Refranchising Initiative

The Company completed a refranchising initiative in 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 most of the franchise operations. Income from minority investments is included in other revenue on the condensed consolidated statements of income. The gains and losses below 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 (in thousands, except number of refranchised Company Drive-Ins):



	Three months ended February 28, 2017			Six months ended February 28, 2017
Number of refranchised Company Drive-Ins	54			110

Proceeds from sales of Company Drive-Ins	$	11,086		$	20,036

Assets sold, net of retained minority investment ⁽¹⁾	(3,277		)	(8,738		)
Initial and subsequent lease payments for real estate option ⁽²⁾	414			(3,396		)
Goodwill related to sales of Company Drive-Ins	(589		)	(966		)
Deferred gain for real estate option ⁽³⁾	(1,040		)	(1,040		)
Gain (loss) on assets held for sale	194			(65		)
Refranchising initiative gains, net	$	6,788		$	5,831

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(1)	Net assets sold consisted primarily of equipment.

(2)

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 fiscal year 2017. Until the option was fully exercised, the franchisee made monthly lease payments which were included in other operating income, net of sub-lease expense.


(3)	The deferred gain of $1.0 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.