Acquisitions and Purchase Accounting

12 Months Ended

Dec. 31, 2013

Business Combinations [Abstract]

Acquisitions and Purchase Accounting

Acquisitions and Purchase Accounting

2013 Acquisitions

On July 22, 2013, NPC’s wholly-owned subsidiary, NPCQB, completed the acquisition of 22 Wendy’s restaurants from the Wendy’s Company for $10.4 million, including initial franchise fees and amounts for working capital. NPCQB subsequently acquired two additional restaurants under development by Wendy’s Company during the fourth quarter for approximately $3.2 million, thereby increasing the number of restaurants acquired to 24.

On July 29, 2013, NPCQB completed the acquisition of 13 Wendy’s restaurants from a Wendy’s franchisee, Value Foods Company, LLC, for $11.1 million, including amounts for working capital. These acquisitions were funded with cash on hand. All of the acquired restaurants are located in and around the Kansas City metropolitan area.

On December 9, 2013, NPCQB completed the acquisition of 54 Wendy’s restaurants from Wendy’s Company for $31.2 million, including initial franchise fees and amounts for working capital. Included in this acquisition was one unit under development by the Wendy’s Company which opened on December 27, 2013. These acquisitions were funded with cash on hand plus borrowings under the Company’s revolving credit facility (“the Revolving Facility”).

As a result of these asset acquisitions, purchase accounting adjustments were made to the underlying assets based upon the appraisals associated with the valuation of certain assets. These estimates of fair value are preliminary, and are therefore subject to further refinement. The purchase price, net of cash acquired, was allocated as follows (in thousands):

Franchise rights	$	32,786
Fixed assets	17,906
Receivable from Wendy’s	1,536
Favorable (unfavorable) leases, net	470
Goodwill	2,121
Other	1,103
Total purchase price	$	55,922
Estimated annual rent(1)	$	8,038

⁽¹⁾ All of the restaurants are leased.

All of the goodwill recognized for these acquisitions will be deductible for income tax purposes. The weighted average amortization period assigned to the franchise rights acquired during 2013 was approximately 23 years.

2012 Acquisitions

The Transactions

On December 28, 2011, all of the outstanding membership interests of Holdings were acquired (“the Acquisition”) by NPC Holdings or Purchaser, an entity controlled by Olympus Growth Fund V, L.P. and certain of its affiliates. Purchaser acquired all of the outstanding membership interests of Holdings, which owns all of the outstanding capital stock of NPC, for approximately $755.0 million, plus post-closing purchase price adjustments as outlined in the Purchase Agreement, (the “Acquisition”).

In connection with the Acquisition, NPC Holdings repaid all of the outstanding borrowings of NPC under its then-existing senior secured credit facilities. In addition, NPC completed a cash tender offer for NPC’s then-outstanding 9 1/2% Senior Subordinated Notes due 2014 and redeemed the remaining Senior Subordinated Notes not tendered in the tender offer.

To consummate the Acquisition, the Company entered into new debt financing consisting of (i) a $375.0 million term loan (the “Term Loan”), (ii) a five-year senior secured revolving credit facility that provides for aggregate borrowings of up to $100.0 million (the Revolving Facility and together with the Term Loan, the “Senior Secured Credit Facilities”) and (iii) $190.0 million of Senior Notes (the “Senior Notes”) due December 28, 2020, (collectively, all of the transactions described in this paragraph together with the Acquisition are collectively referred to as “the Transactions”). In June 2012 the Company completed an exchange offer which allowed the holders of Senior Notes to exchange those notes for an equal principal amount of Senior Notes that are registered under the Securities Act of 1933.

Transaction Expenses

The Purchaser incurred approximately $12.4 million of expenses, net of tax, in connection with the Transactions, consisting of financing commitment fees, other Transactions related legal, accounting and professional fees and a transaction

fee paid to the Sponsor on the closing date pursuant to the management advisory agreement. These costs were funded by NPC and recorded in the Successor period (as defined below) as a reduction to the member’s capital at closing of $235.3 million. Additionally, the bond consent and pre-payment penalty for the Tender Offer were paid at closing by NPC on behalf of the sellers and such costs were recorded, net of tax, at NPC Holdings.

During fiscal 2011, NPC recorded $26.6 million for costs incurred by the sellers in connection with the Transactions. These costs consisted largely of stock and other compensation expense, broker fees and legal and professional fees and were expensed in the Predecessor period (as defined below).

