Item 1A. Risk Factors
None.
Item 2. Properties
We maintain general liability insurance and property damage insurance on all properties in amounts which management believes providewe believe provides adequate coverage.
Item 3. Legal Proceedings
Not applicable.
Item 6. Selected Financial Data(Reserved)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and footnotes for the fiscal yearsperiod beginning June 1, 2022 and ended August 28, 2019 (“fiscal 2019”) and August 29, 2018, (“fiscal 2018”)December 31, 2022 included in Part II, Item 8 of this Annual Report on Form 10-K.
Overview
Organization
All references to the "Trust" refer to LUB Liquidating Trust and its consolidated subsidiaries and all references to "Luby's" refer to Luby’s, Inc., and the consolidated subsidiaries of Luby’s, Inc. References to “Luby’s Cafeteria” refer specifically to the Luby’s Cafeteria brand restaurants. With respect to the period prior to May 31, 2022, references to the "Company, "we", "our", or "us" refer to Luby's and with respect to the periods after May 31, 2022, refer to the Trust.
Substantially all of Luby's business was conducted through its wholly-owned subsidiary RFL, LLC (formerly known as Luby's Fuddruckers Restaurants, LLC), a Texas Limited Liability Company ("RFL")). RFL is now a wholly-owned subsidiary of the Trust and substantially all of the Trust's business is conducted through RFL.
On May 31, 2022, Luby's, the Trustees identified below and Delaware Trust Company (the “Resident Trustee”) entered into a Liquidating Trust Agreement (the “Liquidating Trust Agreement”) in connection with the formation of a liquidating trust, LUB Liquidating Trust (the “Trust”), for the benefit of the Luby's stockholders, to facilitate the dissolution and termination of the Company in accordance with the Plan of Liquidation and Dissolution of the Company (the "Plan of Liquidation" or the “Plan”) that was previously approved by the Luby's stockholders on November 17, 2020. The tabletrustees of the Trust consist of John Garilli, Gerald Bodzy and Joe C. McKinney (collectively, the “Trustees”), and the Resident Trustee.
At 5:00 p.m. Eastern Daylight Time on May 31, 2022 ("the Effective Time"), Luby's transferred its remaining assets (including its member interest in Luby's Fuddruckers Restaurants, LLC, which has been renamed RFL, LLC) and liabilities to the Trust pursuant to the Plan of Liquidation. The last day of trading for Luby's common stock, par value $0.32 per share, on the following page sets forth selected operating data as a percentage of total revenues (unless otherwise noted) forNew York Stock Exchange was May 27, 2022.
At the periods indicated. All information is derived from the accompanying Consolidated Statements of Operations. Percentages may not add due to rounding.
|
| | | | | | |
| | | Fiscal Year Ended |
| | | August 28,
2019 | | August 29,
2018 |
| | | (52 weeks) | | (52 weeks) |
| Restaurant sales | | 88.0 | % | | 91.1 | % |
| Culinary contract services | | 9.9 | % | | 7.1 | % |
| Franchise revenue | | 2.1 | % | | 1.7 | % |
| Vending revenue | | 0.1 | % | | 0.1 | % |
| TOTAL SALES | | 100.0 | % | | 100.0 | % |
| | | | | |
| STORE COSTS AND EXPENSES: | | | | |
| (As a percentage of restaurant sales) | | | | |
| | | | | |
| Cost of food | | 27.9 | % | | 28.3 | % |
| Payroll and related costs | | 38.1 | % | | 37.4 | % |
| Other operating expenses | | 17.9 | % | | 18.7 | % |
| Occupancy costs | | 6.4 | % | | 6.1 | % |
| Vending revenue | | (0.1 | )% | | (0.2 | )% |
| Store level profit | | 9.8 | % | | 9.5 | % |
| | | | | |
COMPANY COSTS AND EXPENSES (as a percentage of total sales) | | | | |
| | | | | |
| Opening costs | | 0.0 | % | | 0.2 | % |
| Depreciation and amortization | | 4.3 | % | | 4.8 | % |
| Selling, general and administrative expenses | | 10.6 | % | | 10.6 | % |
| Other charges | | 1.3 | % | | — | % |
| Provision for asset impairments and restaurant closings | | 1.7 | % | | 2.7 | % |
| Net gain on disposition of property and equipment | | (4.0 | )% | | (1.6 | )% |
| | | | | |
Culinary Contract Services Costs (as a percentage of Culinary contract services sales) | | |
| | | | | |
| Cost of culinary contract services | | 89.5 | % | | 93.7 | % |
| Culinary income | | 10.5 | % | | 6.3 | % |
| | | | | |
Franchise Operations Costs (as a percentage of Franchise revenue) | | | | |
| | | | | |
| Cost of franchise operations | | 24.4 | % | | 24.0 | % |
| Franchise income | | 75.6 | % | | 76.0 | % |
| | | | | |
| (As a percentage of total sales) | | | | |
| LOSS FROM OPERATIONS | | (2.8 | )% | | (6.1 | )% |
| Interest income | | 0.0 | % | | 0.0 | % |
| Interest expense | | (1.8 | )% | | (0.9 | )% |
| Other income, net | | 0.1 | % | | 0.1 | % |
| Loss before income taxes and discontinued operations | | (4.6 | )% | | (6.9 | )% |
| Provision for income taxes | | 0.1 | % | | 2.1 | % |
| Loss from continuing operations | | (4.7 | )% | | (9.0 | )% |
| Loss from discontinued operations, net of income taxes | | (0.0 | )% | | (0.2 | )% |
| NET LOSS | | (4.7 | )% | | (9.2 | )% |
Although store level profit, defined as restaurant sales plus vending revenue less cost of food, payroll and related costs, other operating expenses, and occupancy costs is a non-GAAP measure, we believe its presentation is useful because it explicitly shows the aggregated results of our restaurant brand reportable segments. The following table reconciles between store level profit, a non-GAAP measure to loss from continuing operations, a GAAP measure:
|
| | | | | | | | |
| | | Fiscal Year Ended |
| | | August 28, 2019 | | August 29, 2018 |
| | | (52 weeks) | | (52 weeks) |
| | | (In thousands) |
| Store level profit | | $ | 27,885 |
| | $ | 31,648 |
|
| | | | | |
| Plus: | | | | |
| Sales from culinary contract services | | 31,888 |
| | 25,782 |
|
| Sales from franchise operations | | 6,690 |
| | 6,365 |
|
| | | | | |
| Less: | | | | |
| Opening costs | | 56 |
| | 554 |
|
| Cost of culinary contract services | | 28,554 |
| | 24,161 |
|
| Cost of franchise operations | | 1,633 |
| | 1,528 |
|
| Depreciation and amortization | | 13,998 |
| | 17,453 |
|
Selling, general and administrative expenses(1) | | 34,179 |
| | 38,725 |
|
| Other charges | | 4,270 |
| | — |
|
| Provision for asset impairments and restaurant closings | | 5,603 |
| | 8,917 |
|
| Net gain on disposition of property and equipment | | (12,832 | ) | | (5,357 | ) |
| Interest income | | (30 | ) | | (12 | ) |
| Interest expense | | 5,977 |
| | 3,348 |
|
| Other income, net | | (195 | ) | | (298 | ) |
| Provision for income taxes | | 469 |
| | 7,730 |
|
| Loss from continuing operations | | $ | (15,219 | ) | | $ | (32,954 | ) |
(1) Marketing and advertising expense included in Selling, general and administrative expenses was $3.9 million in fiscal 2019 and $3.5 million in fiscal 2018.
The following table shows our restaurant unit count as of August 28, 2019 and August 29, 2018.
Restaurant Counts:
|
| | | | | | | | | | | | | | | |
| | | Fiscal 2019 Year Begin | | Fiscal 2019 Openings | | Fiscal 2019 Closings | | Fiscal 2019 Transfers to Franchisee | | Fiscal 2019 Year End |
Luby’s Cafeterias(1) | | 84 |
| | — |
| | (5 | ) | | | | 79 |
|
Fuddruckers Restaurants(1) | | 60 |
| | — |
| | (11 | ) | | (5 | ) | | 44 |
|
| Cheeseburger in Paradise | | 2 |
| | — |
| | (1 | ) | | | | 1 |
|
| Total | | 146 |
| | — |
| | (17 | ) | | (5 | ) | | 124 |
|
(1) Includes 6 restaurants that are part of Combo locations
Overview
DescriptionEffective Time of the business
transfer, holders of Luby's common stock automatically received one unit in the Trust ("Unit") for each share of Luby's common stock held by such holder. Units in the Trust are not and will not be listed on the New York Stock Exchange, or any other exchange, and are generally not transferable except by will, intestate succession or operation of law. Pursuant to the Liquidating Trust Agreement, on and after May 31, 2022, all Luby's outstanding shares are automatically deemed to be cancelled. In anticipation of the transfer, the 500,000 shares of common stock Luby's held as Treasury Shares were cancelled.
The Company operatesfiled a Certificate of Dissolution with five reportablethe Delaware Secretary of State, effective May 31, 2022.
The Trust will terminate upon the earlier of three years from the date of creation or the final distribution from the Trust of all Trust assets in compliance with the Delaware General Corporation Law, unless the Trustees determine that a longer period is needed to sell real estate or collect payment in full of any installment obligations owed by a purchaser of assets of the Company or the Trust and to make any final distribution of any such proceeds.
Liquidation Basis of Accounting
The liquidation basis of accounting differs significantly from the going concern basis, as summarized below.
Under the liquidation basis of accounting, the consolidated balance sheet and consolidated statements of operations, equity and cash flows are no longer presented.
The liquidation basis of accounting requires a statement of net assets in liquidation, a statement of changes in net assets in liquidation and all disclosures necessary to present relevant information about our expected resources in liquidation. The liquidation basis of accounting may only be applied prospectively from the day liquidation becomes imminent and the initial statement of changes in net assets in liquidation may present only changes in net assets that occurred during the period since that date.
Under the liquidation basis of accounting, our assets are measured at their estimated net realizable value, or liquidation value, which represents the amount of their estimated cash proceeds or other consideration from liquidation, based on current contracts, estimates and other indications of sales value. In developing these estimates, we utilized third party valuation experts, investment bankers, real estate brokers, the expertise of members of the Special Committee of our Board of Directors, and forecasts generated by our management. For estimated real estate values, we considered comparable sales transactions, our past experience selling real estate assets of the Company and, in certain instances, indicative offers, as well as capitalization rates observed for income-producing real estate. All estimates by nature involve a large degree of judgement and sensitivity to the underlying assumptions.
The liquidation basis of accounting requires us to accrue and present separately, without discounting, the estimated disposal and other costs, including any costs associated with the sale or settlement of our assets and liabilities and the estimated operating segments:income or loss that we reasonably expect to incur, including providing for federal income taxes during the remaining expected duration of the liquidation period. In addition, deferred tax assets previously provided for under the going concern basis of accounting, which include net operating losses and other tax credits, may be realized partially or in full, subject to IRS limitations, to offset taxable income we expect to generate from the liquidation process.
Under the liquidation basis of accounting, we recognize liabilities as they would have been recognized under the going concern basis as adjusted for the timing assumptions related to the liquidation process and they will not be reduced to expected settlement values prior to settlement.
These estimates will be periodically reviewed and adjusted as appropriate. There can be no assurance that these estimated values will be realized. Such amounts should not be taken as an indication of the timing or the amount of future distributions or our actual dissolution.
The valuation of our assets and liabilities, as described above, represents estimates, based on present facts and circumstances, of the net realizable value of the assets and costs associated with carrying out the Plan. The actual values and costs associated with carrying out the Plan may differ from amounts reflected in the accompanying consolidated financial statements because of the Plan's inherent uncertainty. These differences may be material. In particular, these estimates will vary with the length of time necessary to complete the Plan.
Net Assets in Liquidation
Net assets in liquidation represents the estimated liquidation value to our unitholders upon liquidation. It is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to our unitholders and no assurance can be given that the distributions will equal or exceed the estimate presented in these consolidated financial statements.
The net assets in liquidation at December 31, 2022 would result in liquidating distributions of $1.91 per Unit in the Trust based on the number of Units outstanding on that date. This estimate is dependent on projections of costs and expenses to be incurred during the period required to complete the Plan and the realization of estimated net realizable value of our properties and accounts and notes receivable. There is inherent uncertainty with these estimates, and they could change materially based on the timing of the remaining property sales, the performance of the underlying assets, and changes in the underlying assumptions of the projected cash flows. No assurance can be given that the liquidating distributions will equal or exceed the estimate presented in these consolidated financial statements.
Asset Disposal and Liquidation Activities
During the period beginning June 1, 2022 and ended December 31, 2022, we sold six properties for total gross proceeds of approximately $13.2 million.
We also entered into a management agreement with the purchaser of the Luby's Cafeterias,brand to assume operations of the Company's 10 remaining Luby's cafeterias, effective June 2, 2022. As of this date, we no longer directly operate any Luby's cafeterias or Fuddruckers Restaurants,restaurants.
Subsequent to December 31, 2022, we sold three properties for total gross proceeds of $14.5 million. As of March 28, 2023, we own 6 properties.
Prior to the Conversion to the Trust on May 31, 2022, Luby's disposed of its operating brands as follows:
•In December 2020 we terminated our sub-license to the Cheeseburger in Paradise Fuddruckers Franchise Operations, and Culinary Contract Services. We generate revenues primarily by providing quality foodbrand name in return for compensation from the sub-licensor. Proceeds from the sale were immaterial.
•During the second quarter of fiscal 2021 we sold our rights to customers at our 79 Luby’s branded restaurants located mostly in Texas, 44 Fuddruckers restaurants located throughout the United States, 1 Cheeseburger in Paradise restaurant located in New Jersey, and 102 Fuddruckers franchises located primarily inKoo Koo Roo brand name to an independent third party. Proceeds from the United States. Included in the Luby's Cafeterias segment are six locations where we operate both a Luby's Cafeteria and a Fuddruckers restaurant. In addition to our restaurant business model, we also provide culinary contract services for organizations that offer on-site food service, such as healthcare facilities, colleges and universities, sports stadiums, businesses and institutions, as well as sales through retail grocery outlets.
sale were immaterial.
Prior to•During the fourth quarter of fiscal 2019 our internal organization and reporting structure supported three reportable segments; Company-owned restaurants,2021 we sold the Fuddruckers franchise business operations for $15.0 million plus the assumption of certain liabilities to Black Titan Franchise Systems LLC, an affiliate of Black Titan Holding, LLC which previously purchased 13 franchise locations in separate transactions.
•On August 26, 2021, we sold the Luby’s Cafeterias brand name and the business operations at 35 Luby’s locations to an unrelated third party.
•On March 28, 2022, we sold our Culinary Contract Services. The Company-owned restaurants consistedServices business, which did not include our frozen packaged foods business, to Culinary Concessions, LLC ("Purchaser"), a member managed limited liability company. Purchaser is wholly owned by Pappas Restaurants, Inc. ("PRI"). PRI is jointly owned and controlled by Christopher J. Pappas and Harris J. Pappas ("Messrs. Pappas"), who were formerly directors and officers of several brands whichthe Company and who are owners of greater than 5% of our beneficial units.
Prior to the Conversion to the Trust on May 31, 2022, Luby's sold its properties as follows:
•During Luby's fiscal year 2020, we sold nine properties for total gross proceeds of approximately $23.7 million.
•During Luby's fiscal year 2021, we sold 11 properties for total gross proceeds of approximately $32.1 million.
•During Luby's fiscal period beginning August 26, 2021 and ended May 31, 2022, we sold 39 properties for total gross proceeds of $118.7 million. A portion of the proceeds were aggregated into one reportable segment. The primary brands are Luby’s Cafeteria, Fuddruckers - World’s Greatest Hamburgersused to fully repay all amounts outstanding under our 2018 Credit Facility and the Credit Agreement was terminated on September 30, 2021.
Prior to the conversion to the Trust on May 31, 2022, Luby's made the following cash liquidating distributions.
•®, and Cheeseburger in Paradise. In the fourth quarterOn November 1, 2021, we paid $62.2 million, or $2.00 per share to shareholders of fiscal 2019 we re-evaluated our reportable segments and disaggregated the Company-owned restaurants into three reportable segments based on brand name. As such,record as of October 25, 2021.
•On March 28, 2022, we paid $15.5 million, or $0.50 per share to shareholders of record as of March 21, 2022.
•On May 24, 2022, we paid $6.2 million, or $0.20 per share to shareholders of record as of May 17, 2022.
General and Administrative Expenses
As we continue the fourth quarter 2019,efforts to monetize our five reportable segments are Luby’s restaurants, Fuddruckers restaurants, Cheeseburgerassets, we remain focused on reducing our operating and administrative costs, when appropriate, to provide maximum liquidation value to our unitholders.
Accounting Periods
The Trust's fiscal year will be the twelve months beginning January 1 and ending December 31, which will be effective beginning June 1, 2022 for the period ending December 31, 2022.
COVID-19
The COVID-19 pandemic could continue to materially impact our cash flows and value of net assets in Paradise restaurants, Fuddruckers franchiseliquidation, while we monetize our remaining assets.
RESULTS OF OPERATIONS
Under the liquidation basis of accounting we do not report results of operations information.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Culinary Contract Services. Management believes this change better reflectsCash Equivalents
Our ability to meet our obligations is contingent upon the priorities and decision-making analysis around the allocationmonetization of our resourcesremaining assets. We expect that cash on hand and better aligns to the economic characteristics within similar restaurant brands. We began reporting on the new structure in the fourth quarter of fiscal 2019 as reflected in this Annual Report on Form 10-K. The segment data for the comparable periods presented has been recast to conform to the current period presentation. Recasting this historical information did not have an impact on the consolidated financial performance of Luby’s Inc. for any of the periods presented.
Business Strategy
In fiscal 2019, our full efforts were directed toward effecting a turn-around of the business with the aim of re-establishing a solid foundation from which profitability can be restored. This required a close re-evaluation of each of our business segments and restaurant brands with consideration of the value of our underlying real estate portfolio. As part of this process, we announced an asset sales program of up to $45 million. At the end of the first quarter of fiscal 2019, we also re-financed our debt and entered into a five-year credit agreement with a subsidiary of MSD Capital, MSD PCOF Partners IV, LLC ("MSD") as our new lender. This new financing arrangement along with the proceeds from the sale of certain owned property locations is intended to provide the necessary liquidity as we work through our turn-around plan.
Within our operations, we continued our focus on enhancing the guest experience at each of our restaurant brands, executing our growth plan for our Culinary Contract Services segment, and supporting our Fuddruckers franchise network for future growth. At our Company-owned restaurants, we focused on menu innovation and variety across the weeks and the seasons. We furthered our efforts in attracting and retaining the most talented individuals to serve and engage with our guests in both restaurant management roles and front-line hourly restaurant team member roles. We have an experienced culinary team that vigorously pursues culinary innovation enhancements. Our marketing initiatives centered around developing a more personal and direct connection with our guests, deploying technology where it makes most sense. By the end of fiscal 2019, we had transitioned much of our advertising and messaging toward digital media as we advance to the next phase of our loyalty and recognition programs. We continue to take these steps as part of our long-term strategy to increase our brand awareness and motivate increased guest visits, with a particular focus on our existing customer base that already knows us. As we continued to evaluate our portfolio of restaurant locations, we closed 17 restaurants so that resources could be focused on the locations that exhibit the most promise for enhanced profitability. We also transitioned 5 Fuddruckers restaurants in fiscal 2019 and an additional two at the beginning of fiscal year 2020 to a franchisee.
In fiscal 2019, our Fuddruckers franchise business segment continued supporting our loyal franchisees and we continued to pursue opportunities to re-franchise company-owned Fuddruckers locations as part of our strategy to grow franchise revenues. Our Culinary Contract Services segment continues its focus on expanding the number of locations that we serve and developing business partnerships for the long-term, while servicing our existing agreements with our customized and high-level of client service. We have streamlined our corporate overhead cost, including reduced headcount, corporate travel expense, and associated other overhead costs. In addition, at the beginning of fiscal 2020, we began organizational and planning efforts with an on-shore outsourcing firm. We anticipate completing the transition of our accounting, accounts payable, and certain other payroll and back-office functions to this outsourcing firm during the second fiscal quarter of 2020. We expect to realize additional cost savings and enhanced
capabilities with this transition. Concurrent with this effort, we continue to evaluate opportunities to further align and reduce our corporate overhead costs that support our business operations.
Board Special Committee
In September 2019, the Company's Board of Directors formed a new Board Special Committee comprised of independent directors with the purpose of establishing a strategic review process to identify, examine, and consider a range of strategic alternatives available to the Company with the objective of maximizing shareholder value. The Board Special Committee consists of the following members: Gerald Bodzy, Twila Day, Joe McKinney, Gasper Mir, John Morlock, and Randolph Read. The Board Special Committee is co-chaired by Messrs. Bodzy and Read.
Brookwood and Associates, previously engaged by the Company, is advising the Board Special Committee as a financial advisor to assist in certain aspects of the strategic alternatives review process. The Special Committee has retained Gibson, Dunn & Crutcher LLP to advise on various legal matters.
The Board of Directors has not made a decision to enter into any transaction at this time, and there are no assurances that the consideration of strategic alternatives will result in any transaction. The Company does not intend to comment on or disclose developments regarding the process unless it deems further disclosure appropriate or required. Please see "Risk factors" in Item 1A.
Financial and Operation Highlights for Fiscal 2019
Financial Results
Total company sales decreased approximately $41.7 million, or 11.4%, in fiscal 2019 compared to fiscal 2018, consisting primarily of an approximate $48.0 million decrease in restaurant sales, an approximate $6.1 million increase in Culinary contract services sales, an approximate $0.3 million increase in franchise revenue, and an approximate $0.1 million decrease in vending revenue. The decrease in restaurant sales included an approximate $15.8 million decrease in sales at stand-alone Luby's Cafeterias, an approximate $20.3 million decrease in sales at stand-alone Fuddruckers restaurants, an approximate $1.4 million decrease in sales at our Combo locations, and an approximate $9.9 million decrease in sales at Cheeseburger in Paradise restaurants.
Total segment profit decreased approximately $1.8 million to approximately $36.3 million in fiscal 2019 compared to approximately $38.1 million in fiscal 2018. The approximate $1.8 million decrease in total segment profit resulted from a decrease of approximately $3.8 million in Company-owned restaurant segment profit, an approximate $0.2 million increase in franchise segment profit and an approximate $1.7 million increase in Culinary contract services segment profit. The approximate $3.8 million decrease in Company-owned restaurant segment profit resulted from restaurant sales and vending income decreasing approximately $48.2 million with the cost of food, payroll and related costs, other operating expenses, and occupancy costs decreasing approximately $44.4 million.
Net loss was approximately $15.2 million in fiscal 2019 compared to a loss of approximately $33.6 million in fiscal 2018. Net loss included non-cash charges for asset impairments and restaurant closings of approximately $5.6 million and approximately $8.9 million in fiscal 2019 and fiscal 2018, respectively. Net loss included gains on the disposal of asset of approximately $12.8 million in fiscal 2019 and $5.4 million in fiscal 2018, respectively. Net loss included other charges of approximately $4.3 million in fiscal 2019. Net loss for fiscal 2018 included non-tax charges of approximately $8.4 million for valuation allowance on deferred tax assets
Operational Endeavors and Milestones
Luby's cafeteria segment. In fiscal 2019, we continued to promote our "made–from–scratch" cooking with many locally-sourced “from the farm” ingredients at our Luby’s Cafeterias with our “Tastes Like Texas, Feels Like Home” slogan. “Tastes Like Texas, Feels Like Home” signifies that we are dedicated to serving our guests only the best hand-crafted recipes, prepared fresh each day in our kitchens true to our heritage as a well-regarded and loved Texas tradition. We support local farmers and use only fresh produce and highest quality ingredients. We rotate seasonal menu offerings throughout the year that showcase our 70-year history of "made-from-scratch" cooking expertise. Each section of the cafeteria line is presented to entice our guests to keep coming back for their favorites: fresh colorful hot vegetable presentations, extensive and creative cold side offerings and salads, varied recipes and presentations for beef, turkey, chicken, fish, stir-fry, enchiladas, and other delectable entrées. In addition, by the third quarter of fiscal 2019, we had re-introduced breakfast on the weekend at 33 locations, further expanding our offering. From a marketing perspective, we enhanced our online presence and much of our advertising is now in a digital format which we find to be a cost-effective way of reaching our guests and reminding them of who we are and what we offer. In the process, we are gaining more insights about our loyal guests and we are closely listening to our guests' input. At the same time, we are leveraging our Texas roots and heritage -- a message that resonates with our many guests that have known us over the decades. Additionally, we are addressing the conveniences expected by today's busy lifestyles through our partnership with third-party delivery platforms as well as the expected launch in early fiscal 2020 of the new Luby's app for mobile devices.
Fuddrucker restaurants segment. At Fuddruckers, we continue to evolve the World’s Greatest Hamburgers®, with new specialty burger combinations and toppings. In fiscal 2019, we continued to focus on speed of service and the ordering experience. We furthered our use of technology to reach our guests utilizing new digital media campaigns and targeted advertising to guests' mobile devices. We continued to measure guest satisfaction through surveys and other guest interactions that helped us identify areas of excellence and areas for improvement. We are confident the focus on great food and enhanced service will in the long run lead to increased guest frequency and loyalty.
At both of our core brands, we returned to everyday value pricing in efforts to grow guest visits over time. We see this as a rational approach and one that our guests expect and appreciate. By the third quarter of fiscal 2019, we removed substantially all discounts as we focused on delivering this everyday value to our guests with consistent pricing. We also offer select premium items at higher price points at both of our core brands for the guest that is seeking that experience. As anticipated, our overall average spend per guest declined as we moved to this lower pricing structure. However, we credit this approach with the improving guest traffic trends we experienced as we moved through fiscal 2019.
Key to our operational strategy at both of our core brands in fiscal 2019 was aligning the people within our organization into the right roles and providing team members with coaching to aid them in being successful. This alignment was aimed at encouraging everyone within our organization to further commit to a service mindset so that our guests have a welcoming and comfortable experience when visiting any of our restaurants. This initiative, combined with our everyday value pricing, is delivering tangible benefits in terms of guest frequency and overall guest visits.
Fuddruckers franchise network. Key to our strategy is to become a more franchise-centric brand as we transition company-owned Fuddruckers to new and existing franchise-owned business owners in our franchise network. Five locations in the San Antonio, TX metro area transferred in fiscal 2019 and two locations near Austin, TX transferred in early fiscal 2020 to a new franchise business owner as part of this effort. We continue to pursue opportunities to transition company-owned Fuddruckers for each of our existing markets and stores outside of our core Houston, TX market. As of August 28, 2019, we supported a franchise network of 102 Fuddruckers franchise locations. In addition to five locations that transferred from company-operated stores to franchise-owned stores, three other franchise locations opened in fiscal 2019 (one in the country of Panama, one in Georgia, and one in Mississippi). 11 locations closed in fiscal 2019 (three international locations, and eight in the United States). Our franchise network generated approximately $6.7 million in revenue in fiscal 2019.
Culinary Contract Services. Our Culinary Contract Services segment generated approximately $31.9 million in revenue during fiscal 2019 compared to approximately $25.8 million in revenue during fiscal 2018. The approximate $6.1 million increase in revenue was primarily due to a net increase in the number of locations in operation and higher sales volume locations replacing lower sales volume locations. We view this area as a long-term growth business that generally requires less capital investment and produces favorable returns on invested capital.
Cheeseburger in Paradise segment. Despite previous efforts to revitalize the Cheeseburger in Paradise brand and improve financial results, we have ceased operations at all but one location.
Capital Spending. Purchases of property and equipment were approximately $4.0 million in fiscal 2019, down from approximately $13.2 million in fiscal 2018. Capital investments was constrained to a level necessary to maintain our base of continually operated restaurants and the information technology infrastructure needed to support these restaurants. No remodel projects were undertaken in fiscal 2019. We remain committed to maintaining the attractiveness of all of our restaurant locations where we anticipate operating over the long term. In fiscal 2020, we anticipate making capital investments of up to $4.0 million for recurring maintenance of our restaurant buildings and equipment, and technology infrastructure.
Accounting Periods
Our fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. Our first quarter consists of four four-week periods, while our last three quarters normally consist of three four-week periods. Comparability between quarters may be affected by the varying lengths of the quarters, as well as the seasonality associated with the restaurant business.
Same-Store Sales
The restaurant business is highly competitive with respect to food quality, concept, location, price, and service, all of which may have an effect on same-store sales. Our same-store sales calculation measures the relative performance of a certain group of restaurants. A store is included in this group of restaurants after it has been open for six complete consecutive quarters. Stores that close on a permanent basis (or on a temporary basis for remodeling) are removed from the group in the fiscal quarter when operations cease at the restaurant, but remain in the same-store group for previously reported fiscal quarters. Although management believes this approach leads to more effective year-over-year comparisons, neither the time frame nor the exact practice may be similar to those used by other restaurant companies. Same-store sales at our restaurant units decreased 4.2% for fiscal 2019 and decreased 0.5% for fiscal 2018.
