egypt, Jordan, Kazakhstan, Kuwait, Lebanon, Oman, Pakistan, Qatar, Saudi Arabia and the United Arab Emirates.

 

LOGO

As of May 21, 2012, there were 441 international franchise restaurants, representing 13.5% of our total restaurants, in 25 foreign countries.

Attractive Restaurant-Level Economics Drives Franchisee Development

We believe that the economic returns from opening new restaurants are attractive to potential franchisees. Over the past several years, we have redesigned our domestic restaurant prototypes at both Carl’s Jr. and Hardee’s to reduce the initial building construction costs for new restaurants while maintaining the expected performance from our new company-operated restaurants. The cost to develop a new Carl’s Jr. or Hardee’s restaurant, excluding land value, generally ranges from $950,000 to $1,300,000. We believe that our franchisees can achieve attractive returns from new restaurant development as demonstrated by our signing of over 600 new franchise development commitments during the last three years. In addition, our franchisees have opened a total of 273 new restaurants since the end of fiscal 2009, including 113 openings in fiscal 2012, representing the highest number of openings over the past decade, and 33 openings in the first quarter of fiscal 2013. These franchise restaurant openings in fiscal 2012 and the first quarter of fiscal 2013 represented 96% and 94% of the total new restaurant openings for the year and quarter, respectively, and further increased the percentage of our system that is franchised. We collected more than 99% of the royalties owed to us by our 229 domestic and 40 international franchisees during fiscal 2012.

 

 

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Attractive Free Cash Flow Generation

We believe our company-operated restaurant-level adjusted EBITDA margin, stable and growing franchise base and our nearly completed capital program result in attractive free cash flow (operating cash flow minus capital expenditures) generation. Over the past seven years, we have focused on improving the customer experience through the remodeling of our company-operated restaurant base. We have also focused on new franchise restaurant openings and a refranchising program. With over 2,370 franchised restaurants domestically and internationally, we have a franchisee network that generated approximately $94 million of royalties from franchises in fiscal 2012 and approximately $31 million in the first quarter of fiscal 2013. We believe the shift from a company-operated model to a predominantly franchise model allows for a more stable business since we are less impacted by changes in restaurant level profitability, including the impact of commodity costs. Further, we believe the franchise model will allow us to significantly expand our global footprint with minimal investment. Because we have remodeled or developed over 90% of our company-operated restaurants since the end of fiscal 2005, reduced the construction costs required to refresh our restaurants and shifted to a predominantly franchised model, we expect future capital expenditure requirements to be significantly lower than our average capital expenditures from fiscal 2007 to fiscal 2010. Capital expenditures in fiscal 2012 decreased to $52 million from $117 million in fiscal year 2007. Based on our current capital spending projections, we expect capital expenditures to be between $60 million and $70 million for fiscal 2013. Although our business continues to generate free cash flow at an attractive rate, since the Merger we have reported net (loss) income of $(27.9) million, $(19.3) million and $ 6.7 million for the Successor twenty-nine weeks ended January 31, 2011, fiscal 2012 and the sixteen weeks ended May 21, 2012, respectively, primarily due to higher interest expense as a result of the debt incurred in connection with the Merger.

Proven Management Team Has Longstanding History with CKE

Our management team has been together at CKE Restaurants since fiscal 2001 and has an average of 25 years experience in the restaurant industry. During their tenure, our AUV has increased by 52%. Since our CEO took the leadership position in fiscal 2001, our franchise restaurants have increased from 47% of total units to 73% as of May 21, 2012. The management team has also significantly accelerated international unit development over the past few years.

How We Plan to Feed More “Young, Hungry Guys” Globally

We believe there are significant opportunities to grow our brands globally, improve our operating results and deliver stockholder value by executing the following strategies:

Continue Our International Growth

We believe we have demonstrated a strong track record of growing our brands into new international markets over the past five years. Since the end of fiscal 2007, the total number of international franchise restaurants has grown by 85% from 238 units (8% of total) to 441 units (14% of total), including an increase of nearly 18% during fiscal 2012. In addition, we have expanded into a total of 25 foreign countries compared to 13 at the end of fiscal 2007. We have invested in and developed the necessary infrastructure to support and continue growing our international operations. To date, our international development strategy has been primarily focused on what we believe are high growth, emerging markets in Asia, Latin America and Russia for Carl’s Jr. and the Middle East and Central Asia for Hardee’s. We plan to continue expansion in these and new international markets through the use of development agreements. We are targeting 75 new international openings in fiscal 2013, with a long-term target of having over 800 international restaurants by the end of fiscal 2016. We expect to accelerate franchise growth in a number of new markets with significant growth coming from Brazil, Canada, China and Russia, although we can provide no guarantee such growth will occur or will be significant. The recent signing of a 100 restaurant development agreement with a new franchisee in Brazil is an

 

 

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example of our continued progress in achieving this goal. As of May 21, 2012, we had 25 international franchise development agreements representing commitments to build over 500 franchise restaurants. We entered into approximately 80% of these development agreements in the last three years.

Accelerate Our Domestic Franchise Development

In addition to international openings, we are focused on growing our overall franchise base in the U.S. Franchises, as compared to company-operated restaurants, provide a more stable, capital efficient income stream in the form of royalties, which are insulated from fluctuations in restaurant-level costs and profitability and do not require incremental capital expenditures from our company. Increasing our scale by adding system-wide restaurants will also enable us to leverage our corporate infrastructure over a larger restaurant base. Franchising also expands the brands’ marketing reach as franchisees are required to contribute to advertising both nationally and locally. Our overall mix of franchise restaurants has increased from 64% of system restaurants at the end of fiscal 2007 to 73% as of May 21, 2012, with approximately 81% of our total franchise restaurants located in the U.S. We believe our overall franchise mix will continue to increase as our restaurant-level economics continue to entice franchisees to open new restaurants, and we expect the number of new franchise restaurant openings to significantly exceed the number of company-operated restaurant openings. We believe our system-wide mix can exceed 80% franchised over the long-term as we work with both existing and new franchisees to develop new restaurants. Domestically, we continue to focus on developing certain existing markets, such as Texas, and expanding into new and underpenetrated markets, such as the Northeastern United States. As of May 21, 2012, we had 48 domestic franchise development agreements representing commitments to build over 375 restaurants. Based on an analysis of the geographic density of our company-operated and franchised restaurants and other QSRs throughout the United States undertaken by our internal real estate department, we believe there is the potential for up to approximately 4,400 additional Carl’s Jr. and Hardee’s restaurants in the United States.

Continue to Increase Same-Store Sales and Free Cash Flow

We intend to continue building on our same-store sales growth momentum through the following initiatives:

Continue developing and offering innovative products: We believe we have historically had a strong track record of developing new and innovative products targeted towards “young, hungry guys” and plan to drive same-store sales growth through utilizing this expertise. We intend to continue developing and promoting what we believe to be innovative, premium burgers, supplemented by our chicken products and products we believe to be more healthful, such as our turkey burgers. We have introduced new products at both brands including our lines of 100% Black Angus Beef Burgers, Hardee’s Made From Scratch Biscuits, Hand-Scooped Ice Cream Shakes and Malts®, Charbroiled Turkey Burgers and Hand-Breaded Chicken products. While maintaining our “young, hungry guys” focus, we plan to continue to develop and increase customer awareness of those of our products we believe to be more healthful, which have historically included our Charbroiled Chicken Sandwiches and Premium Entrée Salads. More recently, we partnered with Men’s Health and the creators of the bestselling Eat This, Not That! ® brand to develop a line of Charbroiled Turkey Burgers that all have less than 500 calories.

Expand breakfast offering and cross roll-out of popular items: We have regularly rolled out popular items from one of our brands to the other since both concepts have similar market positionings. Currently, our lunch and dinner menus at both brands are centered around our line of 100% Black Angus Beef Burgers and other sandwiches. More recently, we have rolled out new products such as our line of Charbroiled Turkey Burgers and Hand-Breaded Chicken Tenders concurrently at both brands. We believe Hardee’s is regarded as the best choice for breakfast in the QSR industry, with approximately 48% of company-operated restaurant revenue in fiscal 2012 and the first quarter of fiscal 2013 coming from breakfast. Much of the success of Hardee’s breakfast menu can be attributed to its Made From Scratch Biscuits and biscuit breakfast sandwiches. Recently, Carl’s Jr. launched the roll-out of Hardee’s Made From Scratch Biscuits in the Los Angeles market in the second half of fiscal 2012 after completing the launch of these premium breakfast products in selected other markets. We

 

 

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anticipate offering these products at substantially all of our company-operated Carl’s Jr. restaurants and at approximately 70% of the total domestic Carl’s Jr. restaurants by the end of fiscal 2013. During the year after the introduction of Hardee’s Made From Scratch Biscuits at select Carl’s Jr. locations, the share of sales occurring at breakfast increased by approximately 48%, with same-store breakfast sales increasing between 25% and 60%. We believe Hardee’s breakfast menu is a logical extension of Carl’s Jr.’s offerings that can increase our sales and overall market share in the breakfast hours.

Emphasize and capitalize on our brand positioning: We believe our new product introductions are enhanced through what we believe to be edgy, breakthrough advertising, high visibility sports sponsorships in major markets and a creative internet presence. By introducing new products at both brands simultaneously, we have also been able to more efficiently purchase national cable television media, which has not only increased our media presence in our well-penetrated markets, but also provided a solid base of media in our under-penetrated and newer markets, which we believe will help establish demand in potential future expansion markets. In addition, our plans for continued use and focus on digital marketing, including social media and mobile channels, help to increase overall brand awareness, drive traffic into our restaurants and effectively reach our target demographic of “young, hungry guys.” As of May 21, 2012, our digital following included approximately 1.8 million Facebook members who follow us on our Facebook page, and there had been nearly 700,000 downloads of our iPhone and Android mobile applications.

Capitalize on dual-branding opportunities: As of May 21, 2012, approximately 56% of our company-operated units and 31% of our system-wide domestic restaurants were dual-branded with our Green Burrito and Red Burrito concepts. At a dual-branded restaurant, a customer can order Mexican-inspired Green Burrito or Red Burrito products, such as burritos, tacos and quesadillas, at the same counter as our Carl’s Jr. or Hardee’s products. We believe there is an opportunity to increase the number of dual-branded company-operated locations in the future. In addition, we believe there is an opportunity for our royalties to increase as our franchisees continue to dual-brand their locations with the Green Burrito and Red Burrito concepts. In particular, we believe that there is an attractive opportunity for our Hardee’s franchisees to dual-brand additional locations based on the financial results from recent conversions at company-operated Hardee’s units and the fact that only approximately 7% of our 1,227 domestic franchised Hardee’s restaurants were dual-branded as of May 21, 2012. With respect to the performance of recent company-operated dual-branded conversions, 47 company-operated Hardee’s restaurants were converted to dual-branded locations with Red Burrito in fiscal 2011. In fiscal 2012, these restaurants, on average, achieved an increase in sales that was 6.5% greater than comparable Hardee’s restaurants that were not dual-branded. The increase in sales also translated to an increase in profitability and greater than a 40% cash-on-cash return on the capital invested to convert these restaurants, which we currently estimate at approximately $30,000 per restaurant. We are targeting having 60% of our system-wide domestic restaurants dual-branded within the next five years. As of May 21, 2012, 372 of our 1,921 domestic franchised restaurants were dual-branded. Our ability to achieve our dual-branding target of 60% of system-wide domestic restaurants will depend on our franchisees’ acceptance of the dual-branding strategy and their ability to make the necessary investment from their own resources or from available financing.

Continued focus on operational excellence: We also plan to remain focused on our core restaurant fundamentals of quality, service and cleanliness. From fiscal 2007 through May 21, 2012, we spent approximately $148 million on a significant remodeling of our company-operated restaurants, which we believe has improved the customer experience. Restaurants that have been remodeled have demonstrated significantly improved sales and customer satisfaction scores as reflected by a 10 percentage point improvement in customer satisfaction scores across our concepts since the end of fiscal 2007. We also stand to benefit as franchisees continue to remodel their restaurants, as the anticipated sales lift from franchise remodels increases the royalty payments to our company. As of May 21, 2012, only 64% of our domestic franchised units have been remodeled or developed since the end of fiscal 2005 compared to 93% of our company-operated restaurants. Our franchisees are obligated under their franchise agreements to remodel their restaurants to the current image, although in

 

 

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certain circumstances we have granted exceptions or extensions, such as where the unit is newer or where the franchisee needs to obtain additional lease term. By the end of fiscal 2014, many of the extensions will expire and, as a result, we expect that over 85% of our franchised restaurants in the U.S. will have been remodeled or developed since the end of fiscal 2005. We expect these improvements will further benefit our customer satisfaction scores and overall brand image.

Merger and Related Transactions

On July 12, 2010, we acquired CKE Restaurants pursuant to an Agreement and Plan of Merger (the “Merger Agreement”). CKE Restaurants merged with a wholly-owned subsidiary of ours (the “Merger”), and became our wholly-owned subsidiary.

In connection with the Merger, investment funds managed by Apollo Management VII, L.P. (the “Apollo Funds”), and members of our senior management invested in our equity indirectly by purchasing Class A limited partnership units (“Class A Units”) in Apollo CKE Holdings, L.P. (“Apollo CKE Holdings”), our sole stockholder and the selling stockholder in this offering. Apollo CKE Holdings in turn contributed the proceeds of such investment to our equity. In addition, CKE Restaurants issued $600.0 million aggregate principal amount of senior secured second lien notes (the “Senior Secured Notes”) and entered into a $100.0 million senior secured revolving credit facility (the “Credit Facility”), which was undrawn at closing. These transactions, including the Merger and payment of costs related to these transactions, are collectively referred to as the “Transactions.” Upon completion of the Merger, members of management were granted awards in the form of Class B limited partnership units in Apollo CKE Holdings (“Class B Units”). See “Executive Compensation—Compensation Discussion and Analysis for Fiscal 2012—Equity Incentive Compensation” for further information regarding the Class B Units.

Subsequently, on March 14, 2011, CKE completed an offering of $200.0 million of its 10.50%/11.25% senior unsecured PIK toggle notes due March 14, 2016 (the “Toggle Notes,” and collectively with the Senior Secured Notes, the “Notes”).

Our Principal Stockholders

The Apollo Funds and our management own their equity interests in us through partnership units in Apollo CKE Holdings, the selling stockholder in this offering. The net proceeds to Apollo CKE Holdings from its sale of shares in this offering will be distributed pro rata by Apollo CKE Holdings to the holders of its Class A Units (but not its Class B Units). Upon the completion of this offering, all holders of Class A and Class B Units in Apollo CKE Holdings will exchange their units for (or receive as a distribution) all shares of our common stock held by Apollo CKE Holdings.

