Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Luby’s, Inc. (the “Company”, "we", "our", "us", or “Luby’s”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements that are prepared for our Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the periods ended March 11, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending August 26, 2020.
On June 3, 2020, we announced that our Board of Directors approved a course of action whereby we will immediately pursue the sale of our operating divisions and assets, including our real estate assets, or the sale of the Company in its entirety, and distribute the net proceeds to our stockholders after payment of debt and other obligations. During the sale process, certain of our restaurants will remain open to continue to serve our guests.
We have not established a definitive timeframe for completing this process which will most likely lead to the adoption by the Board of Directors of a formal plan of sale and proceeds distribution followed by an orderly wind down of any remaining operations. Such a plan of sale and proceeds distribution will require shareholder approval. There can be no assurance that such a plan of sale and proceeds distribution will be adopted by the Board of Directors or approved by the shareholders.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. See Note 3. Going Concern.
The consolidated balance sheet dated August 28, 2019, included in this Quarterly Report on Form 10-Q (this “Form 10-Q”), has been derived from our audited consolidated financial statements as of that date. However, this Form 10-Q does not include all of the information and footnotes required by GAAP for audited, year-end financial statements. Therefore, these financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 28, 2019.
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, the 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 consisted 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 our Annual Report on Form 10-K. The segment data for the comparable periods of fiscal 2019 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.
Other Charges
Other charges includes those expenses that we consider related to our restructuring efforts or are not part of our recurring operations. These expenses were included in our Selling, general, and administrative cost expense line in previously reported quarters of fiscal 2019. See Note 8 to these unaudited consolidated financial statements.
Recently Adopted Accounting Pronouncements
On August 29, 2019, the first day of fiscal 2020, (the "Effective Date") we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), along with related clarifications and improvements (“ASC 842”). ASC 842 requires lessees to recognize, on their consolidated balance sheet, a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset. The guidance requires lessors to classify leases as sales-type, direct financing or operating. The pronouncement also requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. We have implemented a new lease tracking and accounting system in connection with the adoption of ASC 842.
We elected the optional transition method to apply ASC 842 as of the effective date and therefore, we have not applied the standard to the comparative periods presented on our consolidated financial statements. We also elected the package of practical expedients that allowed us not to reassess previous accounting conclusions regarding lease identification, initial direct costs and classification for existing or expired leases as of the effective date. We did not elect the practical expedient that would have permitted us to use hindsight when determining the lease term, including option periods, and impairment of operating lease assets.
We have made an accounting policy election to account for lease components and non-lease components as a single lease component for all underlying classes of assets where (1) the lease component is predominant, (2) the lease component, if accounted for separately, would be classified as an operating lease and (3) the timing and pattern of the lease component and non-lease component are the same. We have also elected the short-term lease recognition exemption for all of our leases that allows us to not recognize right-of-use assets and related liabilities for leases with an initial term of 12 months or less and that do not include an option to purchase the underlying asset that we are reasonably certain to exercise. Our transition to ASC 842 represents a change in accounting principle.
Upon adoption of ASC 842, we recorded operating lease liabilities of approximately $32.5 million based on the present value of the remaining lease payments using discount rates as of the effective date. The current portion of the operating lease liabilities recorded was approximately $8.1 million. In addition, we recorded operating lease right-of-use assets of approximately $27.2 million , calculated as the initial amount of the operating lease liability, adjusted for amounts reclassified from other lease related asset and liability accounts (such as prepaid rent, favorable and unfavorable lease intangibles and straight-line rent timing differences), in accordance with the new guidance, and impairment of certain right-of-use assets recognized as a charge to retained earnings as of the effective date.
On the effective date, we recorded the $1.0 million net cumulative effect of the adoption as an increase to retained earnings. Included in the net cumulative effect was an adjustment of approximately $2.0 million to clear the unamortized balance for deferred gains from sale / leaseback transactions. For most future sale / leaseback transactions, the gain (adjusted for any off-market items) will be recognized immediately in the period that the sale / leaseback transaction occurs.
The impact of adopting ASC 842 on effected lines of our opening consolidated balance sheet was as follows:
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Balance at August 28, 2019
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ASC 842 Adjustment
|
Balance at August 29, 2019
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(In thousands)
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ASSETS
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Trade accounts and other receivables, net
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$
|
8,852
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|
$
|
70
|
|
$
|
8,922
|
|
|
Prepaid expenses
|
2,355
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|
(225)
|
|
2,130
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Total Current Assets
|
27,395
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|
(155)
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|
27,240
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Intangible assets, net
|
16,781
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|
(190)
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|
16,591
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|
|
Operating lease right-of-use assets, net
|
—
|
|
27,191
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|
27,191
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|
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Total Assets
|
$
|
186,000
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|
$
|
26,846
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|
$
|
212,846
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LIABILITIES
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Operating lease liabilities-current
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$
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—
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|
$
|
8,061
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|
$
|
8,061
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|
|
Accrued expenses and other liabilities
|
24,475
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|
(1,002)
|
|
23,473
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|
|
Total Current Liabilities
|
32,954
|
|
7,059
|
|
40,013
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|
|
Operating lease liabilities-non-current
|
—
|
|
24,360
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|
24,360
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Other liabilities
|
6,577
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|
(5,600)
|
|
977
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|
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Total Liabilities
|
$
|
84,970
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|
$
|
25,819
|
|
$
|
110,789
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SHAREHOLDERS’ EQUITY
|
|
|
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Retained earnings
|
$
|
61,182
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|
$
|
1,027
|
|
$
|
62,209
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|
|
Total Shareholders Equity
|
101,030
|
|
1,027
|
|
102,057
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|
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Total Liabilities and Shareholders Equity
|
$
|
186,000
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|
$
|
26,846
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|
$
|
212,846
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New Accounting Pronouncements - "to be Adopted"
There are no issued accounting pronouncements that we have yet to adopt that we believe would have a material effect on our financial statements.
Subsequent Events
We evaluated events subsequent to March 11, 2020 through the date the financial statements were issued to determine if the nature and significance of the events warrant inclusion in our consolidated financial statements. See Note 2. for subsequent events disclosures.
Note 2. Subsequent Events
COVID-19 Pandemic
On March 13, 2020, President Trump declared a national emergency in response to the novel coronavirus disease ("COVID-19") pandemic. On March 19, 2020, Governor Greg Abbott of Texas issued a public health disaster for the state of Texas to bring the entire state in line with CDC guidelines including, (1) closing of schools statewide, (2) ban on dine-in eating and gatherings of groups of more than 10 people, and (3) closing of gyms and bars. Governor Abbott followed with an essential services order on March 31, 2020, requiring anyone who is not considered an essential, critical infrastructure worker to stay home except for essential activity, essential businesses, essential government functions and critical care facilities. Most other states, including those states where we operate, have issued similar orders. The governor of Texas began relaxing some restrictions on businesses operating in Texas beginning May 1, 2020, which permitted a gradual reopening of businesses, including restaurants, with modified operations..
