Discontinued Operations

On January 24, 2017, the Company entered into the BER Sale Agreement with the Buyer. On April 28, 2017, we completed the sale of the Restaurants Business for an aggregate purchase price of $565,000 in cash, subject to certain adjustments set forth in the BER Sale Agreement (the “Restaurants Transaction”). The Buyer also purchased our corporate headquarters as part of the transaction.

The Restaurants Transaction was effected by (i) the sale of the Restaurants Business assets by the Company’s affiliates to Buyer and (ii) the sale by the Company of fifty percent of the equity interests in a newly formed special purpose entity that holds specified intellectual property assets used by both the Restaurants Business and the Company’s food production business. As part of the Restaurants Transaction the Company also conveyed to the Buyer the majority of working capital liabilities associated with the Restaurants Business, including outstanding payables, accrued wages, and other accrued current liabilities, other than debt.

The Company will continue to supply Bob Evans Restaurants with certain of its products under a five-year supply agreement. The supply agreement requires Bob Evans Restaurants purchase 100% of certain food products from the Company in the first year. The required percentage of purchases for those products then decreases annually, down to 25% in the final year. In fiscal years 2017, 2016 and 2015 respectively, the Company's BEF Foods business sold $22,056, $18,769 and $19,304 of products to Bob Evans Restaurants. These sales were eliminated on our Consolidated Statements of Net Income.

Additionally, pursuant to a transition services agreement, the Company will supply certain services, primarily information technology related, to Bob Evans Restaurants and will receive certain human resource, tax and accounting services from Bob Evans Restaurants. These services will be provided at cost for a period up to 18 months, which can be further extended.

Results associated with the Restaurants Business are classified as income from discontinued operations, net of income taxes, in our Consolidated Statements of Net Income. Prior year results have been adjusted to conform with the current presentation. Income from discontinued operations is comprised of the following:



(in thousands)	2017		2016			2015
Net Sales	$	876,786	$	951,211		$	969,878
Costs and expenses:
Cost of sales	226,516		252,612			258,677
Operating wage and fringe benefit expenses	359,959		384,959			381,822
Operating expenses	172,717		169,673			168,610
Selling, general and administrative expenses	62,025		73,873			69,916
Depreciation and amortization expense	36,059		58,562			61,710
Impairments	522		8,385			6,100
Operating Income from discontinued operations	18,988		3,147			23,043
Gain on sale of Restaurants Business	150,167		—			—
Net interest expense	2,203		373			—
Income from discontinued operations before income taxes	166,952		2,774			23,043
Provision (Benefit) for income taxes	57,521		(5,240		)	1,110
Income from discontinued operations	$	109,431	$	8,014		$	21,933

Selling, general and administrative expenses recorded in discontinued operations include corporate costs incurred directly in support of the Restaurants Business. In fiscal 2017, these costs included $10,818 of severance and stock compensation costs associated with corporate employees who supported the Restaurants Business.

We sold our corporate headquarters facility to the Buyer on a debt-free basis as part of the Restaurants Transaction, which required us to pay-in-full the outstanding borrowings on our Mortgage Loan prior to closing the Transaction. In accordance with ASC 205 - Presentation of Financial Statements, interest expense associated with the Mortgage Loan, which includes $972 of debt issuance amortization charges recorded upon termination of the Mortgage Loan in the fourth quarter, was allocated to discontinued operations.

See the table below for a reconciliation of the gain recorded on the sale of our Restaurants Business:



Net proceeds received from Restaurant Transaction ⁽¹⁾	$	539,301

Restaurants Business assets:
Accounts receivable	3,522
Inventory	8,538
Property, plant and equipment	480,663
Other assets	5,693
Total Restaurants Business assets	498,416

Restaurants Business liabilities:
Accounts payable	13,813
Accrued non income taxes	11,587
Accrued wages and benefits	8,794
Self-insurance reserves	8,003
Accrued gift cards	13,810
Accrued miscellaneous liabilities	12,455
Deferred sale leaseback gain	51,077
Other restaurant liabilities	7,039
Total Restaurants Business Liabilities	126,578

Other transaction costs incurred as part of the sale of the Restaurants Business ⁽²⁾	$	17,296

Gain on sale of the Restaurants Business before income taxes	$	150,167

(1) The proceeds received from the Restaurants Transaction are net of certain costs paid at closing, including transfer taxes and title insurance, and other working capital adjustments outlined in the BER Sale Agreement.

(2) Costs directly incurred as a result of the sale of our Restaurants Business, including investment bank fees, legal fees, professional fees and other administrative costs.

Prior to the closing of the Restaurants Transaction, these assets and liabilities were classified as held for sale in the Consolidated Balance Sheets as of January 27, 2017, in the Form 10-Q. The Company retained certain liabilities associated with the Restaurants Business, including $7,408 of liabilities for general liability and health insurance claims incurred prior to the closing of the Restaurants Transaction. Additionally we retained all liabilities related to income taxes associated with the Restaurants Business.

Proceeds from the sale of the Restaurants Business have been presented in the Consolidated Statements of Cash Flow under investing activities for fiscal year 2017. Total operating and investing cash flows of discontinued operations for fiscal years 2017, 2016 and 2015 are comprised of the following:



(in thousands)	2017			2016		2015
Net cash (used in) provided by operating activities	$	(35,807	)	$	72,645	$	123,401
Net cash provided by (used in) investing activities	$	519,833		$	175,816	$	(49,184	)

Net cash provided by investing activities in fiscal year 2017 includes the proceeds from the sale of the Restaurants Business, while net cash provided by investing activities in fiscal year 2016 includes approximately $197,000 of proceeds associated with our sale leaseback of 143 restaurant properties. Net cash provided by (used in) investing activities in each year is net of capital expenditures associated with the Restaurants Business.

Lease Guarantee

As part of the Restaurants Transaction, the Buyer assumed all operating leases associated with the Restaurants Business, including leases for the 143 restaurant properties that were sold as part of a sale leaseback transaction in the fourth quarter of fiscal 2016. The Company and BEF Foods, Inc. continue to guarantee certain payment and performance obligations associated with the lease agreements for those restaurant properties (the "Guarantee"). In the event Bob Evans Restaurants fails to meet its payment and performance obligations under these lease agreements, the Company may be required to make rent and other payments to the landlord under the requirements of the Guarantee. Should the Company, as guarantor of the lease obligations, be required to make all lease payments due for the remaining term of the lease subsequent to April 28, 2017, the maximum amount we may be required to pay is the annual rent amount, for the remainder of the lease term. The current annual rent on these leases is approximately $13,300, and will increase up to 1.5% annually based on indexed inflation. The lease term extends for approximately 19 more years as of April 28, 2017, and the Company would remain a guarantor of the leases in the event the leases are extended for a renewal period. In the event that the Company is obligated to make payments under the guarantor obligations, we believe the exposure is limited due to contractual protections and recourse available in the master lease agreements as well as the BER Sale Agreement, including a requirement of the landlord to mitigate damages by re-letting the properties in default. Bob Evans Restaurants continues to meet its obligations under these leases and there have not been any events that would indicate that they will not continue to meet the obligations of the leases. As such, we believe the fair value of the Guarantee is immaterial as of April 28, 2017.