The principal beneficial owners of our common stock are the Apollo Funds, investment funds managed by Apollo Management VII, L.P. (“Apollo Management”), an affiliate of Apollo Management, L.P., which we collectively refer to in this prospectus as “Apollo.” Apollo will beneficially own 68.4% or 38,225,945 shares of our common stock after this offering, assuming the underwriters do not exercise their option to purchase up to 2,000,000 additional shares from Apollo CKE Holdings (64.9% or 36,300,318 shares if the underwriters exercise their option in full). Apollo Investment Fund VII, L.P. is an investment fund with committed capital, along with its parallel investment funds, of approximately $14.7 billion. Apollo Management, L.P., is an affiliate of Apollo Global Management, LLC, a leading global alternative asset manager with offices in New York, Los Angeles, London, Frankfurt, Luxembourg, Singapore, Hong Kong and Mumbai. As of March 31, 2012, Apollo Global Management, LLC and its subsidiaries had assets under management of approximately $86 billion across all of their businesses.

 

 

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We currently have a management services agreement with Apollo Management for advisory services. In fiscal 2012, we incurred $2.5 million in fees and out-of-pocket expenses under this agreement, which we intend to terminate upon completion of this offering. In accordance with the terms of this agreement, upon its termination, Apollo Management will receive a fee of approximately $13.8 million (plus any unreimbursed expenses) from us. See “Certain Relationships and Related Party Transactions—Management Services Fee” for more detail regarding our arrangements with Apollo.

Our Ownership Structure

The chart below is a summary of our organizational structure after giving effect to this offering.

 

LOGO

 

* Current investors consist of the Apollo Funds, members of our management (and one former member) and members of our board of directors, all of whom are limited partners of Apollo CKE Holdings, which is our direct stockholder and the selling stockholder in this offering. Upon the completion of this offering and the exchange of units in Apollo CKE Holdings for (or distribution of) shares of our common stock, the current investors in Apollo CKE Holdings will become our direct stockholders. As a result, Apollo will beneficially own 68.4% and members of our management and board of directors will own 7.7% of our common stock, assuming the underwriters do not exercise their option to purchase up to 2,000,000 additional shares from Apollo CKE Holdings. See “Principal and Selling Stockholders” and “Certain Relationships and Related Party Transactions—Management Limited Partnership Agreement.”

Risk Factors

Investing in our common stock involves substantial risk. Our ability to execute our strategy is also subject to certain risks. The risks described under the heading “Risk Factors” immediately following this summary may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. If any of the risks or the risks described under the heading “Risk Factors” were to occur, you may lose part or all of your investment. You should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk Factors” before making an investment decision.

Additional Information

Our principal executive offices are located at 6307 Carpinteria Avenue, Suite A, Carpinteria, California, 93013, and our telephone number is (805) 745-7500.

CKE Inc. was incorporated in Delaware on April 15, 2010 to effect the Transactions.

 

 

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The Offering

 

Issuer

CKE Inc.

 

Common stock offered by us

6,666,667 shares.

 

Common stock offered by selling stockholder

6,666,667 shares.

 

Common stock to be outstanding immediately after the offering

55,911,067 shares.

 

Underwriters’ option to purchase additional shares of common stock in this offering

The selling stockholder has granted to the underwriters a 30-day option to purchase up to 2,000,000 additional shares, at the initial public offering price less underwriting discounts and commissions.

 

Common stock voting rights

Each share of our common stock will entitle its holder to one vote.

 

Dividend policy

We currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business conditions and covenants under any applicable contractual arrangements, including our indebtedness. See “Dividend Policy.”

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $92.0 million after deducting the estimated underwriting discounts and commissions and other expenses of $8.0 million payable by us, assuming the shares are offered at $15.00 per share, which represents the midpoint of the range set forth on the front cover of this prospectus. We intend to use these net proceeds (i) to redeem approximately $82.1 million aggregate principal amount of the outstanding Senior Secured Notes and to pay the related early redemption premiums and (ii) for general corporate purposes. The Senior Secured Notes were issued in connection with the Merger. We will not receive any proceeds from the sale of our common stock by the selling stockholder. For sensitivity analyses as to the offering price and other information, see “Use of Proceeds.” In addition, upon the completion of this offering, we will pay from cash on hand Apollo Management or its affiliates a fee of approximately $13.8 million (plus any unreimbursed expenses) in connection with the termination of our management services agreement, as described under “Certain Relationships and Related Party Transactions—Management Services Fee.”

 

NYSE symbol

“CK”

 

Risk factors

You should carefully read and consider the information set forth under “Risk Factors” beginning on page 19 of this prospectus and all other information set forth in this prospectus before deciding to invest in our common stock.

 

 

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Conflicts of Interest

Apollo Global Securities, LLC, an underwriter of this offering, is an affiliate of Apollo, our controlling stockholder. Since Apollo beneficially owns more than 10% of our outstanding common stock, a “conflict of interest” is deemed to exist under Rule 5121(f)(5)(B) of the Conduct Rules of the Financial Industry Regulatory Authority, or FINRA. As such, any underwriter that has a conflict of interest pursuant to Rule 5121 will not confirm sales to accounts in which it exercises discretionary authority without the prior written consent of the customer. Pursuant to Rule 5121, a “qualified independent underwriter” (as defined in Rule 5121) must participate in the preparation of the prospectus and perform its usual standard of due diligence with respect to the registration statement and this prospectus. Morgan Stanley & Co. LLC has agreed to act as qualified independent underwriter for the offering. See “Underwriting (Conflicts of Interest).”

Except as otherwise indicated, all of the information in this prospectus assumes:

 

   

the 492,444-for-one stock split described below has been completed;

 

   

no exercise of the underwriters’ option to purchase up to 2,000,000 additional shares of common stock from the selling stockholder;

 

   

an initial offering price of $15.00 per share, the midpoint of the range set forth on the cover page of this prospectus; and

 

   

our amended and restated certificate of incorporation and amended and restated bylaws are in effect, pursuant to which the provisions described under “Description of Capital Stock” will become operative.

Prior to completion of this offering, we will increase our authorized shares of common stock and effect a stock split, whereby our stockholder will receive 492,444 shares of common stock for each share it currently holds. The number of shares of common stock to be outstanding after completion of this offering is based on 6,666,667 shares of our common stock to be sold by us in this offering and, except where we state otherwise, the information with respect to our common stock we present in this prospectus does not give effect to 4,000,000 shares of common stock reserved for future issuance under our Stock Incentive Plan (as defined in “Executive Compensation—Stock Incentive Plan”).

 

 

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Summary Historical Financial and Other Data

The summary historical financial data for the fiscal year ended January 31, 2012, the twenty-nine weeks ended January 31, 2011, the twenty-four weeks ended July 12, 2010 and the fiscal year ended January 31, 2010 and as of January 31, 2012 and 2011 have been derived from our audited Consolidated Financial Statements, including the related notes thereto, which are included elsewhere in this prospectus. The summary historical financial data as of May 21, 2012 and for the sixteen weeks ended May 21, 2012 and May 23, 2011 have been derived from our unaudited Condensed Consolidated Financial Statements, including the related notes thereto, which are included elsewhere in this prospectus and have been prepared on a basis consistent with our annual audited Consolidated Financial Statements. Periods ended on or prior to July 12, 2010 reflect the consolidated results of our subsidiary, CKE Restaurants, prior to the Merger, and the periods beginning after July 12, 2010 reflect the results of CKE and its consolidated subsidiaries after the Merger. We refer to the financial statements prior to the Merger as “Predecessor” and to those after the Merger as “Successor.”

The following data should be read in conjunction with “Risk Factors,” “Selected Historical Financial Information and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

 

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    Successor         Predecessor  
    Sixteen
Weeks
Ended
May 21,
2012
    Sixteen
Weeks
Ended
May 23,
2011
    Fiscal Year
Ended
January 31,
2012(1)
    Twenty-Nine
Weeks  Ended
January  31,
2011(1)(2)
        Twenty-Four
Weeks  Ended
July  12,
2010(1)(2)
    Fiscal Year
Ended
January 31,
2010(1)
 
    (dollars in thousands, except per share amounts)  

Consolidated Statements of Operations Data:

               

Revenue:

               

Company-operated restaurants

  $ 361,466      $ 351,604      $ 1,122,430      $ 598,753          $ 500,531      $ 1,084,474   

Franchised restaurants and other(3)

    50,865        48,979        157,897        80,355            151,588        334,259   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total revenue

    412,331        400,583        1,280,327        679,108            652,119        1,418,733   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Operating cost and expenses:

               

Restaurant operating costs

    292,752        293,248        939,615        495,909            414,171        881,397   

Franchise restaurants and other

    25,629        25,878        81,372        39,464            115,120        254,124   

Advertising

    20,852        20,061        65,061        34,481            29,647        64,443   

General and administrative(4)

    41,791        40,961        130,858        84,833            59,859        134,579   

Facility action charges, net

    401        511        (6,018     1,683            590        4,695   

Other operating expenses, net(5)

    —          351        545        20,003            10,249        —     
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total operating costs and expenses

    381,425        381,010        1,211,433        676,373            629,636        1,339,238   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Operating income

    30,906        19,573        68,894        2,735            22,483        79,495   

Interest expense(6)

    (31,310     (28,850     (98,124     (43,681         (8,617     (19,254

Other income (expense), net(7)

    1,149        799        (1,658     1,645            (13,609     2,935   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Income (loss) before income taxes

    745        (8,478     (30,888     (39,301         257        63,176   

Income tax (benefit) expense

    (5,951     (3,176     (11,609     (11,411         7,772        14,978   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net income (loss)

  $ 6,696      $ (5,302   $ (19,279   $ (27,890       $ (7,515)      $ 48,198   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net income (loss) per share—basic and diluted

  $ 0.14      $ (0.11   $ (0.39   $ (0.57        
 

 

 

   

 

 

   

 

 

   

 

 

         

Other Financial Data:

               

Adjusted EBITDA(8)

  $ 61,574      $ 51,499      $ 165,878      $ 90,216          $ 73,761      $ 165,464   

Adjusted EBITDA margin(8)

    14.9     12.9     13.0     13.3         11.3     11.7

Total capital expenditures

  $ 15,725      $ 13,581      $ 52,423      $ 29,360          $ 33,738      $ 102,428   

Cash paid for interest, net of amounts capitalized

    3,549        1,656        72,944        53,374            8,299        19,590   

 

 

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    Sixteen Weeks
Ended
May  21,

2012
    Sixteen Weeks
Ended
May 23,
2011
    Fiscal Year
Ended
January 31,
2012
    Fiscal Year
Ended
January 31,
2011
    Fiscal Year
Ended
January 31,
2010
 
   

(dollars in thousands)

 

Other Operating Data:

         

Company-operated average unit volume (trailing-52 weeks)

  $ 1,268      $ 1,231        1,257        1,207        1,206   

Company-operated same-store sales increase (decrease)

    2.6     5.5     3.5     (0.8 )%      (3.9 )% 

Restaurants open (at end of period):

         

Company-operated

    892        895        892        890        898   

Domestic franchised

    1,930        1,915        1,928        1,910        1,905   

International franchised

    441        372        423        359        338   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurants

    3,263        3,182        3,243        3,159        3,141   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

International franchise restaurants as % of total restaurants (at end of period)

    13.5     11.7     13.0     11.4     10.8

Number of foreign countries with restaurants (at end of period)

    25        20        25        18        16   

 

     Successor  
     May 21,
2012
     January 31,
2012
     January 31,
2011
 
     (dollars in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 125,447       $ 64,585       $ 42,586   

Total assets

     1,521,524         1,478,087         1,496,166   

Total long-term debt and capital lease obligations, including current portion

     774,090         764,703         638,532   

Stockholder’s equity

     228,008         219,895         424,769   

 

(1) Our fiscal year is 52 or 53 weeks, ending the last Monday in January. For clarity of presentation, we generally label all fiscal years presented as if the fiscal year ended January 31. The combined Successor twenty-nine weeks ended January 31, 2011 and Predecessor twenty-four weeks ended July 12, 2010 contain a total of 53 weeks; all other fiscal years presented contain 52 weeks.
(2) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Supplemental Discussion of Historical and Pro Forma Financial Information” for a supplemental discussion of pro forma condensed consolidated financial information for the fiscal year ended January 31, 2011, which combines the Predecessor twenty-four weeks ended July 12, 2010 and Successor twenty-nine weeks ended January 31, 2011, adjusted to give effect to the Transactions as if they had occurred on January 26, 2010, the first day of our fiscal year ended January 31, 2011.
(3) Franchised restaurants and other revenue includes revenues generated from royalties, initial and renewal franchise fees, rent from franchisees and the sale of equipment. The Predecessor twenty-four weeks ended July 12, 2010 and fiscal 2010 also include revenues from our Carl’s Jr. distribution centers, which we sold on July 2, 2010. We generate royalty revenues based upon a percentage of the restaurant sales of our franchisees (typically 4%). Franchised restaurant sales for Carl’s Jr. and Hardee’s were $819,369, $762,181, $2,481,092, $1,295,539, $1,071,633 and $2,240,175 for the sixteen weeks ended May 21, 2012, the sixteen weeks ended May 23, 2011, fiscal 2012, the Successor twenty-nine weeks ended January 31, 2011, the Predecessor twenty-four weeks ended July 12, 2010 and fiscal 2010, respectively.
(4) The Successor twenty-nine weeks ended January 31, 2011 and the Predecessor twenty-four weeks ended July 12, 2010 include $10,587 and $1,521, respectively, of share-based compensation expense related to the acceleration of vesting of stock options and awards in connection with the Merger.
(5) Other operating expenses, net consists of transaction-related costs of $351, $545, $20,003 and $13,691 for the sixteen weeks ended May 23, 2011, fiscal 2012, the Successor twenty-nine weeks ended January 31, 2011 and the Predecessor twenty-four weeks ended July 12, 2010, respectively, and a gain of $3,442 on the sale of our Carl’s Jr. distribution center assets in the Predecessor twenty-four weeks ended July 12, 2010.

 

 

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(6) The Predecessor twenty-four weeks ended July 12, 2010 and fiscal 2010 include $3,113 and $6,803, respectively, of interest expense related to changes in the fair value of our Predecessor interest rate swap agreements.
(7) The Predecessor twenty-four weeks ended July 12, 2010 includes a termination fee of $14,283 related to a prior merger agreement.
(8) “Adjusted EBITDA” represents net income (loss), adjusted to exclude income taxes, interest income and expense, asset impairments, facility action charges, depreciation and amortization, management fees, the effects of acquisition accounting adjustments, and certain non-cash and other items described below. “Adjusted EBITDA margin” is defined as Adjusted EBITDA divided by total revenue. We believe that the presentation of Adjusted EBITDA provides investors with a meaningful measure of operating performance, and we use it for planning purposes. In addition, our calculation of Adjusted EBITDA is consistent with the equivalent measurement in the covenants contained in agreements respecting certain of our indebtedness. See “Description of Indebtedness.” Adjusted EBITDA is not a measurement of operating performance computed in accordance with U.S. GAAP and should not be considered as a substitute for operating income, net income or cash flows from operating activities computed in accordance with U.S. GAAP. Adjusted EBITDA may not be comparable to similarly titled measures of other companies. See “Non-GAAP Financial Measures.”

A reconciliation of net income (loss) to Adjusted EBITDA is provided below.