The spread of the COVID-19 pandemic has affected the United States economy, our operations and those of third parties on which we rely. Beginning on March 17, 2020, we began suspending on-premise dining at our restaurants and substantially all employees at those locations were placed on furlough. By March 31, 2020 we had suspended on-premise dining at all 118 of our company-owned restaurants and had suspended all operations at 50 of our Luby's Cafeteria's, 36 company-owned Fuddruckers restaurants and our one Cheeseburger in Paradise restaurant. The 28 Luby's Cafeteria's and 3 Fuddruckers
restaurants that remained open were providing take-out, drive-through and curbside pickup, or delivery with reduced operating hours and on-site staff. In addition, more than 50 percent of our general and administrative staff were placed on furlough and salaries were temporarily reduced by 50 percent for the remaining general and administrative staff and other salaried employees, including all senior management. Furthermore, our franchise owners suspended operations or moved to limited food-to-go operations at their locations, reducing the number of franchise locations in operation to 37 by early April 2020 from 90 prior to the COVID-19 pandemic.
Beginning in May 2020, we began to gradually reopen the dining rooms with state-mandated limits on guest capacity at the 28 Luby's locations and 3 Fuddruckers locations that had been previously operating with food-to-go service only. We also began to reopen restaurants that were temporarily closed. As of the date of this filing, there were 31 Luby's Cafeteria's and 8 Fuddruckers restaurants operating, all of which had their dining rooms open at limited capacity. There were 59 franchise locations in operation as of the date of this filing.
The full extent and duration of the impact of the COVID-19 pandemic on our operations and financial performance is currently unknown, and depends on future developments that are uncertain and unpredictable, including the duration of the spread of the pandemic, its impact of capital and financial markets on a macro-scale and any new information that may emerge concerning the severity of the virus, its spread to other regions, the actions to contain the virus or treat its impact, and consumer attitudes and behaviors, among others.
We are currently evaluating the potential short-term and long-term implications of the COVID-19 pandemic on our consolidated financial statements. The potential impacts will occur as early as the third quarter of fiscal 2020, and include, but are not limited to: impairment of long-lived assets, including property and equipment, definite-lived intangible assets and operating lease right-of-use assets related to our restaurants, impairment of goodwill and collectability of receivables.
See Note 3. Going Concern.
Payroll Protection Plan (PPP) Loan and Credit Facility Debt Modification
On April 21, 2020 we entered into a promissory note with Texas Capital Bank, N.A., effective April 12, 2020 that provides for a loan in the amount of $10.0 million (the "PPP loan") pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The PPP Loan matures on April 12, 2022 and bears interest at a rate of 1.0% per annum. Monthly amortized principle and interest payments are deferred for six months after the date of disbursement. The PPP Loan funds were received on April 21, 2020. The PPP Loan contains events of default and other provisions customary for a loan of this type. The Payroll Protection Program provides that the use of PPP Loan amount shall be limited to certain qualifying expenses and may be partially forgiven in accordance with the terms of CARES Act to the extent applicable. We are not yet able to determine the amount that might be forgiven.
Additionally, we entered into the Third Amendment to Credit Agreement, dated April 21, 2020 (the "Third Amendment"). The Credit Agreement is further described at Note 15. Debt. The Third Amendment permitted us to incur indebtedness under the PPP Loan and terminated the $5.0 million undrawn portion of the delayed draw term loan upon receipt of the PPP Loan.
Note 3. Going Concern
The Company sustained a net loss of approximately $15.2 million and cash flow from operations was a use of cash of approximately $13.1 million in fiscal year ended August 28, 2019. In the two quarters ended March 11, 2020 (a period prior to the COVID-19 pandemic), the Company sustained a net loss of $12.1 million and cash flow from operations was a use of cash of $5.9 million. On March 13, 2020, shortly after the end of the Company's second quarter, President Trump declared a national emergency in response to the COVID-19 pandemic followed by Governor Greg Abbott of Texas issuing a public health disaster for the state of Texas on March 19, 2020. The Company took the necessary actions described in "Note 2. Subsequent Events" which further stressed the liquid financial resources of the Company. In response, the company borrowed the remaining $1.4 million available on its revolving line of credit with MSD Capital, borrowed $2.5 million on its Delayed Draw Term Loan, and applied for and received a $10.0 million PPP Loan as described in "Note 2. Subsequent Events". As of the date of this filing, the Company has no undrawn borrowing capacity under the Credit Agreement. Further, the Company does not believe that it would be able to secure any additional debt financing currently.
The full extent and duration of the impact of the COVID-19 pandemic on our operations and financial performance is currently unknown. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations and its ability to generate proceeds from real estate property sales to meet its obligations. The above conditions and events, in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern. Notwithstanding the aforementioned substantial doubt, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result
should the Company be unable to continue as a going concern Management has assessed the Company’s ability to continue as a going concern as of the balance sheet date, and for at least one year beyond the financial statement issuance date. The assessment of a company’s ability to meet its obligations is inherently judgmental.
On June 3, 2020, the Company announced that the Board of Directors of the Company will aggressively pursue a sale of its operations and assets and distribute the net proceeds to our stockholder, after payment of debt and other obligations. This course of action is more fully explained in "Note 1 - Basis of Presentation". We have not established a timeframe, nor have we committed to a plan, but such a plan could extend beyond one year. Until an actionable plan is approved, we believe we will be able to meet our obligations for the next 12 months when they come due through 1) cash flow from operating certain restaurants, 2) available cash balances, and 3) proceeds generated from real estate property sales as discussed below.
Throughout April and May of 2020, the Company reviewed and modified many aspects of its operating plan within its restaurants and corporate overhead. The Company is now operating at an increased level of operational cost efficiency. These efforts are expected to mitigate the adverse impacts of COVID-19. Additionally, the sale of some assets will likely be necessary for the Company to generate cash to fund its operations. The Company has historically been able to successfully generate proceeds from property sales. Although the Company has been successful in these endeavors in the past, there are no assurances the Company will generate sufficient funds to meet all its obligations as they become due. The following conditions were considered in management’s evaluation of going concern and its efforts to mitigate that concern:
•Revamping restaurant operations to generate cost efficiencies resulting in higher restaurant operating margins even if sales levels do not return to pre-COVID-19 pandemic levels. As the restaurants adapted to the new operating environment, a lower cost labor model was deployed, food costs declined as menu offerings were concentrated among the historically top selling items, and various restaurant service and supplier costs were reevaluated.
•Restructuring of corporate overhead earlier in calendar 2020 prior to the pandemic, including a transition to 3rd party provider for certain accounting and payroll function. Significant further restructuring took place in April and May of 2020, as we reviewed all corporate service providers, information technology needs, and personnel requirements to support a reduced level of operations going forward.
•Securing the PPP Loan which was necessary for funding continuing operations. We believe that a portion of the loan will be eligible for forgiveness; however, that amount cannot currently be calculated.
•Continued efforts to close real estate sales transactions with anticipated aggregate sales proceeds in excess of $20.0 million prior to the end of fiscal 2020. In addition, the we have identified other real estate properties that may be sold to generate funds for ongoing operations should the identification of a buyer for one or more of the operating divisions not occur timely.
We believe these plans are sufficient to overcome the significant doubt whether we can meet our liquidity needs for the 12 months from the issuance of these financial statements. However, we can not predict with certainty that these efforts will be successful or sufficient.