The following table shows the year-over-year same-store sales change for comparative historical quarters for the restaurant segments:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal 2019 | | Fiscal 2018 |
| Increase (Decrease) | | Q4 | | Q3 | | Q2 | | Q1 | | Q4 | | Q3 | | Q2 | | Q1 |
| Luby's Cafeterias | | (3.2 | )% | | (3.1 | )% | | (2.2 | )% | | (3.0 | )% | | 3.9 | % | | 2.4 | % | | (1.8 | )% | | 1.5 | % |
| Combo Locations | | (2.5 | )% | | (4.8 | )% | | (7.1 | )% | | (11.1 | )% | | (1.5 | )% | | (3.3 | )% | | (5.4 | )% | | 1.3 | % |
| Luby's cafeteria segment | | (3.2 | )% | | (3.3 | )% | | (2.6 | )% | | (3.7 | )% | | 3.3 | % | | 1.9 | % | | (2.1 | )% | | 1.5 | % |
| | | | | | | | | | | | | | | | | |
| Fuddruckers restaurants segment | | (5.5 | )% | | (6.1 | )% | | (5.3 | )% | | (11.2 | )% | | (3.9 | )% | | (5.8 | )% | | (6.4 | )% | | 0.6 | % |
| | | | | | | | | | | | | | | | | |
| Cheeseburger in Paradise Segment | | (3.6 | )% | | (4.4 | )% | | (3.1 | )% | | (0.6 | )% | | (4.4 | )% | | (11.7 | )% | | (13.9 | )% | | (10.5 | )% |
| | | | | | | | | | | | | | | | | |
| Same-store sales | | (3.7 | )% | | (4.0 | )% | | (3.3 | )% | | (5.5 | )% | | 1.2 | % | | (0.9 | )% | | (3.7 | )% | | 0.8 | % |
At the end of fiscal 2019, there were 73 Luby’s Cafeterias, 6 Combo locations, 38 Fuddruckers Restaurants, and 1 Cheeseburger in Paradise locations that met the definition of same-stores.
RESULTS OF OPERATIONS
Fiscal 2019 (52 weeks) compared to Fiscal 2018 (52 weeks)
Sales
|
| | | | | | | | | | |
| | Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
| ($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| | (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
| Restaurant sales | $ | 284,513 |
| | $ | 332,518 |
| | (14.4 | )% |
| Culinary contract services | 31,888 |
| | 25,782 |
| | 23.7 | % |
| Franchise revenue | 6,690 |
| | 6,365 |
| | 5.1 | % |
| Vending revenue | 379 |
| | 531 |
| | (28.6 | )% |
| TOTAL SALES | $ | 323,470 |
| | $ | 365,196 |
| | (11.4 | )% |
Total company sales decreased approximately $41.7 million, or 11.4%, in fiscal 2019 compared to fiscal 2018, consisting primarily of an approximate $48.0 million decrease in restaurant sales and an approximate $0.2 million decrease in vending revenue, partially offset by an approximate $6.1 million increase in Culinary contract services sales, an approximate $0.3 million increase in Franchise revenue.
The Company operates with five reportable operating segments: Luby's Cafeterias, Fuddruckers Restaurants, Cheeseburger in Paradise, Fuddruckers Franchise Operations, and Culinary Contract Services.
Company-Owned Restaurants
Restaurant Sales
|
| | | | | | | | | | |
| Restaurant Brands | Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
| | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| | (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
| Luby’s cafeterias | $ | 195,151 |
| | $ | 210,972 |
| | (7.5 | )% |
| Combo locations | 19,459 |
| | 20,886 |
| | (6.8 | )% |
| Luby's cafeteria segment | $ | 214,610 |
| | $ | 231,858 |
| | (7.4 | )% |
| Fuddruckers restaurants segment | 67,331 |
| | 87,618 |
| | (23.2 | )% |
| Cheeseburger in Paradise segment | $ | 3,108 |
| | $ | 13,042 |
| | (76.2 | )% |
| Total Restaurant Sales | $ | 284,513 |
| | $ | 332,518 |
| | (14.4 | )% |
Total restaurant sales decreased approximately $48.0 million in fiscal 2019 compared to fiscal 2018. The decrease in restaurant sales included an approximate $15.8 million decrease in sales at stand-alone Luby’s Cafeterias, an approximate $20.3 million decrease in sales at stand-alone Fuddruckers restaurants, an approximate $1.4 million decrease in sales from Combo locations, and an approximate $9.9 million decrease at sales from our Cheeseburger in Paradise restaurants.
The approximate $15.8 million decrease in sales at stand-alone Luby’s reflects the reduction of nine operating restaurants, and a 2.9% decrease in same-store stand-alone Luby's Cafeteria sales. The 2.9% decrease in same-store sales includes a 4.9% decrease in guest traffic, partially offset by a 2.1% increase in average spend per guest.
The approximate $20.3 million decrease in sales at stand-alone Fuddruckers restaurants reflects the reduction of 27 operating restaurants and a 7.5% decrease in same-store stand-alone Fuddruckers sales. The 7.5% decrease in same-store sales includes a 10.7% decrease in guest traffic partially offset by a 3.6% increase in average spend per guest.
The approximate $1.4 million decrease in sales from Combo locations reflects a 6.8% decrease in sales at the six locations in operation throughout fiscal 2019 and fiscal 2018.
The approximate $9.9 million decrease in sales from our Cheeseburger in Paradise reflects the reduction of seven operating restaurants and a 2.9% decrease at the one remaining Cheeseburger in Paradise location.
Cost of Food
|
| | | | | | | | | | | |
| | Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
| ($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| | (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
| Cost of food: | | | | | |
| Luby's cafeteria segment | $ | 60,801 |
| | $ | 65,956 |
| | $ | (5,155 | ) |
| Fuddruckers restaurants segment | 17,712 |
| | 23,956 |
| | (6,244 | ) |
| Cheeseburger in Paradise segment | 966 |
| | 4,326 |
| | (3,360 | ) |
| Total Restaurants | $ | 79,479 |
| | $ | 94,238 |
| | $ | (14,759 | ) |
| | | | | | |
| As a percentage of restaurant sales | | | | | |
| Luby's cafeteria segment | 28.4 | % | | 28.4 | % | | 0.0 | % |
| Fuddruckers restaurants segment | 26.3 | % | | 27.3 | % | | (1.0 | )% |
| Cheeseburger in Paradise segment | 31.1 | % | | 33.2 | % | | (2.1 | )% |
| Total Restaurants | 27.9 | % | | 28.3 | % | | (0.4 | )% |
Cost of food, which is comprised of the cost associated with the sale of food and beverage products that are consumed while dining in our restaurants, as take-out, and as catering. Cost of food decreased approximately $14.8 million, or 15.7%, in fiscal 2019 compared to fiscal 2018. Cost of food is variable and generally fluctuates with sales and guest traffic volume. As a percentage of restaurant sales, food costs decreased 0.4% to 27.9% in fiscal 2019 compared to 28.3% in fiscal 2018. The Cost of food as percentage of sales was impacted by higher average pricing in the first half of the fiscal year, menu rationalization leading to a favorable change in the mix of menu items purchased by guests, and continued careful cost management, partially offset by higher prices for certain food commodities.
The cost of food as a percentage of restaurant sales in the Luby's cafeteria segment was level at 28.4% in fiscal 2019 compared to fiscal 2018 due in large part to higher average menu pricing in the first half of fiscal 2019 offset by higher prices for certain food commodities. The cost of food as a percentage of restaurant sales for the Fuddruckers restaurants segment decreased 1.0% in fiscal 2019 compared to fiscal 2018 due to higher average menu pricing and a favorable change in the mix of menu items purchased by guests, partially offset by higher input prices of beef and other food commodities. The cost of food as a percentage of restaurant sales for the Cheeseburger in Paradise segment decreased 2.1% in fiscal 2019 compared to fiscal 2018 due primarily to reducing operations to a single location with better food cost economics.
Payroll and Related Costs
|
| | | | | | | | | | | |
| | Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
| ($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| | (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
| Payroll and related Costs: | | | | | |
| Luby's cafeteria segment | $ | 81,342 |
| | $ | 86,264 |
| | $ | (4,922 | ) |
| Fuddruckers restaurants segment | 25,938 |
| | 32,585 |
| | (6,647 | ) |
| Cheeseburger in Paradise segment | 1,229 |
| | 5,629 |
| | (4,400 | ) |
| Total Restaurants | $ | 108,509 |
| | $ | 124,478 |
| | $ | (15,969 | ) |
| | | | | | |
| As a percentage of restaurant sales | | | | | |
| Luby's cafeteria segment | 38.0 | % | | 37.2 | % | | 0.8 | % |
| Fuddruckers restaurants segment | 38.5 | % | | 37.2 | % | | 1.3 | % |
| Cheeseburger in Paradise segment | 39.5 | % | | 43.2 | % | | (3.6 | )% |
| Total Restaurants | 38.1 | % | | 37.4 | % | | 0.7 | % |
Payroll and related costs includes restaurant-level hourly wages, including overtime pay, and pay while training, as well as management salaries and incentive payments. Payroll and related costs also include the payroll taxes, workers’ compensation expense, group health insurance costs, and 401(k) matching expense for all restaurant-level hourly and management employees. Payroll and related costs decreased approximately $16.0 million, or 12.8%, in fiscal 2019 compared to fiscal 2018 due in part to (1) operating 43 fewer restaurants (closure of 21 restaurants in fiscal 2018 closure of of 17 restaurants in fiscal 2019, and transfer of five Fuddruckers restaurants to a franchisee in fiscal 2019); for stores that continue to operate, payroll and related expense increased less than $0.1 million. The modest increase in payroll and related expenses for stores that continue to operate reflected (1) an increase in average salaries among our restaurant management teams and increased wage rates among our hourly team members; and (2) higher health insurance expense; partially offset by (3) a reduction in scheduled hours as a result of a decline in guest traffic. As a percentage of restaurant sales, payroll and related costs increased 0.7% to 38.1% in fiscal 2019 compared to 37.4% in fiscal 2018, due primarily to (1) the fixed cost component of labor costs (mainly management labor) with lower same-store sales levels and (2) higher health insurance expense.
Payroll and related costs a percentage of restaurant sales in the Luby's cafeteria segment increased 0.8% to 38.0% in fiscal 2019 compared to fiscal 2018 due to (1) increased wage rates among our hourly team members; (2) the fixed component of management labor costs with lower same-store sales levels; (3) increased usage of hourly overtime hours; and (4) higher health insurance expense; partially offset by (5) reduction in scheduled hours as a result of a decline in guest traffic. Payroll and related costs a percentage of restaurant sales in the Fuddruckers restaurants segment increased 1.3% to 38.5% in fiscal 2019 compared to fiscal 2018 due to (1) an increase in staffing and average salary cost for restaurant-level management; (2) higher health insurance expenses; and (3) an increase in average wage rates amount our hourly team members; partially offset by (4) a reduction in scheduled hours as a result of a decline in guest traffic. Payroll and related costs a percentage of restaurant sales in the Cheeseburger in Paradise segment decreased 3.6% to 39.5% in fiscal 2019 compared to fiscal 2018 due primarily to reducing operations to a single location with better labor cost economics and higher average sales volumes.
Other Operating Expenses
|
| | | | | | | | | | | |
| | Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
| ($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| | (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
| Other operating expenses: | | | | | |
| Luby's cafeteria segment | $ | 37,192 |
| | $ | 41,653 |
| | $ | (4,461 | ) |
| Fuddruckers restaurants segment | 12,829 |
| | 17,305 |
| | (4,476 | ) |
| Cheeseburger in Paradise segment | 865 |
| | 3,328 |
| | (2,463 | ) |
| Total Restaurants | $ | 50,886 |
| | $ | 62,286 |
| | $ | (11,400 | ) |
| | | | | | |
| As a percentage of restaurant sales | | | | | |
| Luby's cafeteria segment | 17.4 | % | | 18.0 | % | | (0.6 | )% |
| Fuddruckers restaurants segment | 19.1 | % | | 19.8 | % | | (0.7 | )% |
| Cheeseburger in Paradise segment | 27.8 | % | | 25.5 | % | | 2.3 | % |
| Total Restaurants | 17.9 | % | | 18.7 | % | | (0.8 | )% |
Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, and services. Other operating expenses decreased approximately $11.4 million, or 18.3%, in fiscal 2019 compared to fiscal 2018. Of the approximate $11.4 million million decrease in total other operating expenses, approximately $8.9 million is attributed to store closures and approximately $2.5 million is attributed to stores that continue to operate. The $2.5 million reduction in other operating expenses at stores that continue to operate is attributable to (1) an approximate $1.7 million reduction in restaurant supplies expense; (2) an approximate $0.7 million reduction in repairs and maintenance expense; and (3) an approximate $0.4 million reduction in other expenses, including the benefit from the absence of approximately $0.2 million in post-hurricane related repair and other expenses incurred in fiscal 2018; partially offset by (4) an approximate $0.3 million increase in uninsured losses, net of insurance recoveries. As a percentage of restaurant sales, Other operating expenses decreased 0.8% to 17.9% in fiscal 2019 compared to 18.7% in fiscal 2018. The 0.8% decrease in Other operating expenses as a percentage of restaurant sales was due to the net expense items enumerated above and the beneficial impact of store closures where operating expenses were generally higher as percentage of sales than stores that continue to operate.
Other operating expense a percentage of restaurant sales in the Luby's cafeteria segment decreased 0.6% to 17.4% in fiscal 2019 compared to fiscal 2018 due to (1) an approximate $0.7 million insurance recovery recorded in fiscal 2019; (2) a reduction in restaurant supplies expense; (3) the absence of approximately $0.2 million in post-hurricane related repair and other expenses incurred in fiscal 2018; partially offset by (4) increased cost for certain services provided to the cafeteria restaurants, including an increase in delivery fees related to increased usage of third-party delivery platforms. Other operating expense a percentage of restaurant sales in the Fuddruckers restaurants segment decreased 0.7% to 19.1% in fiscal 2019 compared to fiscal 2018 due to (1) the absence of approximately $0.3 million in post-hurricane related repair and other expenses incurred in fiscal 2018; (2) a reduction in restaurant supplies expense; and (3) the beneficial impact of store closures where operating expenses were generally higher as percentage of sales than stores that continue to operate; partially offset by (4) comparison to fiscal 2018 when an approximate $0.7 million insurance recovery was recorded. Other operating expense a percentage of restaurant sales in the Cheeseburger in Paradise segment increased 2.3% to 27.8% in fiscal 2019 compared to fiscal 2018 due to primarily to wind-down operational costs in fiscal 2019 for locations that closed at the end of fiscal 2018, including utilities expense and certain restaurant service costs.
Occupancy Costs
|
| | | | | | | | | | | |
| | Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
| ($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| | (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
| Occupancy costs: | | | | | |
| Luby's cafeteria segment | $ | 9,315 |
| | $ | 8,935 |
| | $ | 380 |
|
| Fuddruckers restaurants segment | 8,529 |
| | 10,420 |
| | (1,891 | ) |
| Cheeseburger in Paradise segment | 289 |
| | 1,044 |
| | (755 | ) |
| Total Restaurants | $ | 18,133 |
| | $ | 20,399 |
| | $ | (2,266 | ) |
| | | | | | |
| As a percentage of restaurant sales | | | | | |
| Luby's cafeteria segment | 4.4 | % | | 3.9 | % | | 0.5 | % |
| Fuddruckers restaurants segment | 12.7 | % | | 11.9 | % | | 0.8 | % |
| Cheeseburger in Paradise segment | 9.3 | % | | 8.0 | % | | 1.3 | % |
| Total Restaurants | 6.4 | % | | 6.1 | % | | 0.3 | % |
Occupancy costs include property lease expense, property taxes, and common area maintenance charges, property insurance, and permits and licenses. Occupancy costs decreased $2.3 million in fiscal 2019 compared to fiscal 2018. The decrease was primarily due to a decrease in rent and property taxes associated with operating 43 fewer restaurants in fiscal 2019 compared to fiscal 2018 (closure of 21 restaurants in fiscal 2018 closure of of 17 restaurants in fiscal 2019, and transfer of five Fuddruckers restaurants to a franchisee), partially offset by the additional lease expense at three properties that were sold and leased back. As a percentage of restaurant sales, occupancy costs increased 0.3%, to 6.4%, in fiscal 2019 compared to 6.1% in fiscal 2018 primarily as a result of the change in the mix of the portfolio of owned versus leased stores after the closure of 43 locations and sale of certain owned property locations as well as adjustments to property tax estimates. A significantly higher percentage of our Fuddruckers restaurants are leased properties as compared to our Luby's cafeterias. As a result, our Fuddruckers restaurant segment's occupancy costs as a percentage of sales is higher than our Luby's cafeterias.
Fuddruckers Franchise Segment Profit
|
| | | | | | | | | | |
| | Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
| ($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| | (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
| Franchise revenue | $ | 6,690 |
| | $ | 6,365 |
| | 5.1 | % |
| Cost of franchise operations | 1,633 |
| | 1,528 |
| | 6.9 | % |
| Franchise operations segment profit | $ | 5,057 |
| | $ | 4,837 |
| | 4.5 | % |
| Franchise profit as percent of Franchise revenue | 75.6 | % | | 76.0 | % | | (0.4 | )% |
We offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Franchise revenue includes (1) royalties paid to us as the franchisor for the Fuddruckers brand; (2) funds paid to us as the franchisor for pooled advertising expenditures; and (3) franchise fees paid to us when franchise units are opened for business or transferred to new owners and when franchise agreements are renewed or certain milestones in franchise agreements are reached. Cost of franchise operations includes the direct costs associated with supporting franchisees with opening new Fuddruckers franchised restaurants and the corporate overhead expenses associated with generating franchise revenue. These corporate expenses primarily include the salaries and benefits, travel and related expenses, and other expenses for employees whose primary job function involves supporting our franchise owners and the development of new franchise locations
Beginning with the first quarter fiscal 2019, as a result of our adoption of the new revenue accounting standards more fully described in Note 1 to our consolidated financial statements:
We recognize as revenue the amounts due to us from franchisees for pooled advertising expenditures.
We recognize initial and renewal franchise fees evenly over the term of franchise area development agreements and we recognize revenue when a franchise agreement is terminated early.
Additionally, we record an expense and liability in an amount equal to the unspent funds paid to us from franchisees for pooled advertising expenditures that will be incurred in a future period.
Franchise revenue increased approximately $0.3 million, or 5.1%, in fiscal 2019 compared to fiscal 2018. The $0.3 million increase in franchise revenue reflects (1) an approximate $0.3 million increase in franchise fees earned; and (2) recognition of approximately $0.4 million of revenue related to funds owed to us as the franchisor for pooled advertising expenditures; partially offset by (3) an approximate $0.4 million decline in franchise royalties on fewer franchise locations in operation in fiscal 2019.
Cost of franchise operations increased approximately $0.1 million, or 6.9%, in fiscal 2019 compared to fiscal 2018. The increase was due primarily to (1) recording an expense in fiscal 2019 related to pooled advertising expenditures, partially offset by lower salary and benefits expense as well as lower travel expense required to support the franchise system.
Franchise operations segment profit, defined as Franchise revenue less Cost of franchise operations, increased approximately $0.2 million in in fiscal 2019 compared to fiscal 2018, due primarily to the $0.3 million increase in franchise revenue partially offset by the $0.1 million increase in franchise costs, both discussed above.
During fiscal 2019, three new Fuddruckers franchise locations opened, 11 locations closed, and five locations in the San Antonio, Texas area transferred from company operated locations to franchise operated locations. We ended fiscal 2019 with 102 Fuddruckers franchise restaurants.
Culinary Contract Services Segment Profit
Culinary Contract Services is a business line servicing healthcare, sport stadiums, corporate dining clients, and sales through retail grocery stores. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service, and retail dining. Culinary Contract Services has contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, behavioral hospitals, sports stadiums, and business and industry clients. Culinary Contract Services has the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food services to our clients. We operated 31 Culinary Contract Services locations at the end of fiscal 2019 and 28 at the end of fiscal 2018. We focus on clients who are able to enter into agreements in which all operating costs are reimbursed to us and we generally charge a fixed fee as opposed to agreements where we retain all revenues and operating costs and we are exposed to the variability of the operating results of the location. The fixed fee agreements typically present lower financial risk to the company.
|
| | | | | | | | | | |
| | Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
| ($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| | (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
| Culinary contract services | $ | 31,888 |
| | $ | 25,782 |
| | 23.7 | % |
| Cost of culinary contract services | 28,554 |
| | 24,161 |
| | 18.2 | % |
| CCS segment profit | $ | 3,334 |
| | $ | 1,621 |
| | 105.7 | % |
| Culinary contract profit as percent of Culinary contract services sales | 10.5 | % | | 6.3 | % | | 4.2 | % |
Culinary contract services revenue increased $6.1 million, or 23.7%, in fiscal 2019 compared to fiscal 2018. The $6.1 million increase in revenue was primarily due to (1) an increase in sales of approximately $4.5 million from newer accounts that were not in operation for the entirety of fiscal 2019 and fiscal 2018; (2) approximately $0.6 million from a location that was transferred from our restaurant business segment to our culinary contract services business segment; and (3) approximately $1.1 million increase in sales from locations continually operated over the prior full year; partially offset by loss of sales of approximately $0.1 million for locations that ceased operations.
Cost of culinary contract services includes the food, payroll and related costs, other direct operating expenses, and corporate overhead expenses associated with generating Culinary contract services sales. Cost of culinary contract services increased
approximately $4.4 million, or 18.2%, in fiscal 2019 compared to fiscal 2018 due primarily to a net increase in culinary contract sales volume, partially offset by reductions of corporate overhead expenses required to support this business segment. CCS segment profit (defined as Culinary contract cervices revenue less Cost of culinary contract services) increased in dollar terms by approximately $1.7 million and increased as a percent of Culinary contract services revenue to 10.5% in fiscal 2019 from 6.3% in fiscal 2018, due primarily to the change in the mix of culinary contract service agreements with clients.
Opening Costs
Opening costs includes labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were less than $0.1 million in fiscal 2019 compared to approximately $0.6 million in fiscal 2018. Opening costs of $0.6 million in fiscal 2018 included the re-opening costs associated with one Fuddruckers location that was damaged during Hurricane Harvey and subsequently restored and re-opened for business just prior to the quarter ended June 6, 2018 as well as the carrying costs for one location where we previously operated a Cheeseburger in Paradise restaurant and one location that we lease where we previously intended to open a Fuddruckers restaurant.
Depreciation and Amortization
|
| | | | | | | | | | |
| | Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
| ($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| | (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
| Depreciation and amortization | $ | 13,998 |
| | $ | 17,453 |
| | (19.8 | )% |
| As a percentage of total sales | 4.3 | % | | 4.8 | % | | (0.5 | )% |
Depreciation and amortization expense decreased $3.5 million in fiscal 2019 compared to fiscal 2018 due primarily to certain assets reaching the end of their depreciable lives and the removal of certain assets upon sale. As a percentage of total revenue, depreciation and amortization expense decreased to 4.3% in fiscal 2019, compared to 4.8% in fiscal 2018.
Selling, General and Administrative Expenses
|
| | | | | | | | | | |
| | Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
| ($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| | (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
| General and administrative expenses | $ | 30,257 |
| | $ | 35,201 |
| | (14.0 | )% |
| Marketing and advertising expenses | 3,922 |
| | 3,524 |
| | 11.3 | % |
| Selling, general and administrative expenses | $ | 34,179 |
| | $ | 38,725 |
| | (11.7 | )% |
| As percent of total sales | 10.6 | % | | 10.6 | % | | 0.0 | % |
Selling, general and administrative expenses include marketing and advertising expenses, corporate salaries and benefits-related costs, including restaurant area leaders and regional directors, share-based compensation, professional fees, travel and recruiting expenses and other office expenses. Selling, general and administrative expenses decreased by approximately $4.5 million, or 11.7%, in fiscal 2019 compared to fiscal 2018. The approximate $4.5 million decrease in Selling, general and administrative expenses include (1) an approximate $4.6 million decrease in salaries, benefits, and other compensation expenses; (2) an approximate $0.5 million reduction in corporate travel expense; (3) an approximate $0.4 million decrease related to lower general liability insurance expense; partially offset by (4) an approximate $0.4 million increase in marketing and advertising expense; (5) an approximate $0.5 million increase in outside professional services and telecommunications network costs; and (6) an approximate net $0.1 million increase in other corporate overhead costs. As a percentage of total sales, Selling, general and administrative expenses were 10.6% in fiscal 2019 and in fiscal 2018.
Other Charges
Other charges includes those expenses that we consider related to our restructuring efforts are not part of our recurring operations. We have identified these expenses amounting to approximately $4.3 million in fiscal 2019 and recorded in Other charges. These expenses were included in our Selling, general, and administrative cost expense line in previously reported quarters of fiscal 2019.
|
| | | |
| | Fiscal Year 2019 Ended |
| ($000s) | August 28, 2019 |
| | (52 weeks) |
| Proxy communication related | $ | 1,740 |
|
| Employee severances | 1,325 |
|
| Restructuring related | 1,205 |
|
| Total Other Charges | $ | 4,270 |
|
In the first half of fiscal 2019, a shareholder of the company proposed alternative nominees to the Board of Directors and other possible changes to the corporate strategy resulting in a contested proxy at the company's annual meeting. We incurred approximately $1.7 million in proxy communication expense which was primarily for outside professional services and related costs in order to communicate with shareholders about management's strategy and the experience of the Company's members on the Board of Directors.
In fiscal 2019, we separated with a number of employees as part of our efforts to streamline our corporate overhead costs and to support a reduced number of restaurants in operation. Employees who were separated from the company were paid severance based on the number of years of service and earnings with the organization, resulting in an approximate $1.3 million charge.
Also, in fiscal 2019, we engaged a professional consulting firm to evaluate initiatives to right-size corporate overhead costs and revenue enhancing measures. In addition, we engaged other outside consultants to evaluate various other components of our strategy. We also incurred cost of other outside professionals as we began efforts to transition portions of our accounting, payroll, operational reporting, and other back-office functions to a leading multi-unit restaurant outsourcing firm.We anticipate completing the transition in the first calendar quarter of 2020 and expect to realize additional cost savings and enhanced capabilities from this transition. Lastly, we incurred expenses related to certain information technology systems that will be replaced by the capabilities of the outsourcing firm. We incurred an expense of $1.2 million for these restructuring efforts.
Other charges, as defined above, were not significant in fiscal 2018.
Provision for Asset Impairments and Restaurant Closings
The provision for asset impairment and restaurant closings of approximately $5.6 million in fiscal 2019 is primarily related to assets at nine property locations held for use, seven properties held for sale, one international joint venture investment, and spare inventory of restaurant equipment and parts at our maintenance facility, each written down to their estimated fair value. The provision for asset impairment and restaurant closings of approximately $8.9 million in fiscal 2018 is primarily related to assets impaired at 21 property locations, goodwill at three property locations, ten properties held for sale written down to their fair value, and a reserve for 15 restaurant closings of approximately $1.3 million.
Net Gain on Disposition of Property and Equipment
The approximate $12.8 million net gain on disposition of property and equipment in fiscal 2019 primarily reflects (1) the sale and leaseback of two property locations where we operate a total of three restaurants, including a portion related to amortization of deferred gains; (2) sale of one undeveloped property that was previously held for sale; (3) partially offset by net lease termination costs at other locations as well as routine asset retirement activity.
The approximate $5.4 million net gain on disposition of property and equipment in fiscal 2018 is primarily related to the gain on the sale of 10 properties of approximately $4.9 million and approximately $1.3 million of insurance proceeds received for property and equipment damaged by Hurricane Harvey, partially offset by lease termination costs at eight restaurant location closures and routine asset retirements.
Interest Income
Interest income was $30 thousand in fiscal 2019 compared to $12 thousand in fiscal 2018 due to higher net cash balances, including required restricted cash balances.
Interest Expense
Interest expense was approximately $6.0 million in fiscal 2019 compared to $3.3 million in fiscal 2018. The increase in interest expense reflects higher average debt balances, higher interest rates in the credit agreement entered into on December 13, 2018, and higher amortization expense related to pre-paid interest and fees association with the credit agreement into on December 13, 2018, as well as acceleration of the expensing of deferred financing fees associated with our previous debt agreement. Interest paid in cash was $4.5 million in fiscal 2019 and $2.5 million in fiscal 2018.
Other Income (Expense), Net
Other income, net, consisted primarily of the following components: net rental property income and expenses relating to property for which we are the landlord; prepaid sales tax discounts earned through our participation in state tax prepayment programs; oil and gas royalty income; and changes in the fair value of our interest rate swap agreement prior to its termination in December 2018.
Other income was approximately $0.2 million in fiscal 2019 compared to approximately $0.3 million in fiscal 2018. The approximate $0.2 million of income in fiscal 2019 is primarily net rental income, partially offset by sales tax discount expense and a reduction in the fair value of our interest rate swap in the first quarter. The approximate $0.3 million of income in fiscal 2018 primarily reflects net rental income and an increase in the fair value of our interest rate swap, partially offset by gift card expenses (specifically the expense of discounting gift card sales).
Taxes
The income tax provision related to continuing operations for fiscal 2019 was approximately $0.5 million compared to an income tax provision of approximately $7.7 million for fiscal 2018. The income tax provision in fiscal 2019 reflects $0.4 million of current state income tax and $0.1 million of international withholding taxes. The income tax provision in fiscal 2018 reflects the impact of the U.S. tax reform, that is commonly referred to as Tax Cuts and Jobs Act (the "Tax Act"), of $3.2 million in deferred income taxes, an additional $4.1 million of deferred income tax provision, including an incremental valuation allowance, and $0.4 million of current state income taxes.