 

    Successor     Predecessor  
    Sixteen
Weeks
Ended
May 21,
2012
    Sixteen
Weeks
Ended
May 23,
2011
    Fiscal Year
Ended
January 31,
2012
    Twenty-Nine
Weeks
Ended
January 31,
2011(a)
    Twenty-Four
Weeks
Ended
July 12,
2010(a)
    Fiscal Year
Ended
January 31,
2010
 
    (dollars in thousands)  

Net income (loss)

  $ 6,696      $ (5,302   $ (19,279   $ (27,890   $ (7,515   $ 48,198   

Interest expense

    31,310        28,850        98,124        43,681        8,617        19,254   

Income tax (benefit) expense

    (5,951     (3,176     (11,609     (11,411     7,772        14,978   

Depreciation and amortization

    25,467        24,938        82,044        41,881        33,703        71,064   

Facility action charges, net

    401        511        (6,018     1,683        590        4,695   

Gain on sale of distribution center assets

    —          —          —          —          (3,442     —     

Transaction-related costs(b)

    —          351        545        20,003        27,974        823   

Management fees(c)

    765        767        2,490        1,260        —          —     

Share-based compensation expense

    1,417        1,469        4,593        13,246        4,710        8,156   

Losses on asset and other disposals

    221        713        1,801        4,384        2,116        2,341   

Difference between U.S. GAAP rent and cash rent

    835        618        2,690        1,833        527        989   

Other, net(d)

    413        1,760        10,497        1,546        (1,291     (5,034
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(e)

  $ 61,574      $ 51,499      $ 165,878      $ 90,216      $ 73,761      $  165,464   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) The combined Successor twenty-nine weeks ended January 31, 2011 and Predecessor twenty-four weeks ended July 12, 2010 contain a total of 53 weeks. We estimate the extra week resulted in additional Adjusted EBITDA of approximately $2,000.
  (b) Transaction-related costs include investment banking, legal, and other costs related to the Merger.
  (c) Represents the amounts associated with the management services agreement with Apollo Management for on-going investment banking, consulting, and financial planning services, which are included in general and administrative expense.

 

 

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  (d) Other, net includes the net impact of acquisition accounting, early extinguishment of debt, executive retention bonus, severance costs and disposition business expense. For the fiscal year ended January 31, 2012, other, net also includes a charge of $1,976 related to the out-of-period Insurance Reserve Adjustment described in more detail in Note 1 of Notes to Consolidated Financial Statements included elsewhere in this prospectus. For the Predecessor twenty-four weeks ended July 12, 2010 and the fiscal year ended January 31, 2010, other, net also includes an adjustment to remove the Adjusted EBITDA associated with our Carl’s Jr. distribution centers, which we sold on July 2, 2010.
  (e) In comparing Adjusted EBITDA for periods before and after the Merger, we estimate that we would have had cost savings of $15, $955 and $1,510 during the Successor twenty-nine weeks ended January 31, 2011, the Predecessor twenty-four weeks ended July 12, 2010 and fiscal 2010, respectively, had we been a privately held company for those periods.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before investing in our common stock. We describe below risks known to us that we believe are material to our business. Any of the following risks could materially and adversely affect our business, financial condition, results of operations or cash flows. In such a case, you may lose part or all of your original investment.

Risks Relating to our Business

Competition is intense and may harm our business and results of operations.

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

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

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

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

Changes in interest rates, commodity prices, labor costs, energy costs and other expenses could adversely affect our operating results.

Increases in interest rates, gasoline prices, commodity costs, labor and benefits costs, legal claims, as well as inflation and the availability of management and hourly employees affect our restaurant operations and administrative expenses.

 

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In particular, increases in interest rates may impact land and construction costs and the cost and availability of borrowed funds, and thereby adversely affect our ability and our franchisees’ ability to finance new restaurant development and improve existing restaurants. In addition, inflation can cause increased commodity and labor and benefits costs and can increase our operating expenses.

Increases in energy costs for our company-operated restaurants, principally electricity for lighting restaurants and natural gas for our broilers, could reduce our operating margins and financial results if we choose not, or are unable, to pass the increased costs to our customers. In addition, our distributors purchase gasoline needed to transport food and other supplies to us. These distributors may charge fuel surcharges if energy costs significantly increase, which could reduce our operating margins and financial results if we choose not, or are unable, to pass the increased costs to our customers.

Changes in food, packaging and supply costs could adversely affect our results of operations.

Our profitability depends in part on our ability to anticipate and react to changes in food, packaging and supply costs. We, along with our franchisees, purchase large quantities of food, packaging and supplies; and like all restaurant companies, we are susceptible to increases in food, packaging and supply costs as a result of factors beyond our control, such as general economic conditions, significant variations in supply and demand, seasonal fluctuations, weather conditions, food safety concerns, food-borne diseases, fluctuations in the value of the U.S. dollar, commodity market speculation and government regulations. Since we have a higher concentration of company-operated restaurants than many of our competitors, we may have greater volatility in our operating costs than those competitors who are more heavily franchised.

The predominant food commodities purchased by our restaurants include beef, chicken, potatoes, pork, dairy, cheese, produce, wheat flour and soybean oil. The cost of food commodities has increased markedly over the last two years, resulting in upward pricing pressure on many of our raw ingredients, and thereby increasing our food costs. For example, the cost of beef, our largest commodity expenditure and the only commodity that accounts for more than twenty percent of our total food and packaging costs, has increased between ten and fifteen percent over the past year as a result of a reduction in U.S. cattle supply, a trend which we expect to continue for several years, and an increase in world demand. This trend is being exacerbated by the severe drought currently affecting the U.S. Midwest, which has reduced the available supply of corn, the primary feedstock for livestock. The U.S. Department of Agriculture recently estimated that, as a result of the drought, which it said is the worst drought to affect the United States since the 1950’s, the price of beef may rise as much as five percent, and retail food costs may increase between three and four percent, in 2013. For these reasons, we expect that there may be additional inflationary pricing pressure on some of our key ingredients, most notably beef, during fiscal 2013 and 2014. Material increases in the prices of the ingredients most critical to our menu, particularly beef, could adversely affect our operating results or cause us to consider changes to our product delivery strategy and adjustments to our menu pricing.

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

Our profitability is dependent on, among other things, our continuing ability to offer our food products at moderate prices. Our Carl’s Jr. and Hardee’s restaurants depend on the distribution services of Meadowbrook Meat Company, Inc. (“MBM”), a third party, national distributor of food and other products. MBM is responsible for delivering food, packaging and other products from our suppliers to our restaurants on a frequent and routine basis. MBM also provides distribution services to nearly all of our domestic Carl’s Jr. and Hardee’s franchisees. Pursuant to the terms of our distribution agreements, we are obligated to purchase substantially all of the food, packaging and supplies sold or used in our Carl’s Jr. and Hardee’s restaurants from MBM through June 30, 2017.

Our suppliers may be adversely impacted by the ongoing economic weakness and uncertainty, such as increased commodity prices, increased fuel costs, tight credit markets and various other factors. As a result, our suppliers may seek to change the terms on which they do business with us in order to lessen the impact of any

 

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current and future economic challenges on their businesses. If we are forced to renegotiate the terms upon which we conduct business with our suppliers or find alternative suppliers to provide key products or services, it could adversely impact our financial condition or results of operations.

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

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

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

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

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

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

Our financial condition and results of operations are dependent upon consumer confidence and discretionary spending, which are influenced by general economic conditions and other factors, including the ongoing macroeconomic challenges in the U.S. and elsewhere in the world. Negative consumer sentiment in the wake of the recent economic recession has been widely reported over the past three years and, according to some economic forecasts, may continue during fiscal 2013. Our sales may decline during this period of economic uncertainty, or during future economic downturns, which can be caused by various factors such as high gasoline prices, increasing commodity prices, high unemployment rates, declining home prices or tight credit markets. Any material decline in consumer confidence or discretionary spending could cause our financial results to decline.

 

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

We have a geographic concentration of restaurants in certain states and regions, which can cause economic conditions in particular areas to have a disproportionate impact on our overall results of operations. As of May 21, 2012, we and our franchisees operated restaurants in 42 states and 25 foreign countries. By number of restaurants, our domestic operations are most concentrated in California, North Carolina and Virginia, and our international franchisees are most concentrated in Mexico, the Middle East and Central Asia. Adverse economic conditions in states or regions that contain a high concentration of Carl’s Jr. and Hardee’s restaurants could have a material adverse impact on our results of operations in the future. In particular, continuing high unemployment rates in California, especially among our core customer demographic of young men, has had, and may continue to have, a negative impact on our results of operations. In addition, economic, political, legal and other conditions in Mexico, the Middle East and Central Asia, where a significant number of our international franchisees are located, could have an adverse impact on the operations of such international franchisees and, accordingly, could negatively impact our ability to execute our international growth strategy.

If we are unable to attract and retain key personnel, our business would be harmed.

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

If our franchisees do not participate in our strategy, our business would be harmed.

Our franchisees are an integral part of our business. We may be unable to successfully implement our brand strategies if our franchisees do not actively participate in such implementation. The failure of our franchisees to focus on the fundamentals of restaurant operations, such as quality, service and cleanliness, would have a negative impact on our success. It may be more difficult for us to monitor our international franchisees’ implementation of our brand strategies due to our lack of personnel in the markets served by such franchisees. One of our strategies is to increase the ratio of franchise restaurants to company-operated restaurants, which could further reduce our influence over the operations of our total restaurant base.

If we fail to successfully open new domestic and international restaurants, our ability to increase our revenues and operating profits could be adversely affected.

Our growth strategy relies in part upon new restaurant development by existing and new franchisees, or by us. We and our franchisees face many challenges in opening new restaurants, including:

 

   

availability of financing;

 

   

selection and availability of suitable restaurant locations;

 

   

competition for restaurant sites;

 

   

negotiation of acceptable lease and financing terms;

 

   

securing required domestic or foreign governmental permits and approvals;

 

   

consumer preferences in new geographic regions and acceptance of our products;

 

   

employment and training of qualified personnel;

 

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impact of inclement weather, natural disasters and other acts of nature; and

 

   

general economic and business conditions.

In particular, because the majority of our new restaurant development is likely to be funded by franchisee investment, our growth strategy is dependent on our franchisees’ (or prospective franchisees’) ability to access funds to finance such development. We do not provide our franchisees with direct financing and therefore their ability to access borrowed funds generally depends on their independent relationships with various financial institutions. If our franchisees (or prospective franchisees) are not able to obtain financing at commercially reasonable rates, or at all, they may be unwilling or unable to invest in the development of new restaurants, and our future growth could be adversely affected.

To the extent we or our franchisees are unable to open new restaurants as we anticipate, our revenue growth would be limited to growth in comparable store sales. Our failure to add a significant number of new restaurants or grow comparable store sales would adversely affect our ability to increase our revenues and operating income and could materially and adversely impact our business and operating results.

Our financial results are affected by the financial results of our franchisees.

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

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

Our business depends on the willingness of vendors and service providers to supply us with goods and services pursuant to customary credit arrangements which may not be available to us in the future.

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

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

An important component of our growth strategy involves increasing our net restaurant count in international markets. The execution of this growth strategy depends upon the opening of new restaurants by our existing

 

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international franchisees and by new international franchisees. We and our current or future franchisees face many risks and uncertainties in opening new restaurants internationally, including economic and political conditions, differing cultures and consumer preferences, diverse government regulations and tax systems, securing acceptable suppliers, difficulty in collecting our royalties and longer payment cycles, uncertain or differing interpretations of rights and obligations in connection with international franchise agreements, the selection and availability of suitable restaurant locations, currency regulation and fluctuation, changing labor conditions and difficulties in staffing international franchises and other external factors.

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

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

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

In addition, reports, whether or not true, of food-borne illnesses or the use of hormones, antibiotics or pesticides in the production of certain food products may cause consumers to reduce or avoid consumption of such food products. Our brands’ reputations are important assets to us, and any such reports could damage our brands’ reputations and immediately and severely hurt sales and profits. If customers become ill from food-borne illnesses or food tampering, we could be forced to temporarily close some, or all, of our restaurants. While we have implemented a quality assurance program that is designed to verify that the food products prepared in our restaurants are prepared in a manner which complies with, or exceeds, all regulatory standards for food safety, there can be no assurance that we can detect or prevent all incidences of food-borne illnesses or food tampering. In addition, instances of food-borne illnesses or food tampering occurring at the restaurants of competitors, could, by resulting in negative publicity about the QSR industry, adversely affect our sales on a local, regional, or national basis.

Recent public and private concerns about the health risks associated with fast food may adversely affect our financial results.

Recently, class action lawsuits have been filed, and may continue to be filed, against various QSRs alleging, among other things, that QSRs have failed to disclose the health risks associated with high-fat or high-sodium foods and have encouraged obesity. Adverse publicity about these allegations may discourage customers from buying our products, even if we are not the subject of a class action lawsuit.

Our success depends on the effectiveness of our marketing and advertising programs.

Brand marketing and advertising significantly affect our revenues. Our marketing and advertising programs may not be successful, which may prevent us from attracting new customers and retaining existing customers. Also, because franchisees contribute to our advertising fund based on a percentage of their gross sales, our advertising budget depends on sales volumes at these franchised restaurants. If sales decline, we will have less funds available for marketing and advertising, which will harm our business.

 

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Our operations are seasonal and heavily influenced by weather conditions.

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

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

Our restaurant-level workforce requires large numbers of both entry-level and skilled employees. From time to time, we have had difficulty hiring and maintaining qualified restaurant management personnel. In addition, due to the labor-intensive nature of our business, increases in minimum wage levels have negatively impacted our labor costs, and further increases in minimum wage levels could have additional negative effects on our consolidated results of operations.

Higher health care costs could adversely affect our business.

We offer access to healthcare benefits to certain of our employees. Changes in legislation may cause us to provide health insurance to employees on terms that differ significantly from our existing programs. We will be impacted by the passage of the U.S. Patient Protection and Affordable Care Act (the “Act”). Under the Act, we may be required to amend our health care plans to, among other things, provide affordable coverage, as defined in the Act, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the Act, cover adult children of our employees to age 26, delete lifetime limits, and delete pre-existing condition limitations. Many of these requirements will be phased in over a period of time. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care costs could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

 

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In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry, particularly among restaurants. As a result, we have recently become subject to regulatory initiatives in the area of nutrition disclosure including requirements to provide information about the nutritional content of our food products. Some jurisdictions are also beginning to regulate portions and promotions at QSRs that could impact our revenues.

The operation of our franchise system is also subject to franchise laws and regulations enacted by a number of states and rules promulgated by the U.S. Federal Trade Commission. Any future legislation regulating franchise relationships may negatively affect our operations, particularly our relationships with our franchisees. Failure to comply with new or existing franchise laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales.

We are subject to the Fair Labor Standards Act (“FLSA”), which governs such matters as minimum wage, overtime and other working conditions, along with the ADA, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated, by federal, state and local governmental authorities that govern these and other employment matters. We have experienced and expect further increases in payroll expenses as a result of federal and state mandated increases in the minimum wage. In addition, our vendors may be affected by higher minimum wage standards, which may increase the price of goods and services they supply to us.

