At the end of fiscal 2019, there were 73 Luby’s Cafeterias, 6 Combo locations, 38 Fuddruckers Restaurants, and 1 Cheeseburger in Paradise locations that met the definition of same-stores.
RESULTS OF OPERATIONS
Period Ended November 18, 2020 and Fiscal Year Ended August 26, 2020
| | | | | | | | | | | | | | |
| Period Ended | | Year Ended | |
| November 18, 2020 | | August 26, 2020 | |
| (12 weeks) | | (52 weeks) | |
| (In thousands, except per share data) |
SALES: | | | | |
Restaurant sales | $ | 36,485 | | | $ | 183,511 | | |
Culinary contract services | 4,918 | | | 26,747 | | |
Franchise revenue | 530 | | | 3,634 | | |
Vending revenue | 14 | | | 130 | | |
TOTAL SALES | 41,947 | | | 214,022 | | |
COSTS AND EXPENSES: | | | | |
Cost of food | 9,348 | | | 52,505 | | |
Payroll and related costs | 12,964 | | | 69,833 | | |
Other operating expenses | 7,154 | | | 36,588 | | |
Occupancy costs | 2,634 | | | 15,130 | | |
Opening costs | — | | | 14 | | |
Cost of culinary contract services | 4,467 | | | 24,218 | | |
Cost of franchise operations | 294 | | | 1,543 | | |
Depreciation and amortization | 2,142 | | | 11,514 | | |
Selling, general and administrative expenses | 4,267 | | | 24,571 | | |
Other charges | 416 | | | 3,401 | | |
Net provision for (gain on) asset impairments and restaurant closings | (85) | | | 10,193 | | |
Net loss (gain) on disposition of property and equipment | 117 | | | (11,557) | | |
Total costs and expenses | 43,718 | | | 237,953 | | |
LOSS FROM OPERATIONS | (1,771) | | | (23,931) | | |
Interest income | 8 | | | 60 | | |
Interest expense | (1,212) | | | (6,388) | | |
Other income, net | 30 | | | 1,195 | | |
Loss before income taxes and discontinued operations | (2,945) | | | (29,064) | | |
Provision for income taxes | 58 | | | 357 | | |
Loss from continuing operations | (3,003) | | | (29,421) | | |
Loss from discontinued operations, net of income taxes | (16) | | | (29) | | |
NET LOSS | $ | (3,019) | | | $ | (29,450) | | |
Under the liquidation basis of accounting subsequent to November 18, 2020, we no longer report results of operations information. Comparisons of the 12 week period ended November 18, 2020 to the fiscal year ended August 26, 2020 are not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
We have previously funded our operations through borrowings from our Credit Facility, proceeds from our PPP Loan and from asset sales. Since the adoption of our Plan of Liquidation, our ability to meet our obligations is contingent upon the disposal of our assets in accordance with the Plan. We expect that the proceeds from the sale of our assets pursuant to the Plan will be adequate to meet our obligations; however, we cannot provide assurance as to the prices or net proceeds we may receive from the disposition of our assets.
STATUS OF LONG-TERM INVESTMENTS AND LIQUIDITY
We had no long-term investments as of August 25, 2021. As noted in Note 2. Subsequent Events in our consolidated financial statements included in Item 8. of this Form 10-K, subsequent to August 25, 2021, as part of the transaction to sell the Luby's brand and the operations of 35 Luby's cafeterias, we paid $3.0 million to acquire preferred stock and common stock warrants in CAL Acquisition Corp, an unrelated third party. Luby's is restricted from selling the preferred stock or exercising the common stock warrants for a period of nine months, which may be extended an additional three months. Also, a portion of the purchase price for the above-mention sale was paid in notes. We will continue to monitor the underlying investments and notes to determine the future realizable value of the preferred stock and common stock warrants.
STATUS OF TRADE ACCOUNTS AND NOTES RECEIVABLES, NET
We monitor the aging of our receivables and record reserves to adjust to estimated net realizable value, as appropriate. Credit terms of accounts receivable associated with our CCS business vary from 30 to 45 days based on contract terms.
Our notes receivable at August 25, 2021 are recorded in our consolidated statement of net assets at the amount we expect to realize based on the credit terms of the notes. See Note 10. Accounts and Notes Receivable in our consolidate financial statements included in Item 8. of this Form 10-K for a further description of the notes. We continue to monitor the terms of the notes receivable and the payment history of the issuer to determine net realizable value.
CAPITAL EXPENDITURES
Capital expenditures for fiscal year 2021 were approximately $1.2 million primarily related to recurring maintenance of our existing units. Our future maintenance capital expenditures are difficult to predict and will depend on the timing of the sales of our businesses and real estate as part of our Plan of Liquidation.
DEBT
| | | | | | | | | | | |
| |
| August 25, 2021 | | August 26, 2020 |
Long-Term Debt | (Liquidation Basis) | | (Going Concern Basis) |
2018 Credit Agreement - Revolver | $ | 5,000 | | | $ | 10,000 | |
2018 Credit Agreement - Term Loans | 12,024 | | | 36,583 | |
Total credit facility debt | $ | 17,024 | | | $ | 46,583 | |
2020 PPP Loan | $ | — | | | 10,000 | |
Total Long-Term Debt | N/A | | $ | 56,583 | |
Less: | | | |
Unamortized debt issue costs | N/A | | (1,410) | |
Unamortized debt discount | N/A | | (1,055) | |
Total Long Term Debt less unamortized debt issuance costs | N/A | | 54,118 | |
Current Portion | N/A | | — | |
Total Long Term Balance Sheet Debt | N/A | | $ | 54,118 | |
PPP Loan
On April 21, 2020. we entered into a promissory note with Texas Capital Bank, N.A., ("TCB") effective April 12, 2020, that provided for a loan in the amount of $10.0 million (the "PPP Loan") pursuant to the Paycheck Protection Program ("PPP") established under the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The PPP Loan was subject to forgiveness under the PPP upon our request to the extent that the proceeds were used to pay expenses permitted by the PPP, including payroll costs, covered rent and mortgage obligations, and covered utility payments. The PPP Loan was to mature on April 12, 2022, two years from the commencement date and bore interest at a rate of 1% per annum.
On November 12, 2020, we submitted an application for forgiveness of the entire $10.0 million due on the PPP Loan. On June 29, 2021, we received notice from the Small Business Administration ("SBA") that our $10.0 million PPP Loan had been forgiven in full and the principal and accrued interest amounts on our loan were settled on the same date.
2018 Credit Agreement
On December 13, 2018, we entered into a credit agreement (amended as defined below), the (“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 $80.0 million consisting of a $10.0 million revolving credit facility (the “Revolver”), a $10.0 million delayed draw term loan (“Delayed Draw Term Loan”), and a $60.0 million term loan (the “Term Loan”, and together with the Revolver and the Delayed Draw Term Loan, the “Credit Facility”). The Credit Facility was to terminate on, and all amounts owing thereunder was to be repaid on December 13, 2023.
Subsequent to August 25, 2021, we paid all outstanding amounts due under the Credit Agreement and the Credit Agreement was terminated, effective September 30, 2021.
Borrowings under the Revolver, Delayed Draw Term Loan, and Term Loan bore interest at the three month London InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest was payable quarterly and accrued daily. Under the terms of the 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 August 25, 2021 of approximately $3.2 million is recorded in restricted cash and cash equivalents on our consolidated statement of net assets in liquidation.
Through the date of the Third Amendment, the Company also paid a quarterly commitment fee based on the unused portion of the Revolver and the Delayed Draw Term Loan at 0.5% per annum. Voluntary prepayments, refinancing and asset dispositions constituting a sale of all or substantially all assets, under the Delayed Draw Term Loan and the Term Loan were 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. As of August 25, 2021, no make whole premium was paid or payable by the Company under the Credit Facility. Finally, the Company paid to the lenders a one-time fee of $1.6 million in connection with the closing of the Credit Facility.
Indebtedness under the Credit Facility was secured by a security interest in, among other things, all of the present and future personal property of the Company and its subsidiaries (other than certain excluded assets) and all Mortgaged Property (as defined in the Credit Agreement) of the Company and its subsidiaries. Under the Credit Facility, 80% of net proceeds from asset sales, including real property sales, were applied as mandatory prepayments of our Term Loan. Mandatory prepayments were not subject to the make whole premium described above.
The Credit Facility contained customary covenants and restrictions on our ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and contained customary events of default. Specifically, among other things, we were required to maintain minimum Liquidity (as defined in the 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 Credit Agreement) of 2.50 to 1.00. As of August 25, 2021 we were in full compliance with all covenants with respect to the Credit Facility.
All amounts owing by the Company under the Credit Facility were guaranteed by the subsidiaries of the Company.
As of August 25, 2021, we had approximately $1.8 million committed under letters of credit, which are used as security for the payment of insurance obligations and are fully cash collateralized, and approximately $7 thousand in other indebtedness.
COMMITMENTS AND CONTINGENCIES
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Claims
From time to time, we are subject to various other private lawsuits, administrative proceedings and claims that arise in the ordinary course of our 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. We currently believe that the final disposition of these types of lawsuits, proceedings and claims will not have a material adverse effect on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims.
AFFILIATIONS AND RELATED PARTIES
Christopher J. Pappas, our former Chief Executive Office and Harris J. Pappas, a former Director of the Company, own two restaurant entities (the “Pappas entities”) that may, from time to time, provide services to the Company and its subsidiaries, as detailed in the Amended and Restated Master Sales Agreement dated August 2, 2017 among the Company and the Pappas entities. Collectively, Messrs. Pappas and the Pappas entities own greater than 5% of the Company's common stock.
