Refranchising Initiative

Refranchising Transactions

In June 2016, the Company announced plans to refranchise Company Drive-Ins as part of a refranchising initiative to move toward an approximately 95%-franchised system. During the first quarter of fiscal year 2017, the Company completed two transactions to refranchise the operations of 56 Company Drive-Ins and retained a non-controlling minority investment in the franchise operations.

During fiscal year 2016, the Company refranchised the operations of 38 Company Drive-Ins. Of the Company Drive-Ins refranchised in fiscal year 2016, 29 were completed as part of the refranchising initiative announced in June 2016. The Company retained a non-controlling minority investment in the franchise operations of 25 of these refranchised drive-ins.

Income from minority investments is included in other revenue on the condensed consolidated statements of income. Gains and losses associated with refranchised drive-ins are recorded in other operating income, net on the condensed consolidated statement of income. The following is a summary of the pretax activity recorded as a result of the refranchising initiative:



	Three months ended November 30, 2016
Number of Company Drive-Ins sold to franchisees	56

Proceeds from sales of Company Drive-Ins	$	8,950

Assets sold, net of retained minority investment ⁽¹⁾	(5,461		)
Goodwill related to sales of Company Drive-Ins	(377		)
Initial lease payment for real estate option ⁽²⁾	(3,810		)
Loss on assets held for sale	(259		)
Refranchising initiative gains (losses), net	$	(957	)

_______________


(1)	Net assets sold consisted primarily of equipment.

(2)

As part of a 53 drive-in refranchising transaction, the Company entered into a direct financing lease which includes an option for the franchisee to purchase the real estate within the next 24 months. In accordance with lease accounting requirements, since the exercise of this option can occur at any time within the next 24 months, the portion of the proceeds from the refranchising attributable to the fair value of the option represents the initial minimum lease payment for the real estate. Unless and until the option is exercised or expires, the franchisee will make monthly lease payments of $0.3 million through November 2017 and $0.1 million thereafter, through November 2018, which will be included in other operating income.



	Refranchising Initiative Fiscal Year 2016
Number of Company Drive-Ins sold to franchisees ⁽¹⁾	29

Proceeds from sales of Company Drive-Ins	$	3,568

Assets sold, net of retained minority investment ⁽²⁾	(2,402		)
Goodwill related to sales of Company Drive-Ins	(194		)
Refranchising initiative gains (losses), net	$	972

_______________


(1)	Company Drive-Ins refranchised as part of the refranchising initiative announced in June 2016.


(2)	Net assets sold consisted primarily of equipment.

Direct Financing Leases

As part of the refranchising initiative, the Company entered into direct franchising leases ("DFLs") in fiscal year 2016 and the first quarter of fiscal year 2017.

Components of net investment in direct financing leases are as follows at November 30:



	November 30, 2016			August 31, 2016
Minimum lease payments receivable	$	33,490		$	15,108
Less unearned income	(6,483		)	(5,134		)
Net investment in direct financing lease	27,007			9,974
Less amount due within one year	(3,177		)	(115		)
Amount due after one year	$	23,830		$	9,859

Future minimum rental payments receivable as of November 30, 2016 are as follows:



	Direct Financing Lease
Years ended August 31:
2017	$	744
2018	3,948
2019	13,132
2020	1,230
2021	1,325
Thereafter	13,111
	33,490
Less unearned income	(6,483		)
	$	27,007

Initial direct costs incurred in the negotiations and consummations of direct financing lease transactions have not been material. Accordingly, no portion of unearned income has been recognized to offset those costs.

Assets Held for Sale

Assets held for sale consist of Company Drive-Ins that are expected to sell within one year as part of the Company’s refranchising initiative. Such assets are classified as assets held for sale upon meeting the requirements of ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets” and are included in other assets, net on the Company's condensed consolidated balance sheet. These assets are recorded at the lower of the carrying amounts or fair values less costs to sell. Assets are no longer depreciated once classified as held for sale. The following table sets forth the components of assets held for sale:



	November 30, 2016		August 31, 2016
Property and equipment, net ⁽¹⁾	$	7,558	$	5,299
Goodwill, net	90		—
Total assets held for sale	$	7,648	$	5,299

________________

(1) Includes loss on anticipated sale of $0.3 million to reflect assets at fair value.

In the first quarter of fiscal year 2017, a $0.3 million loss on the anticipated sale of 19 Company Drive-Ins was recorded. Property, equipment and goodwill associated with these locations was included in assets held for sale as of November 30, 2016. Subsequent to the end of the first quarter, the anticipated transaction was completed and the Company maintained a non-controlling minority investment in all of the drive-ins.