NOTE P – LEASES

The Company is party as lessee to various leases for its Company-operated restaurants and lessee/sublessor to

one

franchised location property, including land and buildings, as well as leases for its corporate office and certain office equipment.

Determination of Whether a Contract Contains a Lease

We determine if an arrangement is a lease at inception or modification of a contract, and classify each lease as either an operating or finance lease at commencement. The Company only reassesses lease classification subsequent to commencement upon a change to the expected lease term or the contract being modified. Operating leases represent the Company’s right to use an underlying asset as lessee for the lease term, and lease obligations represent the Company’s obligation to make lease payments arising from the lease.

A contract contains a lease if the contract conveys the right to control the use of the identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating lease or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.

ROU Model and Determination of Lease Term

The Company uses the ROU model to account for leases where the Company is the lessee, which requires an entity to recognize a lease liability and ROU asset on the lease commencement date. A lease liability is measured equal to the present value of the remaining lease payments over the lease term and is discounted using the incremental borrowing rate, as the rate implicit in the Company’s leases is

not

readily determinable. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease payments include payments made before the commencement date and any residual value guarantees, if applicable. The initial ROU asset consists of the initial measurement of the lease liability, adjusted for any payments made before the commencement date, initial direct costs and lease incentives earned. When determining the lease term, as both lessee and lessor, the Company includes option periods when it is reasonably certain that those options will be exercised.

Operating leases

For operating leases, minimum lease payments or receipts, including minimum scheduled rent increases, are recognized as rent expense where the Company is a lessee, or income where the Company is a lessor, as applicable, on a straight-line basis (“Straight-Line Rent”) over the applicable lease terms. There is a period under certain lease agreements referred to as a rent holiday (“Rent Holiday”) that generally begins on the possession date and ends on the rent commencement date. During a Rent Holiday,

cash rent payments are typically due under the terms of the lease; however, rent expense is recorded for that period on a straight-line basis. The excess of the Straight-Line Rent over the minimum rents paid is included in the ROU asset where the Company is a lessee. The excess of the Straight-Line Rent over the minimum rents received is recorded as a deferred lease asset and is included in “Other Assets” where the Company is a lessor. The Company recorded

$32,000

in Other Assets at

December 29, 2019.

Certain leases contain provisions, referred to as contingent rent (“Contingent Rent”), that require additional rental payments based upon restaurant sales volume. Contingent Rent is recognized each period as the liability is incurred or the asset is earned.

Lease cost for operating leases is recognized on a straight-line basis and includes the amortization of the ROU asset and interest expense relating to the operating lease liability. Variable lease cost for operating leases include Contingent Rent and payments for executory costs such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. Short-term lease cost for operating leases includes rental expense for leases with a term of less than

months. Leases with an initial expected term of

months or less are

not

recorded in the Consolidated Balance Sheets and the related lease expense is recognized on a straight-line basis over the lease term. Lease costs are recorded in the Consolidated Statements of Earnings based on the nature of the underlying lease as follows: (

) rental expense related to leases for Company-operated restaurants is recorded to “Restaurant Operating Expenses,” (

) rental expense for leased properties that are subsequently subleased to franchisees is recorded to “Other income, net” and (

) rental expense related to leases for corporate offices and equipment is recorded to “General and administrative expenses.”

Rental income for operating leases on properties subleased to franchisees is recorded to “Other income, net.”

Significant Assumptions and Judgement

Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but

not

limited to, property values, market rents, property lives, discount rates and probable term, all of which can impact (

) the classification and accounting for a lease or sublease as operating or finance, (

) the Rent Holiday and escalations in payment that are taken into consideration when calculating Straight-Line Rent, (

) the term over which leasehold improvements for each restaurant are amortized and (

) the values and lives of adjustments to the initial ROU asset where the Company is the lessee, or favorable and unfavorable leases where the Company is the lessor. The amount of depreciation and amortization, interest and rent expense and income would vary if different estimates and assumptions were used.

Company as lessee

The components of the net lease cost for the

thirteen

and

thirty-nine

week periods ended

December 29, 2019

were as follows (in thousands):

	Th irteen weeks ended			T hir ty- nine weeks ended
	Dec ember 29 , 2019			Dec ember 29 , 2019
Statement of Earnings
Operating lease cost	$	339		$	899
Short term lease cost		4			14
Variable lease cost		280			1,240
Less: Sublease income, net		(22	)		(63	)

Total net lease cost (a)	$	601		$	2,090

(a)

The

thirteen

and

thirty-nine

week periods ended

December 29, 2019

include

$470,

net and

$1,679,

net recorded to “Restaurant Operating Expenses” for leases for Company-operated restaurants,

$153

and

$474

recorded to “General and administrative expenses” for leases for corporate offices and equipment and

$22

and

$63

recorded to “Other income, net” for leased properties that are leased to franchisees:

Cash paid for amounts included in the measurement of lease liabilities were as follows (in thousands):

	T hirteen week s ended		T hirty-nine week s ended
	December 29 , 2019		December 29 , 2019

Operating cash flows from operating leases	$	60	$	351

November 29, 2019,

the Company entered into an amendment to its lease agreement for its Coney Island Boardwalk restaurant, commencing on

December 1, 2019 (

the “Renewal Commencement Date”), extending the term for an additional

eight

(

) years, expiring

November 30, 2027.

The Company recorded an operating lease asset and liability of

$1,911,000

on the Renewal Commencement date.

The weighted average remaining lease term and weighted-average discount rate for operating leases as of

December 29, 2019

were as follows:

Weighted average remaining lease term (years):
Operating leases	8.3

Weighted average discount rate:
Operating leases	8.870	%

Future lease commitments to be paid and received by the Company as of

December 29, 2019

were as follows (in thousands):

	Payments		Receipts
	Operating Leases		Subleases		Net Leases

Fiscal year:
2020 (a)	$	247	$	38	$	209
2021		1,577		245		1,332
2022		1,831		247		1,584
2023		1,844		168		1,676
2024		1,774		169		1,605
Thereafter		7,153		521		6,632
Total lease commitments	$	14,426	$	1,388	$	13,038
Less: Amount representing interest		4,314
Present value of lease liabilities (b)	$	10,112

	(a)	Represents the remainder of fiscal year 2020 which excludes the thirty-nine weeks ended December 29, 2019.
	(b)	The present value of minimum operating lease payments of $1,449 and $8,663 are included in “Current portion of operating lease liabilities” and “Long-term operating lease liabilities,” respectively.

Future lease commitments to be paid and received by the Company as of

March 31, 2019

were as follows (in thousands):

	Payments		Receipts
	Operating Leases		Subleases		Net Leases

Fiscal year:
2020	$	1,162	$	273	$	889
2021		1,249		270		979
2022		1,503		272		1,231
2023		1,520		168		1,352
2024		1,453		169		1,284
Thereafter		5,868		521		5,347
Total lease commitments	$	12,755	$	1,673	$	11,082

Company as lessor

The components of lease income for the

thirteen

week and

thirty-nine

week periods ended

December 29, 2019

were as follows (in thousands):

	Thirteen weeks ended		T hir ty- nine weeks ended
	Dec ember 29, 2019		December 29, 2019

Operating lease income, net	$	22	$	63