Refranchising of Company Drive-Ins

In June 2016, the Company announced plans to refranchise Company Drive-Ins as part of an initiative to move toward an approximately 95%‑franchised system. During fiscal year 2016, the Company refranchised the operations of 29 Company Drive-Ins and retained a non-controlling minority investment in the franchise operations of 25 of these refranchised drive-ins.

The Company completed the previously announced refranchising initiative during fiscal year 2017. During the first six months of fiscal year 2017, 110 Company Drive-Ins were refranchised and the Company retained a non-controlling minority investment in 106 of the franchise operations.

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, a portion of the proceeds was applied as the initial payment for an option to purchase the real estate within the next 24 months. 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.

During fiscal year 2018, the Company recognized a net gain of $3.2 million related to the refranchised operations of 41 drive-ins and retained a non-controlling minority investment in the franchise operations. These transactions represent additional markets identified after completion of the refranchising initiative in fiscal year 2017 and bring the Company to a 95% franchised system.

In addition to the refranchised drive-ins discussed above in which the Company retained a non-controlling minority investment in the operations, the Company also refranchised the operations of eight drive-ins during fiscal year 2018, five during fiscal year 2017 and nine during fiscal year 2016. These refranchising transactions all occurred in the normal course of business and did not result in any retained interests.

Income from minority investments is included in other revenue on the consolidated statements of income. The gains and losses related to refranchised drive-ins are recorded in other operating income, net, on the consolidated statement of income.