Note 4. 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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March 11,
2020
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August 28,
2019
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(in thousands)
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Cash and cash equivalents
|
$
|
7,080
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|
|
$
|
3,640
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|
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Restricted cash and cash equivalents
|
8,704
|
|
|
9,116
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|
|
Total cash and cash equivalents shown in our consolidated statements of cash flows
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$
|
15,784
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|
|
$
|
12,756
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Amounts included in restricted cash represent those required to be set aside for (1) maximum amount of interest payable in the next 12 months under the 2018 Credit Agreement (see Note 15), (2) collateral for letters of credit issued for potential insurance obligations, which letters of credit expire within 12 months and (3) prefunding of the credit limit under our corporate purchasing card program.
Note 5. Revenue Recognition
Restaurant Sales
Restaurant sales consist of sales of food and beverage products to restaurant guests at our Luby’s cafeterias and our 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. 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.
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 for reimbursement 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 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. 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.
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:
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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 28, 2019
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|
$
|
2,882
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|
|
$
|
1,287
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Revenue recognized that was included in the contract liability balance at the beginning of the year
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|
(978)
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(20)
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Increase, net of amounts recognized as revenue during the period
|
|
1,455
|
|
|
—
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|
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Balance at March 11, 2020
|
|
$
|
3,359
|
|
|
$
|
1,267
|
|
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 March 11, 2020:
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Franchise Fees
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(In thousands)
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Remainder of fiscal 2020
|
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$
|
17
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Fiscal 2021
|
|
|
|
38
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|
Fiscal 2022
|
|
|
|
38
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|
|
Fiscal 2023
|
|
|
|
38
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|
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Fiscal 2024
|
|
|
|
38
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Thereafter
|
|
|
|
343
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Total operating franchise restaurants
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|
|
512
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Franchise restaurants not yet opened(1)
|
|
|
|
755
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Total
|
|
|
|
$
|
1,267
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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 (in millions):
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Quarter Ended
|
|
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Two Quarters Ended
|
|
|
|
March 11, 2020
|
March 13, 2019
|
|
March 11, 2020
|
March 13, 2019
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(in millions)
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Revenue from performance obligations:
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Satisfied at a point in time
|
$
|
63.8
|
|
$
|
69.2
|
|
|
$
|
152.0
|
|
$
|
165.0
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Satisfied over time
|
4.8
|
|
5.2
|
|
|
11.7
|
|
12.3
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Total Sales
|
$
|
68.6
|
|
$
|
74.4
|
|
|
$
|
163.7
|
|
$
|
177.3
|
|
See Note 7. Reportable Segments for disaggregation of revenue by reportable segment.
Note 6. Leases
Lessee
We determine if a contract contains a lease at the inception date of the contract. Our material operating leases consist of restaurant locations and administrative facilities ("Property Leases"). U.S. GAAP requires that our leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the date on which the leased asset is available for our use (the “Commencement Date”) and the lease term used in the evaluation includes the non-cancellable period for which we have the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option would result in an economic penalty (the "Reasonably Certain Lease Term"). Our lease agreements generally contain a primary term of five to 30 years with one or more options to renew or extend the lease generally from one to five years each. In addition to leases for our restaurant locations and administrative facilities, we also lease vehicles and administrative equipment under operating leases. As of March 11, 2020, we did not have any finance leases.
At the inception of a new lease, we recognize an operating lease liability and a corresponding right of use asset, which are calculated as the the present value of the total fixed lease payments over the reasonably certain lease term using discount rates as of the effective date.
Property lease agreements may include rent holidays, rent escalation clauses and contingent rent provisions based on a percentage of sales in excess of specified levels. Contingent rental expenses (“variable lease cost”) are recognized prior to the achievement of a specified target, provided that the achievement of the target is considered probable. Most of our lease agreements include renewal periods at our option. We include the rent holiday periods and scheduled rent increases in our calculation of straight-line rent expense.
Lease cost for operating leases is recognized on a straight-line basis and includes the amortization of the right-of-use asset and interest expense related to the operating lease liability. We use the reasonably certain lease term in our calculation of straight-line rent expense. We expense rent from commencement date through restaurant open date as opening expense. Once a restaurant opens for business, we record straight-line rent expense plus any additional variable contingent rent expense (such as common area maintenance, insurance and property tax costs) to the extent it is due under the lease agreement as occupancy expense for our restaurants and selling, general and administrative expense for our corporate office and support facilities. The interest expense related to the lease liability for abandoned leases is recorded to provision for asset impairments and store closings. Rental expense for lease properties that are subsequently subleased to franchisees or other third parties is recorded as other income.
We make judgments regarding the reasonably certain lease term for each property lease, which can impact the classification and accounting for a lease as a finance lease or an operating lease, the rent holiday and/or escalations in payments that are taken into consideration when calculating straight-line rent, and the term over which leasehold improvements for each restaurant are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.
The discount rate used to determine the present value of the lease payments is the Company’s estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the Company generally cannot determine the interest rate implicit in the lease.
Lessor
We occasionally lease or sublease certain restaurant properties to our franchisees or to third parties. The lease descriptions, terms, variable lease payments and renewal options are generally similar to our lessee leases described above. Similar to our lessee accounting, we elected the lessor practical expedient that allows us to not separate non-lease components from lease components in regard to all property leases where we are the lessor. As of March 11, 2020, we did not have any sales-type or direct financing leases.
Supplemental balance sheet information related to our leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Classification
|
|
March 11, 2020
|
|
|
|
|
|
|
(in thousands)
|
|
|
Right-of-use assets
|
|
Operating lease right-of-use assets
|
|
$
|
24,296
|
|
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
Operating lease liabilities-current
|
|
$
|
5,916
|
|
|
|
Non-current lease liabilities
|
|
Operating lease liabilities-noncurrent
|
|
23,047
|
|
|
|
Total lease liabilities
|
|
|
|
$
|
28,963
|
|
|
Weighted-average lease terms and discount rates at March 11, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
6.02 years
|
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
9.6%
|
|
Components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
28 Weeks Ended
|
|
|
|
|
|
|
March 11, 2020
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Operating lease expense
|
|
$
|
1,874
|
|
|
$
|
4,412
|
|
|
|
|
|
Variable lease expense
|
|
257
|
|
|
553
|
|
|
|
|
|
Short-term lease expense
|
|
62
|
|
|
125
|
|
|
|
|
|
Sublease expense
|
|
161
|
|
|
382
|
|
|
|
|
|
Total lease expense
|
|
$
|
2,354
|
|
|
$
|
5,472
|
|
|
|
|
Operating lease income is included in other income on our consolidated statements of operations and was comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
28 Weeks Ended
|
|
|
|
|
|
|
March 11, 2020
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Operating lease income
|
|
$
|
213
|
|
|
$
|
503
|
|
|
|
|
|
Sublease income
|
|
114
|
|
|
286
|
|
|
|
|
|
Variable lease income
|
|
33
|
|
|
109
|
|
|
|
|
|
Total lease income
|
|
$
|
360
|
|
|
$
|
898
|
|
|
|
|
Supplemental disclosures of cash flow information related to leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
28 Weeks Ended
|
|
|
|
|
|
|
March 11, 2020
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
2,431
|
|
|
$
|
5,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities
|
|
$
|
903
|
|
|
$
|
903
|
|
|
|
|
Operating lease obligations maturities in accordance with Topic 842 as of March 11, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Remainder of FY 2020
|
|
$
|
3,323
|
|
|
|
|
|
FY 2021
|
|
8,273
|
|
|
|
|
|
FY 2022
|
|
6,066
|
|
|
|
|
|
FY 2023
|
|
5,133
|
|
|
|
|
|
FY 2024
|
|
4,244
|
|
|
|
|
|
Thereafter
|
|
11,855
|
|
|
|
|
|
Total lease payments
|
|
38,894
|
|
|
|
|
|
Less: imputed interest
|
|
(9,931)
|
|
|
|
|
|
Present value of operating lease obligations
|
|
$
|
28,963
|
|
|
|
|
The operating lease obligation and rent expense tables above include amounts related to two leases with related parties, which are further described at "Note 14. Related Parties".