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

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

The success of our business depends on the continued ability to use existing trademarks, service marks, trade secrets and other intellectual property rights in order to increase brand awareness and further develop branded products. All of the steps we have taken to protect our intellectual property may not be adequate. The loss of our intellectual property, or our inability to enforce it, may harm the value of our brands and products. Also, third parties may assert infringement claims against us, and we may be unable to successfully defend against these claims. Any litigation, regardless of whether we prevail, could result in substantial costs and a diversion of our resources, which may harm our business.

We are subject to litigation in the ordinary course of business that could adversely affect us.

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

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

 

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

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

Catastrophic events may disrupt our business.

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

Risks Relating to Our Indebtedness

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under our Notes and Credit Facility.

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the Toggle Notes (which are obligations of CKE only), the Senior Secured Notes (which are obligations of CKE Restaurants and its subsidiaries only) and the Credit Facility. Our high degree of leverage could have important consequences for our creditors and stockholders, including:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

   

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

 

   

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

 

   

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

 

   

we could ultimately be forced into bankruptcy or liquidation.

See “Description of Indebtedness” for further discussion of the Toggle Notes, the Senior Secured Notes and the Credit Facility.

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

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

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

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

 

   

incur or guarantee additional debt or issue certain preferred equity;

 

   

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

 

   

sell certain assets;

 

   

create or incur liens on certain assets to secure debt;

 

   

make certain investments;

 

   

designate subsidiaries as unrestricted subsidiaries;

 

   

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

 

   

enter into certain transactions with affiliates.

The terms of the Credit Facility also include financial performance covenants applicable to CKE Restaurants and its consolidated subsidiaries, which include a maximum secured leverage ratio and a minimum interest coverage ratio. A breach of these or other covenants could allow the lenders to accelerate all amounts due under the Credit Agreement.

See “Description of Indebtedness” for further discussion of the Toggle Notes, the Senior Secured Notes and the Credit Facility.

 

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

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. As a result, we may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness. In addition, because our subsidiaries conduct all of our operations, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to CKE Restaurants or CKE, as the case may be, to pay such indebtedness. While the indentures governing the Notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to CKE Restaurants and CKE, these limitations are subject to certain qualifications and exceptions. In particular, the indenture governing the Senior Secured Notes and the Credit Facility contain restrictions on the ability of CKE Restaurants to make distributions to CKE, which restrictions may prevent CKE Restaurants from making distributions to CKE in an amount sufficient to enable CKE to repay the Toggle Notes when the Toggle Notes mature in 2016 or to enable CKE to pay interest on those Toggle Notes in cash. In the event that CKE Restaurants or CKE does not receive distributions from their respective subsidiaries, CKE Restaurants or CKE, as the case may be, may be unable to make required principal and interest payments on their respective indebtedness.

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

Substantially all of material assets owned by CKE Restaurants and its wholly owned domestic subsidiaries, and CKE Restaurants’ common stock, are subject to a lien to secure obligations under the Credit Facility.

Obligations under our Credit Facility are secured by substantially all material assets owned by CKE Restaurants and its wholly owned domestic subsidiaries and by CKE Restaurants’ common stock. If CKE Restaurants is unable to repay all secured borrowings when due, whether at maturity or if declared due and payable following a default, the lenders would have the right to proceed against the assets securing the indebtedness and may sell these assets in order to repay those borrowings, which could materially harm our business, financial condition and results of operations. If the lenders proceed against CKE Restaurants’ common stock, then we may lose our ownership interests CKE Restaurants, which may significantly harm our business, financial condition and results of operations.

Risks Related to This Offering

There is no existing market for our common stock and we do not know if one will develop, which could impede your ability to sell your shares and may depress the market price of our common stock.

There has not been a public market for our common stock prior to this offering. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the common stock will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. See “Underwriting (Conflicts of Interests).” Consequently, you may be unable to sell our common stock at prices equal to or greater than the price you pay in this offering.

 

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Apollo controls us, and its interests may conflict with or differ from your interests as a stockholder.

After the consummation of this offering, Apollo will beneficially own approximately 68.4% of our common stock, assuming the underwriters do not exercise their option to purchase additional shares, or 64.9% if the underwriters exercise their option in full. As a result, Apollo will continue to have the ability to prevent any transaction that requires the approval of our stockholders, including the approval of significant corporate transactions such as mergers and the sale of substantially all of our assets.

The interests of Apollo could conflict with or differ from your interests as a holder of our common stock. For example, the concentration of ownership held by Apollo could delay, defer or prevent a change of control of us or impede a merger, takeover or other business combination that you as a stockholder may otherwise view favorably. Apollo is in the business of making or advising on investments in companies and holds, and may from time to time in the future acquire, interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. They may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Our certificate of incorporation will provide that we expressly renounce any interest or expectancy in any business opportunity, transaction or other matter in which Apollo Management or any of its members, directors, employees or other affiliates (the “Apollo Group”) participates or desires or seeks to participate in, even if the opportunity is one that we would reasonably be deemed to have pursued if given the opportunity to do so. The renouncement does not apply to any business opportunities that are presented to an Apollo Group member solely in such person’s capacity as a member of our board of directors and with respect to which no other member of the Apollo Group independently receives notice or otherwise identifies such business opportunity prior to us becoming aware of it, or if the business opportunity is initially identified by the Apollo Group solely through the disclosure of information by or on behalf of us. See “Management—Apollo Approval of Certain Matters and Rights to Nominate Certain Directors,” “Certain Relationships and Related Party Transactions—Nominating Agreement” and “Description of Capital Stock—Certain Anti-Takeover, Limited Liability and Indemnification Provisions—Apollo Approval Rights.”

Apollo will continue to strongly influence or effectively control our decisions for so long as it beneficially owns a significant amount of our outstanding common stock.

So long as Apollo continues to beneficially own a significant amount of our equity, even if such amount is less than 50%, it may continue to be able to strongly influence or effectively control our decisions. For example, our bylaws will require the approval of a majority of the directors nominated by Apollo Management voting on the matter for certain important matters, including mergers and acquisitions, issuances of equity and the incurrence of debt, so long as Apollo beneficially owns at least 33 1/3% of our outstanding common stock. Upon completion of this offering, Apollo will continue to beneficially own more than 50% of our common stock. See “Management—Apollo Approval of Certain Matters and Rights to Nominate Certain Directors,” “Certain Relationships and Related Party Transactions—Nominating Agreement” and “Description of Capital Stock—Certain Anti-Takeover, Limited Liability and Indemnification Provisions—Apollo Approval Rights.”

We will be a “controlled company” within the meaning of the New York Stock Exchange rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

Upon the closing of this offering, Apollo will continue to control a majority of our voting common stock. As a result, we will be a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. Under the rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain New York Stock Exchange corporate governance requirements, including:

 

   

the requirement that we have a majority of independent directors on our board of directors;

 

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the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Following this offering, we intend to utilize the foregoing exemptions from the New York Stock Exchange corporate governance requirements. As a result, we will not have a majority of independent directors nor will our nominating and corporate governance and compensation committees consist entirely of independent directors and we will not be required to have an annual performance evaluation of the nominating and corporate governance and compensation committees. See “Management.” Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.

Certain underwriters are affiliates of our controlling stockholder and have interests in this offering beyond customary underwriting discounts and commissions.

Apollo Global Securities, LLC, an underwriter of this offering, is an affiliate of Apollo, our controlling stockholder. Since Apollo beneficially owns more than 10% of our outstanding common stock, a “conflict of interest” is deemed to exist under Rule 5121(f)(5)(B) of the Conduct Rules of the Financial Industry Regulatory Authority, or FINRA. Accordingly, this offering will be made in compliance with the applicable provisions of Rule 5121. Pursuant to Rule 5121, a “qualified independent underwriter” (as defined in Rule 5121) must participate in the preparation of the prospectus and perform its usual standard of due diligence with respect to the registration statement and this prospectus. Morgan Stanley & Co. LLC has agreed to act as qualified independent underwriter for the offering. Although the qualified independent underwriter has participated in the preparation of the prospectus and conducted due diligence, we cannot assure you that this will adequately address any potential conflicts of interest. See “Underwriting (Conflicts of Interest).”

The price of our common stock may fluctuate significantly and you could lose all or part of your investment.

Volatility in the market price of our common stock may prevent you from being able to sell your common stock at or above the price you paid for your common stock. The market price for our common stock could fluctuate significantly for various reasons, including:

 

   

our operating and financial performance and prospects;

 

   

changes in earnings estimates or recommendations by securities analysts who track our common stock or industry;

 

   

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

   

the number of shares to be publicly traded after this offering; and

 

   

sales of common stock by us, our stockholder, the Apollo Funds or its affiliated funds or members of our management team.

In addition, the stock market has experienced significant price and volume fluctuations in recent years. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industries. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce our share price.

 

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We currently have no plans to pay regular dividends on our common stock, so you may not receive funds without selling your common stock.

We currently have no plans to pay regular dividends on our common stock. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions applying to the payment of dividends, and other considerations that our board of directors deems relevant. The terms of our Credit Facility and the indentures governing the Notes include limitations on our ability to pay dividends and/or the ability of our subsidiaries to pay dividends to us. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment.

Future sales or the possibility of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.

We may sell additional shares of common stock in subsequent public offerings or otherwise, including to finance acquisitions. We have 100,000,000 authorized shares of common stock, of which 55,911,067 shares will be outstanding upon consummation of this offering. The outstanding share number includes shares that we or the selling stockholder are selling in this offering, which may be resold immediately in the public market. The remaining outstanding shares are restricted from immediate resale under the lock-up agreements with the underwriters described in the “Underwriting (Conflicts of Interests)” section of this prospectus, but may be sold into the market in the near future. These shares will become available for sale following the expiration of the lock-up agreements, which, without the prior consent of Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and Goldman, Sachs & Co., is 180 days after the date of this prospectus, subject to certain exceptions and extensions. Immediately after the expiration of the lock-up period, the shares will be eligible for resale under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), subject to volume limitations.

As soon as practicable after the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering 4,000,000 shares of our common stock reserved for issuance under our Stock Incentive Plan, our new long-term incentive plan. Accordingly, shares of our common stock registered under such registration statement may become available for sale in the open market upon grants under the plan, subject to vesting restrictions, Rule 144 limitations applicable to our affiliates and the contractual lock-up provisions described below.

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including any shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.

Our organizational documents may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.

Provisions of our certificate of incorporation and bylaws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our board of directors. These provisions include:

 

   

having a classified board of directors;

 

   

establishing limitations on the removal of directors;

 

   

prohibiting cumulative voting in the election of directors;

 

   

empowering only the board to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise, and requiring that, as long as Apollo continues to beneficially own at least 33 1/3% of our common stock, any vacancy resulting from the death, removal or resignation of an Apollo Management designee be filled by a majority of the remaining directors nominated by Apollo Management;

 

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as long as Apollo continues to beneficially own more than 50.1% of our common stock, granting Apollo Management the right to increase the size of our board of directors and to fill the resulting vacancies at any time;

 

   

authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;

 

   

prohibiting stockholders from acting by written consent or calling a special meeting if less than 50.1% of our outstanding common stock is beneficially owned by Apollo;

 

   

requiring the approval of a majority of the directors nominated by Apollo Management voting on the matter to approve certain business combinations and certain other significant matters so long as Apollo beneficially owns at least 33 1/3% of our common stock; and

 

   

establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

Our issuance of shares of preferred stock could delay or prevent a change in control of us. Our board of directors has the authority to cause us to issue, without any further vote or action by the stockholders, shares of preferred stock, par value $0.01 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. The issuance of shares of our preferred stock may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders, even where stockholders are offered a premium for their shares.

Our bylaws will also require the approval of a majority of directors nominated by Apollo Management voting on the matter for certain important matters, including mergers and acquisitions, issuances of equity and the incurrence of debt, as long as Apollo beneficially owns at least 33 1/3% of our outstanding common stock. In addition, as long as Apollo beneficially owns a majority of our outstanding common stock, Apollo Management will be able to control all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and certain corporate transactions. See “Management—Apollo Approval of Certain Matters and Rights to Nominate Certain Directors.” Together, these charter, bylaw and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as the significant common stock beneficially owned by Apollo and its rights to nominate a specified number of directors in certain circumstances, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of us, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

You will experience an immediate and substantial dilution in the net tangible book deficit of the common stock you purchase.

After giving effect to this offering and the other adjustments described elsewhere in this prospectus under “Dilution,” we expect that our pro forma as adjusted net tangible book deficit as of May 21, 2012 would be $6.00 per share. Based on an assumed initial public offering price of $15.00 per share, the midpoint of the estimated offering range set forth on the cover page of this prospectus, you will experience immediate and substantial dilution of approximately $21.00 per share in net tangible book deficit of the common stock you purchase in this offering. See “Dilution,” including the discussion of the effects on dilution from a change in the price of this offering.

The additional requirements of having a class of publicly traded equity securities may strain our resources and distract management.

Even though CKE Restaurants currently files reports with the SEC, after the consummation of this offering, we will be subject to additional reporting requirements of the Securities Exchange Act of 1934 (“the Exchange Act”), the Sarbanes-Oxley Act of 2002, (the “Sarbanes-Oxley Act”), and the Dodd-Frank Wall Street Reform

 

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and Consumer Protection Act (“the Dodd-Frank Act”). The Dodd-Frank Act effects comprehensive changes to public company governance and disclosures in the United States and will subject us to additional federal regulation. We cannot predict with any certainty the requirements of the regulations ultimately adopted or how the Dodd-Frank Act and such regulations will impact the cost of compliance for a company with publicly traded common stock. We are currently evaluating and monitoring developments with respect to the Dodd-Frank Act and other new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect that being a company with publicly traded common stock and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control for financial reporting. These requirements may place a strain on our systems and resources. Under Section 404 of the Sarbanes-Oxley Act, we will be required to include a report of management on our internal control over financial reporting in our Annual Reports on Form 10-K. After consummation of this offering, our independent public accountants auditing our financial statements must attest to the effectiveness of our internal control over financial reporting. This requirement will first apply to our Annual Report on Form 10-K for our fiscal year ending January 31, 2014. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. If we are unable to conclude that our disclosure controls and procedures and internal control over financial reporting are effective, or if our independent public accounting firm is unable to provide us with an unqualified report on our internal control over financial reporting in future years, investors may lose confidence in our financial reports and our stock price may decline.

We have broad discretion to apply the proceeds to us from this offering, and we may use them in ways that may not enhance our operating results or the price of our common stock.

Our management will have broad discretion over the use of proceeds from this offering, and we could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return, if at all. If we do not invest or apply the proceeds of this offering in ways that improve our operating results, we may fail to achieve expected financial results, which could cause our stock price to decline.

