Refranchising

During the third quarter of 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.

The Company completed a previously announced 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.

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

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 two drive-ins during the third quarter and eight drive-ins during the first nine months of fiscal year 2018, respectively, compared to five drive-ins refranchised during the third quarter and first nine months of fiscal year 2017. These refranchising transactions all occurred in the normal course of business and did not result in any retained interests.

The following is a summary of the pretax activity recorded as a result of the refranchising initiative transactions in fiscal year 2017 (in thousands, except number of refranchised Company Drive-Ins):



	Three months ended May 31, 2017			Nine months ended May 31, 2017
Number of refranchised Company Drive-Ins	—			110

Proceeds from sales of Company Drive-Ins	$	—		$	20,036
Proceeds from sale of real estate ⁽¹⁾	4,749			4,749
Proceeds receivable from sale of real estate ⁽¹⁾	6,977			6,977

Real estate assets sold ⁽¹⁾	(12,095		)	(12,095		)
Assets sold, net of retained minority investment ⁽²⁾	847			(7,891		)
Initial and subsequent lease payments for real estate option ⁽¹⁾	195			(3,201		)
Goodwill related to sales of Company Drive-Ins	—			(966		)
Deferred gain for real estate option ⁽³⁾	141			(899		)
Gain (loss) on assets held for sale	—			(65		)
Refranchising initiative gains, net	$	814		$	6,645

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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 initiated exercise of the option during the third fiscal quarter and a portion of the proceeds was received after the quarter ended. Until the option was fully exercised, the franchisee made monthly lease payments which were included in other operating income, net of sub-lease expense.


(2)	Net assets sold consisted primarily of equipment. During the third quarter of fiscal year 2017, the Company made an adjustment to retained minority investment.


(3)	The deferred gain of $0.9 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.