Note 6 - Lease Obligations and Other Commitments

12 Months Ended

Feb. 26, 2012

Commitments and Contingencies Disclosure [Text Block]

NOTE 6.  LEASE OBLIGATIONS AND OTHER COMMITMENTS

Capitalized Leases

Property under capital leases at February 26, 2012 and February 27, 2011 are as follows:

	2012		2011
Leased property:
Buildings and land	$	22,885,000	$	1,298,000
Equipment, furniture and fixtures		-		16,000
Total		22,885,000		1,314,000
Less accumulated amortization		816,000		515,000
	$	22,069,000	$	799,000

Amortization of leased property under capital leases was $316,000 in fiscal 2012 and $2,000 in fiscal 2011.

Related obligations under capital leases at February 26, 2012 and February 27, 2011 are as follows:

	2012		2011
Capital lease obligations	$	22,595,000	$	1,061,000
Less current maturities		90,000		48,000
Long-term capital lease obligations	$	22,505,000	$	1,013,000

The Company paid interest of approximately $562,000 and $104,000 relating to capital lease obligations in fiscal 2012 and 2011, respectively.

Future minimum rental payments to be made under capital leases at February 26, 2012 are as follows:

2013	$	2,252,000
2014		2,322,000
2015		2,355,000
2016		2,389,000
2017		2,465,000
Later years		41,846,000
		53,629,000
Less amount representing interest at approximately 10%		31,034,000
Total obligations under capital leases	$	22,595,000

In connection with its sale/leaseback transactions during fiscal 2012 the Company recorded approximately $7,700,000 of deferred gain in the “other long-term liabilities” caption of its consolidated balance sheet.

Operating Leases

The Company's operating leases for restaurant land and buildings are non-cancellable and expire on various dates through 2050.  The leases have renewal options ranging from 5 to 20 years.  Certain restaurant land and building leases require the payment of additional rent equal to an amount by which a percentage of annual sales exceeds annual minimum rentals.  Total contingent rentals were $44,000 and $57,000 in fiscal 2012 and 2011, respectively.  Future non-cancellable minimum rental payments under operating leases for stores in operation at February 26, 2012 are as follows: 2013 - $2,351,000; 2014 - $2,059,000; 2015 - $1,746,000; 2016 - $1,510,000; 2017 - $1,311,000 and an aggregate $10,923,000 for the years thereafter.  Future non-cancellable minimum rental payments under operating leases of closed locations at February 26, 2012 are as follows: 2013 - $218,000; 2014 - $173,000; 2015 - $176,000; 2016 - $178,000; 2017 - $181,000 and an aggregate $1,807,000 for the years thereafter. Rental expense for all operating leases was $2,427,000 and $2,550,000 for fiscal 2012 and 2011, respectively, and is included in restaurant operating expenses in the consolidated statements of operations.

Royalties

For KFC products, the Company is required to pay royalties of 4% of gross revenues and to expend an additional 5.5% of gross revenues on national and local advertising pursuant to its franchise agreements.  For Taco Bell products, the Company is required to pay royalties of 5.5% of gross revenues and to expend an additional 4.5% of gross revenues on national and local advertising.  KFC/Taco Bell “2n1” restaurants are operated under separate KFC and Taco Bell franchise agreements.  For Pizza Hut products in Taco Bell/Pizza Hut Express “2n1” restaurants the Company is required to pay royalties of 8.0% of Pizza Hut gross revenues and to expend an additional 2.0% of Pizza Hut gross revenues on national and local advertising.  For A&W products in “2n1” restaurants the Company is required to pay royalties of 7% of A&W gross revenues and to expend an additional 4% of A&W gross revenues on national and local advertising.  Total royalties and advertising, which are included in the Consolidated Statements of Operations as part of restaurant operating expenses, were $8,348,000 and $9,298,000 in fiscal 2012 and 2011, respectively.

Image Enhancements

The Company is required by its franchise agreements to periodically bring its restaurants up to the required image of the franchisor.  This typically involves a new dining room décor and seating package and exterior changes and related items but can, in some cases, require the relocation of the restaurant.  If the Company deems a particular image enhancement expenditure to be inadvisable, it has the option to cease operations at that restaurant.  Over time, the estimated cost and time deadline for each restaurant may change due to a variety of circumstances and the Company revises its requirements accordingly.  Also, significant numbers of restaurants may have image enhancement deadlines that coincide, in which case, the Company will adjust the actual timing of the image enhancements in order to facilitate an orderly construction schedule.  During the image enhancement process, each restaurant is normally closed for up to two weeks, which has a negative impact on the Company’s revenues and operating efficiencies.  At the time a restaurant is closed for a required image enhancement, the Company may deem it advisable to make other capital expenditures in addition to those required for the image enhancement.

The franchise agreements with KFC and Taco Bell Corporation require the Company to upgrade and remodel its restaurants to comply with the franchisors’ current standards within agreed upon timeframes and the franchisor may terminate the franchise agreement for failure to meet those requirements.  In the case of a restaurant containing two concepts, even though only one is required to be remodeled, additional costs will be incurred because the dual concept restaurant is generally larger and contains more equipment and signage than the single concept restaurant.  If a property is of usable size and configuration, the Company can perform an image enhancement to bring the building to the current image of the franchisor.  If the property has a deficiency which would render it unsuitable, the Company would need to relocate the restaurant to another location within the trade area to meet the franchisor’s requirements.