 

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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes statements relating to our future plans and developments, financial goals and operating performance that are based on our current beliefs and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Such statements are subject to risks and uncertainties that are often difficult to predict, are beyond our control, and which may cause results to differ materially from expectations. Factors that could cause our results to differ materially from those described include, but are not limited to:

 

   

our ability to compete with other restaurants, supermarkets and convenience stores for customers, employees, restaurant locations and franchisees;

 

   

changes in consumer preferences, perceptions and spending patterns;

 

   

changes in food, packaging and supply costs;

 

   

the ability of our key suppliers to continue to deliver premium-quality products to us at moderate prices;

 

   

our ability to successfully enter new markets, complete construction of new restaurants and complete remodels of existing restaurants;

 

   

changes in general economic conditions and the geographic concentration of our restaurants, which may affect our business;

 

   

our ability to attract and retain key personnel;

 

   

our franchisees’ willingness to participate in our strategy;

 

   

risks associated with implementing our growth strategy;

 

   

the operational and financial success of our franchisees;

 

   

the willingness of our vendors and service providers to supply us with goods and services pursuant to customary credit arrangements;

 

   

risks associated with operating in international locations;

 

   

the effect of the media’s reports regarding food-borne illnesses, food tampering and other health-related issues on our reputation and our ability to procure or sell food products;

 

   

the seasonality of our operations;

 

   

the effect of increasing labor costs including healthcare related costs;

 

   

increased insurance and/or self-insurance costs;

 

   

our ability to comply with existing and future health, employment, environmental and other government regulations;

 

   

our ability to adequately protect our intellectual property;

 

   

the adverse affect of litigation in the ordinary course of business;

 

   

a significant failure, interruption or security breach of our computer systems or information technology;

 

   

catastrophic events, including war, terrorism and other international conflicts, public health issues or natural causes;

 

   

our substantial leverage, which could limit our ability to raise capital, react to economic changes or meet obligations under our indebtedness;

 

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the effect of restrictive covenants in the indentures governing the Notes and the Credit Facility on our business;

 

   

the potentially conflicting interests of our controlling stockholder and our creditors; and

 

   

other factors as discussed under the caption “Risk Factors” in this prospectus.

Investors are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that may affect our future plans and developments, financial goals, operating performance, and the value of our securities. As a result of these and other factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the impact may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

The forward looking statements in this prospectus speak only as of the date of this prospectus. We expressly disclaim any obligation to publicly update or revise any forward looking statement, whether to conform such statement to actual results or as a result of changes in our opinions or expectations, new information, future events or otherwise, in each case except as required by law.

 

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USE OF PROCEEDS

Assuming an initial public offering price of $15.00 per share, the midpoint of the range set forth on the cover page of this prospectus, we estimate that we will receive net proceeds from this offering of approximately $92.0 million, after deducting underwriting discounts and commissions and other estimated expenses of $8.0 million payable by us. We will not receive any net proceeds from the sale by the selling stockholder.

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $6.3 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us, by approximately $14.1 million, assuming the initial public offering price per share remains the same.

We intend to use the net proceeds that we receive (i) to redeem approximately $82.1 million aggregate principal amount of the Senior Secured Notes and to pay the related early redemption premiums (for a total redemption price of approximately $91.5 million, not including accrued and unpaid interest) and (ii) for general corporate purposes. The indenture governing the Senior Secured Notes allows us to redeem up to 35% of the original aggregate principal amount of those notes with the net proceeds of certain equity offerings, including this offering, at a redemption price of 111.375% of the aggregate principal amount of the Senior Secured Notes being redeemed (plus the payment of accrued and unpaid interest to the redemption date); provided that at least 65% of the original aggregate principal amount of the Senior Secured Notes ($390 million) remains outstanding after such redemption. The Senior Secured Notes were issued in connection with the Merger. The Senior Secured Notes mature on July 15, 2018, and bear interest at a rate of 11.375% per annum. In addition, upon the completion of this offering, we will pay from cash on hand Apollo Management or its affiliates a fee of approximately $13.8 million (plus any unreimbursed expenses) in connection with the termination of our management services agreement, as described under “Certain Relationships and Related Party Transactions—Management Services Fee.”

DIVIDEND POLICY

We currently intend to retain all future earnings, if any, for use in the operation of our business and to fund future growth. In addition, our Credit Facility and the indentures governing the Notes limit our ability to pay dividends or other distributions on our common stock. See “Description of Indebtedness.” The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition and requirements, business conditions and covenants under any applicable contractual arrangements.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of May 21, 2012:

 

   

on an actual basis;

 

   

on a pro forma basis giving effect to the redemption on July 16, 2012 of $60.0 million aggregate principal amount of Senior Secured Notes at a redemption price of 103% of their principal amount (plus the payment of accrued and unpaid interest to May 21, 2012); and

 

   

on a pro forma as adjusted basis giving further effect to our sale of 6,666,667 shares of common stock in this offering at an assumed offering price of $15.00, which is the midpoint of the range listed on the cover page of this prospectus, our use of the net proceeds of this offering to redeem approximately $82.1 million aggregate principal amount of the Senior Secured Notes and the payment from cash on hand of a $14.0 million fee, calculated as of May 21, 2012, in connection with the termination of our management services agreement with Apollo Management.

You should read this table in conjunction with our unaudited condensed consolidated financial statements as of and for the sixteen weeks ended May 21, 2012 and related notes thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Use of Proceeds” included elsewhere in this prospectus.

 

     As of May 21, 2012  
     Actual     Pro Forma     Pro Forma
As
Adjusted(1)
 
     (dollars in thousands,
except par values)
 

Cash and cash equivalents

   $ 125,447      $ 61,266      $ 44,513   
  

 

 

   

 

 

   

 

 

 

Long-term debt and capital lease obligations:

      

Toggle Notes(2)

   $ 209,556      $ 209,556      $ 209,556   

Senior Secured Notes(3)

     523,544        464,511        383,713   

Borrowing under Credit Facility(4)

     —          —          —     

Capital lease obligations

     40,602        40,602        40,602   

Other indebtedness

     388        388        388   
  

 

 

   

 

 

   

 

 

 

Total long-term debt and capital lease obligations

     774,090        715,057        634,259   
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Common stock, $0.01 par value; 100,000,000 shares authorized; 49,244,400 issued and outstanding, actual and pro forma; 55,911,067 shares issued and outstanding, pro forma as adjusted(5)

     492        492        559   

Additional paid-in capital

     458,177        458,177        550,110   

Accumulated deficit

     (230,661     (232,959     (249,004
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     228,008        225,710        301,665   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 1,002,098      $ 940,767      $ 935,924   
  

 

 

   

 

 

   

 

 

 

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus) would increase (decrease) each of pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $6.3 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) each of pro forma as adjusted cash and cash equivalents, additional paid in capital, total stockholders’ equity and total capitalization by approximately $14.1 million, assuming the initial public offering price per share remains the same, after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

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(2) The $212,691 aggregate principal amount of the Toggle Notes is reduced by the remaining original issue discount of $3,135 as of May 21, 2012 that will accrete and be recorded to interest expense through the maturity of the Toggle Notes. The Toggle Notes exclude the $10,508 principal amount of Toggle Notes held by CKE Restaurants since these Toggle Notes have been constructively retired.
(3) The aggregate principal amount of the Senior Secured Notes ($532,122 actual; $472,122 pro forma; and $390,000 pro forma as adjusted) is reduced by the remaining original issue discount as of May 21, 2012 ($8,578 actual; $7,611 pro forma; and $6,287 pro forma as adjusted) that will accrete and be recorded to interest expense through the maturity of the Senior Secured Notes.
(4) The Credit Facility provides for facility loans, swingline loans and letters of credit, in an aggregate amount of up to $100,000. As of May 21, 2012, we had no outstanding loan borrowings, $30,913 of outstanding letters of credit, and remaining availability of $69,087 under the Credit Facility.
(5) We intend to amend our certificate of incorporation to authorize 100,000,000 shares of common stock and to complete a 492,444-for-one stock split of our common stock prior to the completion of this offering. All share amounts have been retroactively adjusted to give effect to this stock split and to reflect the increase in authorized shares of common stock.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of the common stock to be sold in this offering exceeds the net tangible book value (deficit) per share of common stock after the offering. Net tangible book value (deficit) per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date. There will be 4,000,000 shares of our common stock reserved for future awards under our Stock Incentive Plan as of the consummation of this offering, which have not been included within the dilution amounts presented below.

Our net tangible book deficit as of May 21, 2012 was approximately $409.3 million, or $8.31 per share. Our pro forma net tangible book deficit as of May 21, 2012 was approximately $411.6 million, or $8.36 per share of common stock. Pro forma net tangible book deficit per share gives effect to the redemption, on July 16, 2012, of $60.0 million aggregate principal amount of Senior Secured Notes at a redemption price of 103% of their principal amount.

After giving effect to the sale of the 6,666,667 shares of common stock we are offering at an assumed initial public offering price of $15.00 per share (the midpoint of the range listed on the cover page of this prospectus) and after deducting underwriting discounts and commissions, our estimated offering expenses, our expected use of the net proceeds of this offering to redeem approximately $82.1 million aggregate principal amount of Senior Secured Notes and the payment from cash on hand of a $14.0 million fee, calculated as of May 21, 2012, in connection with the termination of our management services agreement with Apollo Management, our pro forma as adjusted net tangible book deficit would have been approximately $335.6 million, or $6.00 per share of common stock, as of May 21, 2012. This represents an immediate decrease in pro forma net tangible book deficit of approximately $2.36 per share to existing stockholders and an immediate dilution of approximately $21.00 per share to new investors. The following table illustrates this calculation on a per share basis:

 

Assumed initial public offering price per share

     $ 15.00   

Net tangible book deficit per share as of May 21, 2012

   $ (8.31  

Decrease per share attributable to the pro forma adjustments described above

     (0.05  
  

 

 

   

Pro forma net tangible book deficit as of May 21, 2012

     (8.36  

Increase per share attributable to the offering and the use of proceeds and use of cash on hand described above

     2.36     
  

 

 

   

Pro forma as adjusted net tangible book deficit per share after this offering

       (6.00
    

 

 

 

Dilution per share to new investors

     $ 21.00   
    

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would decrease (increase) our pro forma as adjusted net tangible book deficit by approximately $6.3 million, or $0.11 per share, and increase (decrease) the dilution to new investors in this offering by $0.89 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. An increase of 1,000,000 in the number of shares we are offering would decrease our pro forma as adjusted net tangible book deficit by approximately $14.1 million, or $0.35 per share, and would decrease dilution to new investors in this offering by $0.35 per share, assuming the initial public offering price per share remains the same. A decrease of 1,000,000 in the number of shares we are offering would increase our pro forma as adjusted net tangible book deficit by approximately $14.1 million, or $0.37 per share, and would increase dilution to new investors in this offering by $0.37 per share, assuming the initial public offering price per share remains the same.

 

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The following table summarizes on an as adjusted basis as of May 21, 2012, giving effect to:

 

   

the total number of shares of common stock purchased from us;

 

   

the total consideration paid to us, assuming an initial public offering price of $15.00 per share (before deducting the estimated underwriting discount and commissions and offering expenses payable by us in connection with this offering); and

 

   

the average price per share paid by our existing stockholder and by new investors purchasing shares in this offering:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholder (1)

     49,244,400         88   $ 259,812,000         72   $ 5.28   

Investors in the offering purchasing newly-issued shares

     6,666,667         12     100,000,005         28   $ 15.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     55,911,067         100   $ 359,812,005         100   $ 6.44   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

(1) Total consideration for the existing stockholder of $259,812,000 represents the initial investment by Apollo CKE Holdings of $450,000,000 on July 12, 2010 reduced by dividends of $190,188,000 paid during fiscal 2012.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors purchasing newly-issued shares, total consideration paid by all stockholders and the average price per share by $6.7 million, $6.7 million and $0.12, respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) total consideration paid by new investors and total consideration paid by all stockholders by $15.0 million and $15.0 million, respectively, and would increase and (decrease) the average price per share paid by all stockholders by $0.15 and $(0.16), respectively, assuming the initial public offering price stays the same.

 

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SELECTED HISTORICAL FINANCIAL INFORMATION AND OTHER DATA

The selected financial information for the fiscal year ended January 31, 2012, the twenty-nine weeks ended January 31, 2011, the twenty-four weeks ended July 12, 2010 and the fiscal year ended January 31, 2010 and as of January 31, 2012 and 2011 have been derived from our audited Consolidated Financial Statements, including the related notes thereto, which are included elsewhere in this prospectus. The selected financial data as of May 21, 2012 and for the sixteen weeks ended May 21, 2012 and May 23, 2011 have been derived from our unaudited Condensed Consolidated Financial Statements, including the related notes thereto, which are included elsewhere in this prospectus and have been prepared on a basis consistent with our annual audited Consolidated Financial Statements. The selected financial information for the fiscal years ended January 31, 2009 and 2008 and as of January 31, 2010, 2009 and 2008, have been derived from our audited consolidated financial statements, including the related notes thereto, which are not included in this prospectus. Periods ended on or prior to July 12, 2010 reflect the consolidated results of our subsidiary, CKE Restaurants, prior to the Merger, and the periods beginning after July 12, 2010 reflect the results of CKE and its consolidated subsidiaries after the Merger. We refer to the financial statements prior to the Merger as “Predecessor” and to those after the Merger as “Successor.”