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities may provide specialized (customized) equipment fabrication and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. The Company incurred $18 thousand and $8 thousand under the Amended and Restated Master Sales Agreement for custom-fabricated and refurbished equipment in fiscal 2021 and 2020, respectively. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Company’s Board of Directors.
Operating Leases
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partnership interest and a 50% general partnership interest in the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented 7% of the space in that center since July 1969. No changes were made to the Company’s lease terms as a result of the transfer of ownership of the center to the new partnership.
On November 22, 2006, the Company executed a new lease agreement with respect to this shopping center. Effective upon the Company’s relocation and occupancy into the new space in July 2008, the new lease agreement provides for a primary term of 12 years with two subsequent five-year options and gives the landlord an option to buy out the tenant on or after the calendar year 2015 by paying the then unamortized cost of improvements to the tenant. The Company pays rent of $22.00 per square foot plus maintenance, taxes, and insurance during the remaining primary term of the lease. Thereafter, the lease provides for increases in rent at set intervals. The new lease agreement was approved by the Finance and Audit Committee. Due to the COVID-19 pandemic, the landlord agreed to abate the rent for April, 2020. We entered into an amendment to the lease, effective July 1, 2020, whereby (1) the lease was terminated early on December 31, 2020, (2) the rent for May and June of 2020 is abated and (3) commencing July 1, 2020 through the early termination date, the monthly rent was a fixed gross amount. The amendment 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 for one of the Company’s Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of six years with two subsequent five-year options. Pursuant to the new ground lease agreement, the Company pays rent of $28.53 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until May 31, 2020. The lease agreement provided for increases in rent at set intervals. The lease agreement was approved by the Finance and Audit Committee of our Board of Directors. In December 2019 we exercised the first five-year renewal option, effective June 1, 2020. The renewal was approved by the Finance and Audit Committee of our Board of Directors. Due to the COVID-19 pandemic, Pappas Restaurants, Inc. agreed to abate the rent for April and May of 2020. The lease was terminated on February 26, 2021, in conjunction with the sale of the Fuddruckers operations at this location to operate as a franchised location, as further described below.
For the fiscal years ended August 25, 2021 and August 26, 2020, affiliated rents incurred as a percentage of relative total Company cost was 0.25% and 0.52%, respectively. Rent payments under the two lease agreements described above were 133 thousand and $411 thousand in fiscal 2021 and 2020, respectively.
Fuddruckers Franchise
In February 2021, we completed the sale and transfer of a previously company-owned Fuddruckers restaurant to HPCP Investments, LLC, one of the Pappas entities, for cash proceeds of approximately $0.2 million and the termination of our operating lease on the property, discussed above. Concurrent with the sale, Pappas Restaurants, Inc. entered into a franchise agreement with us to operate as a Fuddruckers restaurant at this location. Each of these transactions was approved by the Finance and Audit Committee of our Board of Directors.
Key Management Personnel
Mr. Pappas resigned his position as President and Chief Executive Officer, effective January 27, 2021. Mr. Pappas remained a member of the Board of Directors of the Company until August 23, 2021. Previously, on December 11, 2017, the Company had entered into a new employment agreement with Mr. Pappas. Under the employment agreement, which is no longer effective as of January 27, 2021, the initial term of Mr. Pappas' employment ended on August 28, 2019 and automatically renewed for additional one year periods, unless terminated in accordance with its terms. The employment agreement had been unanimously
approved by the Executive Compensation Committee of our Board of Directors as well as by the full Board at that time. Previously, effective August 1, 2018, the Company and Mr. Pappas agreed to reduce his fixed annual base salary to one dollar.
Also, effective January 27, 2021, the Board of Directors appointed John Garilli as the Company’s Interim President and Chief Executive Officer. The Company and Mr. Garilli’s employer, Winthrop Capital Advisors LLC ("WCA"), have entered into an agreement (the “Agreement”), pursuant to which the Company paid WCA a one-time fee of $50,000 and will pay a monthly fee of $20,000 for so long as Mr. Garilli serves the Company in said positions. The Company has also entered into an Indemnity Agreement with Mr. Garilli and WCA. The Company and WCA had previously entered into a consulting agreement, pursuant to which WCA provided consulting services related to the Company’s adoption of the liquidation basis of accounting in the filing of our Quarterly Report on Form 10-Q for the quarter ended December 16, 2020. The Company and WCA also executed separate consulting agreements to provide similar services for the filing of our Quarterly Report on Form 10-Q for the quarters ended March 10, 2021 and June 2, 2021, and for the filing of our Annual Report on Form 10-K for the fiscal year ended August 25, 2021, respectively.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are described in Note 1, “Nature of Operations and Significant Accounting Policies,” to our Consolidated Financial Statements included in Item 8 of Part II of this report. The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States. Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods. Management believes the following are critical accounting policies due to the significant, subjective and complex judgments and estimates used when preparing our consolidated financial statements. Management regularly reviews these assumptions and estimates with the Finance and Audit Committee of our Board of Directors.
Liquidation Basis of Accounting
Under the liquidation basis of accounting, our assets are measured at their estimated net realizable value, or liquidation value, which represents the amount of their estimated cash proceeds or other consideration from liquidation, based on current contracts, estimates and other indications of sales value, and may include previously unrecognized assets that we may expect to either sell in the course of our liquidation or use in settling liabilities, such as trademarks or other intangibles. The two areas that require the most significant, subjective and complex judgements and estimates are (i) properties and business units for sale and (ii) liability for estimated costs in excess of estimated receipts during liquidation.
Properties and business units for sale
In developing the estimated net realizable value for our properties and business units held for sale, we utilized third party valuation experts, investment bankers, real estate brokers, the expertise of members of the Special Committee of our Board of Directors, and forecasts generated by our management. For estimated real estate values, we consider comparable sales transactions, our past experience selling real estate assets of the Company and, in certain instances, indicative offers, as well as capitalization rates observed for income-producing real estate. For estimated business unit valuations we consider estimated values of the economic components of possible transactions, the value of a buyer assuming certain liabilities in a purchase transaction, and, in certain instances, indicative offers, as well as the probabilities of certain outcomes.Estimates for the liquidation value of the business units, or subset of operating restaurants, is also tested for reasonableness through a multiple of historical and projected business cash flows.All estimates by nature involve a large degree of judgement and sensitivity to the underlying assumptions.
Estimated costs in excess of estimated receipts during liquidation
The liquidation basis of accounting requires the estimation of net cash flows from operations and all costs associated with implementing and completing the plan of liquidation. We project that we will have estimated costs in excess of estimated receipts during the liquidation period. These amounts can vary significantly due to, among other things, the timing and estimates for receipts and costs associated with the operations of our business units until they are sold, the timing of business and property sales, estimates of direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities, the costs associated with the winding up of operations, and other costs that we may incur which are not currently foreseeable. These receipts and accruals will be adjusted periodically as projections and assumptions change. These receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period.
The valuation of our assets and liabilities, as described above, represents estimates, based on present facts and circumstances, of the net realizable value of the assets and costs associated with carrying out the Plan. The actual values and costs associated with carrying out the Plan may differ from amounts reflected in the accompanying consolidated financial statements because of the Plan's inherent uncertainty. These differences may be material. In particular, these estimates will vary with the length of time necessary to complete the Plan. It is currently anticipated that a majority of the assets we owned on the date of the shareholder approval of the plan will be sold by December 31, 2021, with liquidation substantially complete by June 30, 2022. It is also anticipated that any assets and liabilities remaining at such time will be transferred to a liquidating entity and it is likely that the full realization of proceeds from sales will extend beyond that date.
NEW ACCOUNTING PRONOUNCEMENTS
There are no new accounting pronouncements that are applicable or relevant to the Company under the Liquidation Basis of Accounting.
INFLATION
It is generally our policy to maintain stable menu prices without regard to seasonal variations in food costs. Certain increases in costs of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Luby’s, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated statement of net assets in liquidation of Luby’s, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of August 25, 2021, and the related consolidated statement of changes in net assets in liquidation for the period from November 19, 2020 through August 25, 2021, and the consolidated balance sheet as of August 26, 2020, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the 12 week period ended November 18, 2020 and the year ended August 26, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Companyas of August 25, 2021 and August 26, 2020, and the results of its changes in net assets for the period from November 19, 2020 through August 25, 2021, and its operations and its cash flows for the 12 week period ended November 18, 2020 and the year ended August 26, 2020, in conformity with accounting principles generally accepted in the United States of America applied on the bases described below.
Basis of accounting
As discussed in Note 1 to the consolidated financial statements, the shareholders of the Company approved the Plan of Liquidation and Dissolution on November 17, 2020, and the Company determined liquidation is imminent. As a result, the Company changed its basis of accounting on November 19, 2020 from the going concern basis to the liquidation basis. This matter is also discussed below as a critical audit matter.
Basis for opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
As described in Note 1 to the consolidated financial statements, as a result of the November 17, 2020 approval by the Company’s shareholders of the Plan of Liquidation and Dissolution, it was determined that liquidation was imminent and the Company’s basis of accounting transitioned from the going concern basis of accounting to the liquidation basis of accounting on November 19, 2020, in accordance with generally accepted accounting principles. The total effect of adoption of the liquidation basis of accounting was a $46,578 thousand increase from consolidated net equity as of November 18, 2020 to net
assets in liquidation as of November 19, 2020. The changes in net assets and liabilities in liquidation from November 19, 2020 to August 25, 2021 was an increase of $37,452 thousand.