During April 2011 the Company was required by KFC Corporation to close twelve KFC locations because they did not meet the franchisor’s current image.  Image enhancement requirements for these closed locations were formerly included in the capital requirements schedules published by the Company and have now been removed.  As discussed in its report on Form 8-K filed December 15, 2011, the Company has entered into a Remodel Agreement dated December 9, 2011 with KFC Corporation covering all of its KFC and KFC branded 2 in 1 restaurants.  The Remodel Agreement terminated the May 19, 2011 Pre-negotiation Agreement with KFC Corporation and also the default notices on thirteen KFC restaurants received on May 2, 2011, which were the primary subject of the Pre-negotiation Agreement.

On December 9, 2011, the Company also entered into a Purchase and Sale Agreement and Joint Escrow Instructions with, and completed the sale of 29 restaurant properties to, DBMFI LLC, a Delaware limited liability company and an affiliate of Fortress Credit Corp., in order to lease the properties back.  The sale generated gross proceeds of approximately $22 million to the Company, less normal expenses such as title work, environmental and valuation reports, surveys, and legal fees.  In connection with the sale the Company also entered into two Master Land and Building Leases to lease the 29 properties back from DBMFI LLC under a 20 year lease with 2 five year extension options.  Under the leases the Company will pay annual rent of $2,140,000 with increases of 1.5% for each of the first five years and 10% each five years thereafter. These leases are required to be recorded as capital leases.

The capital requirements for the KFC branded restaurants are included in the schedule based on the requirements of the Remodel Agreement and the Taco Bell restaurants are shown at the time management believes they will be done so that all of them can comfortably be completed before the due date for the group.  The Company has completed the image enhancement of four of its KFC restaurants during the current fiscal year.  Unless otherwise indicated on the schedule, the facility is either a KFC or KFC Branded 2 in 1.  The following schedule contains the capital requirements for the image enhancement of restaurants:

Number of Units	Period	Type	Capital Cost (1)
6	Fiscal 2013	Remodels	2,100,000
2	Fiscal 2014	Remodels	700,000
3	Fiscal 2014	Relo (2)	1,200,000
	Total 2014		1,900,000
4	Fiscal 2015	Remodels	760,000
7	Fiscal 2016	Remodels	1,330,000
4	Fiscal 2017	Remodels	760,000
1	Fiscal 2017	Refresh (3)	75,000
2	Fiscal 2017	Taco Bell	800,000
	Total 2017		1,635,000
3	Fiscal 2018	Remodels	570,000
1	Fiscal 2018	Refresh (3)	75,000
2	Fiscal 2018	Taco Bell	800,000
	Total 2018		1,445,000
2	Fiscal 2019	Remodels	380,000
2	Fiscal 2019	Remodels	320,000
2	Fiscal 2019	Taco Bell	800,000
	Total 2019		1,500,000
7	Fiscal 2020	Refresh (3)	525,000
2	Fiscal 2020	Taco Bell	800,000
	Total 2020		1,325,000
7	Fiscal 2021	Refresh (3)	525,000
7	Fiscal 2022	Refresh (3)	525,000
8	Fiscal 2023	Refresh (3)	600,000
1	Fiscal 2025	Refresh (3)	75,000
73	Total		$        13,720,000
(1) These amounts are based on estimates of current construction costs and actual costs may vary.
(2) Relocations of fee owned properties are shown net of expected recovery of capital from the sale of the former location.  Relocation of leased properties assumes the capital cost of only equipment because it is not known until each lease is finalized whether the lease will be a capital or operating lease.
(3) Reflects the esimated cost of dining room update and exterior paint and refurbishment on restaurants previously remodeled to the current image.  This is a cost that may be incurred at the time of renewal of the franchise agreement for that location.

In addition to the various facilities actions listed on the table above, the Company is obligated to spend approximately $2,400,000 by the end of calendar year 2014, which it expects commit ratably over the three year period, install the KFC operations platform consisting of a new point of sale system and related reporting and management systems, new food holding cabinets that improve the quality of product held for sale and a new drive-thru speed of service system in all of its KFC and KFC/Taco Bell "2n1" restaurants.

During fiscal 2012, the Company completed the remodeling of four of its restaurants in the amount of approximately $1,475,000 and installed one of the new KFC operations platforms mentioned above, at a cost of approximately $34,000.  Subsequent to the balance sheet date of February 26, 2012, the Company completed the remodeling of two additional restaurants which are included in the above chart at a cost of approximately $859,000 and installed four additional KFC operations platforms at a cost of approximately $136,000.

There can be no assurance that the Company will be able to accomplish the image enhancements and relocations required in the franchise agreements on terms acceptable to the Company.  If the Company is unable to meet the requirements of a franchise agreement, the franchisor may choose to extend the time allowed for compliance or may terminate the franchise agreement for the affected location.