The following information should be read in conjunction with “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

     Successor     Predecessor  
     Sixteen
Weeks
Ended
May 21,
2012
    Sixteen
Weeks
Ended
May 23,
2011
    Fiscal Year
Ended
January 31,
2012(1)
    Twenty-Nine
Weeks
Ended
January 31,
2011(1)(2)
    Twenty-Four
Weeks
Ended

July 12,
2010(1)(2)
    Fiscal Year
Ended
January 31,
2010(1)
    Fiscal Year
Ended
January 31,
2009(1)
    Fiscal Year
Ended
January 31,
2008(1)
 
     (dollars in thousands, except per share amounts)  

Consolidated Statements of Operations Data:

                

Revenue:

                

Company-operated restaurants

   $ 361,466      $ 351,604      $ 1,122,430      $ 598,753      $ 500,531      $ 1,084,474      $ 1,131,312      $ 1,201,577   

Franchised restaurants and other(3)

     50,865        48,979        157,897        80,355        151,588        334,259        351,398        333,057   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 412,331      $ 400,583      $ 1,280,327      $ 679,108      $ 652,119      $ 1,418,733      $ 1,482,710      $ 1,534,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income(4)

   $ 30,906      $ 19,573      $ 68,894      $ 2,735      $ 22,483      $ 79,495      $ 84,020      $ 88,327   

Interest expense(5)

     (31,310     (28,850     (98,124 )       (43,681     (8,617     (19,254     (28,609     (33,033

Income tax (benefit) expense

     (5,951     (3,176     (11,609     (11,411     7,772        14,978        21,533        24,659   

Income (loss) from continuing operations(6)

     6,696        (5,302     (19,279     (27,890     (7,515     48,198        36,956        35,072   

Earnings (loss) per share from continuing operations—basic and diluted

   $ 0.14      $ (0.11   $ (0.39   $ (0.57        

Other Financial Data:

                

Adjusted EBITDA(7)

   $ 61,574      $ 51,499      $ 165,878      $ 90,216      $ 73,761      $ 165,464      $ 169,495      $ 171,359   

Adjusted EBITDA margin(7)

     14.9     12.9     13.0     13.3     11.3     11.7     11.4     11.2

Total capital expenditures

   $ 15,725      $ 13,581      $ 52,423      $ 29,360      $ 33,738      $ 102,428      $ 116,513      $ 133,816   

Cash paid for interest, net of amounts capitalized

     3,549        1,656        72,944        53,374        8,299        19,590        21,753        20,235   

 

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    Sixteen Weeks
Ended
May 21, 2012
    Sixteen Weeks
Ended
May 23, 2011
    Fiscal Year Ended January 31,  
        2012     2011     2010     2009     2008  
    (dollars in thousands)  

Other Operating Data:

             

Company-operated average unit volume (trailing-52 weeks)

  $ 1,268      $ 1,231        1,257        1,207        1,206        1,232        1,162   

Company-operated same-store sales increase (decrease)

    2.6     5.5     3.5     (0.8 )%      (3.9 )%      1.7     1.5

Restaurants open (at end of period):

             

Company-operated

    892        895        892        890        898        899        967   

Domestic franchised

    1,930        1,915        1,928        1,910        1,905        1,901        1,834   

International franchised

    441        372        423        359        338        316        282   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurants

    3,263        3,182        3,243        3,159        3,141        3,116        3,083   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

International franchise restaurants as % of total restaurants (at end of period)

    13.5     11.7     13.0     11.4     10.8     10.1     9.1

Number of foreign countries with restaurants (at end of period)

    25        20        25        18        16        14        14   

 

     Successor      Predecessor  
     May 21,
2012
     January 31,
2012
     January 31,
2011
     January 31,
2010
     January 31,
2009
     January 31,
2008
 
     (dollars in thousands)  

Consolidated Balance Sheet Data:

                 

Cash and cash equivalents

   $ 125,447       $ 64,585       $ 42,586       $ 18,246       $ 17,869       $ 19,993   

Total assets

     1,521,524         1,478,087         1,496,166         823,543         804,687         791,711   

Total long-term debt and capital lease obligations, including current portion

     774,090         764,703         638,532         329,008         357,450         392,036   

Stockholders’ equity

     228,008         219,895         424,769         236,175         194,276         145,242   

 

(1) Our fiscal year is 52 or 53 weeks, ending the last Monday in January. For clarity of presentation, we generally label all fiscal years presented as if the fiscal year ended January 31. The combined Successor twenty-nine weeks ended January 31, 2011 and Predecessor twenty-four weeks ended July 12, 2010 contain a total of 53 weeks; all other fiscal years presented contain 52 weeks.
(2) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Supplemental Discussion of Historical and Pro Forma Financial Information” for a supplemental discussion of pro forma condensed consolidated financial information for the fiscal year ended January 31, 2011, which combines the Predecessor twenty-four weeks ended July 12, 2010 and Successor twenty-nine weeks ended January 31, 2011, adjusted to give effect to the Transactions as if they had occurred on January 26, 2010, the first day of our fiscal year ended January 31, 2011.
(3) Franchised restaurants and other revenue includes revenues generated from royalties, initial and renewal franchise fees, rent from franchisees and the sale of equipment. The Predecessor twenty-four weeks ended July 12, 2010, fiscal 2010, fiscal 2009 and fiscal 2008 also include revenues from our Carl’s Jr. distribution centers, which we sold on July 2, 2010. We generate royalty revenues based upon a percentage of the restaurant sales of our franchisees (typically 4%). Franchised restaurant sales for Carl’s Jr. and Hardee’s were $819,369, $762,181, $2,481,092, $1,295,539, $1,071,633, $2,240,175, $2,209,235 and $2,049,896 for the sixteen weeks ended May 21, 2012, the sixteen weeks ended May 23, 2011, fiscal 2012, the Successor twenty-nine weeks ended January 31, 2011, the Predecessor twenty-four weeks ended July 12, 2010, fiscal 2010, fiscal 2009 and fiscal 2008, respectively.
(4)

The sixteen weeks ended May 21, 2012, the sixteen weeks ended May 23, 2011, fiscal 2012, the Successor twenty-nine weeks ended January 31, 2011, the Predecessor twenty-four weeks ended July 12, 2010, fiscal 2010, fiscal 2009 and fiscal 2008 include $401, $511, $(6,018), $1,683, $590, $4,695, $4,139 and $(577), respectively, of facility action charges, net, which are included in operating income. Additionally, $10,587

 

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  and $1,521 of share-based compensation expense related to the acceleration of vesting of stock options and awards in connection with the Merger are included in operating income for the Successor twenty-nine weeks ended January 31, 2011 and Predecessor twenty-four weeks ended July 12, 2010, respectively. Operating income also includes transaction-related costs of $351, $545, $20,003 and $13,691 for the sixteen weeks ended May 23, 2011, fiscal 2012, the Successor twenty-nine weeks ended January 31, 2011 and the Predecessor twenty-four weeks ended July 12, 2010, respectively, and a gain of $3,442 on the sale of our Carl’s Jr. distribution center assets in the Predecessor twenty-four weeks ended July 12, 2010.
(5) The Predecessor twenty-four weeks ended July 12, 2010, fiscal 2010, fiscal 2009 and fiscal 2008 include $3,113, $6,803, $9,010 and $11,380, respectively, of interest expense related to changes in the fair value of our Predecessor interest rate swap agreements.
(6) The Predecessor twenty-four weeks ended July 12, 2010 includes a termination fee of $14,283 related to a prior merger agreement.
(7) “Adjusted EBITDA” represents net income (loss), adjusted to exclude income taxes, interest income and expense, asset impairments, facility action charges, depreciation and amortization, management fees, the effects of acquisition accounting adjustments, and certain non-cash and other items described below. “Adjusted EBITDA margin” is defined as Adjusted EBITDA divided by total revenue. See “Non-GAAP Financial Measures.”

A reconciliation of net income (loss) to Adjusted EBITDA is provided below.

 

    Successor     Predecessor  
    Sixteen
Weeks
Ended
May 21,
2012
    Sixteen
Weeks
Ended
May 23,
2011
    Fiscal Year
Ended
January 31,
2012
    Twenty-Nine
Weeks
Ended
January 31,
2011(a)
    Twenty-Four
Weeks
Ended
July 12,
2010(a)
    Fiscal Year
Ended
January 31,
2010
    Fiscal Year
Ended
January 31,
2009
    Fiscal Year
Ended
January 31,
2008
 
    (dollars in thousands)  

Net income (loss)

  $ 6,696      $ (5,302   $ (19,279   $ (27,890   $ (7,515   $ 48,198      $ 36,956      $ 31,076   

Interest expense

    31,310        28,850        98,124        43,681        8,617        19,254        28,609        33,055   

Income tax (benefit) expense

    (5,951     (3,176     (11,609     (11,411     7,772        14,978        21,533        26,612   

Depreciation and amortization

    25,467        24,938        82,044        41,881        33,703        71,064        63,497        64,102   

Facility action charges, net

    401        511        (6,018     1,683        590        4,695        4,139        (1,282

Gain on sale of distribution center assets

    —          —          —                 (3,442     —          —          —     

Transaction-related costs(b)

    —          351        545        20,003        27,974        823        —          —     

Management fees(c)

    765        767        2,490        1,260        —          —          —          —     

Share-based compensation expense

    1,417        1,469        4,593        13,246        4,710        8,156        12,534        11,378   

Losses on asset and other disposals

    221        713        1,801        4,384        2,116        2,341        2,353        4,429   

Difference between U.S. GAAP rent and cash rent

    835        618        2,690        1,833        527        989        2,729        2,902   

Other, net(d)

    413        1,760        10,497        1,546        (1,291     (5,034     (2,855     (913
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(e)

  $ 61,574      $ 51,499      $ 165,878      $ 90,216      $ 73,761      $ 165,464      $ 169,495      $ 171,359   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (a) The combined successor twenty-nine weeks ended January 31, 2011 and Predecessor twenty-four weeks ended July 12, 2010 contain a total of 53 weeks. We estimate the extra week resulted in additional Adjusted EBITDA of approximately $2,000.

 

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  (b) Transaction-related costs include investment banking, legal, and other costs related to the Merger, as well as costs related to the termination of a prior merger agreement.
  (c) Represents the amounts associated with the management services agreement with Apollo Management for on-going investment banking, consulting, and financial planning services, which are included in general and administrative expense.
  (d) Other, net includes the net impact of acquisition accounting, early extinguishment of debt, executive retention bonus, severance costs and disposition business expense. For the fiscal year ended January 31, 2012, other, net also includes a charge of $1,976 related to the out-of-period Insurance Reserve Adjustment described in more detail in Note 1 of Notes to Consolidated Financial Statements included elsewhere in this prospectus. For the Predecessor twenty-four weeks ended July 12, 2010 and the fiscal years ended January 31, 2010, 2009 and 2008, other, net also includes an adjustment to remove the Adjusted EBITDA associated with our Carl’s Jr. distribution centers, which we sold on July 2, 2010.
  (e) In comparing Adjusted EBITDA for periods before and after the Merger, we estimate that we would have had cost savings of $15, $955, $1,510, $1,470 and $1,535 in the Successor twenty-nine weeks ended January 31, 2011, the Predecessor twenty-four weeks ended July 12, 2010, fiscal 2010, fiscal 2009 and fiscal 2008, respectively, had we been a privately held company for those years.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:

 

   

Overview

 

   

Trends and Uncertainties

 

   

Operating Review

 

   

Supplemental Discussion of Historical and Pro Forma Financial Information

 

   

Liquidity and Capital Resources

 

   

Long-Term Obligations

 

   

Critical Accounting Policies and Estimates

 

   

New Accounting Pronouncements

 

   

Presentation of Non-GAAP Measures

 

   

Impact of Inflation

 

   

Quantitative and Qualitative Disclosures About Market Risk

The MD&A should be read in conjunction with “Cautionary Notice Regarding Forward-Looking Statements,” “Selected Historical and Other Data,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

All dollar amounts, except per share amounts, presented in this MD&A are in thousands, unless the context indicates otherwise.

Overview

We are an owner, operator and franchisor of QSRs in the United States and 25 other countries, operating principally under the Carl’s Jr. and Hardee’s brand names. As of May 21, 2012, we operated 892 restaurants and our franchisees operated 1,930 domestic and 441 international restaurants, primarily under the Carl’s Jr. and Hardee’s brands. Domestic Carl’s Jr. restaurants are predominately located in the Western United States, primarily in California, with a growing presence in Texas. International Carl’s Jr. restaurants are located primarily in Mexico, with a growing presence in the rest of Latin America, Russia and Asia. Hardee’s restaurants are located predominately throughout the Southeastern and Midwestern United States, with a growing international presence in the Middle East and Central Asia. Our Green Burrito restaurants are primarily located in dual-branded Carl’s Jr. restaurants and our Red Burrito restaurants are exclusively located in dual-branded Hardee’s restaurants.

We derive our revenue primarily from sales at company-operated restaurants and from our franchisees. Franchise restaurants and other revenue includes franchise and royalty fees, rental revenue under real property leases and revenue from the sale of equipment to our franchisees. Restaurant operating expenses consist primarily of food and packaging costs, payroll and other employee benefits and occupancy and other operating expenses of company-operated restaurants. Franchise operating costs include depreciation expense or lease payments on properties leased or subleased to our franchisees, the cost of equipment sold to franchisees and franchise administrative support. Our revenue and expenses are directly affected by the number and sales volume of company-operated restaurants and, to a lesser extent, by the number and sales volume of franchised restaurants.

 

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On July 2, 2010, we sold to MBM our Carl’s Jr. distribution center assets located in Ontario, California and Manteca, California. Prior to the sale of our Carl’s Jr. distribution center assets on July 2, 2010, we derived sales from food and packaging products to Carl’s Jr. franchisees and incurred the associated franchise operating costs for food and packaging products.

Merger Agreement

On July 12, 2010, we acquired CKE Restaurants pursuant to the Merger Agreement, with CKE Restaurants becoming our wholly-owned subsidiary through the Merger.

The aggregate consideration for all equity securities of CKE Restaurants was $704,065, including $10,587 of post-combination share-based compensation expense, and the total debt assumed and refinanced in connection with the Merger was $270,487. The Merger was funded by (i) equity contributions from the Apollo Funds, indirectly through Apollo CKE Holdings, of $436,645; (ii) equity contributions from our senior management, indirectly through Apollo CKE Holdings, of $13,355; and (iii) proceeds of $588,510 from the issuance of our $600,000 Senior Secured Notes. In addition, we entered into our $100,000 Credit Facility, which was undrawn at closing.

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

During fiscal 2012, we completed the acquisition accounting for the Merger and retrospectively adjusted post-combination amounts previously reported to reflect our final accounting for the Merger. See Note 2 of Notes to Consolidated Financial Statements included elsewhere in this prospectus for further discussion.

Subsequently, on March 14, 2012, CKE completed an offering of $200,000 of its Toggle Notes.

Presentation of Historical and Pro Forma Operating Results

Since the Merger occurred on July 12, 2010, our operating results for the three years ended January 31, 2012 discussed in this prospectus include both Successor and Predecessor periods. The operating results for the Predecessor periods reflect the consolidated results of our subsidiary, CKE Restaurants, prior to the Merger. Operating results for Successor periods reflect the results of CKE and its consolidated subsidiaries after the Merger. Due to the significant impact of acquisition accounting and Merger related expenses, most notably interest expense, share-based compensation expense and transaction-related costs, on our consolidated operating results, there is a lack of comparability between Successor and Predecessor periods. Accordingly, we have separately discussed our consolidated results of operations for each period. Both the sixteen weeks ended May 21, 2012 and the sixteen weeks ended May 23, 2011 include only Successor periods and are more directly comparable than the periods referred to above.

In addition, in the section of this MD&A captioned “Supplemental Discussion of Historical and Pro Forma Financial Information,” we have included pro forma condensed consolidated financial information for the fiscal year ended January 31, 2011, which combines the Predecessor twenty-four weeks ended July 12, 2010 and Successor twenty-nine weeks ended January 31, 2011, adjusted to give effect to the Transactions as if they had occurred on January 26, 2010, the first day of our fiscal year ended January 31, 2011. We have also included supplemental discussions comparing our condensed consolidated results of operations for fiscal 2012 and fiscal 2010 with such pro forma results of operations for fiscal 2011. We have included this pro forma presentation, which is not required by U.S GAAP, because we believe this supplemental disclosure, including the related discussion, will assist in comparing our results of operations between periods.

 

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Fiscal 2011 Additional Week

Our fiscal year ends on the last Monday in January in each year, which resulted in an extra week during fiscal 2011. As a result, our fourth quarter and fiscal year ended January 31, 2011 included 13 weeks and 53 weeks, respectively, as compared to 12 weeks and 52 weeks in the fourth quarter and fiscal year ended January 30, 2012. The fiscal year ended January 25, 2010 included 52 weeks.