We identified the measurement of property and business unit assets at net realizable value and liabilities for estimated costs in excess of estimated receipts during liquidation at the adoption date of the liquidation basis of accounting and the Company’s year-end date as a critical audit matter. This matter is also discussed above in the Basis of Accounting paragraph.
The principal considerations for our determination that performing procedures relating to the measurement of property and business unit assets at net realizable value and liabilities for estimated costs in excess of estimated receipts during liquidation at the adoption date of the liquidation basis of accounting and the Company’s year-end date is a critical audit matter are the significant judgments made by management when determining the estimated net realizable value of properties and business units and the liability for estimated costs in excess of estimated receipts during liquidation. These judgments included significant assumptions related to estimated cash proceeds or other consideration of property and business unit assets, estimated disposal and other costs, and estimated operating income or loss that the Company reasonably expects to incur during the remaining expected duration of the liquidation period. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the measurement of these assets and the liability for estimated costs in excess of estimated receipts during liquidation. Also, the audit effort involved the use of professionals with specialized skill and knowledge.
Our audit procedures related to the measurement of property and business unit assets at net realizable value and liabilities for estimated costs in excess of estimated receipts during liquidation included the following, among others:
a.We tested management’s process for developing the estimates and assumptions used in the measurement of certain property and business unit assets and the liability for estimated costs in excess of estimated receipts during liquidation on November 19, 2020 and August 25, 2021.
b.We tested the completeness and accuracy of the data used by management in the developing of the estimates.
c.We evaluated the reasonableness of the significant assumptions used by management for certain property and business unit assets related to the estimated cash proceeds or other consideration from liquidation, and the estimated operating income or loss that the Company reasonably expects to incur during the remaining expected duration of the liquidation period.
d.We utilized professionals with specialized skill and knowledge to assist in evaluating management’s assumptions related to the estimated cash proceeds or other consideration from sales of property assets. These procedures included evaluating whether the assumptions used by management and management’s specialists were reasonable considering (i) the current and past performance of the Company; (ii) the consistency with external industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2007.
Houston, Texas
November 19, 2021
Luby’s, Inc.
Consolidated Statement of Net Assets in Liquidation
(Liquidation Basis)
| | | | | |
| August 25, 2021 |
| (in thousands) |
ASSETS | |
Cash and cash equivalents | $ | 14,392 | |
Accounts and notes receivable | 10,184 | |
Restricted cash and cash equivalents | 5,492 | |
Properties and business units for sale | 176,960 | |
Total Assets | $ | 207,028 | |
| |
LIABILITIES | |
Accounts payable | $ | 2,968 | |
Accrued expenses and other liabilities | 12,383 | |
Credit facility debt | 17,024 | |
| |
Operating lease liabilities | 7,181 | |
Liability for estimated costs in excess of estimated receipts during liquidation | 11,289 | |
Other liabilities | 1,390 | |
Total Liabilities | $ | 52,235�� | |
| |
Commitments and Contingencies | 0 |
| |
Net assets in liquidation (Note 4) | $ | 154,793 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statement of Changes in Net Assets in Liquidation
(Liquidation Basis)
(in thousands)
| | | | | | | | |
| | Period from November 19, 2020 through August 25, 2021 |
| | (40 weeks) |
| | (in thousands) |
Net assets in liquidation, beginning of period | | $ | 117,341 | |
Changes in net assets in liquidation | | |
Changes in liquidation value of properties and business units for sale | | 18,431 | |
Changes in accounts and notes receivable | | 3,615 | |
Changes in estimated cash flows during liquidation | | 15,083 | |
Net changes in liquidation value | | 37,129 | |
Proceeds received from exercise of stock options | | 323 | |
Changes in net assets in liquidation | | 37,452 | |
Net assets in liquidation, end of period | | $ | 154,793 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Balance Sheet
(Going Concern Basis)
| | | | | |
| August 26, 2020 |
| (In thousands, except share data) |
ASSETS | |
Current Assets: | |
Cash and cash equivalents | $ | 15,069 | |
Restricted Cash and cash equivalents | 6,756 | |
Trade accounts and other receivables, net | 6,092 | |
Food and supply inventories | 1,653 | |
Prepaid and other assets | 1,577 | |
| |
| |
Total current assets | 31,147 | |
Property held for sale | 11,249 | |
Assets related to discontinued operations | 1,715 | |
Property and equipment, net | 100,599 | |
Intangible assets, net | 15,343 | |
Goodwill | 195 | |
| |
Operating lease right-of-use assets | 16,756 | |
Other assets | 399 | |
Total assets | $ | 177,403 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
Current Liabilities: | |
Accounts payable | $ | 6,770 | |
Liabilities related to discontinued operations | 17 | |
| |
Operating lease liabilities - current | 3,903 | |
Accrued expenses and other liabilities | 19,569 | |
Total current liabilities | 30,259 | |
Long-term debt, less current portion | 54,118 | |
| |
Operating lease liabilities - non-current | 17,797 | |
Other liabilities | 1,630 | |
Total liabilities | 103,804 | |
Commitments and Contingencies | 0 |
| |
SHAREHOLDERS’ EQUITY | |
Common stock, $0.32 par value;100,000,000 shares authorized; Shares issued were 31,125,470 and shares outstanding were 30,625,470 at August 26, 2020. | 9,960 | |
Paid-in capital | 35,655 | |
Retained earnings | 32,759 | |
Less cost of treasury stock, 500,000 shares | (4,775) | |
Total shareholders’ equity | 73,599 | |
Total liabilities and shareholders’ equity | $ | 177,403 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Operations
(Going Concern Basis)
| | | | | | | | | | | | | | |
| Period Ended | | Year Ended | |
| November 18, 2020 | | August 26, 2020 | |
| (12 weeks) | | (52 weeks) | |
| (In thousands, except per share data) |
SALES: | | | | |
Restaurant sales | $ | 36,485 | | | $ | 183,511 | | |
Culinary contract services | 4,918 | | | 26,747 | | |
Franchise revenue | 530 | | | 3,634 | | |
Vending revenue | 14 | | | 130 | | |
TOTAL SALES | 41,947 | | | 214,022 | | |
COSTS AND EXPENSES: | | | | |
Cost of food | 9,348 | | | 52,505 | | |
Payroll and related costs | 12,964 | | | 69,833 | | |
Other operating expenses | 7,154 | | | 36,588 | | |
Occupancy costs | 2,634 | | | 15,130 | | |
Opening costs | — | | | 14 | | |
Cost of culinary contract services | 4,467 | | | 24,218 | | |
Cost of franchise operations | 294 | | | 1,543 | | |
Depreciation and amortization | 2,142 | | | 11,514 | | |
Selling, general and administrative expenses | 4,267 | | | 24,571 | | |
Other charges | 416 | | | 3,401 | | |
Net provision (gain) on asset impairments and restaurant closings | (85) | | | 10,193 | | |
Net loss (gain) on disposition of property and equipment | 117 | | | (11,557) | | |
Total costs and expenses | 43,718 | | | 237,953 | | |
LOSS FROM OPERATIONS | (1,771) | | | (23,931) | | |
Interest income | 8 | | | 60 | | |
Interest expense | (1,212) | | | (6,388) | | |
Other income, net | 30 | | | 1,195 | | |
Loss before income taxes and discontinued operations | (2,945) | | | (29,064) | | |
Provision for income taxes | 58 | | | 357 | | |
Loss from continuing operations | (3,003) | | | (29,421) | | |
Loss from discontinued operations, net of income taxes | (16) | | | (29) | | |
NET LOSS | $ | (3,019) | | | $ | (29,450) | | |
Loss per share from continuing operations: | | | | |
Basic and diluted | $ | (0.10) | | | $ | (0.97) | | |
Loss per share from discontinued operations: | | | | |
Basic and diluted | $ | 0.00 | | | $ | 0.00 | | |
Net loss per share: | | | | |
Basic and diluted | $ | (0.10) | | | $ | (0.97) | | |
Weighted-average shares outstanding: | | | | |
Basic and diluted | 30,662 | | | 30,294 | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Shareholders’ Equity
(Going Concern Basis)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | |
| Issued | | Treasury | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Retained Earnings | | Total Shareholders’ Equity |
Balance at August 28, 2019 | 30,478 | | | $ | 9,753 | | | (500) | | | $ | (4,775) | | | $ | 34,870 | | | $ | 61,182 | | | $ | 101,030 | |
Net loss for the year | — | | | — | | | — | | | — | | | — | | | (29,450) | | | (29,450) | |
Cumulative effect of accounting changes from the adoption of ASC Topic 842 | — | | | — | | | — | | | — | | | — | | | 1,027 | | | 1,027 | |
Common stock issued under nonemployee director benefit plans | 64 | | | 20 | | | — | | | — | | | (20) | | | — | | | — | |
Common stock issued under employee benefit plans | 73 | | | 24 | | | — | | | — | | | (66) | | | — | | | (42) | |
Share-based compensation expense | 509 | | | 163 | | | — | | | — | | | 871 | | | — | | | 1,034 | |
Balance at August 26, 2020 | 31,124 | | | $ | 9,960 | | | (500) | | | $ | (4,775) | | | $ | 35,655 | | | $ | 32,759 | | | $ | 73,599 | |
Net loss for the period | — | | | — | | | — | | | — | | | — | | | (3,019) | | | (3,019) | |
Common stock issued under employee benefit plans | 4 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | |
Share-based compensation expense | 51 | | | 16 | | | — | | | — | | | 167 | | | — | | | 183 | |
Balance at November 18, 2020 | 31,179 | | | $ | 9,977 | | | (500) | | | $ | (4,775) | | | $ | 35,821 | | | $ | 29,740 | | | $ | 70,763 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Cash Flows
(Going Concern Basis)
| | | | | | | | | | | |
| Period Ended | | Year Ended |
| November 18, 2020 | | August 26, 2020 |
| (12 weeks) | | (52 weeks) |
| (In thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net loss | $ | (3,019) | | | $ | (29,450) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Net provision (gain) for asset impairments and restaurant closings | (85) | | | 10,193 | |
Net loss (gain) on disposition of property and equipment | 117 | | | (11,557) | |
Depreciation and amortization | 2,142 | | | 11,514 | |
Amortization of debt issuance cost | 223 | | | 1,212 | |
Share-based compensation expense | 183 | | | 1,034 | |
Provision for doubtful accounts | — | | | 1,624 | |
| | | |
| | | |
Cash used in operating activities before changes in operating assets and liabilities | (439) | | | (15,430) | |
