System Optimization Losses (Gains), Net

In July 2013, the Company announced a system optimization initiative, as part of its brand transformation, which includes a shift from Company-operated restaurants to franchised restaurants over time, through acquisitions and dispositions, as well as facilitating franchisee-to-franchisee restaurant transfers. In February 2015, the Company announced plans to reduce its ongoing Company-operated restaurant ownership to approximately 5% of the total system, which the Company completed as of January 1, 2017. During 2016 and 2015, the Company completed the sale of 310 and 327 Company-operated restaurants to franchisees, respectively, which included the sale of all of its Company-operated restaurants in Canada. In addition, during 2016 and 2015 the Company facilitated the transfer of 144 and 71 restaurants between franchisees, respectively.

During 2017, the Company recorded post-closing adjustments on sales of restaurants and completed the sale of other assets, resulting in net gains totaling $4,559. In addition, the Company facilitated the transfer of 400 restaurants between franchisees during 2017 (excluding the DavCo and NPC Transactions discussed below). While the Company has no plans to reduce its ownership below the 5% level, Wendy’s will continue to optimize its system by facilitating franchisee-to-franchisee restaurant transfers, as well as evaluating strategic acquisitions of franchised restaurants and strategic dispositions of Company-operated restaurants to existing and new franchisees, to further strengthen the franchisee base and drive new restaurant development and accelerate reimages in the Image Activation format, which includes innovative exterior and interior restaurant designs.

DavCo and NPC Transactions

As part of our system optimization initiative, the Company acquired 140 Wendy’s restaurants on May 31, 2017 from DavCo Restaurants, LLC (“DavCo”) for total net cash consideration of $86,788, which were immediately sold to NPC International, Inc. (“NPC”), an existing franchisee of the Company, for cash proceeds of $70,688 (the “DavCo and NPC Transactions”). As part of the transaction, NPC has agreed to remodel 90 acquired restaurants in the Image Activation format by the end of 2021 and build 15 new Wendy’s restaurants by the end of 2022. Prior to closing the DavCo transaction, seven DavCo restaurants were closed. The acquisition of Wendy’s restaurants from DavCo was not contingent on executing the sale agreement with NPC; as such, the Company accounted for the transactions as an acquisition and subsequent disposition of a business. The total consideration paid to DavCo was allocated to net tangible and identifiable intangible assets acquired based on their estimated fair values. As part of the transactions, the Company retained leases for purposes of subleasing such properties to NPC.

The following is a summary of the activity recorded as a result of the DavCo and NPC Transactions:



	Year Ended
	2017
Acquisition (a)
Total consideration paid	$	86,788
Identifiable assets and liabilities assumed:
Net assets held for sale	70,688
Capital lease assets	49,360
Deferred taxes	27,830
Capital lease obligations	(97,797		)
Net unfavorable leases (b)	(22,330		)
Other liabilities (c)	(6,924		)
Total identifiable net assets	20,827
Goodwill (d)	$	65,961

Disposition
Proceeds	$	70,688
Net assets sold	(70,688		)
Goodwill (d)	(65,961		)
Net favorable leases (e)	24,034
Other (f)	(1,708		)
Loss on DavCo and NPC Transactions	$	(43,635	)

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(a)	The fair values of the identifiable intangible assets and taxes related to the acquisition are provisional amounts as of December 31, 2017, pending final purchase accounting adjustments. The Company utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process.


(b)	Includes favorable lease assets of $1,229 and unfavorable lease liabilities of $23,559.


(c)	Includes a supplemental purchase price estimated at $6,269 to be paid to DavCo for the resolution of certain lease-related matters, which is included in “Accrued expenses and other current liabilities.”


(d)	Includes tax deductible goodwill of $21,795.


(e)	The Company recorded favorable lease assets of $30,068 and unfavorable lease liabilities of $6,034 as a result of subleasing land, buildings and leasehold improvements to NPC.


(f)	Includes cash payments for selling and other costs associated with the transaction.

Gains and losses recognized on dispositions are recorded to “System optimization losses (gains), net” in our consolidated statements of operations. Costs related to dispositions under our system optimization initiative are recorded to “Reorganization and realignment costs,” and include severance and related employee costs, professional fees and other associated costs, which are further described in Note 4. All other costs incurred during 2017 related to facilitating franchisee-to-franchisee restaurant transfers were recorded to “Other operating expense (income), net.”

The following is a summary of the disposition activity recorded as a result of our system optimization initiative:



	Year Ended
	2017			2016			2015
Number of restaurants sold to franchisees	—			310			327

Proceeds from sales of restaurants	$	—		$	251,446		$	193,860
Net assets sold (a)	—			(115,052		)	(86,493		)
Goodwill related to sales of restaurants (b)	—			(41,561		)	(29,970		)
Net unfavorable leases (c)	—			(24,592		)	(846		)
Other (d)	—			(3,103		)	(5,499		)
	—			67,138			71,052
Post-closing adjustments on sales of restaurants (e)	2,541			(1,411		)	1,285
Gain on sales of restaurants, net	2,541			65,727			72,337

Gain on sales of other assets, net (f)	2,018			6,204			1,672
Loss on DavCo and NPC Transactions	(43,635		)	—			—
System optimization (losses) gains, net	$	(39,076	)	$	71,931		$	74,009

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(a)	Net assets sold consisted primarily of equipment.


(b)	Goodwill disposed of as a result of the sale of Company-operated restaurants during 2016 included goodwill of $11,429 that had been reclassified to assets held for sale during 2015. See Note 9 for further information.


(c)	During 2016 and 2015, the Company recorded favorable lease assets of $7,612 and $34,437, respectively, and unfavorable lease liabilities of $32,204 and $35,283, respectively, as a result of leasing and/or subleasing land, buildings, and/or leasehold improvements to franchisees, in connection with sales of restaurants.


(d)	2015 includes a deferred gain of $4,568 on the sale of 17 restaurants to franchisees during 2015 as a result of certain contingencies related to the extension of lease terms.

(e)

2017 includes (1) cash proceeds, net of payments, of $294 related to post-closing reconciliations with franchisees, (2) the recognition of a deferred gain of $312 as a result of the resolution of certain contingencies related to the extension of lease terms for a Canadian restaurant and (3) the recognition of a deferred gain of $1,822 (C$2,300) resulting from the release of a guarantee provided by Wendy’s to a lender on behalf of a franchisee in connection with the sale of eight Canadian restaurants to the franchisee during 2014. See Note 21 for further information on the guarantee.

2015 includes the recognition of a gain on sale of $4,492 related to the repayment of notes receivable from franchisees in connection with sales of restaurants in 2014.


(f)	During 2017, 2016 and 2015, Wendy’s received cash proceeds of $10,534, $10,727 and $10,478, respectively, primarily from the sale of surplus properties. 2017 also includes the recognition of a deferred gain of $375 related to the sale of a share in an aircraft.

Assets Held for Sale

As of December 31, 2017 and January 1, 2017, the Company had assets held for sale of $2,235 and $4,800, respectively, primarily consisting of surplus properties. Assets held for sale are included in “Prepaid expenses and other current assets.”