Within this MD&A, management has estimated the impact of the additional week on our operating results by analyzing the last accounting period of fiscal 2011, excluding the impact of certain year-end and quarter-end adjustments, and making various assumptions that management deemed reasonable and appropriate.

Recent Highlights

Highlights from the sixteen weeks ended May 21, 2012 include:

 

   

Our system-wide restaurant count increased by 20 restaurants.

 

   

Our franchisees opened 20 international and 13 domestic restaurants.

 

   

Same-store sales for company-operated restaurants increased 2.6%.

 

   

AUV for company-operated restaurants increased to $1,268.

 

   

Consolidated revenue of $412,331 for the sixteen weeks ended May 21, 2012 increased $11,748, or 2.9%, as compared to the prior year period.

 

   

Operating income of $30,906 for the sixteen weeks ended May 21, 2012 increased $11,333, or 57.9%, as compared to the prior year period.

 

   

Consolidated company-operated restaurant-level adjusted EBITDA margin(1) was 19.3% for the sixteen weeks ended May 21, 2012, as compared to 17.0% for the sixteen weeks ended May 23, 2011.

 

   

Franchise restaurant adjusted EBITDA(1) increased $2,069, or 8.1%, to $27,549, as compared to the prior year period.

 

   

We received proceeds of $29,946 from the sale and leaseback of 20 properties(2).

Highlights from fiscal 2012 include:

 

   

Our system-wide restaurant count for our two major brands increased by 86 restaurants, marking our fifth straight year of net restaurant growth.

 

   

Our franchisees opened 72 international and 41 domestic restaurants, and we opened 5 domestic company-operated restaurants.

 

   

We, through our franchisees, opened restaurants in seven new countries.

 

   

Same-store sales for company-operated restaurants increased 3.5%.

 

   

AUV for company-operated restaurants increased to $1,257.

 

   

We signed development agreements with 17 new and three existing franchisees representing commitments to build over 300 restaurants domestically and internationally over the next seven years.

 

   

We remodeled 65 company-operated restaurants.

 

   

Our domestic franchisees remodeled 284 restaurants.

 

   

We completed a combined 67 dual-branded Green Burrito and Red Burrito company-operated restaurant conversions, and our domestic franchisees completed 45 dual-branded restaurant conversions.

 

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Consolidated revenue of $1,280,327 for fiscal 2012 benefited from an increase in company-operated same-store sales and an increase in the number of our franchised restaurants. Consolidated revenue for fiscal 2012 was unfavorably impacted by the sale of our Carl’s Jr. distribution center assets on July 2, 2010.

 

   

Operating income of $68,894 for fiscal 2012 was primarily comprised of operating income generated by our Carl’s Jr. and Hardee’s operating segments of $30,232 and $38,687, respectively. Operating income for fiscal 2012 includes a charge of $1,976 in the Hardee’s operating segment related to the out-of-period Insurance Reserve Adjustment described in more detail in Note 1 of Notes to Consolidated Financial Statements included elsewhere in this prospectus.

 

   

Consolidated company-operated restaurant-level adjusted EBITDA margin(1) of 16.8% for fiscal 2012 was unfavorably impacted by increases in commodity costs and by the Insurance Reserve Adjustment, which were partially offset by favorability in other components of labor costs. Excluding the Insurance Reserve Adjustment, consolidated company-operated restaurant-level adjusted EBITDA margin for fiscal 2012 was 17.0%.

 

   

Consolidated franchise restaurant adjusted EBITDA(1) of $84,204 for fiscal 2012 benefited from royalties generated from the increase in our franchised restaurant count and was adversely impacted by higher franchise administrative costs to support our long-term growth strategy.

 

   

We extinguished through redemptions and open market purchases a total of $67,878 of the principal amount of our Senior Secured Notes and $9,948 of the principal amount of our Toggle Notes.

 

   

We received proceeds of $67,454 from the sale and leaseback of 47 restaurant properties(3).

 

(1) Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise restaurant adjusted EBITDA within the subheading “Presentation of Non-GAAP Measures” in this MD&A.
(2) See Note 5 of Notes to Condensed Consolidated Financial Statements included elsewhere in this prospectus for additional discussion of sale-leaseback transactions.
(3) See Note 11 of Notes to Consolidated Financial Statements included elsewhere in this prospectus for additional discussion of sale-leaseback transactions.

Trends and Uncertainties

The following represent some of the most significant trends and uncertainties that management believes could reasonably be expected to impact our future plans and developments, financial goals and operating performance. This section should be read in conjunction with “Cautionary Notice Regarding Forward-Looking Statements” and “Risk Factors.”

 

   

The continuing economic uncertainty affecting consumer confidence and discretionary spending may cause long-term changes in the preferences and perceptions of our customers;

 

   

The cost of food commodities has increased markedly over the last two years and we expect that there may be additional pricing pressure on some of our key ingredients, most notably beef, during fiscal 2013, which may adversely affect our operating results or cause us to consider changes to our product delivery strategy and adjustments to our menu pricing;

 

   

We expect to continue to grow our restaurant base, and currently have more than 75 franchise development agreements representing commitments (which we, but not our franchisees, may terminate under certain circumstances) to build over 875 franchised restaurants domestically and internationally over the next ten years;

 

   

Changes in employment and other governmental regulations could result in additional costs to us and cause adverse impacts on our future operating results; and

 

   

Changes in consumer focus on nutrition, food content and food safety could result in loss of market share and adversely impact our operating results.

 

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Operating Review

The following tables present the change in our restaurant portfolios, consolidated and by brand, for the sixteen weeks ended May 21, 2012, fiscal 2012 and fiscal 2011:

 

     Company-
operated
    Domestic
Franchised
    International
Franchised
    Total  

Consolidated:

        

Open as of January 31, 2010

     898        1,905        338        3,141   

New

     7        32        30        69   

Closed

     (15     (27     (9     (51
  

 

 

   

 

 

   

 

 

   

 

 

 

Open as of January 31, 2011

     890        1,910        359        3,159   

New

     5        41        72        118   

Closed

     (6     (20     (8     (34

Divested

     —          (3     —          (3

Acquired

     3        —          —          3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Open as of January 31, 2012

     892        1,928        423        3,243   

New

     2        13        20        35   

Closed

     (2     (11     (2     (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Open at May 21, 2012

     892        1,930        441        3,263   
  

 

 

   

 

 

   

 

 

   

 

 

 

Carl’s Jr.:

        

Open as of January 31, 2010

     422        666        136        1,224   

New

     7        20        19        46   

Closed

     (6     (12     (3     (21
  

 

 

   

 

 

   

 

 

   

 

 

 

Open as of January 31, 2011

     423        674        152        1,249   

New

     3        25        48        76   

Closed

     (3     (6     (3     (12

Divested

     —          —          —          —     

Acquired

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Open as of January 31, 2012

     423        693        197        1,313   

New

     2        8        7        17   

Closed

     (1     (7     —          (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Open at May 21, 2012

     424        694        204        1,322   
  

 

 

   

 

 

   

 

 

   

 

 

 

Hardee’s:

        

Open as of January 31, 2010

     475        1,228        202        1,905   

New

     —          12        11        23   

Closed

     (9     (14     (6     (29
  

 

 

   

 

 

   

 

 

   

 

 

 

Open as of January 31, 2011

     466        1,226        207        1,899   

New

     2        16        24        42   

Closed

     (2     (13     (5     (20

Divested

     —          (3     —          (3

Acquired

     3        —          —          3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Open as of January 31, 2012

     469        1,226        226        1,921   

New

     —          5        13        18   

Closed

     (1     (4     (2     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Open at May 21, 2012

     468        1,227        237        1,932   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Fiscal Quarter—Consolidated

 

    

Sixteen

Weeks Ended

   

Sixteen

Weeks Ended

 
     May 21, 2012     May 23, 2011  

Revenue:

    

Company-operated restaurants

   $ 361,466      $ 351,604   

Franchised restaurants and other

     50,865        48,979   
  

 

 

   

 

 

 

Total revenue

     412,331        400,583   
  

 

 

   

 

 

 

Operating costs and expenses:

    

Restaurant operating costs

     292,752        293,248   

Franchised restaurants and other

     25,629        25,878   

Advertising

     20,852        20,061   

General and administrative

     41,791        40,961   

Facility action charges, net

     401        511   

Other operating expenses

     —          351   
  

 

 

   

 

 

 

Total operating costs and expenses

     381,425        381,010   
  

 

 

   

 

 

 

Operating income

     30,906        19,573   

Interest expense

     (31,310     (28,850

Other income, net

     1,149        799   
  

 

 

   

 

 

 

Income (loss) before income taxes

     745        (8,478

Income tax benefit

     (5,951     (3,176
  

 

 

   

 

 

 

Net income (loss)

   $ 6,696      $ (5,302
  

 

 

   

 

 

 

Company-operated average unit volume (trailing-52 weeks)

   $ 1,268      $ 1,231   

Domestic franchise-operated average unit volume (trailing-52 weeks)

     1,080        1,058   

Company-operated same-store sales increase

     2.6     5.5

Domestic franchise-operated same-store sales increase

     2.1     3.8

Company-operated restaurant-level adjusted EBITDA(1):

    

Company-operated restaurants revenue

   $ 361,466      $ 351,604   

Less: restaurant operating costs

     (292,752     (293,248

Add: depreciation and amortization expense

     22,069        21,600   

Less: advertising expense

     (20,852     (20,061
  

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA

   $ 69,931      $ 59,895   
  

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin

     19.3     17.0

Franchise restaurant adjusted EBITDA(1):

    

Franchised restaurants and other revenue

   $ 50,865      $ 48,979   

Less: franchised restaurants and other expense

     (25,629     (25,878

Add: depreciation and amortization expense

     2,313        2,379   
  

 

 

   

 

 

 

Franchise restaurant adjusted EBITDA

   $ 27,549      $ 25,480   
  

 

 

   

 

 

 

 

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

 

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Fiscal Quarter—Segments

 

    Carl’s Jr.     Hardee’s  
    Sixteen
Weeks Ended
    Sixteen
Weeks Ended
 
    May 21,
2012
    May 23,
2011
    May 21,
2012
    May 23,
2011
 

Company-operated restaurants revenue

  $ 192,916      $ 188,288      $ 168,550      $ 163,250   

Franchised restaurants and other revenue

    18,608        17,846        32,115        30,966   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    211,524        206,134        200,665        194,216   
 

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant operating costs:

       

Food and packaging

    57,263        57,556        51,239        51,317   

Payroll and other employee benefits

    54,580        53,679        48,185        47,941   

Occupancy and other

    45,231        46,318        36,254        36,337   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

    157,074        157,553        135,678        135,595   
 

 

 

   

 

 

   

 

 

   

 

 

 

Franchised restaurants and other expense

    10,111        9,985        15,515        15,893   

Advertising expense

    11,575        11,175        9,277        8,886   

General and administrative expense

    20,142        19,299        21,574        21,662   

Facility action charges, net

    32        359        369        151   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 12,590      $ 7,763      $ 18,252      $ 12,029   
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated average unit volume (trailing-52 weeks)

  $ 1,424      $ 1,389      $ 1,128      $ 1,088   

Domestic franchise-operated average unit volume (trailing-52 weeks)

    1,093        1,102        1,072        1,035   

Company-operated same-store sales increase

    2.6     2.1     2.6     9.6

Domestic franchise-operated same-store sales (decrease) increase

    (0.4 )%      0.4     4.0     5.9

Company-operated same-store transaction increase (decrease)

    2.8     (0.1 )%      (2.2 )%      3.0

Company-operated average check (actual $)

  $ 6.98      $ 6.97      $ 5.57      $ 5.30   

Restaurant operating costs as a percentage of company-operated restaurants revenue:

       

Food and packaging

    29.7     30.6     30.4     31.4

Payroll and other employee benefits

    28.3     28.5     28.6     29.4

Occupancy and other

    23.4     24.6     21.5     22.3

Total restaurant operating costs

    81.4     83.7     80.5     83.1

Advertising expense as a percentage of company-operated restaurants revenue

    6.0     5.9     5.5     5.4

Company-operated restaurant-level adjusted EBITDA(1):

       

Company-operated restaurants revenue

  $ 192,916      $ 188,288      $ 168,550      $ 163,250   

Less: restaurant operating costs

    (157,074     (157,553     (135,678     (135,595

Add: depreciation and amortization expense

    10,498        10,836        11,571        10,764   

Less: advertising expense

    (11,575     (11,175     (9,277     (8,886
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA

  $ 34,765      $ 30,396      $ 35,166      $ 29,533   
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin

    18.0     16.1     20.9     18.1

Franchise restaurant adjusted EBITDA(1):

       

Franchised restaurants and other revenue

  $ 18,608      $ 17,846      $ 32,115      $ 30,966   

Less: franchised restaurants and other expense

    (10,111     (9,985     (15,515     (15,893

Add: depreciation and amortization expense

    1,062        1,088        1,251        1,291   
 

 

 

   

 

 

   

 

 

   

 

 

 

Franchise restaurant adjusted EBITDA

  $ 9,559      $ 8,949      $ 17,851      $ 16,364   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Sixteen Weeks Ended May 21, 2012 Compared with Sixteen Weeks Ended May 23, 2011

Consolidated

Total Revenue

Total revenue increased $11,748, or 2.9%, to $412,331 during the sixteen weeks ended May 21, 2012, as compared to the prior year period, due to the increase in company-operated restaurants revenue of $9,862 and the increase in franchised restaurants and other revenue of $1,886. Company-operated same-store sales increased 2.6% and domestic franchise-operated same-store sales increased 2.1%.

Restaurant Operating Costs

Restaurant operating costs decreased $496, or 0.2%, to $292,752 during the sixteen weeks ended May 21, 2012, as compared to the prior year period. Restaurant operating costs as a percentage of company-operated restaurants revenue were 81.0% during for the sixteen weeks ended May 21, 2012, as compared to 83.4% for the sixteen weeks ended May 23, 2011. This decrease in restaurant operating costs as a percentage of company-operated restaurants revenue was in part due to higher company-operated average unit volumes, which benefited from price increases implemented over the past year. Occupancy and other expense as a percentage of company-operated restaurants revenue decreased 1.0% compared to the prior year period, primarily as a result of lower repairs and maintenance expense. Food and packaging costs as a percentage of company-operated restaurants revenue decreased 1.0% from the prior year period, primarily as a result of higher restaurant pricing and lower commodity costs for produce, pork, and dairy, partially offset by higher commodity costs for beef. Payroll and other employee benefits as a percentage of company-operated restaurants revenue decreased 0.5% from the prior year period.

Franchised Restaurants and Other Expense

During the sixteen weeks ended May 21, 2012, franchised restaurants and other expense of $25,629 was comparable with the prior year period.

Advertising Expense

Advertising expense increased $791, or 3.9%, to $20,852 during the sixteen weeks ended May 21, 2012, as compared to the prior year period. Advertising expense as a percentage of company-operated restaurants revenue was 5.8% during the sixteen weeks ended May 21, 2012, as compared to 5.7% during the prior year period.