Changes in operating assets and liabilities: | | | |
Decrease in trade accounts and other receivables | 679 | | | 1,206 | |
| | | |
Decrease (increase) in food and supply inventories | (950) | | | 345 | |
Decrease in prepaid expenses and other assets | 909 | | | 651 | |
Decrease in operating lease assets | 1,928 | | | 5,054 | |
Decrease in operating lease liabilities | (3,154) | | | (10,862) | |
Increase (decrease) in accounts payable, accrued expenses and other liabilities | 1,046 | | | (2,561) | |
Net cash provided by (used) in operating activities | 19 | | | (21,597) | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Proceeds from disposal of assets and property held for sale | 114 | | | 24,902 | |
| | | |
| | | |
Purchases of property and equipment | (433) | | | (2,120) | |
Net cash provided by (used in) investing activities | (319) | | | 22,782 | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Revolver borrowings | — | | | 4,700 | |
| | | |
| | | |
Proceeds from term loan | — | | | 5,000 | |
Proceeds from PPP Loan | — | | | 10,000 | |
Term loan repayments | — | | | (11,816) | |
| | | |
| | | |
| | | |
Net cash provided by financing activities | — | | | 7,884 | |
Net increase (decrease) in cash and cash equivalents and restricted cash | (300) | | | 9,069 | |
Cash and cash equivalents and restricted cash at beginning of period | 21,825 | | | 12,756 | |
Cash and cash equivalents and restricted cash at end of period | $ | 21,525 | | | $ | 21,825 | |
Cash paid for: | | | |
Income taxes | $ | 4 | | | $ | 446 | |
Interest | $ | 1,059 | | | $ | 5,275 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Notes to Consolidated Financial Statements
Fiscal 2019 (52 weeks)Years 2021and2020
Note 1. Nature of Operations and Significant Accounting Policies
Nature of Operations
Luby's, Inc. is a Delaware corporation with headquarters in Houston, TX, (collectively, with its subsidiaries, the "Company", "we", "our", "us", or "Luby's". We operated restaurants under the brands Luby's Cafeteria, Fuddruckers and Cheeseburger in Paradise. We also had royalty arrangements with Fuddruckers franchisees. Under the Plan of Liquidation and Dissolution discussed below, we terminated our sub-license to the Cheeseburger in Paradise brand name in December 2020 and we sold the Fuddruckers brand and franchise business in July 2021. Subsequent to August 25, 2021, we sold the Luby's Cafeteria brand and the operations at 35 locations (see Note 2. Subsequent Events).
As of August 25, 2021, we operated 53 Luby's cafeterias and 7 Fuddruckers restaurants. Included in the counts for both Luby's cafeterias and Fuddruckers restaurants are 3 Combo units, where a Luby's cafeteria and a Fuddruckers restaurant occupy the same location. Also, as of August 25, 2021, our Culinary Services brand operated 27 contracts to manage food services for clients operating in primarily three lines of business: healthcare; senior living business, and schools.
The accompanying consolidated financial statements include the accounts of Luby’s, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Prior to Adoption of the Plan of Liquidation
The consolidated financial statements prior to November 19, 2020 were prepared on the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and were prepared in accordance with accounting principles generally accepted in the United States ("US GAAP").
Plan of Liquidation
On November 17, 2020 our shareholders approved the Plan of Liquidation and Dissolution (the “Plan of Liquidation“ or the “Plan”). The Plan provides for an orderly sale of our businesses, operations, and real estate, payment of our liabilities and other obligations, and an orderly wind down of any remaining operations and dissolution of the Company. We intend to convert all our assets into cash, satisfy or resolve our remaining liabilities and obligations, including contingent liabilities, claims and costs associated with the liquidation of the Company, and then file a certificate of dissolution with the State of Delaware. The assets to be sold include our Luby's Cafeterias, Fuddruckers, and Culinary Services ("CCS") operating divisions, as well as our real estate. We currently anticipate that our common stock will be delisted from the New York Stock Exchange ("NYSE") upon the filing of the certificate of dissolution, which is not expected to occur until the earlier of the completion of all or substantially all of the asset sales or three years. The delisting of our common stock may occur sooner in accordance with the applicable rules of the NYSE.
Following the Adoption of the Plan of Liquidation
We have determined, as a result of the approval of the Plan by our shareholders, that liquidation is imminent, as defined in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 205-30 Financial Statement Presentation, Liquidation Basis of Accounting ("ASC 205-30"). Liquidation is considered imminent when the likelihood is remote that we will return from liquidation and either (a) the Plan is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the Plan will be blocked by other parties, or (b) the Plan is being imposed by other forces (for example, involuntary bankruptcy).
Accordingly, we have changed our basis of accounting from the going concern basis to the liquidation basis effective November 19, 2020. Although shareholder approval of the Plan occurred on November 17, 2020, we are using the liquidation basis of accounting effective November 19, 2020 as a convenience date. Any activity between November 17, 2020 and November 19, 2020 would not be materially different under the liquidation basis of accounting.
The liquidation basis of accounting differs significantly from the going concern basis, as summarized below.
Under the liquidation basis of accounting, the consolidated balance sheet and consolidated statements of operations, equity and cash flows are no longer presented.
The liquidation basis of accounting requires a statement of net assets in liquidation, a statement of changes in net assets in liquidation and all disclosures necessary to present relevant information about our expected resources in liquidation. The liquidation basis of accounting may only be applied prospectively from the day liquidation becomes imminent and the initial statement of changes in net assets in liquidation may present only changes in net assets that occurred during the period since that date.
Under the liquidation basis of accounting, our assets are measured at their estimated net realizable value, or liquidation value, which represents the amount of their estimated cash proceeds or other consideration from liquidation, based on current contracts, estimates and other indications of sales value, and includes business unit valuations representing previously unrecognized assets that we may expect to either sell in the course of our liquidation or use in settling liabilities, such as trademarks or other intangibles. In developing these estimates, we utilized third party valuation experts, investment bankers, real estate brokers, the expertise of members of the Special Committee of our Board of Directors, and forecasts generated by our management. For estimated real estate values, we considered comparable sales transactions, our past experience selling real estate assets of the Company and, in certain instances, indicative offers, as well as capitalization rates observed for income-producing real estate. For estimated business unit valuations we considered estimated values of the economic components of possible transactions, the value of a buyer assuming certain liabilities in a purchase transaction, and, in certain instances, indicative offers, as well as the probabilities of certain outcomes. Estimates for the liquidation value of the business units, or subset of operating restaurants, were also tested for reasonableness through a multiple of historical and projected business cash flows. All estimates by nature involve a large degree of judgement and sensitivity to the underlying assumptions.
The liquidation basis of accounting requires us to accrue and present separately, without discounting, the estimated disposal and other costs, including any costs associated with the sale or settlement of our assets and liabilities and the estimated operating income or loss that we reasonably expect to incur, including providing for federal income taxes during the remaining expected duration of the liquidation period. In addition, deferred tax assets previously provided for under the going concern basis of accounting, which include net operating losses and other tax credits, may be realized partially or in full, subject to IRS limitations, to offset taxable income we expect to generate from the liquidation process.
Under the liquidation basis of accounting, we recognize liabilities as they would have been recognized under the going concern basis as adjusted for the timing assumptions related to the liquidation process and they will not be reduced to expected settlement values prior to settlement.
These estimates will be periodically reviewed and adjusted as appropriate. There can be no assurance that these estimated values will be realized. Such amounts should not be taken as an indication of the timing or the amount of future distributions or our actual dissolution.
The valuation of our assets and liabilities, as described above, represents estimates, based on present facts and circumstances, of the net realizable value of the assets and costs associated with carrying out the Plan. The actual values and costs associated with carrying out the Plan may differ from amounts reflected in the accompanying consolidated financial statements because of the Plan's inherent uncertainty. These differences may be material. In particular, these estimates will vary with the length of time necessary to complete the Plan. It is currently anticipated that a majority of the assets we owned on the date of the shareholder approval of the plan will be sold by December 31, 2021, with liquidation substantially complete by June 30, 2022. It is also anticipated that any assets and liabilities remaining at such time will be transferred to a liquidating entity and it is likely that the full realization of proceeds from sales will extend beyond that date.
Net assets in liquidation represents the estimated liquidation value to holders of common shares upon liquidation. It is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to our shareholders and no assurance can be given that the distributions will equal or exceed the estimate presented in these consolidated financial statements.
Accounting Periods
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically include three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to Fiscal 2018 (52 weeks)the 365 day calendar year.
