Refranchising of Company Drive-Ins

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 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.

During fiscal year 2017, the Company completed transactions to refranchise the operations of 110 Company Drive-Ins and retained a non-controlling minority investment in 106 of these refranchised drive-ins. The Company completed the refranchising initiative in the second quarter of fiscal year 2017. All subsequent sales of Company Drive-Ins are considered sales in the normal course of business.

Income from minority investments is included in other revenue on the consolidated statements of income. The gains and losses below associated with refranchised drive-ins are recorded in other operating income, net, on the consolidated statement of income. The following is a summary of the pretax activity recorded as a result of the refranchising initiative (in thousands, except number of refranchised Company Drive-Ins):



	Fiscal year ended August 31,
	2017			2016
Number of refranchised Company Drive-Ins	110			29

Proceeds from sales of Company Drive-Ins	$	20,036		$	3,568
Proceeds from sale of real estate ⁽¹⁾	11,726			—

Real estate assets sold ⁽¹⁾	(12,095		)	(2,402		)
Assets sold, net of retained minority investment ⁽²⁾	(7,891		)	—
Initial and subsequent lease payments for real estate option ⁽¹⁾	(3,178		)	—
Goodwill related to sales of Company Drive-Ins	(966		)	(194		)
Deferred gain for real estate option ⁽³⁾	(809		)	—
Loss on assets held for sale	(65		)	—
Refranchising initiative gains, net	$	6,758		$	972

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(1)

During the first quarter of fiscal year 2017, as part of a 53 drive-in refranchising transaction, the Company entered into a direct financing lease which included an option for the franchisee to purchase the real estate within the next 24 months. In accordance with lease accounting requirements, because the exercise of this option could occur at any time within 24 months, the portion of the proceeds from the refranchising attributable to the fair value of the option was applied as the initial minimum lease payment for the real estate. The franchisee exercised the option in the last six months of the fiscal year. Until the option was fully exercised, the franchisee made monthly lease payments which are included in other operating income, net of sub-lease expense.


(2)	Net assets sold consisted primarily of equipment.


(3)	The deferred gain of $0.8 million is recorded in other non-current liabilities as a result of a real estate purchase option extended to the franchisee in the second quarter of fiscal year 2017. The deferred gain will continue to be amortized into income through January 2020 when the option becomes exercisable.