Annual future minimum lease payments under non-cancelable operating leases with terms in excess of one year as of August 28, 2019 in accordance with the previous lease accounting standard (ASC 840) 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
|
|
Note 7. Reportable Segments
As more fully discussed at "Note 1. Basis of Presentation", in the fourth quarter of fiscal 2019, the Company 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 restaurants and Cheeseburger in Paradise restaurant 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, the 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 cafeterias segment includes the results of our company-owned Luby’s Cafeterias restaurants. The total number of Luby’s cafeterias at March 11, 2020 and August 28, 2019 were 78 and 79, respectively.
The Fuddruckers restaurant segment includes the results of our company-owned Fuddruckers restaurants. The total number of Fuddruckers restaurants at March 11, 2020 and August 28, 2019 were 39 and 44, respectively.
The Cheeseburger in Paradise restaurant segment includes the results of our Cheeseburger in Paradise restaurants. The total number of Cheeseburger in Paradise restaurants at both March 11, 2020 and August 28, 2019 was one.
Culinary Contract Services ("CCS")
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 March 11, 2020 and August 28, 2019 were 28 and 31, 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 March 11, 2020 and August 28, 2019 were 90 and 102, respectively.
Segment Table
The tables below show segment financial information. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Two Quarters Ended
|
|
|
|
|
March 11, 2020
|
|
March 13, 2019
|
|
March 11, 2020
|
|
March 13, 2019
|
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
Luby's cafeterias
|
$
|
47,886
|
|
|
$
|
48,621
|
|
|
$
|
115,031
|
|
|
$
|
117,229
|
|
|
Fuddruckers restaurants
|
11,872
|
|
|
16,246
|
|
|
27,551
|
|
|
37,879
|
|
|
Cheeseburger in Paradise restaurants
|
647
|
|
|
592
|
|
|
1,492
|
|
|
1,550
|
|
|
Culinary contract services
|
6,998
|
|
|
7,543
|
|
|
16,772
|
|
|
17,039
|
|
|
Fuddruckers franchise operations
|
1,158
|
|
|
1,421
|
|
|
2,865
|
|
|
3,644
|
|
|
Total
|
$
|
68,561
|
|
|
$
|
74,423
|
|
|
$
|
163,711
|
|
|
$
|
177,341
|
|
|
Segment level profit:
|
|
|
|
|
|
|
|
|
Luby's cafeterias
|
$
|
4,877
|
|
|
$
|
6,153
|
|
|
$
|
12,786
|
|
|
$
|
15,148
|
|
|
Fuddruckers restaurants
|
527
|
|
|
959
|
|
|
494
|
|
|
1,416
|
|
|
Cheeseburger in Paradise restaurants
|
(28)
|
|
|
(106)
|
|
|
(95)
|
|
|
(331)
|
|
|
Culinary contract services
|
598
|
|
|
826
|
|
|
1,424
|
|
|
1,507
|
|
|
Fuddruckers franchise operations
|
749
|
|
|
1,174
|
|
|
1,890
|
|
|
3,125
|
|
|
Total
|
$
|
6,723
|
|
|
$
|
9,006
|
|
|
$
|
16,499
|
|
|
$
|
20,865
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Luby's cafeterias
|
$
|
1,738
|
|
|
$
|
2,039
|
|
|
$
|
4,182
|
|
|
$
|
5,042
|
|
|
Fuddruckers restaurants
|
387
|
|
|
548
|
|
|
937
|
|
|
1,881
|
|
|
Cheeseburger in Paradise restaurants
|
19
|
|
|
26
|
|
|
47
|
|
|
81
|
|
|
Culinary contract services
|
5
|
|
|
24
|
|
|
17
|
|
|
46
|
|
|
Fuddruckers franchise operations
|
178
|
|
|
177
|
|
|
414
|
|
|
413
|
|
|
Corporate
|
350
|
|
|
408
|
|
|
843
|
|
|
663
|
|
|
Total
|
$
|
2,677
|
|
|
$
|
3,222
|
|
|
$
|
6,440
|
|
|
$
|
8,126
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Luby's cafeterias
|
$
|
414
|
|
|
$
|
447
|
|
|
$
|
1,238
|
|
|
$
|
1,404
|
|
|
Fuddruckers restaurants
|
90
|
|
|
39
|
|
|
139
|
|
|
148
|
|
|
Cheeseburger in Paradise restaurants
|
—
|
|
|
11
|
|
|
2
|
|
|
11
|
|
|
Culinary contract services
|
—
|
|
|
(44)
|
|
|
—
|
|
|
9
|
|
|
Fuddruckers franchise operations
|
—
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
Corporate
|
41
|
|
|
209
|
|
|
97
|
|
|
209
|
|
|
Total
|
545
|
|
|
$
|
662
|
|
|
$
|
1,490
|
|
|
$
|
1,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Two Quarters Ended
|
|
|
|
|
March 11, 2020
|
|
March 13, 2019
|
|
March 11, 2020
|
|
March 13, 2019
|
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Income (loss) before income taxes and discontinued operations:
|
|
|
|
|
|
|
|
|
Segment level profit
|
$
|
6,723
|
|
|
$
|
9,006
|
|
|
$
|
16,499
|
|
|
|
$
|
20,865
|
|
|
Opening costs
|
(2)
|
|
|
(11)
|
|
|
(14)
|
|
|
|
(44)
|
|
|
Depreciation and amortization
|
(2,677)
|
|
|
(3,222)
|
|
|
(6,440)
|
|
|
|
(8,126)
|
|
|
Selling, general and administrative expenses
|
(6,816)
|
|
|
(7,753)
|
|
|
(16,974)
|
|
|
|
(17,763)
|
|
|
Other charges
|
(1,509)
|
|
|
(1,263)
|
|
|
(2,748)
|
|
|
|
(2,477)
|
|
|
Provision for asset impairments and restaurant closings
|
(661)
|
|
|
(1,195)
|
|
|
(1,770)
|
|
|
|
(2,422)
|
|
|
Net gain on disposition of property and equipment
|
2,527
|
|
|
12,651
|
|
|
2,498
|
|
|
|
12,501
|
|
|
Interest income
|
5
|
|
|
19
|
|
|
28
|
|
|
|
19
|
|
|
Interest expense
|
(1,473)
|
|
|
(1,554)
|
|
|
(3,435)
|
|
|
|
(3,269)
|
|
|
Other income, net
|
148
|
|
|
55
|
|
|
388
|
|
|
|
86
|
|
|
Total
|
$
|
(3,735)
|
|
|
$
|
6,733
|
|
|
$
|
(11,968)
|
|
|
|
$
|
(630)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 11, 2020
|
|
August 28, 2019
|
|
|
|
(In thousands)
|
|
|
|
|
Total assets:
|
|
|
|
|
|
Luby's cafeterias
|
$
|
106,132
|
|
|
$
|
107,287
|
|
|
|
Fuddruckers restaurants (1)
|
37,984
|
|
|
25,725
|
|
|
|
Cheeseburger in Paradise restaurants (2)
|
363
|
|
|
829
|
|
|
|
Culinary contract services
|
7,212
|
|
|
6,703
|
|
|
|
Fuddruckers franchise operations (3)
|
9,494
|
|
|
10,034
|
|
|
|
Corporate
|
42,112
|
|
|
$
|
35,422
|
|
|
|
Total
|
$
|
203,297
|
|
|
$
|
186,000
|
|
|
(1) Includes Fuddruckers trade name intangible of 7.2 million and 7.5 million at March 11, 2020 and August 28, 2019, respectively.