Subsequent Events
SalesEvents subsequent to the Company’s fiscal year ended August 25, 2021 through the date of issuance of the financial statements are evaluated to determine if the nature and significance of the events warrant inclusion in the Company’s consolidated financial statements. See Note 2. Subsequent Events.
COVID-19
The novel coronavirus disease (“COVID-19”) pandemic has had a significant impact on our level of operations, guest behavior, guest traffic, and the number of locations where we and our former Fuddruckers franchisees operate. As a result, at the onset of the COVID-19 pandemic in the spring of 2020, we modified our business operations within our restaurants and significantly reduced staffing at our corporate support office.
|
| | | | | | | | | | |
| Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
Restaurant sales | $ | 284,513 |
| | $ | 332,518 |
| | (14.4 | )% |
Culinary contract services | 31,888 |
| | 25,782 |
| | 23.7 | % |
Franchise revenue | 6,690 |
| | 6,365 |
| | 5.1 | % |
Vending revenue | 379 |
| | 531 |
| | (28.6 | )% |
TOTAL SALES | $ | 323,470 |
| | $ | 365,196 |
| | (11.4 | )% |
On March 13, 2020, President Donald Trump declared a national emergency in response to the COVID-19 pandemic. Throughout the remainder of calendar 2020, we cycled through periods initially when state government orders mandated a suspension of on-premise dining, followed by periods when our on-premise dining capacity was limited due to government order. Full on-premise dining resumed in Texas in March 2021, when government restrictions limiting on-premise dining were lifted. Prior to the onset of the COVID-19 pandemic, we operated 118 restaurants, of which 87 were closed as a result of the pandemic and 53 of those were reopened as permitted when restrictions were lifted. The 31 of our restaurants that remained open during the pandemic were open at reduced capacity levels or for takeout only.Despite increasing vaccination rates, U.S. Treasury stimulus payments to U.S. citizens and other positive developments, risks and uncertainties remain as cases of COVID-19 infection continue within the communities where we operate, albeit at reduced levels. The COVID-19 pandemic could continue to materially impact our cash flows and value of net assets in liquidation, while we execute on our Plan of Liquidation.
Total company sales decreased approximately $41.7 million, or 11.4%, inReportable Segments
Under the going concern basis of accounting, each restaurant was considered an operating segment because operating results and cash flows could be determined for each restaurant. We aggregated 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, similarity of store level profit margins and the nature of the regulatory environment were alike. For the 12 week period ended November 18, 2020 and the fiscal 2019 compared to fiscal 2018, consisting primarily of an approximate $48.0 million decrease in restaurant sales and an approximate $0.2 million decrease in vending revenue, partially offset by an approximate $6.1 million increase in Culinary contract services sales, an approximate $0.3 million increase in Franchise revenue.
The Company operates with fiveyear ended August 26, 2020, we had 5 reportable operating segments: Luby'sLuby’s Cafeterias, Fuddruckers Restaurants, Cheeseburger in Paradise Restaurants, Fuddruckers franchise operations, and Culinary Services (“CCS”). Under the liquidation basis of accounting, although we continued to operate our restaurant, franchise and CCS businesses, we no longer make operating decisions or assess performance by segment, as all of our assets and businesses are considered held for sale. Accordingly, effective November 19, 2020, we have only one reporting and operating segment.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash and cash equivalents and restricted cash and cash equivalents include highly liquid investments such as money market funds that have a maturity of three months or less. Our bank account balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. Amounts in transit from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction.
Trade Accounts, Notes and Other Receivables
Under the going concern basis of accounting, receivables consisted principally of amounts due from franchises, CCS clients, catering customers and restaurant food sales to corporations. Receivables were recorded at the invoiced amount. The allowance for doubtful accounts was our best estimate of the amount of probable credit losses in our existing accounts receivable. We determined the allowance based on historical loss experience for CCS clients, catering customers and restaurant sales to corporations and, for CCS receivables and franchise royalty and marketing and advertising receivables. We also considered the franchisees’ and CCS clients’ unsecured default status. We periodically reviewed our allowance for doubtful accounts. Account balances were charged off against the allowance after all means of collection were exhausted and the potential for recovery was considered remote. Under the liquidation basis of accounting trade, notes and other receivables are stated at amount of their estimated cash proceeds.
Inventories
Under the going concern basis of accounting, food and supply inventories were stated at the lower of cost (first-in, first-out) or net realizable value. Under the liquidation basis of accounting, food and supply inventories have no net realizable value due to the nature of the inventory and the high turnover used in operating the remaining restaurants.
Property Held for Sale
Under the going concern basis of accounting, we periodically reviewed long-lived assets against our plans to retain or ultimately dispose of properties. If we decided to dispose of a property, it was moved to property held for sale and actively marketed. Property held for sale was recorded at amounts not in excess of what management expected to receive upon sale, less costs of disposal. Depreciation on assets moved to property held for sale was discontinued and gains were not recognized until the properties are sold. Under the liquidation basis of accounting, all of our property is for sale and is recorded on the statement of net assets in liquidation at the amount of their estimated cash proceeds or other consideration from liquidation.
Impairment of Long-Lived Assets
Under the going concern basis of accounting, impairment losses were recorded on long-lived assets used in operations when indicators of impairment were present and the undiscounted cash flows estimated to be generated by those assets were less than
the carrying amount. We evaluated impairments on a restaurant-by-restaurant basis and used cash flow results and other market conditions as indicators of impairment.
Debt Issuance Costs
Under the going concern basis of accounting, debt issuance costs included costs incurred in connection with the arrangement of long-term financing agreements. The debt issuance costs associated with our term loans were presented on our consolidated balance sheet as a direct deduction from long-term debt. The debt issuance costs associated with our revolving credit facility were included in other assets on our consolidated balance sheet. These costs were amortized using the effective interest method over the respective term of the debt to which they specifically relate. Under the liquidation basis of accounting, deferred debt issuance costs are not given a value.
Fair Value of Financial Instruments
Under the going concern basis of accounting, the carrying value of cash and cash equivalents, trade accounts and other receivables, accounts payable and accrued expenses approximated fair value based on the short-term nature of these accounts. The carrying value of credit facility debt also approximated fair value based on its recent renewal.
Self-Insurance Accrued Expenses
We self-insure a significant portion of expected losses under its workers’ compensation, employee injury and general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred claims, both reported and not yet reported. These recorded estimated liabilities are based on judgments and independent actuarial estimates, which include the use of claim development factors based on loss history; economic conditions; the frequency or severity of claims and claim development patterns; and claim reserve management settlement practices.
We maintain a self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits per third party insurance carriers. Under the going concern basis of accounting, we recorded expenses under the plan based on estimates of the costs of expected claims, administrative costs and stop-loss insurance premiums. Under both the going concern basis of accounting and the liquidation basis of accounting, our self-insurance liability is based on the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided by our third party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims may differ from what we have accrued as our estimated loss liability based on historical experience.
Revenue Recognition
See Note 6. Revenue Recognition.
Cost of CCS
Under the going concern basis of accounting, the cost of CCS included all food, payroll and related expenses, other operating expenses, and selling, general and administrative expenses related to culinary service sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with CCS were reported within those respective lines as applicable. Under the liquidation basis of accounting, estimated expenses during the liquidation period are included in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
Cost of Franchise Operations
Under the going concern basis of accounting, the cost of franchise operations included all food, payroll and related expenses, other operating expenses, and selling, general and administrative expenses related to franchise operations sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with franchise operations were reported within those respective lines as applicable. Under the liquidation basis of accounting, estimated expenses during the liquidation period are included in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
Marketing and Advertising Expenses
Under the going concern basis of accounting, marketing and advertising costs were expensed as incurred. Total advertising expense included in other operating expenses and selling, general and administrative expense was $0.6 million and $3.9 million in the 12 weeks ended November 18, 2020 and in fiscal 2020, respectively. We recorded advertising attributable to local store marketing and local community involvement efforts in other operating expenses and we recorded advertising attributable to our brand identity, our promotional offers, and our other marketing messages intended to drive guest awareness of our brands, in selling, general, and administrative expenses. We believed this separation of our marketing and advertising costs assisted with
measurement of the profitability of individual restaurant locations by associating only the local store marketing efforts with the operations of each restaurant.
Marketing and advertising expense included in other operating expenses attributable to local store marketing was $0.1 million and $0.5 million in the 12 weeks ended November 18, 2020 and in fiscal 2020, respectively.
Marketing and advertising expense included in selling, general and administrative expense was $0.5 million and $3.4 million in the 12 weeks ended November 18, 2020 and in fiscal 2020, respectively.
Under the liquidation basis of accounting, estimated expenses during the liquidation period are included in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
Depreciation and Amortization
Under the going concern basis of accounting, property and equipment were recorded at cost. We depreciated the cost of equipment over its estimated useful life using the straight-line method. Leasehold improvements were amortized over the lesser of their estimated useful lives or the related lease terms. Depreciation of buildings was provided on a straight-line basis over the estimated useful lives. There is no depreciation or amortization of our assets under the liquidation basis of accounting.
Other Charges
Under the going concern basis of accounting, other charges includes those expenses that we consider related to our restructuring efforts that are not part of our recurring operations.
Other charges were comprised of:
| | | | | | | | | | | |
| 12 weeks ended | | Fiscal Year Ended |
| November 18, 2020 | | August 26, 2020 |
| (in thousands) |
OTHER CHARGES: | | | |
| | | |
Employee Severances | $ | — | | | $ | 1,332 | |
Restructuring Related | 416 | | | 2,069 | |
Total Other Charges | $ | 416 | | | $ | 3,401 | |
Operating Leases
See Note 7. Leases.