The effective tax rate ("ETR) for continuing operations was a negative 3.2% for fiscal 2019 and a negative 30.6% for fiscal 2018. The ETR for fiscal 2019 differs from the federal statutory rate of 21% due to the change in the valuation allowance, the federal jobs credits, state income taxes, and other discrete items. The Tax Act lowered the federal statutory tax rate from 35% to 21% effective January 1, 2018. In accordance with the application of Internal Revenue Code, Section 15, the Company's federal statutory tax rate for fiscal 2018 was 25%, representing a blended tax rate for the fiscal year. The ETR for fiscal 2018 differs from the blended federal statutory rate due to the change in the valuation allowance, the federal jobs credits, state income taxes and other discrete items.
Discontinued Operations
|
| | | | | | | | |
| | | Fiscal Year Ended |
($000s) | | August 28, 2019 | | August 29, 2018 |
| | | (52 weeks) | | (52 weeks) |
| Discontinued operating losses | | $ | (7 | ) | | $ | (21 | ) |
| Impairments | | — |
| | (59 | ) |
| Gains | | — |
| | — |
|
| Pretax loss | | $ | (7 | ) | | $ | (80 | ) |
| Income tax benefit (expense) from discontinued operations | | — |
| | (534 | ) |
| Loss from discontinued operations, net of income taxes | | $ | (7 | ) | | $ | (614 | ) |
The loss from discontinued operations, net of income taxes was $7 thousand in fiscal 2019 compared to a loss of approximately $0.6 million in fiscal 2018. The loss of $7 thousand in fiscal 2019 primarily reflected net occupancy cost associated with assets that were related to discontinued operations. The loss of $0.6 million in fiscal 2018 included (1) less than $0.1 million in “carrying costs” (typically rent, property taxes, utilities, and maintenance) associated with assets that were related to discontinued operations; (2) less than $0.1 million impairment charges for certain assets related to discontinued operations; and (3) an approximate $0.5 million income tax provision related to increasing the deferred tax asset valuation allowance associated with discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
In fiscal 2019 and 2018 our primary sources of short-term and long-term liquidity were proceeds from asset sales and our 2018 and 2016 Credit Facilities (as defined below). Cash and cash equivalents and restricted cash increased approximately $9.0 million from $3.7 million at the end of fiscal 2018 to $12.8 million at the end of fiscal 2019. We expect to continue to invest our available liquidity to reduce our debt, maintain our existing restaurants and infrastructure and provide working capital requirements as necessary. We plan to continue a level of capital and repair and maintenance expenditures to keep our restaurants attractive and operating efficiently. Based upon our level of past and projected capital requirements, we expect that proceeds from the sale of assets, funding available under our 2018 Credit Facility and cash flows from operations, will be sufficientadequate to meet our capital expenditures and working capital requirements during the next twelve months.
As is common in the restaurant industry,obligations; however, we maintain relatively low levels of accounts receivable and inventories and our vendors grant trade credit for purchases suchcannot provide assurance as food and supplies. However, higher levels of accounts receivable are typical in our CCS business segment and Fuddruckers franchise business segment. We also strategically invest in our business through the addition of new restaurant units and refurbishment of existing restaurant units, which are reflected as long-term assets.
The following table summarizes our cash flows from operating, investing and financing activities:
|
| | | | | | | | | |
| | | Fiscal Year Ended |
| | | August 28, 2019 | | August 29, 2018 | |
| | | (52 weeks) | | (52 weeks) | |
| | | (In thousands) |
| Total cash provided by (used in): | | | | | |
| Operating activities | | $ | (13,130 | ) | | $ | (8,453 | ) | |
| Investing activities | | 17,849 |
| | 3,014 |
| |
| Financing activities | | 4,315 |
| | 8,065 |
| |
| Increase (Decrease) in cash and cash equivalents | | $ | 9,034 |
| | $ | 2,626 |
| |
Operating Activities. Cash flow from operating activities decreased from a use of cash of $8.5 million in fiscal 2018 to a use of cash of $13.1 million in fiscal 2019. The $4.7 million decrease in operating cash flow was primarily due to a $4.4 million decrease in cash used in operations before changes in operating assets and liabilities and a $0.3 million increase in cash used in changes in operating assets and liabilities.
The $4.4 million decrease in cash used in operating activities before changes in operating assets and liabilities was primarily due to uses of cash from a $1.8 million decrease total in total segment level profit and a $2.6 million increase in interest expense.
The $0.3 million increase in cash used in changes in operating assets and liabilities was primarily due to a $2.0 million higher decrease in accounts payable, accrued expenses and other liabilities, partially offset by a $0.7 million decrease in the change in trade accounts receivable and other receivables, a $0.2 million decrease in the change of food and supply inventories, and a $0.8 million decrease in the change of prepaid expenses and other assets, in fiscal 2019 compared to fiscal 2018.
Investing Activities. Cash provided by investing activities was $17.8 million in fiscal 2019, an increase of $14.8 million compared to cash used in investing activities of $3.0 million in fiscal 2018, primarily due to the prices or net proceeds we may receive from disposal of assets and property held for sale and proceeds from property and equipment insurance claims. We used cash to invest $4.0 million in the purchase of property and equipment in fiscal 2019, a decrease of $9.3 million from our investment of $13.2 million in fiscal 2018. Proceeds from disposal of assets and property held for sale was $21.8 million in fiscal 2019, an increase of $7.6 million from proceeds of $14.2 million in fiscal 2018. Proceeds on property and equipment insurance claims of $2.1 million was a source of cash in fiscal
2018. The purchases of property and equipment of $4.0 million in fiscal 2019 included $3.7 million for our Company-owned restaurants and $0.3 million in corporate related capital expenditures,. The purchases of property and equipment of $13.2 million in fiscal 2018 included $11.1 million for our Company-owned restaurants, $1.9 million in corporate related capital expenditures and $0.2 million for our CCS business segment.
Financing Activities. Cash provided by financing activities was $4.3 million in fiscal 2019, a decrease of $3.8 million from cash provided by financing activities of $8.1 million in fiscal 2018. Cash flows from financing activities was primarily the resultmonetization of our 2016 Credit facility, as amended through December 13, 2018 and our 2018 Credit Facility thereafter. During fiscal 2019, net cash provided by our 2018 term loan was $58.4 million and by Revolver borrowings was $42.3 million. Cash used for Revolver repayments was $57.0 million, for repayments of our 2016 term loan was $36.1 million and for debt issuance costs was $3.3 million.assets.
Net cash provided by financing activities of fiscal 2018 of $8.1 million consisted of net borrowings from our Revolver of $15.6 million, partially offset by payments on our 2015 term loan of $7.1 million and debt issuance costs paid of $0.4 million.
STATUS OF LONG-TERM INVESTMENTS AND LIQUIDITY
We had no long-term investments as of December 31, 2022.
At August 28, 2019, we did not hold any long-term investments.
STATUS OF TRADE ACCOUNTS AND OTHERNOTES RECEIVABLES, NET
We monitor the aging of our receivables including Fuddruckers franchising related receivables, and record provisions for uncollectability,reserves to adjust to estimated net realizable value, as appropriate. Credit terms
Our notes receivable at December 31, 2022 are recorded in our consolidated statement of accounts receivable associated with our CCS business vary from 30net assets at the amount we expect to 45 days based on contract terms.
WORKING CAPITAL
At fiscal year-end 2019, current assets increased $7.6 million including an decrease of $0.1 million in cash and an increase in restricted cash of $9.1 million. Trade accounts and other receivables increased $0.1 million while food and supply inventory and prepaid expenses decreased $0.6 million and $0.9 million, respectively. The $0.6 million decrease in food and supply inventory was primarily due to lower spending for restaurant supplies and food supplies on lower sales volumes and the $0.9 million decrease in prepaid expenses was primarily due to reduction in prepayments of expenses.
At fiscal year-end 2019, current liabilities decreased $48.6 million due primarily to a $39.3 million decrease in Credit facility debt, a $7.3 million decrease in accrued expenses and other liabilities and a $2.0 million decrease in accounts payable. The decrease of $39.3 million in Credit facility debt due to the retirementreceive upon monetization of the 2016 Credit Facility debt with the proceeds from the long-term 2018 Credit Facility. The $7.3 million decreaseNotes. See Note 8. Accounts and Notes Receivable in accrued expenses and other liabilities is primarily a result of lower payroll related liabilities of $1.8 million, lower insurance claim and premium liabilities of $1.2 million, lower lease termination costs reserves of $0.6 million, and lower unredeemed gift and dining card liability of $3.4 million, partially offset by higher accrued interest payable of $0.3 million. The lower unredeemed gift and dining card liability includes $3.1 million related to the cumulative effect of adopting the new revenue recognition accounting standard as more fully described at Note 1 to theour consolidated financial statements included in Item 8.8 of this Annual Report on Form 10-K. The $2.0 million decrease in accounts payable was dueWe continue to a $1.6 million decrease in checks in transit, a $0.8 million decrease in trade payables, and a $0.4 million increase in accrued purchases.
CAPITAL EXPENDITURES
Capital expenditures generally consist of purchases of real estate for future restaurant sites, culinary contract services investments, new unit construction, purchases of new and replacement restaurant furniture and equipment, and ongoing remodeling programs. Capital expenditures for fiscal 2019 were approximately $4.0 million primarily related to recurring maintenance of our restaurant properties and information technology infrastructure. In fiscal 2020, we expect to invest up to $4.0 million for recurring maintenance for our restaurant properties and information technology investments. We expect to be able to fund all planned capital expenditures in fiscal 2020 using cash flows from operations, proceeds from the sale of assets, and our available credit.
DEBT
2018 Credit Agreement
On December 13, 2018, the Company entered into a credit agreement (as amended by the First Amendment (as defined below), the “2018 Credit Agreement”) among the Company, the lenders from time to time party thereto, and MSD as Administrative Agent, pursuant to which the lenders party thereto agreed to make loans to the Company from time to time up to an aggregate principal amount of $80 million consisting of a $10 million revolving credit facility (the “2018 Revolver”), a $10 million delayed draw term loan (“2018 Delayed Draw Term Loan”), and a $60 million term loan (the “2018 Term Loan”, and together with the 2018 Revolver and the 2018 Delayed Draw Term Loan, the “2018 Credit Facility”). The 2018 Credit Facility terminates on, and all amounts owing thereunder must be repaid on, December 13, 2023.
On July 31, 2019, the Company entered into the First Amendment to the 2018 Credit Agreement (the “First Amendment”) to extend the 2018 Delayed Draw Term Loan expiration date for up to one year to the earlier to occur of (a) the date on which the commitments under the 2018 Delayed Draw Term Loan have been terminated or reduced to zero in accordance withmonitor the terms of the 2018 Credit Agreementnotes receivable and (b) September 13, 2020.
Borrowings under the 2018 Revolver, 2018 Delayed Draw Term Loan, and 2018 Term Loan will bear interest at the London InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest is payable quarterly and accrues daily. Under the termspayment history of the 2018 Credit Agreement,issuers to determine net realizable value.
CAPITAL EXPENDITURES
Capital expenditures for the maximum amount of interest payable, based on the aggregate principal amount of $80 millionperiod beginning June 1, 2022 and interest rates in effectended December 31, 2022 were not material. We do not expect future capital expenditures to be significant.
DEBT
The Trust has no debt obligations at December 13, 2018, in the next 12 months was required to be pre-funded31, 2022 and at the closing date of the 2018 Credit Agreement. The pre-funded amount at AugustMarch 28, 2019 of approximately $6.4 million is recorded in restricted cash and cash equivalents on our consolidated balance sheet and is not available for other purposes. The interest rate for the 2018 Term Loan and the 2018 Revolver was approximately 10.1% as of November 15, 2019.2023.
The 2018 Credit Facility is subject to the following minimum amortization payments: 1st anniversary: $10 million; 2nd anniversary: $10 million; 3rd anniversary: $15 million; and 4th anniversary: $15 million.
COMMITMENTS AND CONTINGENCIES
The Company also pays a quarterly commitment fee based on the unused portion of the 2018 Revolver and the 2018 Delayed Draw Term Loan at 0.5% per annum. Voluntary prepayments, refinancing and asset dispositions constituting a sale of all or substantially all assets, under the 2018 Delayed Draw Term Loan and the 2018 Term Loan are subject to a make whole premium during years one and two equal to the present value of all interest otherwise owed on the prepaid amount from the date of the pre-payment through the end of year two, a 2.0% fee during year three, and a 1.0% fee during year four. Finally, the Company paid to the lenders a one-time fee of $1.6 million in connection with the closing of the 2018 Credit Facility.
Indebtedness under the 2018 Credit Facility is secured by a security interest in, among other things, all of the Company’s present and future personal property (other than certain excluded assets) and all Mortgaged Property (as defined in the 2018 Credit Agreement) of the Company and its subsidiaries.
The 2018 Credit Facility contains customary covenants and restrictions on the Company’s ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and contains customary events of default. Specifically, among other things, the Company is required to maintain minimum Liquidity (as defined in the 2018 Credit Agreement) of $3.0 million as of the last day of each fiscal quarter and a minimum Asset Coverage Ratio (as defined in the 2018 Credit Agreement) of 2.50 to 1.00.
In conjunction with entering into the 2018 Credit Agreement in December 2018, we obtained third party appraisals on all property used as collateral to maintain the debt covenant requirement of a minimum of 2.50 to 1.00 asset coverage ratio . The asset coverage ratio is defined as the aggregate value of all mortgaged property divided by the outstanding principle amount of term loans plus the average aggregate outstanding principle amount of revolving credit loans during the last full month prior to such date of determination. At August 28, 2019, our asset coverage ratio was 4.23 to 1.00.
All amounts owing by the Company under the 2018 Credit Facility are guaranteed by the subsidiaries of the Company.has no off-balance sheet arrangements.
As of August 28, 2019, we had no amounts due within the next 12 months under the 2018 Credit Facility due to principal repayments in excess of the required minimum. As of August 28, 2019December 31, 2022, we had approximately $1.3$1.8 million committed under letters of credit, which isare used as security for the payment of insurance obligations and are fully cash collateralized, and approximately $0.1 million in other indebtedness.
At August 28, 2019, the Company had $4.7 million available to borrow under the 2018 Revolver and $10.0 million available to borrow under the 2018 Delayed Draw Term Loan.
As of November 26, 2019, the Company was in compliance with all covenants under the terms of the 2018 Credit Agreement.
2016 Credit Agreement (paid in full and terminated in December 2018)
On November 8, 2016, the Company entered into a $65.0 million Senior Secured Credit Facility with Wells Fargo Bank, National Association, as Administrative Agent and Cadence Bank, NA and Texas Capital Bank, NA, as lenders (“2016 Credit Agreement”). The 2016 Credit Agreement, prior to the amendments discussed below, was comprised of a $30.0 million 5-year Revolver (the “Revolver”) and a $35.0 million 5-year Term Loan (the “Term Loan”), and it also included sub-facilities for swingline loans and letters of credits. The original maturity date of the 2016 Credit Agreement was November 8, 2021.
Borrowings under the Revolver and Term Loan bore interest at (1) a base rate equal to the greater of (a) the federal funds effective rate plus one-half of 1% (the “Base Rate”), (b) prime and (c) LIBOR for an interest period of 1 month, plus, in any case, an applicable spread that ranges from 1.50% to 2.50% per annum the (“Applicable Margin”), or (2) the LIBOR, as adjusted for any Eurodollar reserve requirements, plus an applicable spread that ranges from 2.50% to 3.50% per annum. Borrowings under the swingline loan bore interest at the Base Rate plus the Applicable Margin. The applicable spread under each option was dependent upon certain measures of the Company’s financial performance at the time of election. Interest was payable quarterly, or in more frequent intervals if LIBOR applies.
The Company was obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based on the average daily unused amount of the commitment of such lender, ranged from 0.30% to 0.35% per annum depending upon the Company's financial performance.
The proceeds of the 2016 Credit Agreement were available for the Company to (i) pay in full all indebtedness outstanding under the 2013 Credit Agreement as of November 8, 2016, (ii) pay fees, commissions, and expenses in connection with our repayment of the 2013 Credit Agreement, initial extensions of credit under the 2016 Credit Agreement, and (iii) for working capital and general corporate purposes of the Company.
The 2016 Credit Agreement, as amended, contained the customary covenants and was secured by an all asset lien on all of the Company's real property and also included customary events of default. On December 13, 2018, the 2016 Credit Agreement was terminated with all outstanding amounts paid in full.
COMMITMENTS AND CONTINGENCIES
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements except for operating leases for our corporate office, facility service warehouse and certain restaurant properties.
Claims
collateralized.
From time to time, we are subject to various other private lawsuits, administrative proceedings and claims that arise in the ordinary course of our former business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to issues common to the restaurant industry.industry, as well as matters related to our real estate holdings, or the leases associated with such holdings. We currently believe that the final disposition of these types of lawsuits, proceedings, and claims will not have a material adverse effect on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims.the Trust’s cash flows and net assets under liquidation.
Construction Activity
From time to time, we enter into non-cancelable contracts for the construction of our new restaurants and restaurant remodels. This construction activity exposes us to the risks inherent in this industry including but not limited to rising material prices, labor shortages, delays in getting required permits and inspections, adverse weather conditions, and injuries sustained by workers.
Contractual Obligations
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide the contractual obligations table.
AFFILIATIONS AND RELATED PARTIES
Affiliate Services
Effective January 27, 2021, the Luby's Board of Directors appointed John Garilli as the Company’s Interim President and Chief Executive Officer. Additionally, effective September 8, 2021, the Luby's Board of Directors appointed Eric Montague as the Company’s Interim Chief Financial Officer. Luby's and Mr. Garilli’s and Mr. Montague’s employer, Winthrop Capital Advisors LLC (“WCA”), have entered into an agreement, pursuant to which the Company paid WCA a one-time fee of $50,000 and paid a monthly fee of $30,000 for so long as Mr. Garilli and Mr. Montague served the Company in said positions. The Company has also entered into an Indemnity Agreement with Mr. Garilli and WCA. Mr. Garilli is also a member of the Trust's Board of Trustees, effective May 31, 2022. Mr. Garilli receives a fee of $20,000 per calendar quarter for his services as a Trustee.
The Company’s Chief Executive Officer, Christopher J. Pappas,Company and Harris J. Pappas, a former Director of the Company, own restaurant entities (the “Pappas entities”) that may, from timeWCA had previously entered into agreements, pursuant to time,which WCA provides treasury and accounting services for approximately $14,000 per month.
WCA continues to provide services to the Company and its subsidiaries,Trust as detailed in the Amended and Restated Master Sales Agreement dated August 2, 2017 amongit did for the Company, andcurrently on the Pappas entities. Collectively, Messrs. Pappas and the Pappas entities own greater than 5% of the Company's common stock.
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities continue to provide specialized (customized) equipment fabrication, primarily for new construction, and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. The total costs under the Master Sales Agreement of custom-fabricated and refurbished equipment in fiscal 2019 and 2018 were approximately $19 thousand and $31 thousand, respectively. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Company’s Board of Directors.
Operating Leases
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partner interest and a 50% general partner interest in the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented approximately 7% of the space in that center since July 1969. No changes were made to the Company’s leasesame terms as a result ofnoted above. During the transfer of ownership of the center to the new partnership.
On November 22, 2006, the Company executed a new lease agreement with respect to this property. Effective upon the Company’s relocation and occupancy into the new space in July 2008, the new lease agreement provides for a primary term ofperiod June 1, 2022 through December 31, 2022, we paid WCA approximately 12 years with two subsequent five-year options. The new lease also gave the landlord an option to buy out the tenant on or after the calendar year 2015 by paying the then unamortized cost of improvements to the tenant. The Company is paying rent of $22.00 per square foot plus maintenance, taxes, and insurance$358,000 for the remaining primary term of the lease. Thereafter, the lease provides for increases in rent at set intervals. The new lease agreement was approved by the Finance and Audit Committee of our Board of Directors in 2006.above-mentioned services.
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement for one of the Company’s Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of approximately six years with two subsequent five-year options. Pursuant to the new ground lease agreement, the Company is paying $28.53 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until May 31, 2020. Thereafter, the new ground lease agreement provides for increases in rent at set intervals.
Affiliated rents paid for the Houston property lease represented 2.9% and 3.1% of total rents for continuing operations for fiscal 2019 and 2018, respectively. Rent payments under the two lease agreements described above were $593 thousand and $628 thousand in fiscal 2019 and 2018, respectively.
The following table compares current and prior two fiscal years charges incurred under the Amended and Restated Master Sales Agreement, affiliated property leases, and other related party agreements to our total capital expenditures, as well as relative Selling, general and administrative expenses, and other operating expenses included in continuing operations:
|
| | | | | | | | |
| | Fiscal Year Ended |
| | August 28,
2019 | | August 29,
2018 | |
| | (364 days) | | (364 days) | |
| | (In thousands, except percentages) |
| AFFILIATED COSTS INCURRED: | | | | |
| Selling, general and administrative expenses—professional and other costs | $ | — |
| | $ | — |
| |
| Capital expenditures—custom-fabricated and refurbished equipment | 19 |
| | 31 |
| |
| Other operating expenses, occupancy costs and opening costs, including property leases | 593 |
| | 628 |
| |
| Total | $ | 612 |
| | $ | 659 |
| |
| RELATIVE TOTAL COMPANY COSTS: | | | | |
| Selling, general and administrative expenses | $ | 34,179 |
| | $ | 38,725 |
| |
| Capital expenditures | 3,987 |
| | 13,247 |
| |
| Other operating expenses, occupancy costs and opening costs | 69,075 |
| | 83,239 |
| |
| Total | $ | 107,241 |
| | $ | 135,211 |
| |
| AFFILIATED COSTS INCURRED AS A PERCENTAGE OF RELATIVE TOTAL COMPANY COSTS | 0.57 | % | | 0.49 | % | |
The Company entered into a new employment agreement with Christopher Pappas on December 11, 2017. Under the employment agreement, the initial term of Mr. Pappas' employment ended on August 28, 2019 and automatically renews for additional one year periods, unless terminated in accordance with its terms. Mr. Pappas continues to devote his primary time and business efforts to the Company while maintaining his role at Pappas Restaurants, Inc. The Employment Agreement was unanimously approved by the Executive Compensation Committee (the “Committee”) of the Board as well as by the full Board. Effective August 1, 2018, the Company and Christopher J. Pappas agreed to reduce his fixed annual base salary to one dollar.
Peter Tropoli, a former director and officer of the Company, is an attorney and stepson of Frank Markantonis, who is a director of the Company. Mr. Tropoli resigned from the Company and is no longer our General Counsel and Corporate Secretary.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are described in Note 1, “Nature1. Nature of Operations and Significant Accounting Policies” to our Consolidated Financial Statements included in Item 8 of Part II of this report. The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States. Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods. Management believesThe Trustees believe the following are critical accounting policies due to the significant, subjective and complex judgments and estimates used when preparing our consolidated financial statements. Management regularly reviews these assumptions
Liquidation Basis of Accounting
Under the liquidation basis of accounting, our assets are measured at their estimated net realizable value, or liquidation value, which represents the amount of their estimated cash proceeds or other consideration from liquidation, based on current contracts, estimates and other indications of sales value, and may include previously unrecognized assets that we may expect to either sell in the course of our liquidation or use in settling liabilities, such as trademarks or other intangibles. The two areas that require the most significant, subjective and complex judgements and estimates are (i) properties for sale and (ii) liability for estimated costs in excess of estimated receipts during liquidation.
Properties for sale
In developing the estimated net realizable value for our properties held for sale, we utilized third party valuation experts, real estate brokers, the expertise of our Trustees, and forecasts generated by our management. For estimated real estate values, we consider comparable sales transactions, our past experience selling real estate assets of the Company and, in certain instances, indicative offers, as well as capitalization rates observed for income-producing real estate. All estimates by nature involve a large degree of judgement and sensitivity to the underlying assumptions.
Estimated costs in excess of estimated receipts during liquidation
The liquidation basis of accounting requires the estimation of net cash flows from operations and all costs associated with implementing and completing the plan of liquidation. We project that we will have estimated costs in excess of estimated receipts during the liquidation period. These amounts can vary significantly due to, among other things, the timing of property sales, estimates of direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities, the costs associated with the Financewinding up of operations, and Audit Committeeother costs that we may incur which are not currently foreseeable. These receipts and accruals will be adjusted periodically as projections and assumptions change. These receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period.
The valuation of our Board of Directors.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, as described above, represents estimates, based on present facts and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and a limited number of foreign jurisdictions, involving franchised locations in Panama, Mexico, and Canada. Significant judgments and estimates are required in the determinationcircumstances, of the consolidated income tax expense.
On December 22, 2017, U.S. tax reform legislation that is commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The enactment date occurred during the second quarter of fiscal 2018 and the impact on our income tax accounts of the Tax Act were accounted for in the period of enactment, in accordance with ASC 740. The Tax Act makes broad and complex changes to the U.S. tax code and most notably to the Company, the Tax Act lowered the federal statutory tax rate from 35% to 21% effective January 1, 2018. The Company's federal statutory tax rate for fiscal 2019 was 21%.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future, as well as from tax Net Operating Losses ("NOL") and tax credit carryovers. We establish a valuation allowance when we no longer consider it more likely than not that a deferred tax asset will be realized. In evaluating our ability to recover our deferred tax assets, we consider available positive and negative evidence, including scheduled reversals of deferred tax liabilities, tax-planning strategies and existing business conditions, including the results of recent operations. In the third quarter of fiscal 2018, management concluded that a full valuation allowance on the Company's net deferred tax assets was necessary. As of August 28, 2019, the Company considers the deferred tax assets not to be realizable and maintains a full valuation allowance against the Company's net deferred tax asset balance.
The composition of the Company’s deferred tax assets, excluding the offsetting impact of the valuation allowance, includes income tax NOL’s and tax credits of approximately $18.1 million, approximately $5.5 million relating to income tax NOL’s and $12.5 million relating to tax credit carryover, which expire in varying amounts between fiscal 2022 through 2039, except for the portion of the tax NOL's that have an indefinite carryforward period. At this time, the management is uncertain as to the realization of these deferred tax assets, which is otherwise dependent on numerous factors, including our ability to generate sufficient taxable income prospectively and, if necessary, gains on sale of owned property locations, prior to expiration of the tax NOL’s and tax credit carryovers.
Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. We operate within multiple taxing jurisdictions and are subject to examination in these tax jurisdictions, as well as by the Internal Revenue Service (“IRS”). In management’s opinion, adequate provisions for income taxes have been made for all open income tax periods. The potential outcomes of examinations are regularly assessed in determining the adequacy of the provision for income taxes and income tax liabilities. Management believes that adequate provisions have been made for reasonable and foreseeable outcomes related to uncertain tax matters.
Impairment of Long-Lived Assets
We periodically evaluate long-lived assets held for use and held for sale, whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. We analyze historical cash flows of operating locations and compare results of poorer performing locations to more profitable locations. We also analyze lease terms, conditionvalue of the assets and related need for capital expenditures or repairs, construction activity incosts associated with carrying out the surrounding area as well asPlan. The actual values and costs associated with carrying out the economic and market conditions in the surrounding area.
For assets held for use, we estimate future cash flows using assumptions based on possible outcomes of the areas analyzed. If the undiscounted future cash flows are less than the carrying value of our location’s assets, we record an impairment based on an estimate of discounted cash flows. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgments. Assumptions and estimates used include operating results, changes in working capital, discount rate, growth rate, anticipated net proceeds from disposition of the property and if applicable, lease terms.
The span of time for which future cash flows are estimated is often lengthy, increasing the sensitivity to assumptions made. The time span is longer and could be 20 to 25 years for newer properties, but only 5 to 10 years for older properties. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows. We operated 120 restaurants as of November 15, 2019 and periodically experience unanticipated changes in our assumptions and estimates. Those changes could have a significant impact on discounted cash flow models with a corresponding significant impact on the measurement of an impairment. Gains are not recognized until the assets are disposed.
We evaluate the useful lives of our other intangible assets, primarily the Fuddruckers trademarks and franchise agreements to determine if they are definite or indefinite-lived. Reaching a determination of useful life requires significant judgments and assumptions regarding the future effects of obsolescence, contract term, demand, competition, other economic factors (such as the stability of the industry, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets.
We periodically evaluate our intangible assets, primarily the Fuddruckers trademarks and franchise agreements, to determine if events or changes in circumstances such as economic or market conditions indicate that the carrying amount of the assets may not be recoverable. We analyze historical cash flows of operating locations to determine trends that would indicate a need for impairment. We also analyze royalties and collectability from our franchisees to determine if there are trends that would indicate a need for impairment.
Property Held for Sale
We periodically review long-lived assets against our plans to retain or ultimately dispose of properties. If we decide to dispose of a property, it will be moved to property held for sale and actively marketed. Property held for sale is recorded at amounts not in excess of what management currently expects to receive upon sale, less costs of disposal. We analyze market conditions each reporting period and record additional impairments due to declines in market values of like assets. The fair value of the property is determined by observable inputs such as appraisals and prices of comparable properties in active markets for assets like ours. Gains are not recognized until the properties are sold.
Insurance and Claims
We self-insure a significant portion of risks and associated liabilities under our employee injury, workers’ compensation and general liability programs. We maintain insurance coverage with third party carriers to limit our per-occurrence claim exposure. We have recorded accrued liabilities for self-insurance based upon analysis of historical data and actuarial estimates, and we review these amounts on a quarterly basis to ensure that the liability is appropriate.
The significant assumptions made by the actuary to estimate self-insurance reserves, including incurred but not reported claims, are as follows: (1) historical patterns of loss development will continue in the future as they have in the past (Loss Development Method), (2) historical trend patterns and loss cost levels will continue in the future as they have in the past (Bornhuetter-Ferguson Method), and (3) historical claim counts and exposures are used to calculate historical frequency rates and average claim costs are analyzed to get a projected severity (Frequency and Severity Method). The results of these methods are blended by the actuary to provide the reserves estimates.