(2) Includes Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles of $45 thousand and $46 thousand at March 11, 2020 and August 28, 2019, respectively.
(3) Fuddruckers franchise operations segment includes royalty intangibles of $8.8 million and $9.2 million at March 11, 2020 and August 28, 2019 respectively.
Note 8. Other Charges
Other charges includes those expenses that we consider related to our restructuring efforts or are not part of our ongoing operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Two Quarters Ended
|
|
|
|
|
March 11
2020
|
|
March 13
2019
|
|
March 11
2020
|
|
March 13
2019
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Proxy communication related
|
$
|
—
|
|
|
$
|
1,061
|
|
|
$
|
—
|
|
|
$
|
1,802
|
|
|
Employee severances
|
544
|
|
|
173
|
|
|
1,162
|
|
|
645
|
|
|
Restructuring related
|
966
|
|
|
30
|
|
|
1,586
|
|
|
30
|
|
|
Total Other charges
|
$
|
1,510
|
|
|
$
|
1,264
|
|
|
$
|
2,748
|
|
|
$
|
2,477
|
|
Note 9. Fair Value Measurements
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 authoritative accounting guidance requires or permits 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 tiers 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.
The fair values of the Company's cash and cash equivalents, restricted cash and cash equivalents, trade receivables and other receivables, net, and accounts payable approximate their carrying value due to their short duration. The carrying value of the Company's total credit facility debt, net of unamortized discounts and debt issue costs, at March 11, 2020 and August 28, 2019 was approximately $50.8 million and $45.4 million, respectively, which approximates fair value because the applicable interest rate is adjusted frequently based on short-term market rates (Level 2).
There were no recurring fair value measurements related to assets at March 11, 2020 or March 13, 2019 . We terminated our interest rate swap in the first quarter of fiscal 2019 and received cash proceeds of approximately $0.3 million which is recorded in other income.
There were no recurring fair value measurements related to liabilities at March 11, 2020. The fair value of the Company's 2017 Performance Based Incentive Plan liabilities was zero at March 13, 2019.
Non-recurring fair value measurements related to impaired property held for sale and property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
|
|
|
|
|
March 11, 2020
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Impairments(3)
|
|
Nonrecurring Fair Value Measurements
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
Property held for sale (1)
|
$
|
3,362
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,362
|
|
|
$
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,181)
|
|
|
Total Nonrecurring Fair Value Measurements
|
$
|
3,362
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,362
|
|
|
$
|
(1,195)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) In accordance with Subtopic 360-10, long-lived assets held for sale with a carrying value of approximately $3.4 million were written down to their fair value, less cost to sell, of approximately $3.4 million, resulting in an impairment charge of approximately $14 thousand.
(2) In accordance with Subtopic 360-10, operating lease right-to-use assets with a carrying value of approximately $1.2 million were written down to their fair value of zero, resulting in an impairment charge of approximately $1.2 million.
(3) Total impairments for continuing operations are included in provision for asset impairments and restaurant closings in our consolidated statement of operations for the two quarters ended March 11, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
|
|
|
|
|
March 13, 2019
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Impairments(3)
|
|
Nonrecurring Fair Value Measurements
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
Property held for sale (1)
|
$
|
6,573
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,573
|
|
|
$
|
(62)
|
|
|
Property and equipment related to company-owned restaurants (2)
|
704
|
|
|
—
|
|
|
—
|
|
|
704
|
|
|
(1,129)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Nonrecurring Fair Value Measurements
|
$
|
7,277
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,277
|
|
|
$
|
(1,191)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) In accordance with Subtopic 360-10, long-lived assets held for sale with a carrying value of approximately $6.6 million were written down to their fair value, less costs to sell, of approximately $6.6 million, resulting in an impairment charge of approximately $62 thousand.
(2) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of approximately $1.8 million were written down to their fair value of approximately $0.7 million, resulting in an impairment charge of approximately $1.1 million.
(3) Total impairments are included in provision for asset impairments and restaurant closings in our unaudited consolidated statement of operations for the two quarters ended March 13, 2019.
Note 10. Income Taxes
No cash payments of estimated federal income taxes were made during the two quarters ended March 11, 2020 and March 13, 2019, respectively. Deferred tax assets and liabilities are recorded based on differences between the financial reporting basis and the tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when the differences are expected to reverse.
Deferred tax assets are recognized to the extent future taxable income is expected to be sufficient to utilize those assets prior to their expiration. If current available evidence and information raises doubt regarding the realization of the deferred tax assets, on a more likely than not basis, a valuation allowance is necessary. In evaluating our ability to realize the Company's deferred tax assets, the Company considered available positive and negative evidence, scheduled reversals of deferred tax liabilities, tax-planning strategies, and results of recent operations. As of March 11, 2020, management continues to maintain a full valuation allowance against net deferred tax assets.
The effective tax rate ("ETR") for continuing operations was a negative 1.6% for the quarter ended March 11, 2020 and 1.4% for the quarter ended March 13, 2019. The ETR for the quarter ended March 11, 2020 differs from the federal statutory rate of 21% due to management's full valuation allowance conclusion, anticipated federal jobs credits, state income taxes, and other discrete items.
The ETR for continuing operations was a negative 1.3% for the two quarters ended March 11, 2020 and a negative 33.8% for the two quarters ended March 13, 2019. The ETR for the two quarters ended ended March 11, 2020 differs from the federal statutory rate of 21% due to management's full valuation allowance conclusion, anticipated federal jobs credits, state income taxes, and other discrete items.
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 our consolidated financial statements. Amounts considered probable of settlements within one year have been included in the accrued expenses and other liabilities in the accompanying consolidated balance sheet.