Purchase Accounting

As a result of the Transactions, purchase accounting adjustments were made by management to underlying assets and liabilities utilizing a third party valuation. The purchase accounting adjustments did not impact net cash flow. The primary changes to the income statement as a result of the application of purchase accounting includes an increase in the amortization and depreciation expense associated with the adjustments to franchise rights, leasehold interests and facilities and equipment based upon the estimates of fair value and management’s estimate of the remaining useful lives of the subject assets. The Transactions resulted in higher debt levels and higher interest rates which resulted in higher interest accruals and increased capitalized debt issue costs which resulted in higher interest expense during the post-Transactions period. Due to the impact of the change of control that occurred in conjunction with the Transactions and the changes resulting from the purchase accounting adjustments described above, the income statement and statement of cash flows presentation separates the operating results of the Company into two accounting periods; (1) the period prior to December 27, 2011, the day preceding consummation of the Transactions (“Predecessor”), and (2) the period beginning December 28, 2011 and thereafter utilizing the new basis of accounting (“Successor”). The results are further separated by a heavy black line to indicate the effective date of the new basis of accounting.

As a result of the consummation of the Transactions, the consolidated financial statements for the period after December 27, 2011, are presented on a different basis than that for the periods before December 28, 2011, as a result of the application of purchase accounting as of December 28, 2011, and therefore are not comparable.

At December 25, 2012, total consideration includes approximately $13.9 million for contingent consideration representing amounts due to the sellers for future tax benefits which the Company largely realized in fiscal 2013. Such amounts were included in accrued liabilities and other deferred liabilities in the Consolidated Balance Sheet at December 25, 2012. The Company paid $2.8 million to the former owners of Holdings during 2013 and the liability was adjusted to $10.9 million at December 31, 2013, based on expected realized tax benefits. Such amount was subsequently paid to the former owners of Holdings on January 28, 2014 which extinguished the liability.

The purchase price allocation recorded in connection with the Transactions is presented below (in thousands):

Cash and cash equivalents	$	11,962
Accounts receivable	8,537
Inventories	7,296
Prepaid expenses and other current assets	3,399
Income taxes receivable	698
Deferred income tax asset	7,385
Facilities and equipment	138,952
Franchise rights	627,000
Goodwill	289,446
Other assets	24,686
Accounts payable	(24,631		)
Other accrued liabilities	(59,940		)
Other deferred items	(41,402		)
Insurance reserves	(13,969		)
Deferred income tax liability	(211,786		)
Total consideration	767,633

The weighted average amortization period for all intangible assets as of the acquisition date was as follows:

	Years
Franchise rights	41
Favorable leasehold interests	15
Unfavorable leasehold interests	9

Pizza Hut Acquisition

Additionally, on February 20, 2012 the Company closed on an Asset Purchase Agreement with Pizza Hut, Inc. (“PHI”) pursuant to which the Company agreed to purchase 36 units from PHI in and around Jacksonville, Florida for $18.8 million plus an additional $0.5 million for inventory, prepaid expenses and store cash. The purchase price, net of cash acquired, was allocated as follows (in thousands):

Franchise rights	$	10,164
Fixed assets	7,495
Goodwill	1,056
Other	656
Total purchase price	$	19,371

The goodwill recorded reflects the Company’s ability to synergize acquired units with its existing operations. All of the goodwill recognized for this acquisition will be deductible for income tax purposes. The weighted average amortization period assigned to the franchise rights acquired during 2012 was approximately 40 years. This acquisition was funded from available cash on hand and borrowings on the Company’s Revolving Facility.

Pro Forma Impact of Wendy’s Acquisitions

The pro forma impact of the 2013 Wendy’s asset acquisitions on the results of operations is included in the below table for periods prior to the acquisition dates in which the acquisitions were not previously consolidated. The pro forma results of operations are not necessarily indicative of the results that would have occurred had these acquisitions been consummated at the beginning of the periods presented, nor are they necessarily indicative of future operating results.

	unaudited, (in thousands)
	53 Weeks Ended		52 Weeks Ended
	December 31, 2013		December 25, 2012
Total sales	$	1,188,935	$	1,167,757
Net income	$	35,701	$	22,163

The Consolidated Statement of Income for the 53 weeks ended December 31, 2013 included total sales of $25.4 million and a net loss of $0.1 million related to the Wendy’s units acquired during 2013 in the asset acquisitions.