Actual workers’ compensation, employee injury and general liability claims expensePlan may differ from estimated loss provisions. The ultimate level of claims underamounts reflected in the in-house safety program are not known, and declines in incidence of claims as well as claims costs experiences or reductions in reserve requirements under the program may not continue in future periods.
Prior to January 1, 2018, employee health insurance coverage was offered through fully-insured contracts with insurance carriers and the liability for covered health claims was borne by the insurance carriers per the terms of each policy contract. Effective January 1, 2018, we maintain a self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits per 3rd party insurance carriers. Our self-insurance expense is accrued based upon the aggregateaccompanying consolidated financial statements because of the expected liability for reported claims andPlan's inherent uncertainty. These differences may be material. In particular, these estimates will vary with the estimated liability for claims incurred but not reported, based on historical claims experience provided by our 3rd party insurance advisors, adjusted aslength of time necessary based upon management’s reasoned judgment. Actual employee medical claims expense may differ from estimated loss provisions based on historical experience. The liabilities for these claims are included as a component of accrued expenses and other liabilities on our consolidated balance sheets.to complete the Plan.
SHARE-BASED COMPENSATION
Share-based compensation is recognized as compensation expense in the income statement utilizing the fair value on the date of the grant. The fair value of performance share based award liabilities are estimated based on a Monte Carlo simulation model. The fair value of restricted stock units is valued at the closing market price of our common stock at the date of grant. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Assumptions for volatility, forfeitures, expected option life, risk free interest rate, and dividend yield are used in the model.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1There are no new accounting pronouncements that are applicable or relevant to the accompanying Consolidated Financial Statements for a discussionTrust, under the Liquidation Basis of recent accounting guidance adopted and not yet adopted. Except as disclosed in Note 1, the adopted accounting guidance discussed in Note 1 did not have a significant impact on our consolidated financial position or results of operations. Except as disclosed in Note 1, Company either expects that the accounting guidance not yet adopted will not have a significant impact on the Company’s consolidated financial position or results of operations or is currently evaluating the impact of adopting the accounting guidance.Accounting.
INFLATION
It is generally our policy to maintain stable menu prices without regard to seasonal variations in food costs. Certain increases in costs of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Luby’s, Inc.
Opinion on the financial statements
We have audited the accompanying consolidatedbalance sheets of Luby’s, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of August 28, 2019 and August 29, 2018, the related consolidatedstatements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended August 28, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Companyas of August 28, 2019 and August 29, 2018, and the results of itsoperations and itscash flows for each of the two years in the period ended August 28, 2019, in conformity with accounting principles generally accepted in the United States of America.
Adoption of new accounting standard
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue recognition on August 30, 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. The Company adopted the new revenue standard using the modified retrospective method.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2007.
Houston, Texas
November 26, 2019
Luby’s, Inc.LUB Liquidating Trust
Consolidated Balance SheetsStatements of Net Assets in Liquidation (Liquidation Basis)
(Unaudited)
| | | | | |
| December 31, 2022 |
| (in thousands) |
| ASSETS | |
| Cash and cash equivalents | $ | 24,335 | |
| Accounts and notes receivable | 15,305 | |
| Restricted cash and cash equivalents | 2,333 | |
| Properties for sale | 29,966 | |
| |
| Total Assets | $ | 71,939 | |
| |
| LIABILITIES | |
| Accounts payable | $ | 109 | |
| Accrued expenses and other liabilities | 3,737 | |
| |
| |
| Operating lease liabilities | 3,770 | |
| Liability for estimated costs in excess of estimated receipts during liquidation | 4,418 | |
| Other liabilities | 25 | |
| Total Liabilities | $ | 12,059 | |
| |
| Commitments and Contingencies | |
| |
| Net assets in liquidation (Note 3) | $ | 59,880 | |
|
| | | | | | |
| | August 28,
2019 | August 29,
2018 |
| | (In thousands, except share data) |
| ASSETS | | |
| Current Assets: | | |
| Cash and cash equivalents | $ | 3,640 |
| $ | 3,722 |
|
| Restricted cash and cash equivalents | 9,116 |
| — |
|
| Trade accounts and other receivables, net | 8,852 |
| 8,787 |
|
| Food and supply inventories | 3,432 |
| 4,022 |
|
| Prepaid expenses | 2,355 |
| 3,219 |
|
| Total current assets | 27,395 |
| 19,750 |
|
| Property held for sale | 16,488 |
| 19,469 |
|
| Assets related to discontinued operations | 1,813 |
| 1,813 |
|
| Property and equipment, net | 121,743 |
| 138,287 |
|
| Intangible assets, net | 16,781 |
| 18,179 |
|
| Goodwill | 514 |
| 555 |
|
| Other assets | 1,266 |
| 1,936 |
|
| Total assets | $ | 186,000 |
| $ | 199,989 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
| Current Liabilities: | | |
| Accounts payable | $ | 8,465 |
| $ | 10,457 |
|
| Liabilities related to discontinued operations | 14 |
| 14 |
|
| Current portion of credit facility debt | — |
| 39,338 |
|
| Accrued expenses and other liabilities | 24,475 |
| 31,755 |
|
| Total current liabilities | 32,954 |
| 81,564 |
|
| Credit facility debt, less current portion | 45,439 |
| — |
|
| Liabilities related to discontinued operations | — |
| 16 |
|
| Other liabilities | 6,577 |
| 5,781 |
|
| Total liabilities | 84,970 |
| 87,361 |
|
| Commitments and Contingencies |
|
|
| SHAREHOLDERS’ EQUITY | | |
| Common stock, $0.32 par value; 100,000,000 shares authorized; Shares issued were 30,478,972 and 30,003,642 at August 28, 2019 and August 29, 2018, respectively; Shares outstanding were 29,978,972 and 29,503,642 at August 28, 2019 and August 29, 2018, respectively | 9,753 |
| 9,602 |
|
| Paid-in capital | 34,870 |
| 33,872 |
|
| Retained earnings | 61,182 |
| 73,929 |
|
| Less cost of treasury stock, 500,000 shares | (4,775 | ) | (4,775 | ) |
| Total shareholders’ equity | 101,030 |
| 112,628 |
|
| Total liabilities and shareholders’ equity | $ | 186,000 |
| $ | 199,989 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.LUB Liquidating Trust
Consolidated Statements of OperationsChanges in Net Assets in Liquidation (Liquidation Basis)
(Unaudited)
| | | | | | | | |
| Period from June 1, 2022 through December 31, 2022 | |
| (in thousands) |
| Net assets in liquidation, beginning of period | $ | 61,506 | | |
| Changes in net assets in liquidation | | |
| Changes in liquidation value of properties for sale | 3,242 | | |
| | |
| Changes in estimated cash flows during liquidation | (4,868) | | |
| | |
| | |
| | |
| Changes in net assets in liquidation | (1,626) | | |
| Net assets in liquidation, end of period | $ | 59,880 | | |
|
| | | | | | | | |
| | Year Ended |
| | August 28, 2019 | | August 29, 2018 | |
| | (In thousands, except per share data) |
| SALES: | | | | |
| Restaurant sales | $ | 284,513 |
| | $ | 332,518 |
| |
| Culinary contract services | 31,888 |
| | 25,782 |
| |
| Franchise revenue | 6,690 |
| | 6,365 |
| |
| Vending revenue | 379 |
| | 531 |
| |
| TOTAL SALES | 323,470 |
| | 365,196 |
| |
| COSTS AND EXPENSES: | | | | |
| Cost of food | 79,479 |
| | 94,238 |
| |
| Payroll and related costs | 108,509 |
| | 124,478 |
| |
| Other operating expenses | 50,886 |
| | 62,286 |
| |
| Occupancy costs | 18,133 |
| | 20,399 |
| |
| Opening costs | 56 |
| | 554 |
| |
| Cost of culinary contract services | 28,554 |
| | 24,161 |
| |
| Cost of franchise operations | 1,633 |
| | 1,528 |
| |
| Depreciation and amortization | 13,998 |
| | 17,453 |
| |
| Selling, general and administrative expenses | 34,179 |
| | 38,725 |
| |
| Other charges | 4,270 |
| | — |
| |
| Provision for asset impairments and restaurant closings | 5,603 |
| | 8,917 |
| |
| Net gain on disposition of property and equipment | (12,832 | ) | | (5,357 | ) | |
| Total costs and expenses | 332,468 |
| | 387,382 |
| |
| LOSS FROM OPERATIONS | (8,998 | ) | | (22,186 | ) | |
| Interest income | 30 |
| | 12 |
| |
| Interest expense | (5,977 | ) | | (3,348 | ) | |
| Other income, net | 195 |
| | 298 |
| |
| Loss before income taxes and discontinued operations | (14,750 | ) | | (25,224 | ) | |
| Provision for income taxes | 469 |
| | 7,730 |
| |
| Loss from continuing operations | (15,219 | ) | | (32,954 | ) | |
| Loss from discontinued operations, net of income taxes | (7 | ) | | (614 | ) | |
| NET LOSS | $ | (15,226 | ) | | $ | (33,568 | ) | |
| Loss per share from continuing operations: | | | | |
| Basic | $ | (0.51 | ) | | $ | (1.10 | ) | |
| Assuming dilution | $ | (0.51 | ) | | $ | (1.10 | ) | |
| Loss per share from discontinued operations: | | | | |
| Basic | $ | 0.00 |
| | $ | (0.02 | ) | |
| Assuming dilution | $ | 0.00 |
| | $ | (0.02 | ) | |
| Net loss per share: | | | | |
| Basic | $ | (0.51 | ) | | $ | (1.12 | ) | |
| Assuming dilution | $ | (0.51 | ) | | $ | (1.12 | ) | |
| Weighted-average shares outstanding: | | | | |
| Basic | 29,786 |
| | 29,901 |
| |
| Assuming dilution | 29,786 |
| | 29,901 |
| |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | |
| | Issued | | Treasury | | | | | | |
| | Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Retained Earnings | | Total Shareholders’ Equity |
| Balance at August 30, 2017 | 29,624 |
| | $ | 9,480 |
| | (500 | ) | | $ | (4,775 | ) | | $ | 31,850 |
| | $ | 107,497 |
| | $ | 144,052 |
|
| Net loss for the year | — |
| | — |
| | — |
| | — |
| | — |
| | (33,568 | ) | | (33,568 | ) |
| Common stock issued under nonemployee director benefit plans | 87 |
| | 28 |
| | — |
| | — |
| | (28 | ) | | — |
| | — |
|
| Common stock issued under employee benefit plans | 183 |
| | 59 |
| | — |
| | — |
| | (59 | ) | | — |
| | — |
|
| Share-based compensation expense | 109 |
| | 35 |
| | — |
| | — |
| | 2,109 |
| | — |
| | 2,144 |
|
| Balance at August 29, 2018 | 30,003 |
| | $ | 9,602 |
| | (500 | ) | | $ | (4,775 | ) | | $ | 33,872 |
| | $ | 73,929 |
| | $ | 112,628 |
|
| Net loss for the year | — |
| | — |
| | — |
| | — |
| | — |
| | (15,226 | ) | | (15,226 | ) |
| Cumulative effect of accounting changes from the adoption of ASC Topic 606 | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,479 |
| 2,479 |
| 2,479 |
|
| Common stock issued under nonemployee director benefit plans | 53 |
| | 17 |
| | — |
| | — |
| | (17 | ) | | — |
| | — |
|
| Common stock issued under employee benefit plans | 93 |
| | 30 |
| | — |
| | — |
| | (30 | ) | | — |
| | — |
|
| Share-based compensation expense | 329 |
| | 104 |
| | — |
| | — |
| | 1,045 |
| | — |
| | 1,149 |
|
| Balance at August 28, 2019 | 30,478 |
| | $ | 9,753 |
| | (500 | ) | | $ | (4,775 | ) | | $ | 34,870 |
| | $ | 61,182 |
| | $ | 101,030 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Cash Flows
|
| | | | | | | |
| | Year Ended |
| | August 28, 2019 | | August 29, 2018 |
| | (In thousands) |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net loss | $ | (15,226 | ) | | $ | (33,568 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Provision for asset impairments and net loss (gain) on property dispositions | (7,229 | ) | | 3,619 |
|
| Depreciation and amortization | 13,998 |
| | 17,453 |
|
| Amortization of debt issuance cost | 1,317 |
| | 534 |
|
| Share-based compensation expense | 1,140 |
| | 2,144 |
|
| Deferred tax provision | — |
| | 8,192 |
|
| Cash used in operating activities before changes in operating assets and liabilities | (6,000 | ) | | (1,626 | ) |
| Changes in operating assets and liabilities: | | | |
| Increase in trade accounts and other receivables | (65 | ) | | (775 | ) |
| Decrease in food and supply inventories | 590 |
| | 432 |
|
| Decrease in prepaid expenses and other assets | 1,657 |
| | 808 |
|
| Decrease in accounts payable, accrued expenses and other liabilities | (9,312 | ) | | (7,292 | ) |
| Net cash used in operating activities | (13,130 | ) | | (8,453 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Proceeds from disposal of assets and property held for sale | 21,836 |
| | 14,191 |
|
| Insurance proceeds | — |
| | 2,070 |
|
| Purchases of property and equipment | (3,987 | ) | | (13,247 | ) |
| Net cash provided by investing activities | 17,849 |
| | 3,014 |
|
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Revolver borrowings | 42,300 |
| | 147,600 |
|
| Revolver repayments | (57,000 | ) | | (132,000 | ) |
| Debt issuance costs | (3,266 | ) | | (386 | ) |
| Proceeds on term loan | 58,400 |
| | — |
|
| Term loan repayments | (36,107 | ) | | (7,079 | ) |
| Tax paid on equity withheld | (12 | ) | | (70 | ) |
| Net cash provided by financing activities | 4,315 |
| | 8,065 |
|
| Net increase in cash and cash equivalents and restricted cash | 9,034 |
| | 2,626 |
|
| Cash and cash equivalents and restricted cash at beginning of period | 3,722 |
| | 1,096 |
|
| Cash and cash equivalents and restricted cash at end of period | $ | 12,756 |
| | $ | 3,722 |
|
| Cash paid for: | | | |
| Income taxes | $ | 470 |
| | $ | 426 |
|
| Interest | $ | 4,452 |
| | $ | 2,499 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.LUB Liquidating Trust
Notes to Consolidated Financial Statements
Fiscal Years 2019and2018Period Ended December 31, 2022
(Unaudited)
Note 1. NatureOrganization, Plan of OperationsLiquidation and Significant Accounting Policies
Organization
NatureAll references to the "Trust" refer to LUB Liquidating Trust and its consolidated subsidiaries and all references to "Luby's" refer to Luby’s, Inc., and the consolidated subsidiaries of Operations
Luby’s, Inc. References to “Luby’s Cafeteria” refer specifically to the Luby’s Cafeteria brand restaurants. With respect to the period prior to May 31, 2022, references to the "Company, "we", "our", or "us" refer to Luby's and with respect to the periods after May 31, 2022, refer to the Trust.
Substantially all of Luby's business was conducted through its wholly-owned subsidiary RFL, LLC (formerly known as Luby's Fuddruckers Restaurants, LLC), a Texas Limited Liability Company ("RFL")). RFL is basednow a wholly-owned subsidiary of the Trust and substantially all of the Trust's business is conducted through RFL.
On May 31, 2022, Luby's, the Trustees identified below and Delaware Trust Company (the “Resident Trustee”) entered into a Liquidating Trust Agreement (the “Liquidating Trust Agreement”) in Houston, Texas. Asconnection with the formation of August 28, 2019,a liquidating trust, LUB Liquidating Trust (the “Trust”), for the benefit of the Luby's stockholders, to facilitate the dissolution and termination of the Company ownedin accordance with the Plan of Liquidation and operated 124 restaurants, with 101 in TexasDissolution of the Company (the "Plan of Liquidation" or the “Plan”) that was previously approved by the Luby's stockholders on November 17, 2020. The trustees of the Trust consist of John Garilli, Gerald Bodzy and Joe C. McKinney (collectively, the “Trustees”), and the remainderResident Trustee.
At 5:00 p.m. Eastern Daylight Time on May 31, 2022 ("the Effective Time"), Luby's transferred its remaining assets (including its member interest in Luby's Fuddruckers Restaurants, LLC, which has been renamed RFL, LLC) and liabilities to the Trust pursuant to the Plan of Liquidation. The last day of trading for Luby's common stock, par value $0.32 per share, on the New York Stock Exchange was May 27, 2022.
At the Effective Time of the transfer, holders of Luby's common stock automatically received one unit in the Trust ("Unit") for each share of Luby's Common stock held by such holder. Units in the Trust are not and will not be listed on the New York Stock Exchange, or any other states.exchange, and generally are not transferable except by will, intestate succession or operation of law. Pursuant to the Liquidating Trust Agreement, on and after May 31, 2022, all Luby's outstanding shares are automatically deemed to be cancelled. In addition,anticipation of the transfer, the 500,000 shares of common stock Luby's held as Treasury Shares were cancelled.
The Company filed a Certificate of Dissolution with the Delaware Secretary of State, effective May 31, 2022.
The Trust will terminate upon the earlier of three years from the date of creation or the final distribution from the Trust of all Trust assets in compliance with the Delaware General Corporation Law, unless the Trustees determine that a longer period is needed to sell real estate or collect payment in full of any installment obligations owed by a purchaser of assets of the Company received royalties from 102 Fuddruckers franchises asor the Trust and to make any final distribution of August 28, 2019 located primarily throughout the United States. The Company’s owned and franchised restaurant locations are convenient to shopping and business developments, as well as, to residential areas. Accordingly, the restaurants appeal to a varietyany such proceeds.
Basis of customers at breakfast, lunch, and dinner. Culinary Contract Services consists of contract arrangements to manage food services for clients operating in primarily four lines of business: healthcare; senior living; business; and venues.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Luby’s, Inc.the Trust and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Going Concern
Accounting Periods
The Trust's fiscal year will be the twelve months beginning January 1 and ending December 31, which will be effective beginning June 1, 2022, for the period ending December 31, 2022.
Liquidation Basis of Accounting
The liquidation basis of accounting differs significantly from the going concern basis, as summarized below.
Under the liquidation basis of accounting, the consolidated balance sheet and consolidated statements of operations, equity and cash flows are no longer presented.
The liquidation basis of accounting requires a statement of net assets in liquidation, a statement of changes in net assets in liquidation and all disclosures necessary to present relevant information about our expected resources in liquidation. The liquidation basis of accounting may only be applied prospectively from the day liquidation becomes imminent and the initial statement of changes in net assets in liquidation may present only changes in net assets that occurred during the period since that date.
Under the liquidation basis of accounting, our assets are measured at their estimated net realizable value, or liquidation value, which represents the amount of their estimated cash proceeds or other consideration from liquidation, based on current contracts, estimates and other indications of sales value. In developing these estimates, we utilized third party valuation experts, investment bankers, real estate brokers, the expertise of our Trustees, and forecasts generated by our management. For estimated real estate values, we considered comparable sales transactions, our past experience selling real estate assets of the Company and, in certain instances, indicative offers, as well as capitalization rates observed for income-producing real estate. All estimates by nature involve a large degree of judgment and sensitivity to the underlying assumptions.
The liquidation basis of accounting requires us to accrue and present separately, without discounting, the estimated disposal and other costs, including any costs associated with the sale or settlement of our assets and liabilities and the estimated operating income or loss that we reasonably expect to incur, including providing for federal income taxes during the remaining expected duration of the liquidation period. In addition, deferred tax assets previously provided for under the going concern basis of accounting, which include net operating losses and other tax credits, may be realized partially or in full, subject to IRS limitations, to offset taxable income we expect to generate from the liquidation process.
Under the liquidation basis of accounting, we recognize liabilities as they would have been recognized under the going concern basis as adjusted for the timing assumptions related to the liquidation process and they will not be reduced to expected settlement values prior to settlement.
These estimates will be periodically reviewed and adjusted as appropriate. There can be no assurance that these estimated values will be realized. Such amounts should not be taken as an indication of the timing or the amount of future distributions or our actual dissolution.
The valuation of our assets and liabilities, as described above, represents estimates, based on present facts and circumstances, of the net realizable value of the assets and costs associated with carrying out the Plan. The actual values and costs associated with carrying out the Plan may differ from amounts reflected in the accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. We have assessed our ability to continue as a going concern asbecause of the balance sheet datePlan's inherent uncertainty. These differences may be material. In particular, these estimates will vary with the length of time necessary to complete the Plan.
Net assets in liquidation represents the estimated liquidation value to our unitholders upon liquidation. It is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to our unitholders and for at least oneno assurance can be given that the distributions will equal or exceed the estimate presented in these consolidated financial statements.
Subsequent Events
Events subsequent to the Company’s fiscal year beyondended December 31, 2022 through the issuance date of issuance of the financial statements are evaluated to determine if the nature and significance of the events warrant inclusion in the Company’s consolidated financial statements. Based on an evaluation of both quantitative and qualitative information, including available liquidity under our 2018 Credit Facility, related to known conditions and events in the aggregate, it is probable that we will be able to meet our obligations as they become due within one year after the date the consolidated financial statements are issued.
Accounting Periods
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically include three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year.
Reportable Segments
Each restaurant is an operating segment because operating results and cash flow can be determined for each restaurant. We aggregate our operating segments into reportable segments by restaurant brand due to the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, similarity of store level profit margins and the nature of the regulatory environment are alike. The Company has five reportable segments: Luby’s cafeterias, Fuddruckers restaurants, Cheeseburger in Paradise restaurant, Fuddruckers franchise operations, and Culinary Contract Services (“CCS”).
Prior to the fourth quarter of fiscal 2019 our internal organization and reporting structure supported three reportable segments; Company-owned restaurants, Franchise operations and Culinary Contract Services. The Company-owned restaurants consists of the three brands discussed above, which were aggregated into one reportable segment. In the fourth quarter of fiscal 2019 we re-evaluated and disaggregated the Company-owned restaurants into three reportable segments based on brand name. As such, as of the fourth quarter 2019, our five reportable segments are Luby’s cafeterias, Fuddruckers restaurants, Cheeseburger in Paradise restaurants, Fuddruckers franchise operations and Culinary Contract Services. Management believes this change better reflects the priorities and decision-making analysis around the allocation of our resources and better aligns to the economic characteristics within similar restaurant brands. We began reporting on the new structure in the fourth quarter of fiscal 2019 as reflected in this Annual Report on Form 10-K. The segment data for the comparable periods presented has been recast to conform to the current period presentation. Recasting this historical information did not have an impact on the consolidated financial performance of Luby’s Inc. for any of the periods presented.
See Note 10. Subsequent Events.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash and cash equivalents and restricted cash and cash equivalents include highly liquid investments such as money market funds that have a maturity of three months or less. The Company’sOur bank account balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. However, balances
Restricted cash and cash equivalents as of December 31, 2022 was $2.3 million. Amounts included in money market fund accounts are not insured. Amounts in transit fromrestricted cash at December 31, 2022 represent those required to be set aside for (1) collateral for letters of credit issued for potential insurance obligations, which letters of credit expire within 12 months and (2) prefunding of the credit limit under our corporate purchasing card program. We terminated our credit card companies are also consideredprogram in the fourth quarter of 2022 and the restrictions on the $0.5 million restricted cash equivalents because they are both short-term and highly liquidrelated to our credit card program were lifted in nature and are typically converted to cash within three days of the sales transaction.January 2023.
Trade Accounts and Other Receivables, netNotes Receivable
Receivables consist principallyUnder the liquidation basis of amounts due from franchises, culinary contract service clients, catering customersaccounting, trade, notes and restaurant food sales to corporations. Receivables are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical loss experience for CCS clients, catering customers and restaurant sales to corporations and, for CCSother receivables and franchise royalty and marketing and advertising receivables, the Company also considers the franchisees’ and CCS clients’ unsecured default status. The Company periodically reviews its allowance for doubtful accounts. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
Food and supply inventories are stated at the lower of cost (first-in, first-out) or net realizable value.
Property Held for Sale
The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of properties. If the Company decides to dispose of a property, it will be moved to property held for sale and actively marketed. Property held for sale is recorded at amounts not in excess of what management currently expects to receive upon sale, less costs of disposal. Depreciation on assets moved to property held for sale is discontinued and gains are not recognized until the properties are sold.
Impairment of Long-Lived Assets
Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company evaluates impairments on a restaurant-by-restaurant basis and uses cash flow results and other market conditions as indicators of impairment.
Debt Issuance Costs
Debt issuance costs include costs incurred in connection with the arrangement of long-term financing agreements. The debt issuance costs associated with our term loans are presented on the our consolidated balance sheet as a direct deduction from long-term debt. The debt issue costs associated with the our revolving credit facility are included in other assets on our consolidated balance sheet. These costs are amortized using the effective interest method over the respective term of the debt to which they specifically relate.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, trade accounts and other receivables, accounts payable and accrued expenses approximates fair value based on the short-term nature of these accounts. The carrying value of credit facility debt also approximates fair value based on its recent renewal.
Self-Insurance Accrued Expenses
The Company self-insures a significant portion of expected losses under its workers’ compensation, employee injury and general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred claims, both reported and not yet reported. These recorded estimated liabilities are based on judgments and independent actuarial estimates, which include the use of claim development factors based on loss history; economic conditions; the frequency or severity of claims and claim development patterns; and claim reserve management settlement practices.
Effective January 1, 2018, we maintain a self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits per 3rd party insurance carriers. We record expenses under the plan based on estimates of the costs of expected claims, administrative costs and stop-loss insurance premiums. Our self-insurance expense is accrued based upon the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided by our 3rd party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims expense may differ from estimated loss provisions based on historical experience.
Revenue Recognition
See Note 3. Revenue Recognition.
Cost of CCS
The cost of CCS includes all food, payroll and related expenses, other operating expenses, and selling, general and administrative expenses related to culinary contract service sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with CCS are reported within those respective lines as applicable.
Cost of Franchise Operations
The cost of franchise operations includes all food, payroll and related expenses, other operating expenses, and selling, general and administrative expenses related to franchise operations sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with franchise operations are reported within those respective lines as applicable.
Marketing and Advertising Expenses
Marketing and advertising costs are expensed as incurred. Total advertising expense included in other operating expenses and selling, general and administrative expense was $4.0 million and $4.1 million in fiscal 2019 and 2018, respectively. We record advertising attributable to local store marketing and local community involvement efforts in other operating expenses; we record advertising attributable to our brand identity, our promotional offers, and our other marketing messages intended to drive guest awareness of our brands, in selling, general, and administrative expenses. We believe this separation of our marketing and advertising costs assists with measurement of the profitability of individual restaurant locations by associating only the local store marketing efforts with the operations of each restaurant.
Marketing and advertising expense included in other operating expenses attributable to local store marketing was $0.1 million and $0.6 million in fiscal 2019 and 2018, respectively.
Marketing and advertising expense included in selling, general and administrative expense was $3.9 million and $3.5 million in fiscal 2019 and 2018, respectively.
Depreciation and Amortization
Property and equipment are recorded at cost. The Company depreciates the cost of equipment over its estimated useful life using the straight-line method. Leasehold improvements are amortized over the lesseramount of their estimated useful lives or the related lease terms. Depreciation of buildings is provided on a straight-line basis over the estimated useful lives.cash proceeds. See Note 5. Accounts and Notes Receivable.
Opening Costs
Opening costs are expenditures related to the opening of new restaurants through its opening periods, other than those for capital assets. Such costs are charged to expense when incurred.
Other Charges
Other charges includes those expenses that we consider related to our restructuring efforts or not part of our recurring operations.
In the first half of fiscal 2019, a shareholder of the company proposed alternative nominees to the Board of Directors and other possible changes to the corporate strategy resulting in a contested proxy at the Company's 2019 annual meeting. We incurred $1.7 million in proxy communication expense which was primarily for outside professional services and related costs in order to communicate with shareholders about management's strategy and the experience of the Company's members on the Board of Directors.
Also, in fiscal 2019, we engaged a professional consulting firm to evaluate initiatives to right-size corporate overhead costs and revenue enhancing measures. In addition, we engaged other outside consultants to evaluate various other components of our strategy. We also incurred cost of other outside professionals as we began efforts to transition portions of our accounting, payroll, operational reporting, and other back-office functions to a leading multi-unit restaurant outsourcing firm. We anticipate completing the transition in the first calendar quarter of 2020 and expect to realize additional cost savings and enhanced capabilities from this transition. Lastly, we incurred expenses related to certain information technology systems that will be replaced by the capabilities of the outsourcing firm. We incurred an expense of $1.3 million for these restructuring efforts.
In fiscal 2019, we separated with a number of employees as part of our efforts to streamline our corporate overhead costs and to support a reduced number of restaurants in operation. Employees who were separated from the company were paid severance based on the number of years of service and earnings with the organization, resulting in a $1.2 million charge.
Other charges, as defined above, were not significant in fiscal 2018.
Operating Leases
See Note 4. Leases.
The Company leases restaurant and administrative facilities, vehicles and administrative equipment under operating leases. Building lease agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for a percentage of sales in excess of specified levels. Contingent rental expenses are recognized prior to the achievement of a specified target, provided that the achievement of the target is considered probable. Most of the Company’s lease agreements include renewal periods at the Company’s option. The Company recognizes rent holiday periods and scheduled rent increases on a straight-line basis over the lease term beginning with the date the Company takes possession of the leased space.