Note 11. Property and Equipment, Intangible Assets and Goodwill
The costs, net of impairment, and accumulated depreciation of property and equipment at March 11, 2020 and August 28, 2019, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 11,
2020
|
|
August 28,
2019
|
|
Estimated
Useful Lives
(years)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Land
|
$
|
45,822
|
|
|
$
|
45,845
|
|
|
|
|
—
|
|
|
|
Restaurant equipment and furnishings
|
68,437
|
|
|
67,015
|
|
|
3
|
|
to
|
|
15
|
|
Buildings
|
127,011
|
|
|
126,957
|
|
|
20
|
|
to
|
|
33
|
|
Leasehold and leasehold improvements
|
22,164
|
|
|
22,098
|
|
|
Lesser of lease term or estimated useful life
|
|
|
|
|
|
Office furniture and equipment
|
3,315
|
|
|
3,364
|
|
|
3
|
|
to
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266,749
|
|
|
265,279
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
(149,319)
|
|
|
(143,536)
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
$
|
117,430
|
|
|
$
|
121,743
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
$
|
16,025
|
|
|
$
|
16,781
|
|
|
15
|
|
to
|
|
21
|
Intangible assets, net, includes the Fuddruckers trade name and franchise agreements and are 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 useful life of 15 years from the date of acquisition, December 2012.
The aggregate amortization expense related to intangible assets subject to amortization was approximately $0.8 million and $0.7 million for the two quarters ended March 11, 2020 and March 13, 2019, respectively. The aggregate amortization expense related to intangible assets subject to amortization is expected to be approximately $1.4 million in each of the next five successive fiscal years.
The following table presents intangible assets as of March 11, 2020 and August 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 11, 2020
|
|
|
|
|
|
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
|
|
|
$
|
(13,506)
|
|
|
$
|
15,980
|
|
|
$
|
29,486
|
|
|
$
|
(12,752)
|
|
|
$
|
16,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cheeseburger in Paradise trade name and license agreements
|
146
|
|
|
(101)
|
|
|
45
|
|
|
146
|
|
|
(99)
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
$
|
29,632
|
|
|
$
|
(13,607)
|
|
|
$
|
16,025
|
|
|
$
|
29,632
|
|
|
$
|
(12,851)
|
|
|
$
|
16,781
|
|
Goodwill, net of accumulated impairments of approximately $1.9 million, was approximately $514 thousand as of March 11, 2020 and August 28, 2019, respectively. Goodwill has been allocated and impairment is assessed at the reporting level, which is the individual restaurants within our Fuddruckers and Cheeseburger in Paradise reporting segments that were acquired in fiscal 2010 and fiscal 2013, respectively. The net Goodwill balance at March 11, 2020 is comprised of amounts assigned to one Cheeseburger in Paradise restaurant that is still operated by us, and the goodwill from the Fuddruckers acquisition in 2010. The Company performs a goodwill impairment test annually as of the end of the second fiscal quarter of each year and more frequently when negative conditions or a triggering event arises. 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 level.
The Company recorded no goodwill impairment charges during the two quarters ended March 11, 2020 and March 13, 2019.
Note 12. Impairment of Long-Lived Assets, Discontinued Operations, Property Held for Sale and Store Closings
Impairment of Long-Lived Assets and Store Closings
We periodically evaluate long-lived assets held for use and held for sale whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. We analyze historical cash flows of operating locations and compare results of poorer performing locations to more profitable locations. We also analyze lease terms, 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, we estimate future cash flows using assumptions based on possible outcomes of the areas analyzed. If the estimated undiscounted future cash flows are less than the carrying value of the location’s assets, we record 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 could be 20 to 25 years for newer properties, but only 5 to 10 years for older properties.
Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows.
We recognized the following impairment charges to income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
March 11,
2020
|
|
March 13,
2019
|
|
|
(28 weeks)
|
|
(28 weeks)
|
|
|
(In thousands, except per share data)
|
|
|
|
Provision for asset impairments and restaurant closings
|
$
|
1,770
|
|
|
$
|
2,422
|
|
|
Net gain on disposition of property and equipment
|
(2,498)
|
|
|
(12,501)
|
|
|
|
|
|
|
|
|
$
|
(728)
|
|
|
$
|
(10,079)
|
|
|
Effect on EPS:
|
|
|
|
|
Basic
|
$
|
0.02
|
|
|
$
|
0.34
|
|
|
Assuming dilution
|
$
|
0.02
|
|
|
$
|
0.34
|
|
The $1.8 million provision for asset impairments and restaurant closings for the two quarters ended March 11, 2020 was due primarily to the impairment of certain surplus equipment written down to fair value and the right-of-use asset for two of our leased locations where we ceased operations during the period.
The $2.5 million net gain on disposition of property and equipment for the two quarters ended March 11, 2020 was primarily related to gains on the sale of two previously held for sale properties partially offset by routine asset retirements.
The $2.4 million provision for asset impairments and restaurant closings for the two quarters ended March 13, 2019 was primarily related to assets at 8 property locations, 6 properties held for sale and one international joint venture investment written down to their fair values.
The $12.5 million net gain on disposition of property and equipment for the two quarters ended March 13, 2019 is primarily related to gains on the sale and leaseback of two properties partially offset by routine asset retirements.
Discontinued Operations
As a result of the first quarter fiscal 2010 adoption of our Cash Flow Improvement and Capital Redeployment Plan, we reclassified 24 Luby’s Cafeterias to discontinued operations. As of March 11, 2020, one location remains held for sale.
The following table sets forth the assets and liabilities for all discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 11,
2020
|
|
August 28,
2019
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
$
|
1,813
|
|
|
$
|
1,813
|
|
|
|
|
|
|
|
Assets related to discontinued operations—non-current
|
$
|
1,813
|
|
|
$
|
1,813
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
$
|
5
|
|
|
$
|
14
|
|
|
Liabilities related to discontinued operations—current
|
$
|
5
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
As of March 11, 2020, we had one property classified as discontinued operations. The asset carrying value of the owned property was approximately $1.8 million and is included in assets related to discontinued operations. We are actively marketing this property for sale. The asset carrying value at one other property with a ground lease, included in discontinued operations, was previously impaired to zero.
The following table sets forth the sales and pretax losses reported from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
|
|
|
March 11,
2020
|
|
March 13,
2019
|
|
|
(28 weeks)
|
|
(28 weeks)
|
|
|
(In thousands)
|
|
|
|
Sales
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Pretax loss
|
$
|
(17)
|
|
|
$
|
(13)
|
|
|
Income tax expense from discontinued operations
|
—
|
|
|
—
|
|
|
Loss from discontinued operations, net of income taxes
|
$
|
(17)
|
|
|
$
|
(13)
|
|
|
|
|
|
|
The following table summarizes discontinued operations for the two quarters of fiscal 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended
|
|
|
|
|
March 11,
2020
|
|
March 13,
2019
|
|
|
(28 weeks)
|
|
(28 weeks)
|
|
|
(In thousands, except per share data)
|
|
|
|
Discontinued operating loss
|
$
|
(17)
|
|
|
$
|
(13)
|
|
|
Impairments
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Pretax loss
|
(17)
|
|
|
(13)
|
|
|
Income tax expense from discontinued operations
|
—
|
|
|
—
|
|
|
Loss from discontinued operations, net of income taxes
|
$
|
(17)
|
|
|
$
|
(13)
|
|
|
Effect on EPS from discontinued operations—basic
|
$
|
(0.00)
|
|
|
$
|
(0.00)
|
|
Property Held for Sale
We periodically review long-lived assets against our plans to retain or ultimately dispose of properties. If we decide to dispose of a property, it will be moved to property held for sale, actively marketed and recorded at fair value less transaction costs. We analyze market conditions each reporting period and record additional impairments due to declines in market values of like assets. The fair value of the property is determined by observable inputs such as appraisals and prices of comparable properties in active markets for assets like ours. Gains are not recognized until the properties are sold.