Income Taxes
Under both the going concern basis of accounting and the liquidation basis of accounting, the estimated future income tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as operating loss and tax credit carrybacks and carryforwards are recorded. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established against deferred tax assets when the Company determines, based on the weight of available evidence, that they are more likely to not be realized than realized. In the event the Company subsequently determines that it would be able to realize deferred income tax assets in excess of their net recorded amount, the Company would reduce the valuation allowance, which would reduce the provision for income taxes. See Note 11. Income Taxes for further discussion of the valuation allowance.
We make judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions as well as by the Internal Revenue Service (“IRS”). In management’s opinion, adequate provisions for income taxes have been made for all open tax years. The potential outcomes of examinations are regularly assessed in determining the adequacy of the provision for income taxes and income tax liabilities. We believe that adequate provisions have been made for reasonably possible outcomes related to uncertain tax matters.
Discontinued Operations
Under the going concern basis of accounting, we reported the disposal of a component or a group of components of the Company in discontinued operations if the disposal of the components or group of components represented a strategic shift that had or was expected to have a major effect on the Company’s operations and financial results.
Share-Based Compensation
Under the going concern basis of accounting, share-based compensation expense was estimated for equity awards at fair value at the grant date. We determined the fair value of restricted stock awards based on the average of the high and low price of its common stock on the date awarded by the Board of Directors. We determined the fair value of stock option awards using a Black-Scholes option pricing model. The Black-Scholes option pricing model requires various judgmental assumptions including the expected dividend yield, stock price volatility, and the expected life of the award. The fair value of performance share based award liabilities were estimated based on a Monte Carlo simulation model. For further discussion, see Note 17. Share-Based and Other Compensation.
Earnings Per Share
Under the going concern basis of accounting, basic income per share is computed by dividing net income attributable to common shareholders by the weighted-average number of shares outstanding, including restricted stock units, during each period presented. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, determined using the treasury stock method.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting periods. Actual results could differ from these estimates.
Recently Accounting Pronouncements
There are no new accounting pronouncements that are applicable or relevant to the Company under the Liquidation Basis of Accounting.
Note 2. Subsequent Events
Subsequent to the end of fiscal year 2021, on August 26, 2021, we sold the Luby’s Cafeterias brand name and the business operations at 35 Luby’s locations to an unrelated third party for an adjusted aggregate consideration of approximately $28.4 million which includes the assumption of certain liabilities and the issuance of notes to us. There can be no assurance that we will realize or receive full value of such consideration. The net asset value of the sale is included in properties and business units for sale on the accompanying consolidated statement of net assets in liquidation at August 25, 2021 at a discounted rate that represents the amount we expect to receive upon liquidation of the notes.
On September 30, 2021, we completed the previously announced sale of 26 real estate properties, which properties were leased to and are operated by LRC, to Store Capital Acquisitions, LLC for cash consideration of $88.0 million. We utilized approximately $17.6 million of the proceeds to repay in full all amounts due under our Credit Facility (see Note 14. Debt) with MSD PCOF Partners VI, LLC. The Credit Facility was terminated effective September 30, 2021.
Subsequent to August 25, 2021, in addition to the properties sold to Store Capital, we sold 4 other properties for cash consideration of approximately $13.0 million.
On November 1, 2021, we paid a cash liquidating distribution of $2.00 per share to shareholders of record as of October 25, 2021. The liquidating distribution of approximately $62.2 million was paid from the net proceeds from recent property sales.
Note 3. Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation
The liquidation basis of accounting requires the estimation of net cash flows from operations and all costs associated with implementing and completing the plan of liquidation. We project that we will have estimated costs in excess of estimated receipts during the liquidation period. These amounts can vary significantly due to, among other things, the timing and estimates for receipts and costs associated with the operations of our business units until they are sold, the timing of business and property sales, estimates of direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities, the costs associated with the winding up of operations, and other costs that we may incur which are not currently foreseeable. These receipts and accruals will be adjusted periodically as projections and assumptions change. These receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period. Upon transition to the liquidation basis of accounting on November 19, 2020, the Company accrued revenues and expenses expected to be earned or incurred during liquidation. The liability for estimated costs in excess of estimated receipts during liquidation at August 25, 2021 and November 19, 2020 was comprised of (in thousands):
| | | | | | | | | | | | | | |
| | August 25, 2021 | | November 19, 2020 |
Total estimated receipts during remaining liquidation period | | $ | 25,045 | | | $ | 92,017 | |
Total estimated costs of operations | | (20,763) | | | (76,151) | |
Selling, general and administrative expenses | | (9,585) | | | (18,745) | |
| | | | |
Interest expense | | (151) | | | (2,305) | |
Interest component of operating lease payments | | (2,307) | | | (7,064) | |
Capital expenditures | | (120) | | | (943) | |
Sales costs | | (3,408) | | | (4,079) | |
Total estimated costs during remaining liquidation period | | (36,334) | | | (109,287) | |
Liability for estimated costs in excess of estimated receipts during liquidation | | $ | (11,289) | | | $ | (17,270) | |
The change in the liability for estimated costs in excess of estimated receipts during liquidation between November 19, 2020 and August 25, 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 19, 2020 | | Net Change in Working Capital (3) | | Changes in Estimated Future Cash Flows During Liquidation (4) | | August 25, 2021 |
| | | | | | | | |
Assets: | | | | | | | | |
Estimated net inflows from operations (1) | | $ | 7,859 | | | $ | (21,423) | | | $ | 15,419 | | | $ | 1,855 | |
| | | | | | | | |
| | 7,859 | | | (21,423) | | | 15,419 | | | 1,855 | |
Liabilities: | | | | | | | | |
Sales costs | | (4,079) | | | 1,876 | | | (1,205) | | | (3,408) | |
Corporate expenditures (2) | | (21,050) | | | 10,445 | | | 869 | | | (9,736) | |
| | | | | | | | |
| | (25,129) | | | 12,321 | | | (336) | | | (13,144) | |
| | | | | | | | |
Liability for estimated costs in excess of estimated receipts during liquidation | | $ | (17,270) | | | $ | (9,102) | | | $ | 15,083 | | | $ | (11,289) | |
(1) Estimated net inflows from operations consists of total estimated receipts during liquidation less the sum of total estimated (i) costs of operations, (ii) interest component of operating lease payments and (iii) capital expenditures.
(2) Corporate expenditures consists of (i) selling, general and administrative expenses and (ii) interest expense.
(3) Net change in working capital represents changes in cash, restricted cash, accounts receivable, accounts payable, and accrued expenses and other liabilities as a result of the Company's operating activities for the period from November 19, 2020 to August 25, 2021.
(4) Changes in estimated future cash flows during liquidation includes adjustments to previous estimates and changes in estimated holding periods of our assets.
Note 4. Net Assets in Liquidation
Initial Net Assets In Liquidation
The following is a reconciliation of total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the liquidation basis of accounting as of November 19, 2020 (in thousands):
| | | | | | | | |
Total Shareholders' Equity as of November 18, 2020 | | $ | 70,763 | |
Increase due to estimated net realizable value of properties and business units (1) | | 78,985 | |
Decrease due to write-off of deferred financing costs | | (2,260) | |
| | |
| | |
Decrease due to write-off of operating lease right-of-use assets | | (14,829) | |
Net increase due to write-off of deferred assets, deferred income and goodwill | | 1,952 | |
Liability for estimated costs in excess of estimated receipts during liquidation | | (17,270) | |
Adjustment to reflect the change to the liquidation basis of accounting | | 46,578 | |
Estimated value of net assets in liquidation as of November 19, 2020 | | $ | 117,341 | |
(1) Under the liquidation basis of accounting, all assets are recorded at net realizable value which implicitly includes the tangible and intangible value of all assets. This adjustment at November 19, 2020 reflects adjusting real properties to net realizable value and recording an estimated value for our business units, Luby's Cafeterias, Fuddruckers Restaurants and franchise operations, and Culinary Contract Services.
Current Fiscal Year Activity
Company-Owned RestaurantsNet assets in liquidation increased by $37.5 million during the period from November 19, 2020 through August 25, 2021. The increase was primarily due to a $18.4 million increase in properties and business units for sale and a $15.1 million net increase due to a remeasurement of assets and liabilities.
The increase in properties and business units for sale was due to a change in value attributable to properties that have closed, or are under contract to sell with non-refundable deposits, at prices that were different than our previous liquidation values and to the sale and conversion to franchise locations of Fuddruckers restaurants. This increase was partially offset by a change in the estimated value of our business units and some of our real estate assets.
The $15.1 million increase generated by the remeasurement of assets and liabilities was mainly due to the $10.0 million forgiveness of our PPP loan, $1.8 million increase in projected future operating results for the remainder of the holding period, and $6.5 million increase from our actual operating results for the period from November 19, 2020 to August 25, 2021. This increase was partially offset by increases in actual and projected sale closing costs of $1.2 million and an increase in corporate general and administrative costs of $2.0 million.
We have one class of common stock. The net assets in liquidation at August 25, 2021 would result in liquidating distributions of $5.00 per common share based on 30,973,755 common shares outstanding at that date. This estimate is dependent on projections of costs and expenses to be incurred during the period required to complete the Plan and the realization of estimated net realizable value of our properties and business units. There is inherent uncertainty with these estimates, and they could change materially based on the timing of business and property sales, the performance of the underlying assets, any changes in the underlying assumptions of the projected cash flows, as well as the ultimate vesting of outstanding restricted share awards and exercise of vested stock options. The estimated liquidating distributions per share on a fully diluted basis, assuming all restricted stock awards vest and all in-the-money stock options are exercised, is not materially different than the amount stated above. No assurance can be given that the liquidating distributions will equal or exceed the estimate presented in these consolidated financial statements.