Income Taxes
The estimated futureTrust is not subject to U.S. federal, state and local income tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carrybacks and carryforwards are recorded. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not a portion or alltaxes. Beneficiaries of the deferred tax asset will not be recognized. During fiscal 2018, management concluded to increaseTrust are individually liable for their valuation allowance to reduce fullyrespective share of the Company’s net deferred tax asset balances, net of deferred tax liabilities, including throughTrust’s taxable income. Accordingly, the fiscal year ended August 28, 2019.
ManagementTrust makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions as well as by the Internal Revenue Service (“IRS”). In management’s opinion, adequate provisions for income taxes have been made for all open tax years. The potential outcomes of examinations are regularly assessed in determining the adequacy of theno provision for income taxes in its financial statements. The Trust owns all the shares of RFL which is subject to U.S. federal, state and local income taxes as a corporation.
Under the liquidation basis of accounting, an estimate of future income tax liabilities. Management believes that adequate provisions have been madeliability for reasonably possible outcomes related to uncertain tax matters.
Discontinued Operations
We will report the disposal of a component or a group of components of the Company in discontinued operations if the disposal of the components or group of components represents a strategic shift that has or will have a major effect on the Company’s operations and financial results. Adoption of this standard did not have a material impact on our consolidated financial statements.
Share-Based Compensation
Share-based compensation expenseRFL is estimated for equity awards at fair value at the grant date. The Company determines fair value of restricted stock awardsprepared based on the averageprojected sale price of assets compared to the tax basis of the highassets. Additionally, the Company takes into consideration any existing net loss or capital loss carryforwards in determining the estimate for future tax liabilities. See Note 6. Income Taxes
COVID-19
The COVID-19 pandemic could continue to materially impact our cash flows and low price of its common stock on the date awarded by the Board of Directors. The Company determines the fair value of stock option awards using a Black-Scholes option pricing model. The Black-Scholes option pricing model requires various judgmental assumptions including the expected dividend yield, stock price volatility, and the expected life of the award. If any of the assumptions usednet assets in the model change significantly, share-based compensation expense may differ materially in the future, from that recorded in the current period. The fair value of performance share based award liabilities are estimated based on a Monte Carlo simulation model. For further discussion, see Note 16, “Share-Based Compensation,” below.
Earnings Per Share
Basic income per share is computed by dividing net income by the weighted-average number of shares outstanding, including restricted stock units, during each period presented. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, determined using the treasury stock method.
liquidation, while we monetize our remaining assets.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management iswe are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period.statements. Actual results could differ from these estimates.
Recently AdoptedRecent Accounting Pronouncements
We transitionedThere are no new accounting pronouncements that are applicable or relevant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, RevenueTrust under the Liquidation Basis of Accounting.
Note 2. Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation
The liquidation basis of accounting requires the estimation of net cash flows from Contractsoperations and all costs associated with Customers (“ASC 606”) from ASC Topic 605, Revenue Recognitionimplementing and ASC Topic 953-605, Franchisors - Revenue Recognition (together,completing the “Previous Standards”) on August 30, 2018. Our transitionPlan of Liquidation. We project that we will have estimated costs in excess of estimated receipts during the remaining liquidation period. These amounts can vary significantly due to, ASC 606 represents aamong other things, the timing of property sales, estimates of direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities, the receipts and costs associated with the winding up of operations, and other costs that we may incur which are not currently foreseeable. These receipts and accruals will be adjusted periodically as projections and assumptions change. These receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period. The liability for estimated costs in excess of estimated receipts during liquidation at December 31, 2022 and May 31, 2022, respectively, was comprised of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | May 31, 2022 |
| Total estimated receipts during remaining liquidation period | $ | 6,331 | | | $ | 8,560 | |
| Total estimated costs of operations | (310) | | | (438) | |
| Selling, general and administrative expenses | (8,306) | | | (8,503) | |
| | | |
| | | |
| Interest component of operating lease payments | (1,081) | | | (1,315) | |
| Capital expenditures | — | | | (5) | |
| Sales costs | (1,052) | | | (1,264) | |
| Total estimated costs during remaining liquidation period | (10,749) | | | (11,525) | |
| Liability for estimated costs in excess of estimated receipts during liquidation | $ | (4,418) | | | $ | (2,965) | |
The change in accounting principle. ASC 606 eliminates industry-specific guidancethe liability for estimated costs in excess of estimated receipts during liquidation between June 1, 2022 and provides a single model for recognizing revenueDecember 31, 2022 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31, 2022 | | Net Change in Working Capital (3) | | Changes in Estimated Future Cash Flows During Liquidation (4) | | December 31, 2022 |
| | | | | | | | |
| Assets: | | | | | | | | |
Estimated net inflows from operations (1) | | $ | 6,802 | | | $ | 321 | | | $ | (2,183) | | | $ | 4,940 | |
| | | | | | | | |
| | 6,802 | | | 321 | | | (2,183) | | | 4,940 | |
| Liabilities: | | | | | | | | |
| Sales costs | | (1,264) | | | 595 | | | (383) | | | (1,052) | |
Corporate expenditures (2) | | (8,503) | | | 2,499 | | | (2,302) | | | (8,306) | |
| | | | | | | | |
| | (9,767) | | | 3,094 | | | (2,685) | | | (9,358) | |
| | | | | | | | |
| Liability for estimated costs in excess of estimated receipts during liquidation | | $ | (2,965) | | | $ | 3,415 | | | $ | (4,868) | | | $ | (4,418) | |
(1) Estimated net inflows from contracts with customers. The core principleoperations consists of ASC 606 is that a reporting entity should recognize revenue to depicttotal estimated receipts during liquidation less the transfersum of promised goods and services to customers in an amount that reflects the consideration to which the reporting entity expects to be entitled for the exchange of those goods or services.
We adopted ASC 606 using the modified retrospective method applied to contracts that were not completed at August 29, 2018. Due to the short term nature of a significant portion of our contracts with customers, we have elected to apply the practical expedients under ASC 606 to: (1) not adjust the consideration for the effects of a significant financing component, (2) recognize incrementaltotal estimated (i) costs of obtaining a contract as expense when incurredoperations, (ii) interest component of operating lease payments and (3) not disclose the value(iii) capital expenditures.
(2) Corporate expenditures consists of our unsatisfied performance obligations for contracts with an original expected duration of one year or less.selling, general and administrative expenses.
The adoption of ASC 606 did not have an impact on the recognition of revenues from our primary source of revenue from our Company owned restaurants (except for recognition of breakage(3) Net change in working capital represents changes in cash, restricted cash, accounts receivable, accounts payable, and discounts on gift cards, as discussed below), revenues from our culinary contract services, vending revenue or ongoing franchise royalty fees, which are based on a percentage of franchisee sales. The adoption did impact the recognition of initial franchise fees and area development fees and gift card breakage.
The adoption of ASC 606 requires us to recognize initial and renewal franchise and development fees on a straight-line basis over the term of the franchise agreement, which is usually 20 years. Historically, we have recognized revenue from initial franchise and development fees upon the opening of a franchised restaurant when we have completed all our material obligations and initial services.
Additionally, ASC 606 requires gift card breakage to be recognized as revenue in proportion to the pattern of gift card redemptions exercised by our customers. Historically, we recorded breakage income within other (expense) income (and not within revenue) when it was deemed remote that the unused gift card balance will be redeemed.
Upon adoption of ASC 606 we changed our reporting of marketing and advertising fund (“MAF”) contributions from franchisees and the related marketing and advertising expenditures. Under the Previous Standards, we did not reflect MAF contributions from franchisees and MAF expenditures in our statements of operations. Although the gross amounts of our revenues and expenses are impacted by the recognition of franchisee MAF fund contributions and related expenditures of MAF funds we manage, increases to gross revenues and expenses did not result in a material net impact to our statement of operations.
Our consolidated financial statements reflect the application of ASC 606 beginning in fiscal year 2019, while our consolidated financial statements for prior periods were prepared under the guidance of the Previous Standards. The $2.5 million cumulative effect of our adoption of ASC 606 is reflected as an increase to our August 30, 2018 shareholders’ equity with a corresponding decrease to accrued expenses and other liabilities and was comprisedas a result of (1) a reduction to accrued expense and other liabilities of $3.1 million to adjust the unused gift card liability balance as if the gift card breakage guidance had been applied prior to August 30, 2018 and (2) an increase to accrued expense and other liabilities of $0.6 million to adjust the unearned franchise feesCompany's activities for the fees received through the end of fiscal year 2018 that would have been deferredrespective periods.
(4) Changes in estimated future cash flows during liquidation includes adjustments to previous estimates and recognized over the term of the franchise agreement if the new guidance had been applied prior to August 30, 2018.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. This update provides clarification regarding how certain cash receipts and disbursements are presented and classified in the statement of cash flows. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. We adopted ASU 2016-15 on August 30, 2018 using the retrospective method of adoption. The adoption of this standard did not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. This update addresses the diversity in practice on how to classify and present changes in restricted cash or restricted cash equivalentsestimated holding periods of our assets.
Note 3. Net Assets in the statement of cash flows. The update requires that a statement of cash flows explain the changeLiquidation
Current Fiscal Period Activity
Net assets in liquidation decreased by $1.6 million during the period from May 31, 2022 through December 31, 2022. The decrease was primarily due to a $4.9 million net decrease due to the remeasurement of assets and liabilities, partially offset by a $3.2 million net increase in restrictedthe estimated value of properties held for sale.
The $4.9 million net decrease generated by the remeasurement of assets and liabilities was mainly due to a $4.4 million decrease in projected future cash or restricted cash equivalentsflows from operations and corporate activity, primarily as a result of changes in estimated holding periods for our operating properties, as well as increases in actual and projected sales closing costs of $0.4 million. In addition, actual operating results fell short of projected operating results by $0.1 million.
The net increase in properties held for sale was due to changes in cashvalues attributable to properties that have been sold, or are under contract to sell with non-refundable deposits, at prices that were different than our previously estimated liquidation values.
The net assets in liquidation at December 31, 2022 would result in liquidating distributions of $1.91 per Unit in the Trust based on 31,298,052 outstanding Units on that date. This estimate is dependent on projections of costs and cash equivalents. Entities are alsoexpenses to be incurred during the period required to disclose information aboutcomplete the naturePlan and the realization of estimated net realizable value of our properties and accounts and notes receivable. There is inherent uncertainty with these estimates, and they could change materially based on the timing of the restrictionsremaining property sales, the performance of the underlying assets, and amounts described as restrictedchanges in the underlying assumptions of the projected cash and restricted cash equivalents. Also, when cash, cash equivalents, restricted cash and restricted cash equivalents areflows. No assurance can be given that the liquidating distributions will equal or exceed the estimate presented in morethese consolidated financial statements.
Lease Obligations
We continue to negotiate with our landlords to settle and terminate our existing leases; however, we can offer no assurances that we will settle any lease obligations for less than one line on the balance sheet, an entity must reconcile these amounts to the total shown onundiscounted base rent payments, or for less than their discounted value recorded within net assets in liquidation. See Note 4. Leases.
Note 4. Leases
Under the statementliquidation basis of cash flows. We adopted ASU 2016-18 effective August 30, 2018 usingaccounting, lease obligations are recorded at the retrospective methodpresent value of adoption. Our adoption of ASU 2016-18 represents a change in accounting principle. Our adoption had no effect on our consolidated statement of cash flows for the fiscal year ended August, 29, 2018. See Note 2 for the reconciliation and disclosures regarding the restrictions required by this update. The adoption of this standard did not have a material impact on our consolidated financial statements.
New Accounting Pronouncements - "to be Adopted"
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Subsequently, the FASB issued ASU 2018-01, 2018-10, 2018-11, 2018-20 and 2019-01, which were targeted improvements to ASU 2016-02 (collectively, with ASU 2016-02, “ASC 842”) and provided entities with an additional (and optional) transition method to adopt the new lease standard. ASC 842 requires a lessee to recognize a liability to maketotal fixed lease payments and a corresponding right-of-use asset onover the balance sheet, as well as provide additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. ASC 842 is effective for annual and interim periods beginning after December 15, 2018. ASC 842 may be adoptedreasonably certain lease term using the modified retrospective method, which requires application to all comparative periods presented (the “comparative method”) or alternatively,discount rates as of the effective date of initial application without restating comparative period financial statements (the “effective date method”).the lease and the obligation is reduced as we make lease payments. We will adopt ASC 842 invalue the first quarter of fiscal year 2020 using the effective date method. The ASC 842 also provides several practical expedients and policies that companies may elect under either transition method.
We are implementing a new lease tracking and accounting system in connection with the adoption of ASC 842. Based on a preliminary assessment, we expect that most of our operating lease commitments will be subject to the new standard and we will record operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on our consolidated balance sheet. Weat zero, since we do not expect to receive cash proceeds or other consideration for the adoption of ASC 42right-of-use assets.
The discount rate used to have a significant impact on our consolidated statements of operations or our consolidated statements of cash flows.We expect to elect the package of practical expedients which will allow us not to reassess previous accounting conclusions regarding lease identification and classification for existing or expired leases as of the date of adoption. We also expect to elect the short-term lease recognition exemption, which provides the option to not recognize right-of-use assets and related liabilities for leases with terms of 12 months or less.
Upon adoption, our lease liability will generally be based ondetermine the present value of the operating lease payments and the related right-of-use asset will generally bewas our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease liability, adjusted for amounts reclassified from other lease-related assetsterms, since we could not determine the interest rate implicit in the lease.
Weighted-average lease terms and liabilities,discount rates were as follows.
| | | | | | |
| December 31, 2022 | |
| Weighted-average remaining lease term | 4.80 years | |
| | |
| Weighted-average discount rate | 9.97% | |
Operating lease obligations maturities in accordance with Topic 842 as of December 31, 2022 were as follows: | | | | | | | | | | | |
| | (In thousands) | | | |
| Less than One Year | | $ | 1,029 | | | | |
| One to Three Years | | 1,508 | | | | |
| Three to Five Years | | 1,388 | | | | |
| Thereafter | | 926 | | | | |
| | | | | |
| | | | | |
| Total lease payments | | 4,851 | | | | |
| Less: imputed interest | | (1,081) | | | | |
| Present value of operating lease obligations | | $ | 3,770 | | | | |
Abandoned Leased Facilities - Liability for Store Closing
As of December 31, 2022, we classified four leased restaurants locations as abandoned. Although we remain obligated under the new guidance,terms of the leases for the rent and impairmentother costs that may be associated with the leases, we decided to cease operations and we have no foreseeable plans to occupy the spaces as an operating restaurant in the future. The total liability represents the present value of certain right-of-use assets recognizedthe total amount of rent and other direct costs (such as a chargecommon area costs, property taxes, and insurance allocated by the landlord) for the remaining lease term less the present value of any sublease income expected to retained earnings. We expect to recognize operating lease liabilities of approximately $32.0 millionbe collected. During the period beginning June 1, 2022 and corresponding right-of-use assets of approximately $27.0 million.ended December 31, 2022 we settled and terminated one abandoned lease.
The liability for our abandoned leases were as follows (in thousands).
| | | | | |
| December 31, 2022 |
| Included in Operating lease liabilities | $ | 486 | |
| Included in Accrued expenses and other liabilities | 588 | |
| Total | $ | 1,074 | |
Note 5. Accounts and Notes Receivable
In addition,connection with the sale of the Fuddruckers brand and franchise business in fiscal 2021 and the sale of the Luby's Cafeterias brand name and business in fiscal 2022, we received secured promissory notes (the "Notes") from the respective buyers of the brands. The Notes are carried at the aggregate amount we expect to record an initial adjustment to retained earnings to derecognizereceive upon monetization of the deferred gain from the sale / leaseback transactions using the cumulative effect transition method,Notes and we will no longer recognize the amortization of this gain to net gain on disposition of propertiesare included in accounts and notes receivable in our consolidated statements of operations startingnet assets in fiscal 2020. For any future sale / leaseback transactions, the gain (adjusted for any off-market items) will be recognized immediately in most cases. As of August 28, 2019, we had $2.0 million of deferred gain on sale / leaseback transactions recorded in other long-term liabilities in our consolidated balance sheet.liquidation.
The amounts of right-of-use-assets, lease liabilities and cumulative effect adjustment to retained earnings we ultimately recognized may differ from these estimates as we finalize the calculations upon adoption.
Subsequent Events
Events subsequent to the Company’s fiscal year ended August 28, 2019 through the date of issuance of the financial statements are evaluated to determine if the nature and significance of the events warrant inclusion in the Company’s consolidated financial statements.
Note 2. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
|
| | | | | | | |
| | August 28,
2019 | | August 29,
2018 |
| | (in thousands) |
| Cash and cash equivalents | $ | 3,640 |
| | $ | 3,722 |
|
| Restricted cash and cash equivalents | 9,116 |
| | — |
|
| Total cash and cash equivalents shown in the statement of cash flows | $ | 12,756 |
| | $ | 3,722 |
|
Amounts included in restricted cash represent amounts required to be set aside for (1) maximum amount of interest payable in the next 12 months under the 2018 Credit Agreement (see Note 12. Debt), (2) collateral for letters of credit issued for potential insurance obligations, which letters of credit expire in less than 12 months and (3) pre-funding of the credit limit under our corporate purchasing card program.
Note 3. Revenue Recognition
Restaurant Sales
Restaurant sales consist of sales of food and beverage products to restaurant guests at our Luby’s Cafeteria, Fuddruckers and Cheeseburger in Paradise restaurants. Revenue from restaurant sales is recognized at the point of sale and is presented net of discounts, coupons, employee meals and complimentary meals. Sales taxes that we collect and remit to the appropriate taxing authority related to these sales are excluded from revenue.
We sell gift cards to our customers in our venues and through certain third-party distributors. These gift cards do not expire and do not incur a service fee on unused balances. Sales of gift cards to our restaurant customers are initially recorded as a contract liability, included in accrued expenses and other liabilities, at their expected redemption value. When gift cards are redeemed, we recognize revenue and reduce the contract liability. Discounts on gift cards sold by third parties are recorded as a reduction to accrued expenses and other liabilities and are recognized, as a reduction to revenue, over a period that approximates redemption patterns. The portion of gift cards sold to customers that are never redeemed is commonly referred to as gift card breakage. Under ASC 606 we recognize gift card breakage revenue in proportion to the pattern of gift card redemptions exercised by our customers, using an estimated breakage rate based on our historical experience. Under the Previous Standards, we recognized gift card breakage income within other (expense) income (and not within revenue) when it was deemed remote that the unused gift card balance would be redeemed.
Culinary contract services revenue
Our Culinary Contract Services segment provides food, beverage and catering services to our clients at their locations. Depending on the type of client and service, we are either paid directly by our client and/or directly by the customer to whom we have been provided access by our client.
We typically use one of the following types of client contracts:
Fee-Based Contracts. Revenue from fee-based contracts is based on our costs incurred and invoiced to the client along with the agreed management fee, which may be calculated as a fixed dollar amount or a percentage of sales or other variable measure. Some fee-based contracts entitle us to receive incentive fees based upon our performance under the contract, as measured by factors such as sales, operating costs and client satisfaction surveys. This potential incentive revenue is allocated entirely to the management services performance obligation. We recognize revenue from our management fee and payroll cost reimbursement over time as the services are performed. We recognize revenue from our food and 3rd party purchases reimbursement at the point in time when the vendor delivers the goods or performs the services.
Profit and Loss Contracts. Revenue from profit and loss contracts consist primarily of sales made to consumers, typically with little or no subsidy charged to clients. Revenue is recognized at the point of sale to the consumer. Sales taxes that we collect and remit to the appropriate taxing authority related to these sales are excluded from revenue.
As part of client contracts, we sometimes make payments to clients, such as concession rentals, vending commissions and profit share. These payments are accounted for as operating costs when incurred.
Revenue from the sale of frozen foods includes royalty fees based on a percentage of frozen food sales and is recognized at the point in time when product is delivered by our contracted manufacturers to the retail outlet.
Franchise revenues
Franchise revenues consist primarily of royalties, marketing and advertising fund (“MAF”) contributions, initial and renewal franchise fees, and upfront fees from area development agreements related to our Fuddruckers restaurant brand. Our performance obligations under franchise agreements consist of: (1) a franchise license, including a license to use our brand and MAF management, (2) pre-opening services, such as training and inspections and (3) ongoing services, such as development of training materials and menu items as well as restaurant monitoring and inspections. These performance obligations are highly interrelated, so we do not consider them to be individually distinct. We account for them under ASC 606 as a single performance obligation, which is satisfied over time by providing a right to use our intellectual property over the term of each franchise agreement.
Royalties, including franchisee MAF contributions, are calculated as a percentage of franchise restaurant sales. MAF contributions paid by franchisees are used for the creation and development of brand advertising, marketing and public relations, merchandising research and related programs, activities and materials. The initial franchisee fee is payable upon execution of the franchise agreement and the renewal fee is due and payable at the expiration of the initial term of the franchise agreement. Our franchise agreement royalties, including advertising fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized as franchise sales occur.
Initial and renewal franchise fees and area development fees are recognized as revenue over the term of the respective agreement unless the franchise agreement is terminated early, in which case the remaining initial or renewal franchise fee is fully recognized in the period of termination. Area development fees are not distinct from franchise fees, so upfront fees paid by franchisees for exclusive development rights are deferred and apportioned to each franchise restaurant opened by the franchisee. The pro rata amount apportioned to each restaurant is accounted for as an initial franchise fee.
Under the Previous Standards, initial franchise fees and area development fees were recognized as revenue when the related restaurant commenced operations and we completed all material pre-opening services and conditions. Renewal franchise fees were recognized as revenue upon execution of a new franchise agreement. MAF contributions from franchisees and the related MAF expenditures were accounted for on a net basis in our consolidated balance sheets.
Revenue from vending machine sales is recorded at the point in time when the sale occurs.
Contract Liabilities
Contract liabilities consist of (1) deferred revenue resulting from initial and renewal franchise fees and upfront area development fees paid by franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement, (2) liability for unused gift cards and (3) unamortized discount on gift cards sold to 3rd party retailers. These contract liabilities are included in accrued expenses and other liabilities in our consolidated balance sheets. The following table reflects the change in contract liabilities between the date of adoption (August 30, 2018) and August 28, 2019:
|
| | | | | | | | |
| | | Gift Cards, net of discounts | | Franchise Fees |
| | | (In thousands) |
| Balance at August 30, 2018 | | $ | 2,707 |
| | $ | 1,891 |
|
| Revenue recognized that was included in the contract liability balance at the beginning of the year | | (1,308 | ) | | (564 | ) |
| Increase (decrease), net of amounts recognized as revenue during the period | | 1,481 |
| | (40 | ) |
| Balance at August 28, 2019 | | $ | 2,880 |
| | $ | 1,287 |
|
The following table illustrates the estimated revenues expected to be recognized in the future related to our deferred franchise fees that are unsatisfied (or partially unsatisfied) as of August 28, 2019 (in thousands):
|
| | | | |
| | | Franchise Fees |
| | (In thousands) |
| Fiscal 2020 | | $ | 37 |
|
| Fiscal 2021 | | 37 |
|
| Fiscal 2022 | | 37 |
|
| Fiscal 2023 | | 37 |
|
| Fiscal 2024 | | 37 |
|
| Thereafter | | 347 |
|
| Total operating franchise restaurants | | $ | 495 |
|
Franchise restaurants not yet opened(1) | | 755 |
|
| Total | | $ | 1,250 |
|
(1) Amortization of the deferred franchise fees will begin when the restaurant commences operations and revenue will be recognized straight-line over the franchise term (which is typically 20 years). If the franchise agreement is terminated, the deferred franchise fee will be recognized in full in the period of termination.
Disaggregation of Total Revenues
For the fiscal year ended August 28, 2019, total sales of $323.5 million was comprised of revenue from performance obligations satisfied over time of $23.0 million and revenue from performance obligations satisfied at a point in time of $300.5 million. See Note 4. Reportable Segments for disaggregation of revenue by reportable segment.
With the exception of the cumulative effect adjustment described in Note 1, the adoption of ASC 606 did not have a material effect on our consolidated financial statements for the fiscal year ended August 28, 2019.
Note 4. Reportable Segments
As more fully discussed at Note 1. Nature of Operations and Significant Accounting Policies, in the fourth quarter of fiscal 2019, the Company has reevaluated its reportable segments and has disaggregated its Company-owned restaurants into three reportable segments; Luby’s cafeterias, Fuddruckers restaurants and Cheeseburger in Paradise restaurants. We began reporting on the new structure in the fourth quarter of fiscal 2019. The segment data for the comparable periods presented has been recast to conform to the current period presentation. We have five reportable segments: Luby’s cafeterias, Fuddruckers restaurants, Cheeseburger in Paradise restaurants, Fuddruckers franchise operations, and Culinary contract services.
Company-owned restaurants
Company-owned restaurants consists of Luby’s Cafeterias, Fuddruckers and Cheeseburger in Paradise reportable segments. We consider each restaurant to be an operating segment because operating results and cash flow can be determined for each restaurant. We aggregate our operating segments into reportable segments by restaurant brand because the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, long-term store level profit margins, and the nature of the regulatory environment are similar. The chief operating decision maker analyzes store level profit which is defined as restaurant sales and vending revenue, less cost of food, payroll and related costs, other operating expenses and occupancy costs. All Company-owned Luby’s Cafeterias, Fuddruckers and Cheeseburger in Paradise restaurants are casual dining restaurants.
The Luby’s segment includes the results of our company-owned Luby’s Cafeterias restaurants. The total number of Luby’s restaurants at the end of fiscal 2019 and 2018 were 79 and 84, respectively.
The Fuddruckers segment includes the results of our company-owned Fuddruckers restaurants. The total number of Fuddruckers restaurants at the end of fiscal 2019 and 2018 were 44 and 60, respectively.
The Cheeseburger and Paradise segment includes the results of our Cheeseburger in Paradise restaurants. The total number of Cheeseburger in Paradise restaurants at the end of fiscal 2019 and 2018 were one and two, respectively.
Culinary Contract Services
CCS, branded as Luby’s Culinary Services, consists of a business line servicing healthcare, sport stadiums, corporate dining clients, and sales through retail grocery stores. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service, and retail dining. CCS had contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, retail grocery stores, behavioral hospitals, a senior living facility, sports stadiums, government, and business and industry clients. CCS has the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food services to our clients. The cost of culinary contract services on our consolidated statements of operations includes all food, payroll and related costs, other operating expenses, and other direct general and administrative expenses related to CCS sales. The total number of CCS contracts at the end of fiscal 2019 and 2018 were 31 and 28, respectively.
CCS began selling Luby's Famous Fried Fish, Macaroni & Cheese and Chicken Tetrazzini in February 2017, December 2016, and May, 2019, respectively, in the freezer section of H-E-B stores, a Texas-born retailer. H-E-B stores now stock the family-sized versions of Luby's Classic Macaroni and Cheese , Chicken Tetrazzini, and Luby's Fried Fish. HEB also stocks single serve versions of these three items as well as Jalapeno Macaroni and Cheese.
Fuddruckers Franchise Operations
We only offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Initial franchise agreements generally have a term of 20 years. Franchise agreements typically grant franchisees an exclusive territorial license to operate a single restaurant within a specified area.
Franchisees bear all direct costs involved in the development, construction, and operation of their restaurants. In exchange for a franchise fee, we provide franchise assistance in the following areas: site selection, prototypical architectural plans, interior and exterior design and layout, training, marketing and sales techniques, assistance by a Fuddruckers “opening team” at the time a franchised restaurant opens, and operations and accounting guidelines set forth in various policies and procedures manuals.
All franchisees are required to operate their restaurants in accordance with Fuddruckers standards and specifications, including controls over menu items, food quality, and preparation. The Company requires the successful completion of its training program by a minimum of three managers for each franchised restaurant. In addition, franchised restaurants are evaluated regularly by the Company for compliance with franchise agreements, including standards and specifications through the use of periodic, unannounced, on-site inspections and standards evaluation reports.
The number of franchised restaurants at the end of fiscal 2019 and 2018 were 102 and 105, respectively.