Property held for sale includes unimproved land, closed restaurant properties, properties with operating restaurants that our Board of Directors has approved for sale, and related equipment for locations not classified as discontinued operations. The specific assets are valued at the lower of net depreciated value or net realizable value.
At March 11, 2020, and August 28, 2019 we had 12 and 14 owned properties with a carrying value of approximately $13.8 million and $16.5 million, respectively, in property held for sale. During the two quarters ended March 11, 2020, two properties were sold that were previously classified as held for sale. The pretax profit (loss) for the disposal group of 12 locations operating for the two quarters ended March 11, 2020 and March 13, 2019 was a pretax gain of approximately $0.1 million and a pretax loss of approximately $0.1 million, respectively.
We are actively marketing the locations currently classified as property held for sale.
Abandoned Leased Facilities - Liability for Store Closings
As of March 11, 2020, we classified 10 leased restaurants located in Arizona, California, Illinois, Maryland, and Texas as abandoned. Although we remain obligated under the terms of the leases for the rent and other costs that may be associated with the leases, we decided to cease operations and we have no foreseeable plans to occupy the spaces as a company restaurant in the future. In connection with the adoption of ASC 842 (see Note 1.), we reclassified the rent portion of the liability for store closings in the amount of $1.0 million to operating lease liabilities-current. During the two quarters ended March 11, 2020, three of the leases we considered abandoned as of August 28, 2019 expired and the operating lease liability-current of approximately $0.6 million for these three locations was reclassified to the liability for store closings. The liability at March 11,
2020 is equal to our estimate of direct costs for the remaining period of time the properties will be unoccupied as well as unpaid rent and direct costs for the three expired leases discussed above. Accrued lease termination expense liability was approximately $1.0 million and $1.4 million as of March 11, 2020 and August 28, 2019, respectively.
Note 13. Commitments and Contingencies
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Pending Claims
From time to time, the Company is subject to various 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 fiscal quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings, or claims.
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 pays a royalty fee of 2.5% of gross sales, less discounts, at the Company's operating Cheeseburger in Paradise location 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 14. Related Parties
Affiliate Services
Christopher J. Pappas, the Company’s Chief Executive Officer, and Harris J. Pappas, former director, own two restaurant entities (the “Pappas entities”) that from time to time may 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 percent 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 zero and $13 thousand under the Amended and Restated Master Sales Agreement for custom-fabricated and refurbished equipment in the two quarters ended March 11, 2020 and March 13, 2019, respectively. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of our 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 approximately 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 approximately 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 of our Board of Directors.
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement with Pappas Restaurants, Inc. for one of our Fuddruckers locations in Houston, Texas. The lease provides for a primary term of approximately six years with two subsequent five-year options. Pursuant to the lease agreement, the Company paid $28.53 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until May 31, 2020. Currently, the lease agreement provides for increases in rent at set intervals. The new lease agreement was approved by the Finance and Audit Committee of our Board of Directors.
For the two quarters ended March 11, 2020 and March 13, 2019, affiliated rents incurred as a percentage of relative total Company cost was 0.58% and 0.57%, respectively. Rent payments under the two lease agreements described above were $300 thousand and $314 thousand, respectively.
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 our Board of Directors 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.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
Note 15. Debt
The following table summarizes credit facility debt, less current portion at March 11, 2020 and August 28, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 11,
2020
|
|
August 28,
2019
|
|
Long-Term Debt
|
|
|
|
|
2018 Credit Agreement - Revolver
|
$
|
8,600
|
|
|
$
|
5,300
|
|
|
2018 Credit Agreement - Term Loan
|
45,067
|
|
|
43,399
|
|
|
Total credit facility debt
|
53,667
|
|
|
48,699
|
|
|
Less:
|
|
|
|
|
Unamortized debt issue costs
|
(1,630)
|
|
|
(1,887)
|
|
|
Unamortized debt discount
|
(1,202)
|
|
|
(1,373)
|
|
|
Total credit facility debt, less unamortized debt issuance costs
|
50,835
|
|
|
45,439
|
|
|
Current portion of credit facility debt
|
2,567
|
|
|
—
|
|
|
Credit facility debt, less current portion
|
$
|
48,268
|
|
|
$
|
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. On December 18, 2019, the Company entered into the Second Amendment to the 2018 Credit Agreement which did not change any terms of the agreement permanently. The amendment only decreased the amount of mandatory prepayment related to the sale of two properties in the .quarter ended March 11, 2020. See Note 2. Subsequent Events for discussion of Third Amendment entered subsequent to the end of the second quarter of fiscal 2020..
Borrowings under the 2018 Revolver, 2018 Delayed Draw Term Loan, and 2018 Term Loan will bear interest at the London InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest is payable quarterly and accrues daily. Under the terms of the 2018 Credit Agreement, the maximum amount of interest payable, based on the aggregate principal amount of $80.0 million and interest rates in effect at December 13, 2018, in the next 12 months was required to be prefunded at the closing date of the 2018 Credit Agreement. The prefunded amount at March 11, 2020 of approximately $6.1 million is recorded in restricted cash and cash equivalents on the Company's consolidated balance sheet. LIBOR is set to terminate in December, 2021. We expect 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: $10.0 million; 2nd anniversary: $10.0 million; 3rd anniversary: $15.0 million; and 4th anniversary: $15.0 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 0.50% 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 prepayment 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), all of the personal property of its guarantors (other than certain excluded assets) and all Mortgaged Property (as defined in the 2018 Credit Agreement) of the Company and its subsidiaries.
The 2018 Credit Facility contains customary covenants and restrictions on the Company’s ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and contains customary events of default. Specifically, among other things, the Company is required to maintain minimum Liquidity (as defined in the 2018 Credit Agreement) of $3.0 million as of the last day of each fiscal quarter and a minimum Asset Coverage Ratio (as defined in the 2018 Credit Agreement) of 2.50 to 1.00. As of March 11, 2020, the Company was in full compliance with all covenants with respect to the 2018 Credit Facility.
All amounts owing by the Company under the 2018 Credit Facility are guaranteed by the subsidiaries of the Company.
As of March 11, 2020 we had approximately $1.7 million committed under letters of credit, which are used as security for the payment of insurance obligations and are fully cash collateralized, and approximately $0.1 million in other indebtedness.
As of June 5, 2020, the Company was in compliance with all covenants under the terms of the 2018 Credit Agreement.
2016 Credit Agreement
On December 13, 2018, the 2016 Credit Agreement was terminated with all outstanding amounts paid in full.