Lease Obligations
Under both the going concern basis of accounting and the liquidation basis of accounting, lease obligations are recorded at the present value of the total fixed lease payments over the reasonably certain lease term using discount rates as of the effective date of the lease and the obligation is reduced as we make lease payments. As a result of the same accounting treatment, there is no reconciling entry to adjust total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the liquidation basis of accounting as of November 19, 2020.
During the fourth quarter of fiscal 2020 and all of fiscal 2021, we were able to settle 29 leases for closed restaurant properties and negotiated an early termination date and reduced lease payment at 1 operating restaurant property. While the amounts paid to settle our lease liabilities varied, in the aggregate, we have settled these 29 leases for approximately 21% of the total undiscounted base rent payments that would otherwise have been due under the leases through their original contractual termination date. We can offer no assurances that we will continue to settle any lease obligations for less than the total undiscounted base rent payments, or for less than their discounted value recorded within net assets in liquidation.
Note 5. 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 aggregate to the total of the same such amounts shown in the consolidated statements of cash flows:
| | | | | | | | | | | |
| November 18, 2020 | | August 26, 2020 |
| (In thousands) |
Cash and cash equivalents | $ | 14,874 | | | $ | 15,069 | |
Restricted cash and cash equivalents | 6,651 | | | 6,756 | |
Total cash and cash equivalents shown in the statement of cash flows | $ | 21,525 | | | $ | 21,825 | |
Restricted cash and cash equivalents as of August 25, 2021 was $5.5 million. Amounts included in restricted cash represent those required to be set aside for (1) estimated amount of interest payable in the next 12 months under the Credit Agreement (see "Note 14. Debt"), (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 6. Revenue Recognition
Under the going concern basis of accounting, we recognized revenue as described below. Under the liquidation basis of accounting, we estimate the cash receipts from food and beverage sales at each of our restaurants, and fees under our CCS contracts. We estimate these expected cash receipts from operating these businesses through the point when we expect the operations of these businesses or individual income producing properties are sold to a new owner or when we otherwise estimate operations cease. This estimated ending period for operating these businesses and individual income producing property generally varies from first quarter of fiscal 2022 through the third quarter of fiscal 2022. These estimated revenues are included in the calculation of estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets in liquidation. Estimated proceeds from the sale of our operating businesses and real estate assets are recorded separately from the estimated operating revenues and are included in properties and business units for sale on our consolidated statement of net assets in liquidation.
Restaurant SalesLIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents |
| | | | | | | | | | |
Restaurant Brands | Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
| August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
Luby’s cafeterias | $ | 195,151 |
| | $ | 210,972 |
| | (7.5 | )% |
Combo locations | 19,459 |
| | 20,886 |
| | (6.8 | )% |
Luby's cafeteria segment | $ | 214,610 |
| | $ | 231,858 |
| | (7.4 | )% |
Fuddruckers restaurants segment | 67,331 |
| | 87,618 |
| | (23.2 | )% |
Cheeseburger in Paradise segment | $ | 3,108 |
| | $ | 13,042 |
| | (76.2 | )% |
Total Restaurant Sales | $ | 284,513 |
| | $ | 332,518 |
| | (14.4 | )% |
Total restaurant sales decreased approximately $48.0 million in fiscal 2019 compared to fiscal 2018. The decrease in restaurant sales included an approximate $15.8 million decrease in sales at stand-alone Luby’s Cafeterias, an approximate $20.3 million decrease in sales at stand-alone Fuddruckers restaurants, an approximate $1.4 million decrease in sales from Combo locations, and an approximate $9.9 million decrease at salesWe have previously funded our operations through borrowings from our Cheeseburger in Paradise restaurants.
The approximate $15.8 million decrease in sales at stand-alone Luby’s reflects the reduction of nine operating restaurants, and a 2.9% decrease in same-store stand-alone Luby's Cafeteria sales. The 2.9% decrease in same-store sales includes a 4.9% decrease in guest traffic, partially offset by a 2.1% increase in average spend per guest.
The approximate $20.3 million decrease in sales at stand-alone Fuddruckers restaurants reflects the reduction of 27 operating restaurants and a 7.5% decrease in same-store stand-alone Fuddruckers sales. The 7.5% decrease in same-store sales includes a 10.7% decrease in guest traffic partially offset by a 3.6% increase in average spend per guest.
The approximate $1.4 million decrease in sales from Combo locations reflects a 6.8% decrease in sales at the six locations in operation throughout fiscal 2019 and fiscal 2018.
The approximate $9.9 million decrease in salesCredit Facility, proceeds from our CheeseburgerPPP Loan and from asset sales. Since the adoption of our Plan of Liquidation, our ability to meet our obligations is contingent upon the disposal of our assets in Paradise reflectsaccordance with the reduction of seven operating restaurants and a 2.9% decrease atPlan. We expect that the one remaining Cheeseburger in Paradise location.
Cost of Food
|
| | | | | | | | | | | |
| Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
Cost of food: | | | | | |
Luby's cafeteria segment | $ | 60,801 |
| | $ | 65,956 |
| | $ | (5,155 | ) |
Fuddruckers restaurants segment | 17,712 |
| | 23,956 |
| | (6,244 | ) |
Cheeseburger in Paradise segment | 966 |
| | 4,326 |
| | (3,360 | ) |
Total Restaurants | $ | 79,479 |
| | $ | 94,238 |
| | $ | (14,759 | ) |
| | | | | |
As a percentage of restaurant sales | | | | | |
Luby's cafeteria segment | 28.4 | % | | 28.4 | % | | 0.0 | % |
Fuddruckers restaurants segment | 26.3 | % | | 27.3 | % | | (1.0 | )% |
Cheeseburger in Paradise segment | 31.1 | % | | 33.2 | % | | (2.1 | )% |
Total Restaurants | 27.9 | % | | 28.3 | % | | (0.4 | )% |
Cost of food, which is comprised of the cost associated withproceeds from the sale of food and beverage products that are consumed while diningour assets pursuant to the Plan will be adequate to meet our obligations; however, we cannot provide assurance as to the prices or net proceeds we may receive from the disposition of our assets.
STATUS OF LONG-TERM INVESTMENTS AND LIQUIDITY
We had no long-term investments as of August 25, 2021. As noted in Note 2. Subsequent Events in our restaurants,consolidated financial statements included in Item 8. of this Form 10-K, subsequent to August 25, 2021, as take-out,part of the transaction to sell the Luby's brand and the operations of 35 Luby's cafeterias, we paid $3.0 million to acquire preferred stock and common stock warrants in CAL Acquisition Corp, an unrelated third party. Luby's is restricted from selling the preferred stock or exercising the common stock warrants for a period of nine months, which may be extended an additional three months. Also, a portion of the purchase price for the above-mention sale was paid in notes. We will continue to monitor the underlying investments and notes to determine the future realizable value of the preferred stock and common stock warrants.
STATUS OF TRADE ACCOUNTS AND NOTES RECEIVABLES, NET
We monitor the aging of our receivables and record reserves to adjust to estimated net realizable value, as catering. Costappropriate. Credit terms of food decreasedaccounts receivable associated with our CCS business vary from 30 to 45 days based on contract terms.
Our notes receivable at August 25, 2021 are recorded in our consolidated statement of net assets at the amount we expect to realize based on the credit terms of the notes. See Note 10. Accounts and Notes Receivable in our consolidate financial statements included in Item 8. of this Form 10-K for a further description of the notes. We continue to monitor the terms of the notes receivable and the payment history of the issuer to determine net realizable value.
CAPITAL EXPENDITURES
Capital expenditures for fiscal year 2021 were approximately $14.8$1.2 million or 15.7%primarily related to recurring maintenance of our existing units. Our future maintenance capital expenditures are difficult to predict and will depend on the timing of the sales of our businesses and real estate as part of our Plan of Liquidation.
DEBT
| | | | | | | | | | | |
| |
| August 25, 2021 | | August 26, 2020 |
Long-Term Debt | (Liquidation Basis) | | (Going Concern Basis) |
2018 Credit Agreement - Revolver | $ | 5,000 | | | $ | 10,000 | |
2018 Credit Agreement - Term Loans | 12,024 | | | 36,583 | |
Total credit facility debt | $ | 17,024 | | | $ | 46,583 | |
2020 PPP Loan | $ | — | | | 10,000 | |
Total Long-Term Debt | N/A | | $ | 56,583 | |
Less: | | | |
Unamortized debt issue costs | N/A | | (1,410) | |
Unamortized debt discount | N/A | | (1,055) | |
Total Long Term Debt less unamortized debt issuance costs | N/A | | 54,118 | |
Current Portion | N/A | | — | |
Total Long Term Balance Sheet Debt | N/A | | $ | 54,118 | |
PPP Loan
On April 21, 2020. we entered into a promissory note with Texas Capital Bank, N.A., in fiscal 2019 compared to fiscal 2018. Cost of food is variable and generally fluctuates with sales and guest traffic volume. As("TCB") effective April 12, 2020, that provided for a percentage of restaurant sales, food costs decreased 0.4% to 27.9% in fiscal 2019 compared to 28.3% in fiscal 2018. The Cost of food as percentage of sales was impacted by higher average pricingloan in the first halfamount of $10.0 million (the "PPP Loan") pursuant to the Paycheck Protection Program ("PPP") established under the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The PPP Loan was subject to forgiveness under the PPP upon our request to the extent that the proceeds were used to pay expenses permitted by the PPP, including payroll costs, covered rent and mortgage obligations, and covered utility payments. The PPP Loan was to mature on April 12, 2022, two years from the commencement date and bore interest at a rate of 1% per annum.