Segment Table
The table on the following page shows financial information as required by ASC 280 for segment reporting. ASC 280 requires depreciation and amortization be disclosed for each reportable segment, even if not used by the chief operating decision maker. The table also lists total assets for each reportable segment. Corporate assets include cash and cash equivalents, restricted cash, property and equipment, assets related to discontinued operations, property held for sale, deferred tax assets, and prepaid expenses.
|
| | | | | | | | |
| | Fiscal Year Ended |
| | August 28, 2019 | | August 29, 2018 | |
| | (In thousands) |
| Sales: | | | | |
| Luby's cafeterias | $ | 214,074 |
| | $ | 231,859 |
| |
Fuddruckers restaurants(1) | 67,710 |
| | 88,139 |
| |
| Cheeseburger in Paradise restaurants | 3,108 |
| | 13,051 |
| |
| Culinary contract services | 31,888 |
| | 25,782 |
| |
| Fuddruckers franchise operations | 6,690 |
| | 6,365 |
| |
| Total | $ | 323,470 |
| | $ | 365,196 |
| |
| Segment level profit: | | | | |
| Luby's cafeterias | $ | 25,423 |
| | $ | 29,050 |
| |
| Fuddruckers restaurants | 2,702 |
| | 3,873 |
| |
| Cheeseburger in Paradise restaurants | (240 | ) | | (1,275 | ) | |
| Culinary contract services | 3,334 |
| | 1,621 |
| |
| Fuddruckers franchise operations | 5,057 |
| | 4,837 |
| |
| Total | $ | 36,276 |
| | $ | 38,106 |
| |
| Depreciation and amortization: | | | | |
| Luby's cafeterias | $ | 8,886 |
| | $ | 10,455 |
| |
| Fuddruckers restaurants | 2,844 |
| | 3,900 |
| |
| Cheeseburger in Paradise restaurants | 117 |
| | 386 |
| |
| Culinary contract services | 82 |
| | 71 |
| |
| Fuddruckers franchise operations | 767 |
| | 769 |
| |
| Corporate | 1,302 |
| | 1,872 |
| |
| Total | $ | 13,998 |
| | $ | 17,453 |
| |
| Total assets: | | | | |
| Luby's cafeterias | $ | 107,287 |
| | $ | 113,259 |
| |
Fuddruckers restaurants (2) | 25,725 |
| | 36,345 |
| |
Cheeseburger in Paradise restaurants (3) | 829 |
| | 1,907 |
| |
| Culinary contract services | 6,703 |
| | 4,569 |
| |
Fuddrucker franchise operations (4) | 10,034 |
| | 10,982 |
| |
| Corporate | 35,422 |
| | 32,927 |
| |
| Total | $ | 186,000 |
| | $ | 199,989 |
| |
(1) Includes vending revenue of $379 thousand and $531 thousand for the years ended August 28, 2019 and August 29, 2018, respectively.
(2) Includes Fuddruckers trade name intangible of $7.5 million and $8.3 million at August 28, 2019 and August 29, 2018, respectively.
(3) Includes Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles of $46 thousand and $131 thousand at August 28, 2019 and August 29, 2018, respectively.
(4) Fuddruckers franchise operations segment includes royalty intangibles of $9.2 million and $9.9 million at August 28, 2019 and August 29, 2018, respectively.
|
| | | | | | | | |
| | Fiscal Year Ended |
| | August 28, 2019 | | August 29, 2018 | |
| | (In thousands) |
| Capital expenditures: | | | | |
| Luby's cafeterias | $ | 3,195 |
| | $ | 7,474 |
| |
| Fuddruckers restaurants | 513 |
| | 3,258 |
| |
| Cheeseburger in Paradise restaurants | 16 |
| | 377 |
| |
| Culinary contract services | — |
| | 235 |
| |
| Corporate | 263 |
| | 1,903 |
| |
| Total | $ | 3,987 |
| | $ | 13,247 |
| |
|
| | | | | | | | |
| | Fiscal Year Ended |
| | August 28, 2019 | | August 29, 2018 | |
| | (In thousands) |
| Loss before income taxes and discontinued operations: | | | | |
| Segment level profit | $ | 36,276 |
| | $ | 38,106 |
| |
| Opening costs | (56 | ) | | (554 | ) | |
| Depreciation and amortization | (13,998 | ) | | (17,453 | ) | |
| Selling, general and administrative expenses | (34,179 | ) | | (38,725 | ) | |
| Other charges | (4,270 | ) | | — |
| |
| Provision for asset impairments and restaurant closings | (5,603 | ) | | (8,917 | ) | |
| Net gain on disposition of property and equipment | 12,832 |
| | 5,357 |
| |
| Interest income | 30 |
| | 12 |
| |
| Interest expense | (5,977 | ) | | (3,348 | ) | |
| Other income, net | 195 |
| | 298 |
| |
| Total | $ | (14,750 | ) | | $ | (25,224 | ) | |
Note 5. Derivative Financial Instruments
The Company enters into derivative instruments, from time to time, to manage its exposure to changes in interest rates on a percentage of its long-term variable rate debt. On December 14, 2016, the Company entered into an interest rate swap, pay fixed- receive floating, with a constant notional amount of $17.5 million. The fixed rate we paid was 1.965% and the variable rate we receive is one-month LIBOR. The term of the interest rate swap was 5 years. The Company did not apply hedge accounting treatment to this derivative; therefore, changes in fair value of the instrument were recognized in other income (expense), net in our consolidated statements of operations. The changes in the interest rate swap fair value resulted in expense of $0.1 million and income of $0.7 million in fiscal 2019 and 2018, respectively. The Company terminated its interest rate swap in the quarter ended December 19, 2018 and received $0.3 million million in cash proceeds
The Company does not hold or use derivative instruments for trading purposes.
Note 6. Fair Value Measurement
GAAP establishes a framework for using fair value to measure assets and liabilities, and expands disclosure about fair value measurements. Fair value measurements guidance applies whenever other statements require or permit assets or liabilities to be measured at fair value.
GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These include:
Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.
Level 3: Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value.
Recurring fair value measurements related to assets are presented below:
|
| | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Using | | |
| | Fiscal Year Ended August 29, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs
(Level 3) | | Valuation Method |
| Recurring Fair Value - Assets | | | (In thousands) | | | | |
| Continuing Operations: | | | | | | | | | |
Derivative - Interest Rate Swap(1) | $ | 435 |
| | $ | — |
| | $ | 435 |
| | $ | — |
| | Discounted Cash Flow |
(1) The fair value of the interest rate swap is recorded in other assets on our consolidated balance sheet.
We terminated the interest rate swap in the first quarter of fiscal 2019 and received proceeds of $0.3 million.
Recurring fair value measurements related to liabilities are presented below:
|
| | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Using | | |
| | Fiscal Year Ended August 29, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs
(Level 3) | | Valuation Method |
| Recurring Fair Value - Liabilities | | | (In thousands) | | | | |
| Continuing Operations: | | | | | | | | | |
TSR Performance Based Incentive Plan(1) | $ | 21 |
| | $ | — |
| | $ | 21 |
| | $ | — |
| | Monte Carlo Approach |
(1) The fair value of the Company's 2017 Performance Based Incentive Plan liabilities was $21 thousand. See Note 16 to the our consolidated financial statements in this Form 10-K for further discussion of Performance Based Incentive Plan.
Non-recurring fair value measurements related to impaired property and equipment consist of the following: |
| | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Using | | |
| | Fiscal Year Ended August 28, 2019 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs
(Level 3) | | Total Impairments (4) |
| Nonrecurring Fair Value Measurements | (In thousands) | | |
| Continuing Operations: | | | | | | | | | |
Property and equipment related to Company-owned restaurants(1) | $ | 1,220 |
| | $ | — |
| | $ | — |
| | $ | 1,220 |
| | $ | (5,627 | ) |
Goodwill(2) | 514 |
| | — |
| | — |
| | $ | 514 |
| | $ | (41 | ) |
Property held for sale(3) | 8,030 |
| | — |
| | — |
| | 8,030 |
| | (124 | ) |
| Total Nonrecurring Fair Value Measurements | $ | 9,764 |
| | $ | — |
| | $ | — |
| | $ | 9,764 |
| | $ | (5,792 | ) |
(1) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of $7.2 million were written down to their fair value of $1.2 million, resulting in an impairment charge of $5.6 million.
(2) In accordance with Subtopic 350-20, goodwill with a carrying amount of $0.6 million was written down to its implied fair value of $0.5 million resulting in an impairment charge of $41 thousand See Note 9 and Note 13 to the our consolidated financial statements in this Form 10-K for further discussion of goodwill.
(3) In accordance with Subtopic 360-10, long-lived assets held for sale with carrying values of $8.2 million were written down to their fair value, less cost to sell, of $8.0 million, resulting in an impairment charge of $0.1 million. Proceeds on the sale of two property previously recorded in Property held for sale amounted to $19.6 million. See Note 13. Impairment of Long-Lived Assets, Discontinued Operations, Property Held for Sale and Store Closings.
(4) Total impairments are included in provision for asset impairments and restaurant closings in the our consolidated statement of operations.
|
| | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Using | | |
| | Fiscal Year Ended August 29, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Impairments(4) |
| Nonrecurring Fair Value Measurements | | | (In thousands) | | | | |
| Continuing Operations: | | | | | | | | | |
Property and equipment related to Company-owned restaurants(1) | $ | 1,519 |
| | $ | — |
| | $ | — |
| | $ | 1,519 |
| | $ | (4,052 | ) |
Goodwill(2) | — |
| | — |
| | — |
| | — |
| | (513 | ) |
Property held for sale(3) | 5,132 |
| | — |
| | — |
| | 5,132 |
| | (3,062 | ) |
| Total Nonrecurring Fair Value Measurements | $ | 6,651 |
| | $ | — |
| | $ | — |
| | $ | 6,651 |
| | $ | (7,627 | ) |
(1) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of $5.6 million were written down to their fair value of $1.5 million, resulting in an impairment charge of $4.1 million.
(2) In accordance with Subtopic 350-20, goodwill with a carrying amount of $513 thousand was written down to its implied fair value of zero, resulting in an impairment charge of $513 thousand. See Note 9 and Note 13 to the our consolidated financial statements in this Form 10-K for further discussion of goodwill.
(3) In accordance with Subtopic 360-10, long-lived assets held for sale with carrying values of $12.9 million were written down to their fair value, less costs to sell, of $5.1 million, resulting in an impairment charge of $3.1 million. Proceeds on the sale of six properties previously recorded in Property held for sale amounted to $4.7 million.
(4) Total impairments are included in Provision for asset impairments and restaurant closings in the or consolidated statement of operations.
Note 7. Trade Receivables and Other
Trade and other receivables, net, consist of the following: |
| | | | | | | |
| | August 28,
2019 | | August 29,
2018 |
| | (In thousands) |
| Trade and other receivables | $ | 6,326 |
| | $ | 6,697 |
|
| Franchise royalties and marketing and advertising receivables | 1,040 |
| | 764 |
|
| Unbilled revenue | 1,913 |
| | 1,557 |
|
| Allowance for doubtful accounts | (427 | ) | | (231 | ) |
| Total Trade accounts and other receivables, net | $ | 8,852 |
| | $ | 8,787 |
|
CCS receivable balance at August 28, 2019 was $4.7 million, primarily the result of 24 contracts with balances of $0.1 million to $1.5 million per contract entity. These 24 contracts collectively represented 49% of the Company’s total accounts receivables. Contract payment terms for its CCS customers’ receivables are due within 30 to 45 days. Unbilled revenue, was $1.9 million at August 28, 2019 and $1.6 million at August 29, 2018. CCS contracts are billed on a calendar month end basis and represent the total balance of unbilled revenue.
The Company recorded receivables related to Fuddruckers franchise operations royalty and marketing and advertising payments from the franchisees, as required by their franchise agreements. Franchise royalty and marketing and advertising fund receivables balance at August 28, 2019 was $1.0 million. At August 28, 2019, the Company had 102 operating franchise restaurants with no significant concentration of accounts receivable.
The change in allowances for doubtful accounts for each of the years in the three-year periods ended as of the dates below is as follows: |
| | | | | | | | |
| | Fiscal Year Ended |
| | August 28,
2019 | | August 29,
2018 | |
| | (In thousands) |
| Beginning balance | $ | 231 |
| | $ | 275 |
| |
| Provisions for doubtful accounts, net of reversals | 196 |
| | 464 |
| |
Write-offs(1) | — |
| | (508 | ) | |
| Ending balance | $ | 427 |
| | $ | 231 |
| |
(1) The $0.5 million Balance Sheet write-off in fiscal 2018 primarily resulted from uncollectable receivables at seven Culinary Contract Services accounts reserved in fiscal years 2015 through and including 2018.
Note 8. Income Taxes
The following table details the categories of total income tax assets and liabilities for both continuing and discontinued operations resulting from the cumulative tax effects of temporary differences:RFL:
|
| | | | | | | |
| | August 28,
2019 | | August 29,
2018 |
| | (In thousands) |
| Deferred income tax assets: | | | |
| Workers’ compensation, employee injury, and general liability claims | $ | 395 |
| | $ | 507 |
|
| Deferred compensation | 193 |
| | 280 |
|
| Net operating losses | 5,541 |
| | 4,401 |
|
| General business and foreign tax credits | 12,529 |
| | 12,105 |
|
| Depreciation, amortization and impairments | 8,561 |
| | 6,796 |
|
| Straight-line rent, dining cards, accruals, and other | 2,594 |
| | 2,917 |
|
| Subtotal | 29,813 |
| | 27,006 |
|
| Valuation allowance | (28,865 | ) | | (25,873 | ) |
| Total deferred income tax assets | 948 |
| | 1,133 |
|
| Deferred income tax liabilities: | | | |
| Property taxes and other | 948 |
| | 1,133 |
|
| Total deferred income tax liabilities | 948 |
| | 1,133 |
|
| Net deferred income tax asset | $ | — |
| | $ | — |
|
| | | | | |
| December 31,
2022 |
| (In thousands) |
| Deferred income tax assets: | |
| Workers’ compensation, employee injury, and general liability claims | $ | 219 | |
| |
| |
| General business and foreign tax credits | 10,823 | |
| Depreciation, amortization and impairments | 2,772 | |
| |
| Lease liabilities | 987 | |
| Straight-line rent, dining cards, accruals, and other | 395 | |
| Subtotal | 15,196 | |
| Valuation allowance | (14,541) | |
| Total deferred income tax assets | 655 | |
| Deferred income tax liabilities: | |
| Property taxes and other | 763 | |
| Lease assets | 588 | |
| Total deferred income tax liabilities | 1,351 | |
| Net deferred income tax liability | $ | (696) | |
At August 28, 2019, the Company considered the deferred tax assets not to be realizable and maintainsDecember 31, 2022, we recognized a full valuation allowance against the Company’s net deferred tax asset balance.liability of $0.7 million after valuation allowance as a result of anticipated taxable gains to be generated from future property sales as part of our Plan of Liquidation and our ability to utilize our deferred tax assets. The most significant deferred tax asset prior to valuation allowance is the Company’sour general business tax credits carryovers to future years of $12.5$10.8 million. This item may be carried forward up to twenty years for possible utilization in the future. The carryover of general business tax credits, beginning in fiscal 2002,2005, will begin to expire at the end of fiscal 20222025 through 2039, if not utilized by then. The utilization of general business credits is subject to limitations based on the federal income tax liability before applying the general business credits within a tax year. Deferred tax assets available to be utilized against state taxable gains generated on future property sales will differ per state jurisdiction. The net deferred tax liability is included in other liabilities on our consolidated statement of net assets in liquidation at December 31, 2022.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future, as well as from tax net operating losses and tax credit carryovers. We establish a valuation allowance when we no longer consider it more likely than not that a deferred tax asset will be realized. In evaluating our ability to recover our deferred tax assets, we consider available positive and negative evidence, including scheduled reversals of deferred tax liabilities, tax-planning strategies and existing business conditions, including amendment to our credit agreement(s) to avoid default and resultsthe Plan of recent operations.Liquidation. In the third quarter of fiscal 2018, managementwe concluded that a full valuation allowance on the Company'sour net deferred tax assets was necessary. As of August 28, 2019, the Company continues to maintainDecember 31, 2022, we recognized a full valuation allowance against the net deferred tax asset balance.
An analysisliability due to our expectation that we will be able to utilize our deferred tax assets as a result of the provision for income taxes for continuing operations is as follows:
|
| | | | | | | |
| | August 28,
2019 | | August 29,
2018 |
| | (In thousands) |
| Current federal and state income tax expense | $ | 418 |
| | $ | 405 |
|
| Current foreign income tax expense | 51 |
| | 71 |
|
| Deferred income tax expense | — |
| | 7,254 |
|
| Provision for income taxes | $ | 469 |
| | $ | 7,730 |
|
Relative only to continuing operations, the reconciliationimplementing our Plan of the expense for income taxes to the expected income tax expense, computed using the statutory tax rate, was as follows:
|
| | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | August 28,
2019 | | August 29,
2018 |
| | Amount | | % | | Amount | | % |
| | (In thousands and as a percent of pretax loss from continuing operations) |
| Income tax benefit from continuing operations at the federal rate | $ | (3,098 | ) | | 21.0 | % | | $ | (6,405 | ) | | 25.4 | % |
| Permanent and other differences: | | | | | | | |
| Federal jobs tax credits (wage deductions) | 89 |
| | (0.6 | ) | | 129 |
| | (0.5 | ) |
| Stock options and restricted stock | 19 |
| | (0.1 | ) | | 67 |
| | (0.3 | ) |
| Other permanent differences | 31 |
| | (0.2 | ) | | 41 |
| | (0.2 | ) |
| State income tax, net of federal benefit | 273 |
| | (1.9 | ) | | 145 |
| | (0.6 | ) |
| General Business Tax Credits | (422 | ) | | 2.9 |
| | (506 | ) | | 2.0 |
|
| Impact of U.S. Tax Reform | — |
| | — |
| | 3,167 |
| | (12.6 | ) |
| Other | 117 |
| | (0.8 | ) | | 487 |
| | (1.8 | ) |
| Change in valuation allowance | 3,460 |
| | (23.5 | ) | | 10,605 |
| | (42.0 | ) |
| Provision for income taxes from continuing operations | $ | 469 |
| | (3.2 | )% | | $ | 7,730 |
| | (30.6 | )% |
For the fiscal year ended August 28, 2019, including both continuing and discontinued operations, the Company is estimated to report a federal taxable loss of $5.1 million. For the fiscal year ended August 29, 2018, including both continuing and discontinued operations, the Company generated federal taxable loss of $14.2 million.
Liquidation.
Our income tax filings are periodically examined by various federal and state jurisdictions. There are no open examinations by federal and state income tax jurisdiction.jurisdictions. The Company's U.S. federal income tax return remains open to examination for fiscal 20162020 through fiscal 2018.period ended May 31, 2022.
There were no payments ofWe paid federal income taxes in fiscal 2019 or fiscal 2018.of $0.6 million during the period beginning June 1, 2022 and ended December 31, 2022. The Company has had income tax filing requirements in over 3015 states. State income tax payments were $0.5 million$10 thousand during the period beginning June 1, 2022 and $0.4 million in fiscal 2019 and 2018, respectively.
The following table is a reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of fiscal 2018 and 2019 (in thousands):
|
| | | |
| Balance as of August 30, 2017 | $ | 25 |
|
| Decrease based on prior year tax positions | — |
|
| Interest Expense | — |
|
| Balance as of August 29, 2018 | $ | 25 |
|
| Decrease based on prior year tax positions | — |
|
| Interest Expense | — |
|
| Balance as of August 28, 2019 | $ | 25 |
|
The unrecognized tax benefits would favorably affect the Company’s effective tax rate in future periods if they are recognized. There is no interest associated with unrecognized benefits as of August 28, 2019. The Company has included interest or penalties related to income tax matters as part of income tax expense.
It is reasonably possible that the amount of unrecognized tax benefits with respect to our uncertain tax positions could significantly increase or decrease within 12 months. However, based on the current status of examinations, it is not possible to estimate the future impact, if any, to recorded uncertain tax positions as of August 28, 2019.
ended December 31, 2022.
Management believes that adequate provisions for income taxes have been reflected in the financial statements and is not aware of any significant exposure items that have not been reflected in the financial statements. Amounts considered probable of settlement within one year have been included in the accrued expenses and other liabilities in the accompanying consolidated balance sheet.
Note 9. Property and Equipment, Intangible Assets and Goodwill
The cost, net of impairment, and accumulated depreciation of property and equipment at August 28, 2019 and August 29, 2018, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:
|
| | | | | | | | | | | | | |
| | August 28, 2019 | | August 29, 2018 | | Estimated Useful Lives (years) |
| | (In thousands) | | | | | | |
| Land | $ | 45,845 |
| | $ | 46,817 |
| | | | — | | |
| Restaurant equipment and furnishings | 67,015 |
| | 69,678 |
| | 3 | | to | | 15 |
| Buildings | 126,957 |
| | 131,557 |
| | 20 | | to | | 33 |
| Leasehold and leasehold improvements | 22,098 |
| | 27,172 |
| | | | Lesser of lease term or
estimated useful life | | |
| Office furniture and equipment | 3,364 |
| | 3,596 |
| | 3 | | to | | 10 |
| | 265,279 |
| | 278,820 |
| | | | | | |
| Less accumulated depreciation and amortization | (143,536 | ) | | (140,533 | ) | | | | | | |
| Property and equipment, net | $ | 121,743 |
| | $ | 138,287 |
| | | | | | |
| Intangible assets, net | $ | 16,781 |
| | $ | 18,179 |
| | 15 | | to | | 21 |
| Goodwill | $ | 514 |
| | $ | 555 |
| | | | | | |
Depreciation expense for the fiscal years 2019 and 2018, was $12.6 million and $16.1 million, respectively.
Intangible assets, net, consist primarily of the Fuddruckers trade name and franchise agreements and will be amortized. The Company believes the Fuddruckers brand name has an expected accounting life of 21 years from the date of acquisition based on the expected use of its assets and the restaurant environment in which it is being used. The trade name represents a respected brand with customer loyalty and the Company intends to cultivate and protect the use of the trade name. The franchise agreements, after considering renewal periods, have an estimated accounting life of 21 years from the date of acquisition, July 2010, and will be amortized over this period of time.
Intangible assets, net, also includes the license agreement and trade name related to Cheeseburger in Paradise and the value of the acquired licenses and permits allowing the sales of beverages with alcohol. These assets have an expected accounting life of 15 years from the date of acquisition December 2012.
The aggregate amortization expense related to intangible assets subject to amortization for fiscal 2019 and 2018 was $1.4 million and $1.4 million, respectively. The aggregate amortization expense related to intangible assets subject to amortization is expected to be $1.4 million in each of the next five successive years.
The following table presents intangible assets as of August 28, 2019 and August 29, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | August 28, 2019 | | August 29, 2018 |
| | (In thousands) | | (In thousands) |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Intangible Assets Subject to Amortization: | | | | | | | | | | | |
| Fuddruckers trade name and franchise agreements | $ | 29,486 |
| | $ | (12,752 | ) | | $ | 16,734 |
| | $ | 29,701 |
| | $ | (11,653 | ) | | $ | 18,048 |
|
| Cheeseburger in Paradise trade name and license agreements | $ | 146 |
| | $ | (99 | ) | | $ | 47 |
| | $ | 206 |
| | $ | (75 | ) | | $ | 131 |
|
| Intangible assets, net | $ | 29,632 |
| | $ | (12,851 | ) | | $ | 16,781 |
| | $ | 29,907 |
| | $ | (11,728 | ) | | $ | 18,179 |
|
Goodwill, net of accumulated impairments of $0.5 million and $1.6 million in fiscal 2019 and 2018, respectively, was $0.5 million as of August 28, 2019 and $0.6 million as of August 29, 2018. Goodwill has been allocated to and impairment is assessed at the reporting unit level, which is the individual restaurants within our Fuddruckers and Cheeseburger in Paradise restaurant segments that were acquired in fiscal 2010 and fiscal 2013, respectively. The net Goodwill balance at the end of fiscal 2019 is comprised of amounts assigned to the one Cheeseburger in Paradise restaurant that is still operated by us, two Cheeseburger in Paradise restaurants that were converted to Fuddruckers restaurants, and the goodwill from the Fuddruckers acquisition in 2010. The Company performs a goodwill impairment test annually as of the end of the second quarter of each year and more frequently when negative conditions or a triggering event arise. Management prepares valuations for each of its restaurants using a discounted cash flow analysis (Level 3 inputs) to determine the fair value of each reporting unit for comparison with the reporting unit’s carrying value in determining if there has been an impairment of goodwill at the reporting unit level.
The Company recorded goodwill impairment charges of $41 thousand and $513 thousand in fiscal 2019 and 2018, respectively.
Note 10.7. Current Accrued Expenses and Other Liabilities
The following table sets forth current accrued expenses and other liabilities as of August 28, 2019 and August 29, 2018: December 31, 2022.
|
| | | | | | | |
| | August 28,
2019 | | August 29,
2018 |
| | (In thousands) |
| Salaries, compensated absences, incentives, and bonuses | $ | 4,318 |
| | $ | 6,073 |
|
| Operating expenses | 925 |
| | 1,068 |
|
| Unredeemed gift and dining cards | 3,862 |
| | 7,213 |
|
| Taxes, other than income | 9,056 |
| | 9,247 |
|
| Accrued claims and insurance | 1,796 |
| | 2,958 |
|
Income taxes, legal and other(1) | 4,518 |
| | 5,195 |
|
| Total | $ | 24,475 |
| | $ | 31,754 |
|
| | | | | |
| December 31,
2022 |
| (In thousands) |
| Accrued claim and insurance | $ | 1,039 | |
| Taxes, other than income | 988 | |
| Income taxes, net | 696 | |
| Lease termination costs | 588 | |
| Legal and other | 426 | |
| |
| |
| Total | $ | 3,737 | |
(1) Income taxes, legal and other includes accrued lease termination costs. See Note 13 to our consolidated financial statements in this Form 10-K4. Leases for further discussion of lease termination costs.
Note 11. Other Long-Term Liabilities
The following table sets forth other long-term liabilities as of August 28, 2019 and August 29, 2018:
|
| | | | | | | |
| | August 28,
2019 | | August 29,
2018 |
| | (In thousands) |
| Workers’ compensation and general liability insurance reserve | $ | 736 |
| | $ | 1,002 |
|
| Capital leases | 73 |
| | 137 |
|
| Deferred rent and unfavorable leases | 3,710 |
| | 4,380 |
|
| Deferred compensation | 80 |
| | 106 |
|
| Deferred gain on sale / leaseback transactions | 1,969 |
| | — |
|
| Other | 9 |
| | 156 |
|
| Total | $ | 6,577 |
| | $ | 5,781 |
|
Note 12. Debt
The following table summarizes credit facility debt, less current portion at August 28, 2019 and August 29, 2018:
|
| | | | | | | |
| | | | |
| | August 28,
2019 | | August 29, 2018 |
| | (In thousands) |
| Long-Term Debt | | | |
| 2016 Credit Agreement - Term Loan | — |
| | $ | 19,506 |
|
| 2016 Credit Agreement - Revolver | — |
| | 20,000 |
|
| 2018 Credit Agreement - Revolver | 5,300 |
| | — |
|
| 2018 Credit Agreement - Term Loan | 43,399 |
| | — |
|
| Total credit facility debt | 48,699 |
| | 39,506 |
|
| Less: | | | |
| Unamortized debt issue costs | (1,887 | ) | | (168 | ) |
| Unamortized debt discount | (1,373 | ) | | — |
|
| Total credit facility debt, less unamortized discount and issuance costs | 45,439 |
| | 39,338 |
|
| Current portion of credit facility debt | — |
| | 39,338 |
|
| Total Credit facility debt, less current portion | $ | 45,439 |
| | $ | — |
|
2018 Credit Agreement
On December 13, 2018, the Company entered into a credit agreement (as amended by the First Amendment (as defined below), the “2018 Credit Agreement”) among the Company, the lenders from time to time party thereto, and a subsidiary of MSD Capital, MSD PCOF Partners VI, LLC (“MSD”), as Administrative Agent, pursuant to which the lenders party thereto agreed to make loans to the Company from time to time up to an aggregate principal amount of $80 million consisting of a $10 million revolving credit facility (the “2018 Revolver”), a $10 million delayed draw term loan (“2018 Delayed Draw Term Loan”), and a $60 million term loan (the “2018 Term Loan”, and together with the 2018 Revolver and the 2018 Delayed Draw Term Loan, the “2018 Credit Facility”). The 2018 Credit Facility terminates on, and all amounts owing thereunder must be repaid on, December 13, 2023.
On July 31, 2019, the Company entered into the First Amendment to the 2018 Credit Agreement (the “First Amendment”) to extend the 2018 Delayed Draw Term Loan expiration date for up to one year to the earlier to occur of (a) the date on which the commitments under the 2018 Delayed Draw Term Loan have been terminated or reduced to zero in accordance with the terms of the 2018 Credit Agreement and (b) September 13, 2020.
Borrowings under the 2018 Revolver, 2018 Delayed Draw Term Loan, and 2018 Term Loan will bear interest at the three-month LIBOR plus 7.75% per annum. Interest is payable quarterly and accrues daily. Under the terms of the 2018 Credit Agreement, the maximum amount of interest payable, based on the aggregate principal amount of $80 million and interest rates in effect at December 13, 2018, in the next 12 months was required to be pre-funded at the closing date of the 2018 Credit Agreement. The pre-funded amount at August 28, 2019 of $6.4 million is recorded in restricted cash and cash equivalents on our consolidated balance sheet and is not available for other purposes. LIBOR is set to terminate in December 2021. We expect that to agree to a replacement rate with MSD prior to the LIBOR termination.
The 2018 Credit Facility is subject to the following minimum amortization payments: 1st anniversary: $10 million; 2nd anniversary: $10 million; 3rd anniversary: $15 million; and 4th anniversary: $15 million.
The Company also pays a quarterly commitment fee based on the unused portion of the 2018 Revolver and the 2018 Delayed Draw Term Loan at 0.5% per annum. Voluntary prepayments, refinancing and asset dispositions constituting a sale of all or substantially all assets, under the 2018 Delayed Draw Term Loan and the 2018 Term Loan are subject to a make whole premium during years one and two equal to the present value of all interest otherwise owed from the date of the pre-payment through the end of year two, a 2.0% fee during year three, and a 1.0% fee during year four. Finally, the Company paid to the lenders a one-time fee of $1.6 million in connection with the closing of the 2018 Credit Facility.
Indebtedness under the 2018 Credit Facility is secured by a security interest in, among other things, all of the Company’s present and future personal property (other than certain excluded assets) and all Mortgaged Property (as defined in the 2018 Credit Agreement) of the Company and its subsidiaries. All amounts owing by the Company under the 2018 Credit Facility are guaranteed by the subsidiaries of the Company.
