Notes to Consolidated Financial Statements
Fiscal Years 2019 and 2018
Note 1. Nature of Operations and Significant Accounting Policies
Nature of Operations
Luby’s, Inc. is based in Houston, Texas. As of August 28, 2019, the Company owned and operated 124 restaurants, with 101 in Texas and the remainder in other states. In addition, the Company received royalties from 102 Fuddruckers franchises as 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 variety 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. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Going Concern
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 as of the balance sheet date and for at least one year beyond the issuance date of the 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.
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’s bank account balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. However, balances in money market fund accounts are not insured. Amounts in transit from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction.
Trade Accounts and Other Receivables, net
Receivables consist principally of amounts due from franchises, culinary contract service clients, catering customers 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 CCS 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 lesser 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.
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
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 future 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 all of the deferred tax asset will not be recognized. During fiscal 2018, management concluded to increase their valuation allowance to reduce fully the Company’s net deferred tax asset balances, net of deferred tax liabilities, including through the fiscal year ended August 28, 2019.
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. 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 the provision for income taxes and income tax liabilities. Management believes that adequate provisions have been made 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 expense is estimated for equity awards at fair value at the grant date. The Company determines fair value of restricted stock awards based on the average of the high 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 used 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.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is 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. Actual results could differ from these estimates.
Recently Adopted Accounting Pronouncements
We transitioned to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) from ASC Topic 605, Revenue Recognition and ASC Topic 953-605, Franchisors - Revenue Recognition (together, the “Previous Standards”) on August 30, 2018. Our transition to ASC 606 represents a change in accounting principle. ASC 606 eliminates industry-specific guidance and provides a single model for recognizing revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depict the transfer 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 incremental costs of obtaining a contract as expense when incurred and (3) not disclose the value of our unsatisfied performance obligations for contracts with an original expected duration of one year or less.
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 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 comprised 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 fees for the fees received through the end of fiscal year 2018 that would have been deferred 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 equivalents in the statement of cash flows. The update requires that a statement of cash flows explain the change during the period in restricted cash or restricted cash equivalents in addition to changes in cash and cash equivalents. Entities are also required to disclose information about the nature of the restrictions and amounts described as restricted cash and restricted cash equivalents. Also, when cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line on the balance sheet, an entity must reconcile these amounts to the total shown on the statement of cash flows. We adopted ASU 2016-18 effective August 30, 2018 using the retrospective method 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 make lease payments and a corresponding right-of-use asset on 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 adopted using the modified retrospective method, which requires application to all comparative periods presented (the “comparative method”) or alternatively, as of the effective date of initial application without restating comparative period financial statements (the “effective date method”). We will adopt ASC 842 in 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. We do not expect the adoption of ASC 42 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 on the present value of the operating lease payments and the related right-of-use asset will generally be based on the lease liability, adjusted for amounts reclassified from other lease-related assets and liabilities, in accordance with the new guidance, and impairment of certain right-of-use assets recognized as a charge to retained earnings. We expect to recognize operating lease liabilities of approximately $32.0 million and corresponding right-of-use assets of approximately $27.0 million.
In addition, we expect to record an initial adjustment to retained earnings to derecognize the deferred gain from the sale / leaseback transactions using the cumulative effect transition method, and we will no longer recognize the amortization of this gain to net gain on disposition of properties in our consolidated statements of operations starting 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.
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:
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|
|
|
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August 28,
2019
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|
August 29,
2018
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|
(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
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$
|
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:
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Gift Cards, net of discounts
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Franchise Fees
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(In thousands)
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Balance at August 30, 2018
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$
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2,707
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|
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$
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1,891
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Revenue recognized that was included in the contract liability balance at the beginning of the year
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(1,308
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)
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(564
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)
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Increase (decrease), net of amounts recognized as revenue during the period
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1,481
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(40
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)
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Balance at August 28, 2019
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$
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2,880
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|
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$
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1,287
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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):
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Franchise Fees
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(In thousands)
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Fiscal 2020
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$
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37
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Fiscal 2021
|
|
37
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Fiscal 2022
|
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37
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Fiscal 2023
|
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37
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Fiscal 2024
|
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37
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Thereafter
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347
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Total operating franchise restaurants
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$
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495
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Franchise restaurants not yet opened(1)
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755
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Total
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$
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1,250
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|
(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:
|
|
|
|
|
|
|
|
|
|
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
|
$
|
—
|
|
|
$
|
—
|
|
At August 28, 2019, the Company considered the deferred tax assets not to be realizable and maintains a full valuation allowance against the Company’s net deferred tax asset balance. The most significant deferred tax asset prior to valuation allowance is the Company’s general business tax credits carryovers to future years of $12.5 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, will begin to expire at the end of fiscal 2022 through 2039, if not utilized by then.
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 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 continues to maintain a full valuation allowance against the net deferred tax asset balance.
An analysis 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 reconciliation 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.
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. The Company's U.S. federal income tax return remains open to examination for fiscal 2016 through fiscal 2018.
There were no payments of federal income taxes in fiscal 2019 or fiscal 2018. The Company has income tax filing requirements in over 30 states. State income tax payments were $0.5 million 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.
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. 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:
|
|
|
|
|
|
|
|
|
|
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
|
|
(1) Income taxes, legal and other includes accrued lease termination costs. See Note 13 to our consolidated financial statements in this Form 10-K 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. 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.
Claims
From time to time, the Company is subject to various other private lawsuits, administrative proceedings and claims that arise in the ordinary course of its 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 believes 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, results of operations, or liquidity. It is possible, however, that the Company’s future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings, or claims.
Construction Activity
From time to time, the Company enters into non-cancelable contracts for the construction of its new restaurants or restaurant remodels. This construction activity exposes 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. The Company had no non-cancelable construction contracts as of August 28, 2019.
Cheeseburger in Paradise, Royalty Commitment
The license agreement and trade name relates to 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 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
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 has 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 amended 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 available 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 $5.95 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:
|
|
|
|
|
|
|
|
Fiscal Year 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 related 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, as detailed in the Amended and Restated Master Sales Agreement dated August 2, 2017 among the Company and 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 lease terms as a result of 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 May 31, 2020. Thereafter, the new ground lease agreement provides for increases in rent at set intervals.
Affiliated rents paid 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.
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 Stock
At August 28, 2019, the Company had 500,000 shares 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 $4.8 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 2019 and 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
|
%
|