Acquisition Of Predecessor

6 Months Ended

Aug. 15, 2011

Acquisition Of Predecessor

Acquisition Of Predecessor

NOTE 2 — ACQUISITION OF PREDECESSOR

The acquisition of Predecessor was accounted for as a business combination using the acquisition method of accounting, whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair market values. Fair-value measurements were applied based on assumptions that market participants would have used in the pricing of the asset or liability. During the second quarter of fiscal 2012, we completed our accounting for the acquisition of Predecessor. The following table summarizes the fair values assigned to the net assets acquired as of the July 12, 2010 acquisition date:

Total consideration:
Cash paid to shareholders	$	704,065
Less: post-combination share-based compensation expense		(10,587	)
Total purchase price consideration		693,478
Fair value of assets acquired and liabilities assumed:
Cash and cash equivalents		25,724
Accounts receivable(1)		39,762
Inventories		13,956
Deferred income tax assets, net – current		19,872
Other current assets		36,372
Notes receivable – current and long-term(2)		2,311
Property and equipment(3)		654,467
Property under capital leases		39,738
Intangible assets		457,001
Other assets		5,363
Bank indebtedness – current and long-term		(271,505	)
Capital lease obligations – current and long-term		(52,922	)
Accounts payable		(54,811	)
Deferred income tax liabilities, net – long-term		(165,456	)
Unfavorable lease obligations		(96,356	)
Other liabilities – current and long-term(4)		(167,855	)
Net assets acquired		485,661
Excess purchase price attributed to goodwill acquired	$	207,817

(1) The gross amount due under accounts receivable acquired is $40,081, of which $319 was expected to be uncollectible.

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

(3) The estimated fair value of property and equipment acquired consisted of $231,916 of land, $87,709 of leasehold improvements, $223,751 of buildings and improvements, and $111,091 of equipment, furniture and fixtures.

(4) Litigation reserves of $2,305 are included within other current liabilities. Since the acquisition date fair value of these contingent liabilities could not be determined during the measurement period, we recorded an accrued liability for litigation contingencies with a probable likelihood of loss and for which the range of loss was reasonably estimable.

During the first quarter of fiscal 2012, we recorded retrospective purchase price adjustments at the acquisition date to increase the fair value of accounts receivable by $7, current deferred income tax assets, net by $768, other current assets by $158, property and equipment by $17,813, property under capital leases by $1,375, other assets by $126, unfavorable lease obligations by $27,376 and other liabilities by $2,436. Purchase price adjustments were also recorded to reduce the fair value of intangible assets by $14,763, capital lease obligations by $127 and long-term deferred income tax liabilities by $13,504. These adjustments to our purchase price allocation caused an increase to goodwill of $10,697. In connection with the completion of our accounting for the acquisition of Predecessor during the second quarter of fiscal 2012, no further acquisition accounting adjustments were recorded.

We have retrospectively adjusted our post-combination consolidated results of operations and cash flows for the impacts of the purchase price adjustments. As a result of the retrospective adjustments, our net loss for the Successor twenty-nine weeks ended January 31, 2011 decreased by $852, and our Successor stockholder's equity as of January 31, 2011 increased by the same amount.

At the time of the Merger, the Company believed its market position and future growth potential for both company-operated and franchised and licensed restaurants were the primary factors that contributed to a total purchase price that resulted in the recognition of goodwill. There was $45,939 of goodwill recognized in connection with the Merger that had carryover basis from previous acquisitions and was expected to be deductible for federal income tax purposes.

Transaction Costs

We recorded $194 and $545 in transaction-related costs for accounting, investment banking, legal and other costs in connection with the Transactions within other operating expenses, net in our accompanying unaudited Condensed Consolidated Statements of Operations for the Successor twelve and twenty-eight weeks ended August 15, 2011, respectively.

We recorded $19,661, $7,123 and $13,691 in transaction-related costs for accounting, investment banking, legal and other costs in connection with the Transactions within other operating expenses, net in our accompanying unaudited Condensed Consolidated Statements of Operations for the Successor four weeks ended August 9, 2010 and the Predecessor eight and twenty-four weeks ended July 12, 2010, respectively. Additionally, we recorded a termination fee for a prior merger agreement with an affiliate of Thomas H. Lee Partners, L.P. of $9,283 and $5,000 in reimbursable costs within other operating expenses, net in our accompanying unaudited Condensed Consolidated Statement of Operations for the Predecessor twenty-four weeks ended July 12, 2010.

Pro Forma Financial Information (Unaudited)

The following unaudited pro forma results of operations assume that the Transactions had occurred on February 1, 2010 for the twelve and twenty-eight weeks ended August 9, 2010, after giving effect to acquisition accounting adjustments relating to depreciation and amortization of the revalued assets, interest expense associated with the Credit Facility and the Notes, and other acquisition-related adjustments in connection with the Transactions. These unaudited pro forma results exclude transaction costs and share-based compensation expense related to the acceleration of stock options and restricted stock awards in connection with the Merger. Additionally, the following unaudited pro forma results of operations do not give effect to the sale of our Carl's Jr. distribution facility operations, which was completed on July 2, 2010. This unaudited pro forma information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the Transactions had actually occurred on those dates, nor of the results that may be obtained in the future.

	Twelve Weeks  Ended August 9, 2010(1)		Twenty-Eight Weeks Ended August 9, 2010(1)
Total revenue	$	314,668	$	750,876
Net income (loss)		11,188		(2,524	)

(1) The unaudited pro forma results of operations exclude any effect related to the senior unsecured PIK toggle notes issued by CKE Holdings, Inc. (see Note 7).