The 2018 Credit Facility contains customary covenants and restrictions on the Company’s ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and contains customary events of default. Specifically, among other things, the Company is required to maintain minimum Liquidity (as defined in the 2018 Credit Agreement) of $3.0 million as of the last day of each fiscal quarter and a minimum Asset Coverage Ratio (as defined in the 2018 Credit Agreement) of 2.50 to 1.00. As of August 28, 2019, the Company was in full compliance with all covenants with respect to the 2018 Credit Facility.
As of August 28, 2019, we had no amounts due within the next 12 months under the 2018 Credit Facility due to principal repayments in excess of the required minimum. As of August 28, 2019 we had $1.3 million committed under letters of credit, which is used as security for the payment of insurance obligations and are fully cash collateralized, and $0.1 million in other indebtedness.
At August 28, 2019, the Company had $4.7 million available to borrow under the 2018 Revolver and $10.0 million available to borrow under the 2018 Delayed Draw Term Loan.
As of November 26, 2019, the Company was in compliance with all covenants under the terms of the 2018 Credit Agreement.
2016 Credit Agreement (paid in full and terminated in December 2018)
On November 8, 2016, the Company entered into a $65.0 million Senior Secured Credit Facility with Wells Fargo Bank, National Association, as Administrative Agent and Cadence Bank, NA and Texas Capital Bank, NA, as lenders (“2016 Credit Agreement”). The 2016 Credit Agreement, prior to the amendments discussed below, was comprised of a $30.0 million 5 year Revolver (the “Revolver”) and a $35.0 million 5 year Term Loan (the “Term Loan”), and it also included sub-facilities for swingline loans and letters of credits. The original maturity date of the 2016 Credit Agreement was November 8, 2021.
Borrowings under the Revolver and Term Loan bore interest at (1) a base rate equal to the greater of (a) the federal funds effective rate plus one-half of 1% (the “Base Rate”), (b) prime and (c) LIBOR for an interest period of 1 month, plus, in any case, an applicable spread that ranges from 1.50% to 2.50% per annum the (“Applicable Margin”), or (2) the LIBOR, as adjusted for any Eurodollar reserve requirements, plus an applicable spread that ranges from 2.50% to 3.50% per annum. Borrowings under the swingline loan bore interest at the Base Rate plus the Applicable Margin. The applicable spread under each option was dependent upon certain measures of the Company’s financial performance at the time of election. Interest was payable quarterly, or in more frequent intervals if LIBOR applies.
The Company was obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based on the average daily unused amount of the commitment of such lender, ranged from 0.30% to 0.35% per annum depending upon the Company's financial performance.
The proceeds of the 2016 Credit Agreement were available for the Company to (i) pay in full all indebtedness outstanding under the 2013 Credit Agreement as of November 8, 2016, (ii) pay fees, commissions, and expenses in connection with our repayment of the 2013 Credit Agreement, initial extensions of credit under the 2016 Credit Agreement, and (iii) for working capital and general corporate purposes of the Company.
The 2016 Credit Agreement, as amended, contained the customary covenants and was secured by an all asset lien on all of the Company's real property and also included customary events of default. On December 13, 2018, the 2016 Credit Agreement was terminated with all outstanding amounts paid in full.
Interest Expense
Total interest expense incurred for fiscal 2019 and 2018 was $6.0 million and $3.3 million, respectively. No interest expense was allocated to discontinued operations in fiscal 2019 or 2018. No interest was capitalized on properties in fiscal 2019 or 2018.
Note 13. Impairment of Long-Lived Assets, Store Closings, Discontinued Operations and Property Held for Sale
Impairment of Long-Lived Assets and Store Closings
The Company periodically evaluates long-lived assets held for use and held for sale whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. The Company analyzes historical cash flows of operating locations and compares results of poorer performing locations to more profitable locations. The Company also analyzes lease terms, condition of the assets and related need for capital expenditures or repairs, as well as construction activity and the economic and market conditions in the surrounding area.
For assets held for use, the Company estimates future cash flows using assumptions based on possible outcomes of the areas analyzed. If the undiscounted future cash flows are less than the carrying value of the location’s assets, the Company records an impairment loss based on an estimate of discounted cash flows. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgments. Assumptions and estimates used include operating results, changes in working capital, discount rate, growth rate, anticipated net proceeds from disposition of the property and if applicable, lease terms. The span of time for which future cash flows are estimated is often lengthy, increasing the sensitivity to assumptions made. The time span is longer and could be 20 to 25 years for newer properties, but only 5 to 10 years for older properties. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. The Company considers the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows.
The Company recognized the following impairment charges and gains on asset disposals to income from operations: |
| | | | | | | | |
| | Fiscal Year Ended |
| | August 28, 2019 | | August 29, 2018 | |
| | (In thousands, except per share data) |
| Provision for asset impairments and restaurant closings | $ | 5,603 |
| | $ | 8,917 |
| |
| Net gain on disposition of property and equipment | (12,832 | ) | | (5,357 | ) | |
| | | | | |
| Total | $ | (7,229 | ) | | $ | 3,560 |
| |
| Effect on EPS: | | | | |
| Basic | $ | 0.24 |
| | $ | (0.12 | ) | |
| Assuming dilution | $ | 0.24 |
| | $ | (0.12 | ) | |
The approximate $5.6 million impairment charge in fiscal 2019 is primarily related to assets impaired at nine property locations, goodwill at one property locations, seven properties held for sale written down to their fair value, certain surplus equipment written down to fair value, and an impairment to a joint venture investment, partially offset by a net decrease in the reserve for restaurant closings of $0.2 million.
The $12.8 million net gain on disposition of property and equipment in fiscal 2019 is primarily related to the $13.2 million gain on the sale of two properties discussed below, partially offset by asset retirements at three locations.
During fiscal 2019, the Company sold and leased back two properties. The net sales price was $19.6 million. The properties sold had been included in the previously announced asset sales program. The sales included lease back periods of 36 and 60 months and average annual lease payments of $450 thousand and $295 thousand respectively. The Company recorded a total net gain on the two sales of $15.3 million of which $12.9 million was recognized at the time of the sale and the remainder will be recognized over the respective lease back periods. The deferred gain on the sale of the two properties is included in other liabilities on our consolidated balance sheet at August 28, 2019. Net proceeds from the sales were used in accordance with the 2018 Credit Agreement, to reduce the balance on its outstanding 2018 Term Loan (as defined above) and for general business purposes.
The $8.9 million impairment charge in fiscal 2018 is primarily related to assets impaired at twenty-one property locations, goodwill at three property location, ten properties held for sale written down to their fair value, and a reserve for fifteen restaurant closings of $1.3 million.
The $5.4 million net gain on disposition of property and equipment in fiscal 2018 is primarily related to the gain on the sale of ten properties of $4.9 million, $1.3 million of insurance proceeds received for property and equipment damaged by Hurricane Harvey, partially partially offset by asset retirements at eight locations.
Discontinued Operations
As a result of the first quarter fiscal 2010 adoption of the Company’s Cash Flow Improvement and Capital Redeployment Plan, the Company reclassified 24 Luby’s Cafeterias to discontinued operations. As of August 28, 2019, one location remains held for sale.
The following table sets forth the assets and liabilities for all discontinued operations:
|
| | | | | | | |
| | August 28,
2019 | | August 29,
2018 |
| | (In thousands) |
| Property and equipment | $ | 1,813 |
| | $ | 1,813 |
|
| Deferred tax assets | — |
| | — |
|
| Assets related to discontinued operations—non-current | $ | 1,813 |
| | $ | 1,813 |
|
| Deferred income taxes | $ | — |
| | $ | — |
|
| Accrued expenses and other liabilities | 14 |
| | 14 |
|
| Liabilities related to discontinued operations—current | $ | 14 |
| | $ | 14 |
|
| Other liabilities | $ | — |
| | $ | 16 |
|
| Liabilities related to discontinued operations—non-current | $ | — |
| | $ | 16 |
|
As of August 28, 2019, under both closure plans, the Company had one property classified as discontinued operations. The asset carrying value of the owned property was $1.8 million and is included in assets related to discontinued operations. The Company is actively marketing this property for sale.
The following table sets forth the sales and pretax losses reported for all discontinued locations in fiscal 2019 and fiscal 2018:
|
| | | | | | | | |
| | Fiscal Year Ended |
| | August 28,
2019 | | August 29,
2018 | |
| | (In thousands, except locations) |
| Sales | $ | — |
| | $ | — |
| |
| | | | | |
| Pretax loss | $ | (7 | ) | | $ | (80 | ) | |
| Income tax benefit on discontinued operations | $ | — |
| | $ | (534 | ) | |
| Loss on discontinued operations | $ | (7 | ) | | $ | (614 | ) | |
| Discontinued locations closed during the period | — |
| | — |
| |
The following table summarizes discontinued operations for fiscal 2019 and 2018:
|
| | | | | | | | |
| | Fiscal Year Ended |
| | August 28,
2019 | | August 29,
2018 | |
| | (In thousands, except per share data) |
| Discontinued operating losses | $ | (7 | ) | | $ | (21 | ) | |
| Impairments | — |
| | (59 | ) | |
| Gains | — |
| | — |
| |
| Net loss | $ | (7 | ) | | $ | (80 | ) | |
| Income tax benefit (expense) from discontinued operations | — |
| | (534 | ) | |
| Loss from discontinued operations, net of income taxes | $ | (7 | ) | | $ | (614 | ) | |
| Effect on EPS from discontinued operations—decrease—basic | $ | 0.00 |
| | $ | (0.02 | ) | |
Within discontinued operations, the Company offsets gains from applicable property disposals against total impairments. The amounts in the table described as “Other” include employment termination and shut-down costs, as well as operating losses through each restaurant’s closing date and carrying costs until the locations are finally disposed.
The impairment charges included above relate to properties closed and designated for immediate disposal. The assets of these individual operating units have been written down to their net realizable values. In turn, the related properties have either been sold or are being actively marketed for sale. All dispositions are expected to be completed within one to two years. Within discontinued operations, the Company also recorded the related fiscal year-to-date net operating results, employee terminations and basic carrying costs of the closed units.
Property Held for Sale
The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of properties. If the Company decides to dispose of a property, it will be reclassified to property held for sale and actively marketed. The Company analyzes market conditions each reporting period and records additional impairments due to declines in market values of like assets. The fair value of the property is determined by observable inputs such as appraisals and prices of comparable properties in active markets for assets like the Company’s. Gains are not recognized until the properties are sold.
Property held for sale includes unimproved land, closed restaurant properties and related equipment for locations not classified as discontinued operations. The specific assets are valued at the lower of net depreciable value or net realizable value. The Company actively markets all locations classified as property held for sale.
At August 28, 2019, the Company had 14 owned properties recorded at $16.5 million in property held for sale.
At August 29, 2018, the Company had 15 owned properties recorded at $19.5 million in property held for sale.
The pretax profit (loss) for the 14 held for sale locations was $0.3 million and $(1.0) million in fiscal 2019 and 2018, respectively.
The Company’s results of continuing operations will be affected to the extent proceeds from sales exceed or are less than net book value.
A roll forward of property held for sale for fiscal 2019, and 2018 is provided below (in thousands):
|
| | | |
| Balance as of August 30, 2017 | $ | 3,372 |
|
| Disposals | (7,916 | ) |
| Net transfers to property held for sale | 27,075 |
|
| Adjustment to fair value | (3,062 | ) |
| Balance as of August 29, 2018 | $ | 19,469 |
|
| Disposals | (6,036 | ) |
| Net transfers to property held for sale | 3,055 |
|
| Adjustment to fair value | — |
|
| Balance as of August 28, 2019 | $ | 16,488 |
|
Abandoned Leased Facilities - Reserve for Store Closing
As of August 28, 2019, the Company classified eleven leased locations in Arizona, Florida, Illinois, Maryland, Texas, and Virginia as abandoned. Although the Company remains obligated under the terms of the leases for the rent and other costs that may be associated with the leases, the Company has ceased operations and has no foreseeable plans to occupy the spaces as a company restaurant in the future. Therefore, the Company recorded a liability and a corresponding charge to earnings, in provision for asset impairments and restaurant closings, equal to the estimated total amount of rent and other direct costs for the remaining period of time the properties will be unoccupied plus the present value, calculated using a credit-adjusted risk free rate, of the estimated amount by which the rent paid by the Company to the landlord exceeds any rent paid to the Company by a tenant under a sublease over the remaining period of the lease terms. The liability is adjusted for changes in estimates and when a final settlement is reached with and paid to the lessor. For fiscal years 2019 and 2018 net charges (credits) to provision for assets impairments and store closings related to the abandoned lease facilities were $(0.2) million and $1.3 million, respectively. The accrued lease termination liability was $1.4 million and $2.0 million as of August 28, 2019 and August 29, 2018, respectively.
Note 14.8. Commitments and Contingencies
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements, except for operating leases for the Company’s corporate office, facility service warehouse, and certain restaurant properties.arrangements.
Claims
From time to time, the Company iswe are subject to various other private lawsuits, administrative proceedings and claims that arise in the ordinary course of itsour former business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to issues common to the restaurant industry. The Company currently believesindustry, as well as matters related to our real estate holdings, or the leases associated with such holdings. We believe that the final disposition of these types of lawsuits, proceedings, and claims will not have a material adverse effect on the Company’s financial position, resultscash flows and net assets under liquidation.
Note 9. Related Parties
Effective January 27, 2021, the Luby's Board of operations, or liquidity. It is possible, however, thatDirectors appointed John Garilli as the Company’s future resultsInterim President and Chief Executive Officer. Additionally, effective September 8, 2021, the Luby's Board of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relatingDirectors appointed Eric Montague as the Company’s Interim Chief Financial Officer. The Company and Mr. Garilli’s and Mr. Montague’s employer, Winthrop Capital Advisors LLC (“WCA”), entered into an agreement, pursuant to lawsuits, proceedings, or claims.
Construction Activity
From time to time,which the Company enters into non-cancelable contractspaid WCA a one-time fee of $50,000 and paid a monthly fee of $30,000 for the construction of its new restaurants or restaurant remodels. This construction activity exposesso long as Mr. Garilli and Mr. Montague served the Company to the risks inherent in this industry including but not limited to rising material prices, labor shortages, delays in getting required permits and inspections, adverse weather conditions, and injuries sustained by workers.said positions. The Company had no non-cancelable construction contracts ashas also entered into an Indemnity Agreement with Mr. Garilli and WCA. Mr. Garilli is also a member of August 28, 2019.
Cheeseburger in Paradise, Royalty Commitment
The license agreement and trade name relates tothe Trust's Board of Trustees, effective May 31, 2022. Mr. Garilli receives a perpetual license to use intangible assets including trademarks, service marks and publicity rights related to Cheeseburger in Paradise owned by Jimmy Buffett and affiliated entities. In return, the Company will pay a royalty fee of 2.5% of gross sales, less discounts, at the Company's operating Cheeseburger in Paradise locations to an entity owned or controlled by Jimmy Buffett. The trade name represents$20,000 per calendar quarter for his services as a respected brand with positive customer loyalty, and the Company intends to cultivate and protect the use of the trade name.
Note 15. Operating Leases
Trustee.
The Company conducts part of its operations from facilities that are leased under non-cancelable lease agreements. Lease agreements generally contain a primary term of five to 30 years with options to renew or extend the lease from one to 25 years. As of August 28, 2019, the Company has lease agreements for 71 properties which include the Company’s corporate office, facility service warehouse, two remote office spaces, and restaurant properties. The leasing terms of the 71 properties consist of 18 properties expiring in less than one year, 33 properties expiring between one and five years and the remaining 20 properties having current terms that are greater than five years. Of the 71 leased properties, 46 properties have options remaining to renew or extend the lease.
A majority of the leases include periodic escalation clauses. Accordingly, the Company follows the straight-line rent method of recognizing lease rental expense.
As of August 28, 2019, the Company hasWCA had previously entered into noncancelable operating lease agreements, for certain office equipment with terms ranging from 36 to 60 months.
Annual future minimum lease payments under noncancelable operating leases with terms in excess of one year as of August 28, 2019 are as follows:
|
| | | |
| Fiscal Year Ending: | (In thousands) |
| August 26, 2020 | $ | 8,841 |
|
| August 25, 2021 | 7,155 |
|
| August 31, 2022 | 5,643 |
|
| August 30, 2023 | 4,410 |
|
| August 28, 2024 | 3,768 |
|
| Thereafter | 10,312 |
|
| Total minimum lease payments | $ | 40,129 |
|
Most of the leases are for periods of five to 30 years and some leases provide for contingent rentals based on sales in excess of a base amount. As of August 28, 2019, aggregate future minimum rentals to be received under noncancelable subleases is $1.9 million.
Total rent expense for operating leases for fiscal 2019 and 2018 was as follows:
|
| | | | | | | | |
| | Year Ended |
| | August 28,
2019 | | August 29,
2018 | |
| | (In thousands, except percentages) |
| Minimum rent-facilities | $ | 9,218 |
| | $ | 10,584 |
| |
| Contingent rentals | 75 |
| | 77 |
| |
| Minimum rent-equipment | 761 |
| | 801 |
| |
| Total rent expense (including amounts in discontinued operations) | $ | 10,054 |
| | $ | 11,462 |
| |
The future minimum lease payment table and the total rent expense table above include amounts related to two leases with related parties, which are further described at Note 17. Related Parties.
Note 16. Share-Based Compensation
We have two active share-based stock plans, the Luby's Incentive Stock Plan, as amended and restated effective December 5, 2015 (the "Employee Stock Plan") and the Nonemployee Director Stock Plan. Both plans authorize the granting of stock options, restricted stock, and other types of awards consistent with the purpose of the plans.
Of the aggregate 2.1 million shares approved for issuance under the Nonemployee Director Stock Plan, (which amount includes shares authorized under the original plan and shares authorized pursuant to the amendedwhich WCA provides treasury and restated plan effective as of February 9, 2018), 1.6 million options, restricted stock units and restricted stock awards were granted, 0.1 million options expired or were canceled and added back into the plan, since the plans inception. Approximately 0.6 million shares remain availableaccounting services for future issuance as of August 28, 2019. Compensation cost for share-based payment arrangements under the Nonemployee Director Stock Plan, recognized in selling, general and administrative expenses for fiscal 2019 and 2018 was $0.6 million and $0.5 million, respectively.
Of the 4.1 million shares approved for issuance under the Employee Stock Plan (which amount includes shares authorized under the original plan and shares authorized pursuant to the amended and restated plan effective as of December 5, 2015), 7.3 million options and restricted stock units were granted, 4.3 million options and restricted stock units were canceled or expired and added back into the plan, since the plans inception in 2005. Approximately 1.1 million shares remain available for future issuance as of August 28, 2019. Compensation cost for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses for fiscal 2019 and 2018 was $0.3 million and $0.9 million, respectively.
Stock Options
Stock options granted under either the Employee Stock Plan or the Nonemployee Director Stock Plan have exercise prices equal to the market price of the Company’s common stock at the date of the grant. The market price under the Employee Stock Plan is the closing price at the date of the grant. The market price under the Nonemployee Director Plan is the average of the high and the low price on the date of the grant.
Option awards under the Nonemployee Director Stock Plan generally vest 100% on the first anniversary of the grant date and expire ten years from the grant date. No options were granted under the Nonemployee Director Stock Plan in fiscal 2019 or 2018, No options to purchase shares remain outstanding under this plan, as of August 28, 2019.
Options granted under the Employee Stock Plan generally vest 50% on the first anniversary of grant date, 25% on the second anniversary of the grant date and 25% on the third anniversary of the grant date, with all options expiring ten years from the grant date. All options granted in fiscal 2018, and 2017 were granted under the Employee Stock Plan. No options were granted in fiscal 2019. Options to purchase 1,387,412 shares at options prices from $2.82 to $5.95approximately $14,000 per share remain outstanding as of August 28, 2019.
The Company has segregated option awards into two homogeneous groups for the purpose of determining fair values for its options because of differences in option terms and historical exercise patterns among the plans. Valuation assumptions are determined separately for the two groups which represent, respectively, the Employee Stock Plan and the Nonemployee Director Stock Option Plan. The assumptions are as follows:
The Company estimated volatility using its historical share price performance over the expected life of the option. Management believes the historical estimated volatility is materially indicative of expectations about expected future volatility.
The Company uses an estimate of expected lives for options granted during the period based on historical data.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.
The expected dividend yield is based on the Company’s current dividend yield and the best estimate of projected dividend yield for future periods within the expected life of the option.
The fair value of each option award is estimated on the date of the grant using the Black-Scholes option pricing model which determine inputs as shown in the following table for options granted under the Employee Stock Plan: month.
|
| | | | | |
| FiscalYear Ended
|
| August 28,
2019 | | August 29,
2018 | |
| (In thousands, except percentages) |
Dividend yield | N/A | | 0 | % | |
Volatility | N/A | | 34.80 | % | |
Risk-free interest rate | N/A | | 2.19 | % | |
Expected life (in years) | N/A | | 5.87 |
| |
A summary of the Company’s stock option activity for fiscal 2019 and 2018 is presented in the following table:
|
| | | | | | | | | | | | | |
| | Shares
Under
Fixed
Options | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| | | | | | (Years) | | (In thousands) |
| Outstanding at August 30, 2017 | 1,345,916 |
| | $ | 4.76 |
| | 6.6 |
| | $ | 178 |
|
| Granted | 449,410 |
| | 2.82 |
| | — |
| | — |
|
| Cancelled | — |
| | 0.00 |
| | — |
| | — |
|
| Forfeited | (97,111 | ) | | 4.80 |
| | — |
| | — |
|
| Expired | (44,801 | ) | | 7.89 |
| | — |
| | — |
|
| Outstanding at August 29, 2018 | 1,653,414 |
| | $ | 4.10 |
| | 6.4 |
| | $ | — |
|
| Granted | — |
| | 0.00 |
| | — |
| | — |
|
| Forfeited | (178,700 | ) | | 3.68 |
| | — |
| | — |
|
| Expired | (87,302 | ) | | 5.54 |
| | — |
| | — |
|
| Outstanding at August 28, 2019 | 1,387,412 |
| | $ | 4.06 |
| | 5.7 |
| | $ | — |
|
| Exercisable at August 28, 2019 | 1,217,957 |
| | $ | 4.19 |
| | 5.4 |
| | $ | — |
|
The intrinsic value for stock options is defined as the difference between the market value at August 28, 2019 and the grant price.
At August 28, 2019, there was $0.1 million of total unrecognized compensation cost relatedWCA continues to unvested options that are expected to be recognized over a weighted-average period of 1.1 years.
The weighted-average grant-date fair value of options granted during fiscal 2018 at $1.05 per share. No options were granted in fiscal 2019. During fiscal 2018 and 2019, no options were exercised.
Restricted Stock Units
Grants of restricted stock units consist of the Company’s common stock and generally vest after three years. All restricted stock units are cliff-vested. Restricted stock units are valued at market price of the Company’s common stock at the date of grant. The market price under the Employee Stock Plan is the closing price at the date of the grant. The market price under the Nonemployee Director Plan is the average of the high and the low price on the date of the grant.
A summary of the Company’s restricted stock unit activity during fiscal years 2018 and 2019 and is presented in the following table:
|
| | | | | | | | | |
| | Restricted Stock Units | | Weighted Average Fair Value | | Weighted- Average Remaining Contractual Term |
| | | | (Per share) | | (In years) |
| Unvested at August 30, 2017 | 404,364 |
| | $ | 5.23 |
| | 1.9 |
|
| Granted | 244,748 |
| | 2.83 |
| | — |
|
| Vested | (99,495 | ) | | 4.42 |
| | — |
|
| Forfeited | (32,326 | ) | | 3.87 |
| | — |
|
| Unvested at August 29, 2018 | 517,291 |
| | $ | 3.79 |
| | 1.8 |
|
| Granted | 4,410 |
| | 1.15 |
| | — |
|
| Vested | (153,757 | ) | | 4.66 |
| | — |
|
| Forfeited | (93,935 | ) | | 3.41 |
| | — |
|
| Unvested at August 28, 2019 | 274,009 |
| | $ | 3.39 |
| | 1.2 |
|
At August 28, 2019, there was $0.2 million of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 1.2 years.
Performance Based Incentive Plan
For fiscal years 2015 - 2018, the Company approved a Total Shareholder Return ("TSR") Performance Based Incentive Plan (“Plan”). Each Plan’s award value varies from 0% to 200% of a base amount, as a result of the Company’s TSR performance in comparison to its peers over the respective measurement period. Each Plan’s vesting period is three years.
The Plans for fiscal years 2015 - 2017 provided for a right to receive an unspecified number of shares of common stock under the Employee Stock Plan based on the total shareholder return ranking compared to a selection of peer companies over the three-year vesting period, for each plan year. The number of shares at the end of the three-year period is determined as the award value divided by the closing stock price on the last day of each fiscal year, accordingly. Each three-year measurement period is designated a plan year name based on year one of the measurement period. Since the plans provide for an undeterminable number of awards, the plans are accounted for as liability based plans. The liability valuation estimate for each plan year has been determined based on a Monte Carlo simulation model. Based on this estimate, management accrues expense ratably over the three-year service periods. A valuation estimate of the future liability associated with each fiscal year's performance award plan is performed periodically with adjustments made to the outstanding liability at each reporting period to properly state the outstanding liability for all plan years in the aggregate as of the respective balance sheet date.
The 2015 TSR Performance Based Incentive Plan vested for each active participant on August 30, 2017 and a total of 187,883 shares were awarded under the Plan at 50% of the original target. The fair value of the 2015 plan's liability in the amount of $496 thousand was converted to equity and the number of shares awarded for the 2015 TSR Performance Based Incentive Plan was based on the Company's stock price at closing on the last day of fiscal 2017.
The fair value of the 2016 TSR Performance Based Incentive Plan was zero at the end of the three-year measurement period and at August 29, 2018 no shares vested due to the relative ranking of the Company's stock performance.
The fair value of the 2017 TSR Performance Based Incentive Plan was zero at the end of the three-year measurement period and at August 28, 2019 no shares vested due to the relative ranking of the Company's stock performance.
The 2018 TSR Performance Based Incentive Plan provides for a specified number of shares of common stock under the Employee Stock Plan based on the total shareholder return ranking compared to a selection of peer companies over a three-year cycle. The Fair Value of the 2018 Plan has been determined based on a Monte Carlo simulation model for the three-year period. The target number of shares for distribution at 100% of the plan is 373,294. The 2018 TSR Performance Based Incentive Plan is accounted for as an equity award since the Plan provides for a specified number of shares. The expense for this Plan year is amortized over the three-year period based on 100% target award.
Non-cash compensation expense related to the Company's TSR Performance Based Incentive Plans in fiscal 2019 and 2018 was a credit to expense of $0.3 million, and $15 thousand, respectively, and is recorded in selling, general and administrative expenses on our consolidated statement of operations.
A summary of the Company’s restricted stock Performance Based Incentive Plan activity during fiscal 2019 is presented in the following table:
|
| | | | | | |
| | Units | | Weighted Average Fair Value |
| | | | (Per share) |
| Unvested at August 30, 2017 | — |
| | — |
|
| Granted | 561,177 |
| | 3.33 |
|
| Vested | (187,883 | ) | | 2.64 |
|
| Forfeited | — |
| | — |
|
| Unvested at August 29, 2018 | 373,294 |
| | 3.68 |
|
| Granted | — |
| | — |
|
| Vested | — |
| | — |
|
| Forfeited | (106,851 | ) | | 3.68 |
|
| Unvested at August 28, 2019 | $ | 266,443 |
| | 3.68 |
|
At August 28, 2019, there was $0.4 million of total unrecognized compensation cost related to 2018 TSR Performance Based Incentive Plan that is expected to be recognized over a weighted-average period of 1.0 year.
Restricted Stock Awards
Under the Nonemployee Director Stock Plan, directors are granted restricted stock in lieu of cash payments, for all or a portion of their compensation as directors. Directors may receive a 20% premium of additional restricted stock by opting to receive stock over a minimum required amount of stock, in lieu of cash. The number of shares granted is valued at the average of the high and low price of the Company’s stock at the date of the grant. Restricted stock awards vest when granted because they are granted in lieu of a cash payment. However, directors are restricted from selling their shares until after the third anniversary of the date of the grant.
Supplemental Executive Retirement Plan
The Company has an unfunded Supplemental Executive Retirement Plan (“SERP”). In 2005, the Board of Directors voted to amend the SERP and suspend the further accrual of benefits and participation. The net benefit recognized for the SERP for the years ended August 28, 2019 and August 29, 2018 was zero, and the unfunded accrued liability included in “Other Liabilities” on the Company’s consolidated Balance Sheets as of August 28, 2019 and August 29, 2018 was $32 thousand and $39 thousand, respectively.
Nonemployee Director Phantom Stock Plan
The Company has a Nonemployee Director Phantom Stock Plan (“Phantom Stock Plan”). Authorized shares ( shares) under the Phantom Stock Plan were fully depleted in early fiscal 2003; since that time, no deferrals, incentives or dividends have been credited to phantom stock accounts. As participants cease to be directors, their phantom shares are converted into an equal number of shares of common stock and issued from the Company’s treasury stock. As of August 28, 2019, 17,801 phantom shares remained outstanding and unconverted under the Phantom Stock Plan.
401(k) Plan
The Company has a voluntary 401(k) employee savings plan to provide substantially all employees of the Company an opportunity to accumulate personal funds for their retirement. The Company matches 25% of participants’ contributions made to the plan up to 6% of their salary. The net expense recognized in connection with the employer match feature of the voluntary 401(k) employee savings plan for the fiscal years ended August 28, 2019 and August 29, 2018 was $279 thousand and $243 thousand, respectively.