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 Non-employee Director Stock Plan, as amended and restated effective February 9, 2018. 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 Non-employee Director Stock Plan, as amended, 1.8 million options, restricted stock units and restricted stock awards have been granted to date, and 0.1 million options were canceled or expired and added back into the plan since the plan’s inception. As of March 11, 2020, approximately 0.4 million shares remain available for future issuance. Compensation costs for share-based payment arrangements under the Non-employee Director Stock Plan, recognized in selling, general and administrative expenses, for the two quarters ended March 11, 2020 and March 13, 2019 was approximately $390 thousand and $289 thousand, respectively, and approximately $237 thousand and $168 thousand for the quarters ended March 11, 2020 and March 13, 2019, respectively.
Of the aggregate 4.1 million shares approved for issuance under the Employee Stock Plan, as amended, 7.3 million options and restricted stock units have been granted to date, and 4.5 million options and restricted stock units were canceled or expired and added back into the plan since the plan’s inception in 2005. As of March 11, 2020, approximately 1.4 million shares remain available for future issuance. Compensation costs for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses, for the two quarters ended March 11, 2020 and March 13, 2019 was approximately $136 thousand and $296 thousand, respectively, and approximately $40 thousand and $113 thousand, respectively, for the quarters ended March 11, 2020 and March 13, 2019.
Stock Options
Stock options granted under either the Employee Stock Plan or the Non-employee Director Stock Plan have exercise prices equal to the market price of the Company’s common stock at the date of the grant.
Option awards under the Non-employee 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 Non-employee Director Stock Plan in the two quarters ended March 11, 2020. No options to purchase shares were outstanding under this plan as of March 11, 2020.
Options granted under the Employee Stock Plan generally vest 50% on the first anniversary date of the 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. No options were granted in the two quarters ended March 11, 2020. Options to purchase 1,174,247 shares at option prices of $2.82 to $5.95 per share remain outstanding as of March 11, 2020.
A summary of the Company’s stock option activity for the two quarters ended March 11, 2020 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Under
Fixed
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
(Per share)
|
|
(In years)
|
|
(In thousands)
|
|
Outstanding at August 28, 2019
|
1,387,412
|
|
|
$
|
4.06
|
|
|
5.7
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled / Forfeited
|
(53,165)
|
|
|
$
|
4.54
|
|
|
—
|
|
|
—
|
|
|
Expired
|
(160,000)
|
|
|
$
|
3.44
|
|
|
—
|
|
|
—
|
|
|
Outstanding at March 11, 2020
|
1,174,247
|
|
|
$
|
4.12
|
|
|
5.9
|
|
$
|
—
|
|
|
Exercisable at March 11, 2020
|
1,108,153
|
|
|
$
|
4.20
|
|
|
5.8
|
|
$
|
—
|
|
The intrinsic value for stock options is defined as the difference between the current market value, or closing price on March 11, 2020, and the grant price on the measurement dates in the table above.
At March 11, 2020, there was approximately $46 thousand of total unrecognized compensation cost related to unvested options that are expected to be recognized over a weighted-average period of 0.7 years.
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 the closing market price of the Company’s common stock at the date of grant.
A summary of the Company’s restricted stock unit activity during the two quarters ended March 11, 2020 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 28, 2019
|
274,009
|
|
|
$
|
3.40
|
|
|
1.2
|
|
Granted
|
65,236
|
|
|
$
|
2.27
|
|
|
—
|
|
|
Vested
|
(121,111)
|
|
|
$
|
4.27
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Unvested at March 11, 2020
|
|
218,134
|
|
|
$
|
2.62
|
|
|
2.1
|
At March 11, 2020, there was approximately $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 2.1 years.
Performance Based Incentive Plan
The 2018 TSR Performance Based Incentive Plan (the "2018 TSR 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 period of three years. The grant date fair value of the 2018 TSR Plan was determined based on a Monte Carlo simulation model for a period of three years. The target number of shares for distribution at 100% of the award was 373,294 on the grant date. The 2018 TSR Plan is accounted for as an equity award since it provides for a specified number of shares. The expense for this plan year is amortized over a period of three years based on 100% target award.
Non-cash compensation expense related to the Company's TSR Performance Based Incentive Plans, recorded in selling, general and administrative expenses, was approximately $207 thousand and $237 thousand in the two quarters ended March 11, 2020 and March 13, 2019, respectively, and approximately $89 thousand and $118 thousand, respectively in the quarters ended March 11, 2020 and March 13, 2019.
A summary of the Company’s restricted stock Performance Based Incentive Plan activity during the two quarters ended March 11, 2020 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted
Average
Fair Value
|
|
|
|
|
(Per share)
|
|
Unvested at August 28, 2019
|
266,443
|
|
|
$
|
3.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 11, 2020
|
266,443
|
|
|
$
|
3.68
|
|
At March 11, 2020, there was approximately $0.2 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 0.5 years.
Restricted Stock Awards
Under the Non-employee Director Stock Plan, directors may be 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.
Note 17. Earnings Per Share
Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. 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. Stock options excluded from the computation of net income per share for the two quarters ended ended March 11, 2020 and March 13, 2019 and the quarter ended March 11, 2020 include 1,174,247 shares, 1,464,010 shares and 1,174,247 shares, respectively with exercise prices exceeding market prices whose inclusion would also be anti-dilutive.
The components of basic and diluted net loss per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
Two Quarters Ended
|
|
|
|
|
March 11,
2020
|
|
March 13,
2019
|
|
March 11,
2020
|
|
March 13,
2019
|
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(28 weeks)
|
|
(28 weeks)
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(3,797)
|
|
|
$
|
6,640
|
|
|
$
|
(12,124)
|
|
|
$
|
(843)
|
|
|
Loss from discontinued operations, net of income taxes
|
(6)
|
|
|
(8)
|
|
|
(17)
|
|
|
(13)
|
|
|
NET INCOME (LOSS)
|
$
|
(3,803)
|
|
|
$
|
6,632
|
|
|
$
|
(12,141)
|
|
|
$
|
(856)
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share—weighted-average shares
|
30,215
|
|
|
29,769
|
|
|
30,123
|
|
|
29,671
|
|
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
|
|
|
Employee and non-employee stock options
|
—
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
Denominator for earnings per share assuming dilution
|
30,215
|
|
|
29,799
|
|
|
30,123
|
|
|
29,671
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.13)
|
|
|
$
|
0.22
|
|
|
$
|
(0.40)
|
|
|
$
|
(0.03)
|
|
|
Assuming dilution
|
$
|
(0.13)
|
|
|
$
|
0.22
|
|
|
$
|
(0.40)
|
|
|
$
|
(0.03)
|
|
|
Loss per share from discontinued operations:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
Assuming dilution
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.13)
|
|
|
$
|
0.22
|
|
|
$
|
(0.40)
|
|
|
$
|
(0.03)
|
|
|
Assuming dilution
|
$
|
(0.13)
|
|
|
$
|
0.22
|
|
|
$
|
(0.40)
|
|
|
$
|
(0.03)
|
|
Note 18: Shareholder Rights Plan
On February 15, 2018, the Board of Directors adopted a shareholder 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 shareholder 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 shareholder 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 shareholder 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, 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 $0.01 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 shareholder rights plan.
On February 11, 2019, the Board of Directors approved the first amendment to the shareholder rights plan extending the term of the shareholder rights plan to February 15, 2020.
On February 14, 2020, the Board of Directors approved the second amendment to the shareholder rights plan extending the term of the plan to February 15, 2021.