General and Administrative Expense

General and administrative expense increased $830, or 2.0%, to $41,791 in the sixteen weeks ended May 21, 2012 from the prior year period. This increase was mainly due to an increase of $629 in bonus expense, which is based on our performance relative to executive management and operations bonus criteria.

Interest Expense

During the sixteen weeks ended May 21, 2012, interest expense increased $2,460, or 8.5%, to $31,310, as compared to the prior year period. This increase was primarily due to an increase in interest expense related to our Toggle Notes of $2,877, which were issued during the sixteen weeks ended May 23, 2011, and an increase in interest expense of $2,090 related to our financing method sale-leaseback transactions. These increases were partially offset by a decrease in interest expense of $2,492 related to our Senior Secured Notes caused by the early extinguishment of $67,878 of principal amount of our Senior Secured Notes during fiscal 2012.

Income Tax Benefit

Our effective income tax rate for the sixteen weeks ended May 21, 2012 differs from the federal statutory rate primarily as a result of non-deductible share-based compensation expense, state income taxes, federal

 

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income tax credits and the release of $5,969 of valuation allowance on state income tax credit and net operating loss (“NOL”) carryforwards. Our effective income tax rate for the sixteen weeks ended May 23, 2011 differs from the federal statutory rate primarily as a result of non-deductible share-based compensation expense, state income taxes and federal income tax credits and the release of $328 of valuation allowance on state NOL and income tax credit carryforwards.

Carl’s Jr.

Company-Operated Restaurants Revenue

Revenue from company-operated Carl’s Jr. restaurants increased $4,628, or 2.5%, to $192,916 during the sixteen weeks ended May 21, 2012, as compared to the sixteen weeks ended May 23, 2011. This increase was primarily due to the 2.6% increase in company-operated same-store sales for the quarter, which was driven, in part, by price increases taken over the past year.

Company-Operated Restaurant-Level Adjusted EBITDA Margin

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

 

Company-operated restaurant-level adjusted EBITDA margin for the period ended May 23, 2011

     16.1

Decrease in food and packaging costs

     0.9   

Payroll and other employee benefits:

  

Decrease in workers’ compensation expense

     0.1   

Decrease in labor costs, excluding workers’ compensation

     0.1   

Occupancy and other (excluding depreciation and amortization):

  

Decrease in repairs and maintenance expense

     0.6   

Decrease in utilities expense

     0.2   

Other, net

     0.1   

Increase in advertising expense

     (0.1
  

 

 

 

Company-operated restaurant-level adjusted EBITDA margin for the period ended May 21, 2012

     18.0
  

 

 

 

Food and Packaging Costs

Food and packaging costs decreased as a percentage of company-operated restaurants revenue during the sixteen weeks ended May 21, 2012, as compared to the prior year period, mainly due to the impact of price increases taken over the past year and decreased commodity costs for produce, pork, chicken and cheese products, partially offset by increased commodity costs for beef and potato products.

Occupancy and Other Costs

Repairs and maintenance expense decreased as a percentage of company-operated restaurants revenue during the sixteen weeks ended May 21, 2012, as compared to the prior year period, mainly due to decreased spending on contract services, repairs of restaurant equipment and building maintenance.

Depreciation and amortization expense decreased as a percentage of company-operated restaurants revenue during the sixteen weeks ended May 21, 2012, as compared to the prior fiscal year, due primarily to sales leverage and the acceleration of depreciation expense in the prior year period for certain restaurants.

 

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Franchised Restaurants

 

     Sixteen
Weeks Ended
     Sixteen
Weeks Ended
 
     May 21, 2012      May 23, 2011  

Franchised restaurants and other revenue:

     

Royalties

   $ 11,655       $ 10,672   

Rent and other occupancy

     6,474         6,746   

Franchise fees

     479         428   
  

 

 

    

 

 

 

Total franchised restaurants and other revenue

   $ 18,608       $ 17,846   
  

 

 

    

 

 

 

Franchised restaurants and other expense:

     

Administrative expense (including provision for bad debts)

   $ 3,607       $ 3,436   

Rent and other occupancy

     6,504         6,549   
  

 

 

    

 

 

 

Total franchised restaurants and other expense

   $ 10,111       $ 9,985   
  

 

 

    

 

 

 

Franchised restaurants and other revenue increased $762, or 4.3%, to $18,608 during the sixteen weeks ended May 21, 2012, as compared to the prior year period. Royalty revenues increased $983, or 9.2%, to $11,655, due primarily to the net increase of 46 international and 14 domestic franchised restaurants since the end of the first quarter of fiscal 2012.

Franchised restaurants and other expense increased $126, or 1.3%, to $10,111 during the sixteen weeks ended May 21, 2012, from the comparable prior year period. Administrative expense increased $171, or 5.0%, from the comparable prior year period, due primarily to increased franchise operations and administration costs related to our international growth strategy.

Hardee’s

Company-Operated Restaurants Revenue

Revenue from company-operated Hardee’s restaurants increased $5,300, or 3.2%, to $168,550 during the sixteen weeks ended May 21, 2012, as compared to the sixteen weeks ended May 23, 2011. This increase was primarily due to the 2.6% increase in company-operated same-store sales for the quarter, which was driven, in part, by price increases taken over the past year and revenue generated from five restaurants opened or acquired during the sixteen weeks ended May 23, 2011 that were only open for a portion of the comparable prior year period.

 

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Company-Operated Restaurant-Level Adjusted EBITDA Margin

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

 

Company-operated restaurant-level adjusted EBITDA margin for the period ended May 23, 2011

     18.1

Decrease in food and packaging costs

     1.0   

Payroll and other employee benefits:

  

Decrease in labor costs, excluding workers’ compensation

     0.9   

Increase in workers’ compensation expense

     (0.1

Occupancy and other (excluding depreciation and amortization):

  

Decrease in repairs and maintenance expense

     0.4   

Decrease in general liability insurance expense

     0.3   

Decrease in asset disposal expense

     0.3   

Other, net

     0.1   

Increase in advertising expense

     (0.1
  

 

 

 

Company-operated restaurant-level adjusted EBITDA margin for the period ended May 21, 2012

     20.9
  

 

 

 

Food and Packaging Costs

Food and packaging costs decreased as a percentage of company-operated restaurants revenue during the sixteen weeks ended May 21, 2012, as compared to the prior year period, mainly due to the impact of price increases taken over the past year and decreased commodity costs for produce, pork, dairy and cheese products, partially offset by increased commodity costs for beef and potato products.

Labor Costs

Labor costs, excluding workers’ compensation expense, decreased as a percentage of company-operated restaurants revenue during the sixteen weeks ended May 21, 2012, as compared to the prior year period, due primarily to more efficient use of labor in the restaurants and sales leverage resulting from the same-store sales increase.

Occupancy and Other Costs

Repairs and maintenance expense decreased as a percentage of company-operated restaurants revenue during the sixteen weeks ended May 21, 2012, as compared to the prior year period, mainly due to decreased spending on contract services, repairs of restaurant equipment and building maintenance.

General liability insurance expense decreased as a percentage of company-operated restaurants revenue during the sixteen weeks ended May 21, 2012, as compared to the prior year period, due primarily to favorable claims reserve adjustments as a result of actuarial analyses of outstanding claims reserves in the current year period and unfavorable claims reserve adjustments in the comparable prior year period.

Asset disposal expense decreased as a percentage of company-operated restaurants revenue during the sixteen weeks ended May 21, 2012, as compared to the prior year period, due primarily to lower asset disposals resulting from a reduction in restaurant remodels in the current year period.

Depreciation and amortization expense increased as a percentage of company-operated restaurants revenue during the sixteen weeks ended May 21, 2012, as compared to the prior year period, due primarily to the impact of fixed asset additions.

 

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Franchised Restaurants

 

     Sixteen
Weeks Ended
     Sixteen
Weeks Ended
 
     May 21, 2012      May 23, 2011  

Franchised restaurants and other revenue:

     

Royalties

   $ 19,435       $ 17,971   

Equipment sales

     8,367         8,571   

Rent and other occupancy

     3,828         4,023   

Franchise fees

     485         401   
  

 

 

    

 

 

 

Total franchised restaurants and other revenue

   $ 32,115       $ 30,966   
  

 

 

    

 

 

 

Franchised restaurants and other expense:

     

Administrative expense (including provision for bad debts)

   $ 3,820       $ 3,964   

Equipment distribution center

     8,399         8,532   

Rent and other occupancy

     3,296         3,397   
  

 

 

    

 

 

 

Total franchised restaurants and other expense

   $ 15,515       $ 15,893   
  

 

 

    

 

 

 

Total franchised restaurants and other revenue increased $1,149, or 3.7%, to $32,115 during the sixteen weeks ended May 21, 2012, as compared to the prior year period. Royalty revenues increased $1,464, or 8.1%, to $19,435 from the comparable prior year period, due primarily to a net increase of 23 international and 2 domestic franchised restaurants since the end of the first quarter of fiscal 2012 and an increase in domestic franchise-operated same-store sales of 4.0%. Equipment sales decreased $204, or 2.4%, to $8,367, from the comparable prior year period, primarily due to a decrease in equipment sales to franchisees.

Franchised restaurants and other expense decreased $378, or 2.4%, to $15,515, during the sixteen weeks ended May 21, 2012, as compared to the prior year period. The decrease in administrative expense of $144, or 3.6%, to $3,820 was primarily due to reduced travel and meeting costs. The decrease in equipment distribution center costs of $133, or 1.6%, resulted directly from the decrease in equipment sales to franchisees.

 

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Fiscal Year—Consolidated

 

    Successor     Predecessor  
    Fiscal 2012     Twenty-Nine
Weeks Ended
January 31,

2011(1)
    Twenty-Four
Weeks Ended
July 12,
2010(1)
    Fiscal 2010  

Revenue:

       

Company-operated restaurants

  $ 1,122,430      $ 598,753      $ 500,531      $ 1,084,474   

Franchised restaurants and other

    157,897        80,355        151,588        334,259   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    1,280,327        679,108        652,119        1,418,733   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

       

Restaurant operating costs

    939,615        495,909        414,171        881,397   

Franchised restaurants and other

    81,372        39,464        115,120        254,124   

Advertising

    65,061        34,481        29,647        64,443   

General and administrative

    130,858        84,833        59,859        134,579   

Facility action charges, net

    (6,018     1,683        590        4,695   

Other operating expenses, net

    545        20,003        10,249        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    1,211,433        676,373        629,636        1,339,238   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    68,894        2,735        22,483        79,495   

Interest expense

    (98,124     (43,681     (8,617     (19,254

Other (expense) income, net

    (1,658     1,645        (13,609     2,935   
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (30,888     (39,301     257        63,176   

Income tax (benefit) expense

    (11,609     (11,411     7,772        14,978   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (19,279   $ (27,890   $ (7,515   $ 48,198   
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA(2):

       

Company-operated restaurants revenue

  $ 1,122,430      $ 598,753      $ 500,531      $ 1,084,474   

Less: restaurant operating costs

    (939,615     (495,909     (414,171     (881,397

Add: depreciation and amortization expense

    70,994        35,750        30,412        63,096   

Less: advertising expense

    (65,061     (34,481     (29,647     (64,443
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA

  $ 188,748      $ 104,113      $ 87,125      $ 201,730   
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin

    16.8     17.4     17.4     18.6

Franchise restaurant adjusted EBITDA(2)

       

Franchised restaurants and other revenue

  $ 157,897      $ 80,355      $ 151,588      $ 334,259   

Less: franchised restaurants and other expense

    (81,372     (39,464     (115,120     (254,124

Add: depreciation and amortization expense

    7,679        4,266        1,388        3,130   
 

 

 

   

 

 

   

 

 

   

 

 

 

Franchise restaurant adjusted EBITDA

  $ 84,204      $ 45,157      $ 37,856      $ 83,265   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Refer to discussion of unaudited pro forma condensed consolidated statement of operations for fiscal 2011 within “— Supplemental Discussion of Historical and Pro Forma Financial Information.” The pro forma condensed consolidated financial information for the fiscal year ended January 31, 2011 combines the Predecessor twenty-four weeks ended July 12, 2010 and Successor twenty-nine weeks ended January 31, 2011, adjusted to give effect to the Transactions as if they had occurred on January 26, 2010, the first day of our fiscal year ended January 31, 2011.

 

(2) Refer to definitions of company-operated restaurant-level non-GAAP measures and franchise restaurant adjusted EBITDA within “—Presentation of Non-GAAP Measures.”

 

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Fiscal Year—Segments

 

    Successor     Predecessor  
    Fiscal 2012     Twenty-Nine
Weeks Ended
January 31,

2011(1)
    Twenty-Four
Weeks Ended
July 12,
2010(1)
    Fiscal 2010  

Carl’s Jr.

       

Revenue:

       

Company-operated restaurants

  $ 598,234      $ 321,525      $ 271,379      $ 604,937   

Franchised restaurants and other

    59,666        31,967        111,855        247,542   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    657,900        353,492        383,234        852,479   

Operating costs and expenses:

       

Restaurant operating costs

    502,397        266,686        223,299        482,100   

Franchised restaurants and other

    32,824        17,534        98,035        214,971   

Advertising

    36,065        18,496        16,620        36,730   

General and administrative

    62,083        39,620        28,523        63,032   

Facility action charges, net

    (5,701     366        168        2,219   

Gain on sale of distribution center assets

    —          —          (3,442     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 30,232      $ 10,790      $ 20,031      $ 53,427   
 

 

 

   

 

 

   

 

 

   

 

 

 
 

Company-operated restaurant-level adjusted EBITDA(2):

       

Company-operated restaurants revenue

  $ 598,234      $ 321,525      $ 271,379      $ 604,937   

Less: restaurant operating costs

    (502,397     (266,686     (223,299     (482,100

Add: depreciation and amortization expense

    34,366        17,723        14,834        31,113   

Less: advertising expense

    (36,065     (18,496     (16,620     (36,730
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA

  $ 94,138      $ 54,066      $ 46,294      $ 117,220   
 

 

 

   

 

 

   

 

 

   

 

 

 

Company-operated restaurant-level adjusted EBITDA margin

    15.7     16.8     17.1     19.4
 

Franchise restaurant adjusted EBITDA(2):

       

Franchised restaurants and other revenue

  $ 59,666      $ 31,967      $ 111,855      $ 247,542   

Less: franchised restaurants and other expense

    (32,824     (17,534     (98,035     (214,971

Add: depreciation and amortization expense

    3,419        1,914        752        1,889   
 

 

 

   

 

 

   

 

 

   

 

 

 

Franchise restaurant adjusted EBITDA

  $ 30,261      $ 16,347      $ 14,572      $ 34,460   
 

 

 

   

 

 

   

 

 

   

 

 

 
 

Hardee’s

       

Revenue:

       

Company-operated restaurants

  $ 524,084      $ 277,110      $ 229,043      $ 479,289   

Franchised restaurants and other

    97,698        48,103        39,480        86,173   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    621,782        325,213        268,523        565,462   

Operating costs and expenses:

       

Restaurant operating costs

    437,074