Note 17. Related Parties
Affiliate Services
The Company’s Chief Executive Officer, Christopher J. Pappas, and Harris J. Pappas, a former Director of the Company, own two restaurant entities (the “Pappas entities”) that may, from time to time, provide services to the Company and its subsidiaries,Trust as detailed in the Amended and Restated Master Sales Agreement dated August 2, 2017 amongit did for the Company, andcurrently on the Pappas entities. Collectively, Messrs. Pappas and the Pappas entities own greater than 5% of the Company's common stock.
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities may provide specialized (customized) equipment fabrication and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. The Company incurred $19 thousand and $31 thousand under the Amended and Restated Master Sales Agreement for custom-fabricated and refurbished equipment in fiscal 2019 and 2018, respectively and incurred $2 thousand in other operating costs in fiscal 2018. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Company’s Board of Directors.
Operating Leases
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partnership interest and a 50% general partnership interest in the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented 7% of the space in that center since July 1969. No changes were made to the Company’s leasesame terms as a result ofnoted above. During the transfer of ownership of the center to the new partnership.
On November 22, 2006, the Company executed a new lease agreement with respect to this shopping center. Effective upon the Company’s relocation and occupancy into the new space in July 2008, the new lease agreement provides for a primary term of 12 years with two subsequent five-year options and gives the landlord an option to buy out the tenant on or after the calendar year 2015 by paying the then unamortized cost of improvements to the tenant. The Company pays rent of $22.00 per square foot plus maintenance, taxes, and insurance during the remaining primary term of the lease. Thereafter, the lease provides for increases in rent at set intervals. The new lease agreement was approved by the Finance and Audit Committee in 2006.
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement for one of the Company’s Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of six years with two subsequent five-year options. Pursuant to the new ground lease agreement, the Company pays rent of $28.53 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until Mayperiod June 1, 2022 through December 31, 2020. Thereafter, the new ground lease agreement provides for increases in rent at set intervals.
Affiliated rents2022, we paid WCA approximately $358,000 for the Houston property leases represented 2.9% and 3.1% of total rents for continuing operations for fiscal 2019 and 2018, respectively. Rent payments under the two lease agreements described above were $593 thousand and $628 thousand in fiscal 2019 and 2018, respectively.above-mentioned services.
Board of Directors
Christopher Pappas and Frank Markantonis, an attorney whose former principal client is Pappas Restaurants, Inc., are current members of our Board of Directors.
Key Management Personnel
The Company entered into a new employment agreement with Christopher Pappas on December 11, 2017. Under the employment agreement, the initial term of Mr. Pappas' employment ended on August 28, 2019 and automatically renews for additional one year periods, unless terminated in accordance with its terms. Mr. Pappas continues to devote his primary time and business efforts to the Company while maintaining his role at Pappas Restaurants, Inc. The Employment Agreement was unanimously approved by the Executive Compensation Committee (the “Committee”) of the Board as well as by the full Board. Effective August 1, 2018, the Company and Christopher J. Pappas agreed to reduce his fixed annual base salary to one dollar.
Peter Tropoli, a former director and officer of the Company, is an attorney and stepson of Frank Markantonis, who is a director of the Company. Mr. Tropoli resigned from the Company and is no longer our General Counsel and Corporate Secretary.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
Note 18. Common Stock10. Subsequent Events
At August 28, 2019, the Company had 500,000 sharesSubsequent to December 31, 2022, we sold three properties for cash consideration of common stock reserved for issuance upon the exercise of outstanding stock options.
Treasury Shares
In February 2008, the Company acquired 500,000 treasury shares for $4.8approximately $14.5 million.
Note 19. Earnings Per Share
A reconciliation of the numerators and denominators of basic earnings per share and earnings per share assuming dilution is shown in the table below:
|
| | | | | | | | |
| | Fiscal Year Ended |
| | August 28,
2019 | | August 29,
2018 | |
| | (In thousands, except per share data) |
| Numerator: | | | | |
| Loss from continuing operations | $ | (15,219 | ) | | $ | (32,954 | ) | |
| Net Loss | $ | (15,226 | ) | | $ | (33,568 | ) | |
| Denominator: | | | | |
| Denominator for basic earnings per share—weighted-average shares | 29,786 |
| | 29,901 |
| |
| Effect of potentially dilutive securities: | | | | |
| Employee and non-employee stock options | — |
| | — |
| |
| Denominator for earnings per share assuming dilution | 29,786 |
| | 29,901 |
| |
| Loss from continuing operations: | | | | |
| Basic | $ | (0.51 | ) | | $ | (1.10 | ) | |
Assuming dilution (a) | $ | (0.51 | ) | | $ | (1.10 | ) | |
| Net loss per share: | | | | |
| Basic | $ | (0.51 | ) | | $ | (1.12 | ) | |
Assuming dilution (a) | $ | (0.51 | ) | | $ | (1.12 | ) | |
(a) Potentially dilutive shares, not included in the computation of net income per share because to do so would have been anti-dilutive, totaled 63,000 shares in fiscal 2019 and no shares in fiscal 2018. Additionally, stock options with exercise prices exceeding market close prices that were excluded from the computation of net income per share amounted to 1,387,000 shares in fiscal 2019and 1,653,000 shares in fiscal 2018.
Note 20. Shareholder Rights Plan
On February 15, 2018, the Board of Directors adopted a rights plan with a 10% triggering threshold and declared a dividend distribution of one right initially representing the right to purchase one half of a share of Luby’s common stock, upon specified terms and conditions. The rights plan was effective immediately.
The Board adopted the rights plan in view of the concentrated ownership of Luby’s common stock as a means to ensure that all of Luby’s stockholders are treated equally. The rights plan is designed to limit the ability of any person or group to gain control of Luby’s without paying all of Luby’s stockholders a premium for that control. The rights plan was not adopted in response to any specific takeover bid or other plan or proposal to acquire control of Luby’s.
If a person or group acquires 10% or more of the outstanding shares of Luby’s common stock (including in the form of synthetic ownership through derivative positions), each right will entitle its holder (other than such person or members of such group) to purchase, for $12.00, a number of shares of Luby’s common stock having a then-current market value of twice such price. The rights plan exempts any person or group owning 10% or more (35.5% or more in the case of Harris J. Pappas, Christopher J. Pappas and their respective affiliates and associates) of Luby’s common stock immediately prior to the adoption of the rights plan. However, the rights will be exercisable if any such person or group acquires any additional shares of Luby’s common stock (including through derivative positions) other than as a result of equity grants made by Luby’s to its directors, officers or employees in their capacities as such.
Prior to the acquisition by a person or group of beneficial ownership of 10% or more of the outstanding shares of Luby’s common stock, the rights are redeemable for 1 cent per right at the option of Luby’s Board of Directors.
The dividend distribution was made on February 28, 2018 to stockholders of record on that date. Unless and until a triggering event occurs and the rights become exercisable, the rights will trade with shares of Luby’s common stock.
Luby’s financial condition, operations, and earnings per share was not affected by the adoption of the rights plan.
On February 11, 2019, the Board of Directors approved the first amendment to the shareholder rights plan extending the term of the plan to February 15, 2020.
Note 21. Quarterly Financial Information
The following tables summarize quarterly unaudited financial information for fiscal 2019 and 2018.
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | August 28,
2019 | | June 6,
2019 | | March 14,
2019 | | December 20,
2018 |
| | (84 days) | | (84 days) | | (84 days) | | (112 days) |
| | (In thousands, except per share data) |
| Restaurant sales | $ | 62,434 |
| | $ | 65,611 |
| | $ | 65,370 |
| | $ | 91,098 |
|
| Franchise revenue | 1,563 |
| | 1,482 |
| | 1,421 |
| | 2,224 |
|
| Culinary contract services | 7,278 |
| | 7,571 |
| | 7,543 |
| | 9,496 |
|
| Vending revenue | 88 |
| | 102 |
| | 90 |
| | 99 |
|
| Total sales | $ | 71,363 |
| | $ | 74,766 |
| | $ | 74,424 |
| | $ | 102,917 |
|
| Loss from continuing operations | (9,081 | ) | | (5,295 | ) | | 6,640 |
| | (7,483 | ) |
| Loss from discontinued operations | 12 |
| | (6 | ) | | (8 | ) | | (5 | ) |
| Net loss | $ | (9,069 | ) | | $ | (5,301 | ) | | $ | 6,632 |
| | $ | (7,488 | ) |
| Net loss per share: | | | | | | | |
| Basic | $ | (0.30 | ) | | $ | (0.18 | ) | | $ | 0.22 |
| | $ | (0.25 | ) |
| Assuming dilution | $ | (0.30 | ) | | $ | (0.18 | ) | | $ | 0.22 |
| | $ | (0.25 | ) |
Costs and Expenses (as a percentage of restaurant sales) | | | | | | |
| Cost of food | 28.5 | % | | 28.2 | % | | 27.8 | % | | 27.5 | % |
| Payroll and related costs | 38.8 | % | | 38.1 | % | | 37.8 | % | | 37.9 | % |
| Other operating expenses | 18.4 | % | | 17.5 | % | | 17.5 | % | | 18.1 | % |
| Occupancy costs | 6.5 | % | | 6.1 | % | | 6.4 | % | | 6.4 | % |
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | August 29, 2018 | | June 6,
2018 | | March 14,
2018 | | December 20,
2017 |
| | (91 days) | | (84 days) | | (84 days) | | (112 days) |
| | (In thousands, except per share data) |
| Restaurant sales | $ | 75,782 |
| | $ | 77,803 |
| | $ | 74,351 |
| | $ | 104,582 |
|
| Franchise revenue | 1,633 |
| | 1,444 |
| | 1,401 |
| | 1,887 |
|
| Culinary contract services | 6,369 |
| | 6,639 |
| | 5,889 |
| | 6,885 |
|
| Vending revenue | 119 |
| | 118 |
| | 151 |
| | 143 |
|
| Total sales | $ | 83,903 |
| | $ | 86,004 |
| | 81,792 |
| | $ | 113,497 |
|
| Loss from continuing operations | (1,858 | ) | | (14,133 | ) | | (11,461 | ) | | (5,502 | ) |
| Loss from discontinued operations | (6 | ) | | (463 | ) | | (110 | ) | | (35 | ) |
| Net loss | $ | (1,864 | ) | | $ | (14,596 | ) | | $ | (11,571 | ) | | $ | (5,537 | ) |
| Net loss per share: | | | | | | | |
| Basic | $ | (0.06 | ) | | $ | (0.48 | ) | | $ | (0.39 | ) | | $ | (0.19 | ) |
| Assuming dilution | $ | (0.06 | ) | | $ | (0.48 | ) | | $ | (0.39 | ) | | $ | (0.19 | ) |
Costs and Expenses (as a percentage of restaurant sales) | | | | | | |
| Cost of food | 27.8 | % | | 28.6 | % | | 28.5 | % | | 28.5 | % |
| Payroll and related costs | 37.5 | % | | 37.8 | % | | 38.3 | % | | 36.5 | % |
| Other operating expenses | 17.7 | % | | 19.3 | % | | 19.3 | % | | 18.6 | % |
| Occupancy costs | 6.4 | % | | 5.9 | % | | 6.3 | % | | 6.0 | % |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
We have had no disagreements with our accountants on any accounting or financial disclosures.
Item 9A. Controls and Procedures
Evaluation of Disclosure Control and Procedures
Our management,An evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluatedmanagement, including our Trustees, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e)13a-15€(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of August 28, 2019.December 31, 2022. Based on that evaluation, our Chief Executive Officer and Chief Financial OfficerTrustees have concluded that, as of August 28, 2019,December 31, 2022, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
ManagementThe Liquidating Trust’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of ourOur management, including our Chief Executive Officer and Chief Financial Officer, weTrustees, have evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework-2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, we concluded that our internal control over financial reporting was effective as of August 28, 2019.
December 31, 2022.
Changes in Internal Control over Financial Reporting
Except as noted above,During the period ended December 31, 2022, there werewas no changeschange in our internal control over financial reporting during(as defined in Rule 13a-15(f) and 15d-15(f) of the quarter ended August 28, 2019Exchange Act) that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
There is incorporatedThe Trust does not have directors or executive officers. All management and executive authority over the Trust resides with the Trustees. References to our Trustees in this Item 10 by reference that portion ofreport mean our definitive proxy statementTrustees for the 2020 annual meetingperiods after May 31, 2022 and references to our directors and the Board mean the directors and the board of shareholders appearing therein underdirectors of the captions “ElectionCompany for the period prior to May 31, 2022. As of Directors,” “Corporatethe date of this report, our Trustees, their ages, their year first elected, their business experience and principal occupation, their directorships in public corporations and investment companies are as follows:
TRUSTEES
GERALD W. BODZY, 71, has served as a Trustee since inception of the Trust on May 31, 2022. Mr. Bodzy previously served as an independent director of the Company from 2016 until the inception of the Trust and served as Chairman of the Board, a member of Nominating and Corporate Governance” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Officers,” Committee, Co-Chair of the Board Special Committee, a member of the Finance and “Certain RelationshipsAudit Committee, and Related Transactions.”
We havea member of the Compensation Committee. Mr. Bodzy was President and owner of Showcase Custom Vinyl Windows and Doors, a manufacturer of residential windows in placeHouston, Texas from 2004 until he retired in November 2020. From 1990 to 2000, Mr. Bodzy was a Policy GuideManaging Director of Stephens, Inc. where he headed the investment banking firm’s Houston office. From 1979 to 1990, he was employed by Smith Barney, Inc. in New York where he was a Managing Director from 1986 to 1990. From 1976 to 1990, he worked in the real estate group at General Crude Oil Company in Houston. Mr. Bodzy is a former director of Oshman’s Sporting Goods, Benchmark Electronics, and Republic Bankshares of Texas. Mr. Bodzy earned a B.A. Degree in Economics from the University of Texas in 1973 and a J.D. Degree from the University of Texas School of Law in 1976 and is a member of Phi Beta Kappa. Mr. Bodzy serves on Standardsthe board of Conductdirectors of the Boys & Girls Clubs of Greater Houston and Ethics applicable to all employees, as well asis Chairman of the Board of Directors,the Boys & Girls Clubs of Greater Houston Foundation.
JOHN GARILLI, 58, has served as a Trustee since inception of the Trust on May 31, 2022. Mr. Garilli previously served as the Company’s Interim President and Supplemental StandardsChief Executive Officer from January 2021 until the inception of Conductthe Trust on May 31, 2022. Mr. Garilli has been a member of Winthrop Capital Advisors LLC (“WCA”) and Ethics forits affiliates since 1995 serving in various capacities, previously in its accounting department, and is currently serving as its President and Chief Operating Officer. Mr. Garilli has served as the Interim Chief Financial Officer of Seritage Growth Properties, a NYSE-listed real estate company, since January 2022. Mr. Garilli has served as Chief Executive Officer, President, Chief Financial Officer, Treasurer, and Secretary of New York REIT Liquidating LLC (“NYRTLLC”) since November 2018. Mr. Garilli served as the Chief Executive Officer of New York REIT, Inc. (“NYRT”), a NYSE-listed real estate investment trust and the predecessor to NYRTLLC, from July 2018 until November 2018 and as the Chief Financial Officer, Vice PresidentSecretary, and Treasurer of NYRT from March 2017 until November 2018. Mr. Garilli served as Chief Accounting Officer of Winthrop Realty Trust (“WRT”), a NYSE-listed real estate investment trust, from 2006 until his appointment to Chief Financial Officer in 2012, a position held until its liquidation in August 2016. Mr. Garilli worked in a similar capacity at WRT’s successor, Winthrop Realty Liquidating Trust, from August 2016 until its final liquidation in December 2019. Mr. Garilli holds an MBA from Babson College and all senior financial officers. This Policy Guidea BA from the College of the Holy Cross.
JOE C. McKINNEY, 76, has served as a Trustee since inception of the Trust on May 31, 2022. Mr. McKinney previously served as an independent director of the Company from January 2003 until inception of the Trust on May 31, 2022 and served as chair of the Finance and Audit Committee, a member of the Nominating and Corporate Governance Committee, a member of the Compensation Committee, and a co-Chair of the Special Committee. Mr. McKinney was Vice-Chairman of Broadway National Bank, a locally owned and operated San Antonio-based bank, from October 2002 until his retirement in March 2020. He formerly served as Chairman of the board of directors and Chief Executive Officer of JPMorgan Chase Bank-San Antonio from November 1987 until his retirement there in March 2002. Mr. McKinney graduated from Harvard University in 1969 with a Bachelor of Arts in Economics, and he graduated from the Wharton School of the University of Pennsylvania in 1973 with a Master of Business Administration in Finance. He is a former director of Broadway National Bank, Broadway Bancshares, Inc., New York REIT Liquidating LLC, a successor to New York REIT, Inc., a publicly traded real estate investment trust, USAA Real Estate Company; US Industrial REIT I, II, and III; US Global Investors Funds; and Prodigy Communications Corporation.
CORPORATE GOVERNANCE
Audit Committee
Due to the limited operations and level of activity, which primarily includes the sale of our remaining assets and the Supplemental Standards were filedpayment of outstanding obligations, we do not have an audit committee or other committee that performs similar functions and, consequently, have not designated an audit committee financial expert. Nonetheless, we believe that each of Gerald Bodzy, Joe C. McKinney and John Garilli satisfies the definition of an audit committee financial expert set forth in Item 407(d) of Regulation S-K.
Process for Recommending Trustee Nominees
The Trust is not required to, and does not have, a formal nominating and corporate governance committee and, as exhibitsa result, has not established a nominating and corporate governance committee. The Liquidating Trust Agreement provides that there shall initially be three trustees of the Trust and that a majority of Trustees or holders of Units holding a majority of the Units (a “Majority-in-Interest”) may change the number of Trustees. Any Trustee may resign at any time by giving written notice to the Annual Report on Form 10-K forremaining Trustees, and such resignation shall be effective upon the fiscal year ended August 26, 2003 and candate provided in such notice. Any Trustee may be found on our website at www.lubys.com. We intend to satisfyremoved, with or without cause, by a Majority-in-Interest or a majority of remaining Trustees. The Trustees may not remove a Trustee selected by a Majority-in-Interest, nor may the disclosure requirement under Item 5.05Trustees re-appoint any Trustee removed by a Majority-in-Interest. If a Trustee resigns or is removed, a majority of Form 8-K regarding amendments toremaining Trustee(s) or, waivers from theif there is none, a Majority-in-Interest, may appoint a successor or successors.
Code of Ethics
The Trust has not adopted a code of ethics, or supplementary code of ethics by posting such information onnor do we currently intend to due to the fact that our website at www.lubys.com.Trustees manage our business and affairs subject to fiduciary duties. Our Trustees intend to promote honest and ethical conduct, including full and fair disclosure in our reports to the SEC and compliance with applicable governmental laws and regulations.
Item 11. Executive Compensation
Compensation Matters Beginning May 31, 2022
There is incorporated in this Item 11Since the formation of the Trust on May 31, 2022, we have had no executive officers or employees performing policy making functions. The Trustees perform our day-to-day management and are entitled to receive compensation for their services as Trustees. Pursuant to the Liquidating Trust Agreement, the Chairman selected by reference that portiona majority of our definitive proxy statementthe Trustees receives $25,000 per fiscal quarter and the remaining Trustees receive $20,000 per fiscal quarter for their services. In addition, the 2020 annual meeting of shareholders appearing therein underTrustees will be reimbursed by the captions “Compensation DiscussionTrust for their reasonable expenses and Analysis—Executive Compensation,” “—Executive Compensation Committee Report,” “—Compensation Tables and Information,” “—Director Compensation,” and “Corporate Governance—Executive Compensation Committee—Compensation Committee Interlocks.”disbursements incidental to Trustee duties. We do not currently intend to hire or compensate any executive officers or other employees.
TRUSTEE COMPENSATION FOR THE PERIOD BEGINNING JUNE 1, 2022 AND ENDING DECEMBER 31, 2022
| | | | | |
| Name | Fees Earned or
Paid in Cash
($) |
| Gerald W. Bodzy | $ | 58,333 | |
| John Garilli | $ | 46,667 | |
| Joe C. McKinney | $ | 46,667 | |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
There is incorporatedno public market for the units of beneficial interest in this Item 12the Trust (the "Units"). On May 31, 2022, the Company filed its certificate of dissolution with the Secretary of State of Delaware, which became effective on that date, and transferred its remaining assets and liabilities to the Trust. Upon the transfer of the assets and liabilities to the Trust, the Company's stock records were closed, all outstanding shares of the Company's common stock were cancelled, and each stockholder of the Company automatically became the holder of one Unit for each one share of common stock of the Company then currently held of record by reference that portionsuch stockholder. The Units are not and will not be listed on any exchange or quoted on any quotation system. The Units generally are not transferable or assignable, except by will, intestate succession, or operation of law.
The following table sets forth information as to the beneficial ownership of Units by (i) each of our definitive proxy statement forTrustees and (ii) all our Trustees as group as of March 28, 2023.
| | | | | | | | | | | | | | |
Name (1) | | Units Beneficially Owned | | Percent of
Units |
| Gerald W. Bodzy | | 240,854 | | * |
| John Garilli | | — | | * |
| Joe C. McKinney | | 319,845 | | 1.02% |
| All Trustees as a group (3) persons | | 560,699 | | 1.79% |
*Represents beneficial ownership of less than one percent of the 2020 annual meetingUnits issued and outstanding as of shareholders appearing therein under the captions “Ownership of Equity SecuritiesMarch 28, 2023.
(1)Except as indicated in these notes and subject to applicable community property laws, each person named in the Company”table directly owns the number of Units indicated and “Principal Shareholders.”has sole ownership of such Units. Unless otherwise specified, the mailing address of each person named in the table is Two Liberty Square, 9th Floor, Boston, Massachusetts, 02109.
Item 13. Certain Relationships and Related Transactions, and Director Independence
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
ThereRelated Person Transactions
On July 23, 2002, the Company entered into an Indemnification Agreement with each member of the Company's Board under which the Company obligated itself to indemnify each director to the fullest extent permitted by applicable law so that he or she will continue to serve the Company free from undue concern regarding liabilities. The Company also entered into an Indemnification Agreement with each person becoming a member of the Board since July 23, 2002. The Board determined that uncertainties relating to liability insurance and indemnification have made it advisable to provide directors with assurance that liability protection will be available in the future.
Effective January 27, 2021, the Luby's Board of Directors appointed John Garilli as the Company’s Interim President and Chief Executive Officer. Additionally, effective September 8, 2021, the Luby's Board of Directors appointed Eric Montague as the Company’s Interim Chief Financial Officer. The Company and Mr. Garilli's and Mr. Montague’s employer, Winthrop Capital Advisors LLC (“WCA”), entered into an agreement, pursuant to which the Company paid WCA a one-time fee of $50,000 and will pay a monthly fee of $30,000 for so long as Mr. Garilli and Mr. Montague served the Company in said positions. The Company also entered into an Indemnity Agreement with Mr. Garilli and WCA. Mr. Garilli is incorporated in this Item 13 by reference that portionalso a member of our definitive proxy statementthe Trust's Board of Trustees, effective May 31, 2022. Mr. Garilli receives a fee of $20,000 per calendar quarter for his services as a Trustee.
The Company and WCA had previously entered into agreements, pursuant to which WCA provides treasury and accounting services for approximately $14,000 per month.
WCA continues to provide services to the Trust as it did for the 2020 annual meetingCompany, currently on the same terms as noted above. During the period June 1, 2022 through December 31, 2022 we paid WCA approximately $358,000 for the above-mentioned services.
Pursuant to the Liquidating Trust Agreement, the Trust and the Company will indemnify Delaware Trust Company, as the Resident Trustee, and any director, officer, affiliate, employee, employer, professional, agent or representative of shareholders appearing therein under the captions, “Corporate Governance Guidelines—Director Independence”Resident Trustee and “Certain Relationshipswill advance expenses, defend and Related Transactions.”hold harmless from time to time against any and all losses, claims, costs, expenses and liabilities to which such indemnified parties may be subject by reason of such indemnified party’s performance of its duties pursuant to the discretion, power and authority conferred on such person by the Liquidating Trust Agreement or the Plan of Liquidation and Dissolution of the Company.
DIRECTOR INDEPENDENCE
Trustees of the Trust evaluated the independence of the Trustees that served during the period beginning June 1, 2022 and each Trustee or his immediate family and the Trust to determine whether any such transactions or relationships were material and, therefore, inconsistent with a determination that each such Trustee is independent. Based upon that evaluation, the Trustees determined that the following were independent during the respective time each served as Trustees: Gerald W. Bodzy
Joe C. McKinney
Item 14. Principal Accountant Fees and Services
There is incorporated in this Item 14 by reference that portion of our definitive proxy statement forFees Paid to the 2020 annual meeting of shareholders appearing therein under the caption “Fees Paid To The Independent Registered Public Accounting Firm.”
Firm
The Trust did not engage independent auditors to perform an audit of the financial statements contained in this report for the period beginning June 1, 2022 and ended December 31, 2022.
PART IV
Item 15. Exhibits, Financial Statement Schedules
|
| | | | |
| | The following financial statements are filed as part of this Report: |
|
| | | | |
| | Consolidated balance sheets at August 28, 2019 and August 29, 2018.statement of net assets in liquidation as of December 31, 2022 |
|
| | | | |
| | Consolidated statementsstatement of operationschanges in net assets in liquidation for each of the two years in the period ended August 28, 2019.from June 1, 2022 through December 31, 2022 |
|
| |
| Consolidated statements of shareholders’ equity for each of the two years in the period ended August 28, 2019. |
|
| |
| Consolidated statements of cash flows for each of the two years in the period ended August 28, 2019. |
|
| |
| | Notes to consolidated financial statements |
|
| |
| Report of Independent Registered Public Accounting Firm Grant Thornton LLP |
|
| |
2. | Financial Statement Schedules |
All schedules are omitted sinceAs a "smaller reporting company" as defined by Item 10 of Regulation S-K, the required informationCompany is not present or is not present in amounts sufficientrequired to require submission of the schedule or because the information required is included in the financial statements and notes thereto.provide this information.
The following exhibits are filed as a part of this Report:
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4 | |
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4(a) |
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4(b) | |
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10(a) | |
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10(b) | |
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10(c) | |
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10(d) | |
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10(e) | Amended and Restated Master Sales Agreement effective November 16, 2011, by and among Luby’s, Inc., Pappas Restaurants, L.P., and Pappas Restaurants, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 9, 2012, filed on June 15, 2012 (File No. 001-08308)). |
| |
10(f) | Amended and Restated Master Sales Agreement effective August 2, 2017, by and among Luby’s, Inc., Pappas Restaurants, L.P., and Pappas Restaurants, Inc. (incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the fiscal year ended August 30, 2017, filed on November 13, 2017 (File No. 001-08308)).
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10(g) | |
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10(h) | |
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10(i) | |
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10(j) | |
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10(k) | |
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10(l) | |
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10(m) | |
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10(n) | |
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10(o) |
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10(p) |
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14(a) | |
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14(b) | |
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| 21 | |
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23.1 | |
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| 31.1 | |
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31.2 | |
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| 32.1 | |
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32.2 | |
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99(a) | |
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101.INS | XBRL Instance Document |
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101.SCH | XBRL Schema Document |
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101.CAL | XBRL Calculation Linkbase Document |
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_________________________
Item 16. Form 10-K Summary
None.
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101.DEF | XBRL Definition Linkbase Document |
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101.LAB | XBRL Label Linkbase Document |
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101.PRE | XBRL Presentation Linkbase Document |
__________________________
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* | Denotes management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | |
November 26, 2019March 28, 2023 | | LUBY’S, INC.LUB LIQUIDATING TRUST |
| Date | | (Registrant) |
| | |
| | By: | /s/ CHRISTOPHER J. PAPPASJOHN GARILLI |
| | | Christopher J. PappasJohn Garilli |
| | | President and Chief Executive OfficerTrustee |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature and Title | Date |
| |
| /S/ GERALD W. BODZY | November 26, 2019March 28, 2023 |
Gerald W. Bodzy, Director and Chairman of the BoardTrustee | |
| |
/S/ CHRISTOPHER J. PAPPASJOHN GARILLI | November 26, 2019March 28, 2023 |
Christopher J. Pappas, Director, President and Chief
Executive Officer
(Principal Executive Officer)
John Garilli, Trustee | |
| |
/S/ K. SCOTT GRAY | November 26, 2019 |
K. Scott Gray, Senior Vice President and Chief Financial
Officer, and Principal Accounting Officer
(Principal Financial and Accounting Officer)
| |
| |
/S/ TWILA DAY | November 26, 2019 |
Twila Day, Director | |
| |
/S/ JILL GRIFFIN | November 26, 2019 |
Jill Griffin, Vice Chair and Director | |
| |
/S/ FRANK MARKANTONIS | November 26, 2019 |
Frank Markantonis, Director | |
| |
| /S/ JOE C. MCKINNEY | November 26, 2019March 28, 2023 |
Joe C. McKinney, Director | |
| |
/S/ GASPER MIR, III | November 26, 2019 |
Gasper Mir, III, Director | |
| |
/S/ JOHN B. MORLOCK | November 26, 2019 |
John B. Morlock, Director | |
| |
/S/ RANDOLPH C. READ | November 26, 2019 |
Randolph C. Read, DirectorTrustee | |