On November 12, 2020, we submitted an application for forgiveness of the fiscal year, menu rationalization leadingentire $10.0 million due on the PPP Loan. On June 29, 2021, we received notice from the Small Business Administration ("SBA") that our $10.0 million PPP Loan had been forgiven in full and the principal and accrued interest amounts on our loan were settled on the same date.
2018 Credit Agreement
On December 13, 2018, we entered into a credit agreement (amended as defined below), the (“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 $80.0 million consisting of a $10.0 million revolving credit facility (the “Revolver”), a $10.0 million delayed draw term loan (“Delayed Draw Term Loan”), and a $60.0 million term loan (the “Term Loan”, and together with the Revolver and the Delayed Draw Term Loan, the “Credit Facility”). The Credit Facility was to terminate on, and all amounts owing thereunder was to be repaid on December 13, 2023.
Subsequent to August 25, 2021, we paid all outstanding amounts due under the Credit Agreement and the Credit Agreement was terminated, effective September 30, 2021.
Borrowings under the Revolver, Delayed Draw Term Loan, and Term Loan bore interest at the three month London InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest was payable quarterly and accrued daily. Under the terms of the 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 August 25, 2021 of approximately $3.2 million is recorded in restricted cash and cash equivalents on our consolidated statement of net assets in liquidation.
Through the date of the Third Amendment, the Company also paid a quarterly commitment fee based on the unused portion of the Revolver and the Delayed Draw Term Loan at 0.5% per annum. Voluntary prepayments, refinancing and asset dispositions constituting a sale of all or substantially all assets, under the Delayed Draw Term Loan and the Term Loan were subject to a favorable change inmake whole premium during years one and two equal to the mixpresent value of menu items purchased by guests, and continued careful cost management, partially offset by higher prices for certain food commodities.
The cost of food as a percentage of restaurant sales in the Luby's cafeteria segment was level at 28.4% in fiscal 2019 compared to fiscal 2018 due in large part to higher average menu pricing in the first half of fiscal 2019 offset by higher prices for certain food commodities. The cost of food as a percentage of restaurant sales for the Fuddruckers restaurants segment decreased 1.0% in fiscal 2019 compared to fiscal 2018 due to higher average menu pricing and a favorable change in the mix of menu items purchased by guests, partially offset by higher input prices of beef and other food commodities. The cost of food as a percentage of restaurant sales for the Cheeseburger in Paradise segment decreased 2.1% in fiscal 2019 compared to fiscal 2018 due primarily to reducing operations to a single location with better food cost economics.
Payroll and Related Costs
|
| | | | | | | | | | | |
| Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
Payroll and related Costs: | | | | | |
Luby's cafeteria segment | $ | 81,342 |
| | $ | 86,264 |
| | $ | (4,922 | ) |
Fuddruckers restaurants segment | 25,938 |
| | 32,585 |
| | (6,647 | ) |
Cheeseburger in Paradise segment | 1,229 |
| | 5,629 |
| | (4,400 | ) |
Total Restaurants | $ | 108,509 |
| | $ | 124,478 |
| | $ | (15,969 | ) |
| | | | | |
As a percentage of restaurant sales | | | | | |
Luby's cafeteria segment | 38.0 | % | | 37.2 | % | | 0.8 | % |
Fuddruckers restaurants segment | 38.5 | % | | 37.2 | % | | 1.3 | % |
Cheeseburger in Paradise segment | 39.5 | % | | 43.2 | % | | (3.6 | )% |
Total Restaurants | 38.1 | % | | 37.4 | % | | 0.7 | % |
Payroll and related costs includes restaurant-level hourly wages, including overtime pay, and pay while training, as well as management salaries and incentive payments. Payroll and related costs also include the payroll taxes, workers’ compensation expense, group health insurance costs, and 401(k) matching expense for all restaurant-level hourly and management employees. Payroll and related costs decreased approximately $16.0 million, or 12.8%, in fiscal 2019 compared to fiscal 2018 due in part to (1) operating 43 fewer restaurants (closure of 21 restaurants in fiscal 2018 closure of of 17 restaurants in fiscal 2019, and transfer of five Fuddruckers restaurants to a franchisee in fiscal 2019); for stores that continue to operate, payroll and related expense increased less than $0.1 million. The modest increase in payroll and related expenses for stores that continue to operate reflected (1) an increase in average salaries among our restaurant management teams and increased wage rates among our hourly team members; and (2) higher health insurance expense; partially offset by (3) a reduction in scheduled hours as a result of a decline in guest traffic. As a percentage of restaurant sales, payroll and related costs increased 0.7% to 38.1% in fiscal 2019 compared to 37.4% in fiscal 2018, due primarily to (1) the fixed cost component of labor costs (mainly management labor) with lower same-store sales levels and (2) higher health insurance expense.
Payroll and related costs a percentage of restaurant sales in the Luby's cafeteria segment increased 0.8% to 38.0% in fiscal 2019 compared to fiscal 2018 due to (1) increased wage rates among our hourly team members; (2) the fixed component of management labor costs with lower same-store sales levels; (3) increased usage of hourly overtime hours; and (4) higher health insurance expense; partially offset by (5) reduction in scheduled hours as a result of a decline in guest traffic. Payroll and related costs a percentage of restaurant sales in the Fuddruckers restaurants segment increased 1.3% to 38.5% in fiscal 2019 compared to fiscal 2018 due to (1) an increase in staffing and average salary cost for restaurant-level management; (2) higher health insurance expenses; and (3) an increase in average wage rates amount our hourly team members; partially offset by (4) a reduction in scheduled hours as a result of a decline in guest traffic. Payroll and related costs a percentage of restaurant sales in the Cheeseburger in Paradise segment decreased 3.6% to 39.5% in fiscal 2019 compared to fiscal 2018 due primarily to reducing operations to a single location with better labor cost economics and higher average sales volumes.
Other Operating Expenses
|
| | | | | | | | | | | |
| Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
Other operating expenses: | | | | | |
Luby's cafeteria segment | $ | 37,192 |
| | $ | 41,653 |
| | $ | (4,461 | ) |
Fuddruckers restaurants segment | 12,829 |
| | 17,305 |
| | (4,476 | ) |
Cheeseburger in Paradise segment | 865 |
| | 3,328 |
| | (2,463 | ) |
Total Restaurants | $ | 50,886 |
| | $ | 62,286 |
| | $ | (11,400 | ) |
| | | | | |
As a percentage of restaurant sales | | | | | |
Luby's cafeteria segment | 17.4 | % | | 18.0 | % | | (0.6 | )% |
Fuddruckers restaurants segment | 19.1 | % | | 19.8 | % | | (0.7 | )% |
Cheeseburger in Paradise segment | 27.8 | % | | 25.5 | % | | 2.3 | % |
Total Restaurants | 17.9 | % | | 18.7 | % | | (0.8 | )% |
Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, and services. Other operating expenses decreased approximately $11.4 million, or 18.3%, in fiscal 2019 compared to fiscal 2018. Of the approximate $11.4 million million decrease in total other operating expenses, approximately $8.9 million is attributed to store closures and approximately $2.5 million is attributed to stores that continue to operate. The $2.5 million reduction in other operating expenses at stores that continue to operate is attributable to (1) an approximate $1.7 million reduction in restaurant supplies expense; (2) an approximate $0.7 million reduction in repairs and maintenance expense; and (3) an approximate $0.4 million reduction in other expenses, including the benefitinterest otherwise owed from the absencedate of approximately $0.2 million in post-hurricane related repair and other expenses incurred in fiscal 2018; partially offset by (4) an approximate $0.3 million increase in uninsured losses, net of insurance recoveries. As a percentage of restaurant sales, Other operating expenses decreased 0.8% to 17.9% in fiscal 2019 compared to 18.7% in fiscal 2018. The 0.8% decrease in Other operating expenses as a percentage of restaurant sales was due to the net expense items enumerated above and the beneficial impact of store closures where operating expenses were generally higher as percentage of sales than stores that continue to operate.
Other operating expense a percentage of restaurant sales in the Luby's cafeteria segment decreased 0.6% to 17.4% in fiscal 2019 compared to fiscal 2018 due to (1) an approximate $0.7 million insurance recovery recorded in fiscal 2019; (2) a reduction in restaurant supplies expense; (3) the absence of approximately $0.2 million in post-hurricane related repair and other expenses incurred in fiscal 2018; partially offset by (4) increased cost for certain services provided to the cafeteria restaurants, including an increase in delivery fees related to increased usage of third-party delivery platforms. Other operating expense a percentage of restaurant sales in the Fuddruckers restaurants segment decreased 0.7% to 19.1% in fiscal 2019 compared to fiscal 2018 due to (1) the absence of approximately $0.3 million in post-hurricane related repair and other expenses incurred in fiscal 2018; (2) a reduction in restaurant supplies expense; and (3) the beneficial impact of store closures where operating expenses were generally higher as percentage of sales than stores that continue to operate; partially offset by (4) comparison to fiscal 2018 when an approximate $0.7 million insurance recovery was recorded. Other operating expense a percentage of restaurant sales in the Cheeseburger in Paradise segment increased 2.3% to 27.8% in fiscal 2019 compared to fiscal 2018 due to primarily to wind-down operational costs in fiscal 2019 for locations that closed atprepayment through the end of fiscal 2018, including utilities expenseyear two, a 2.0% fee during year three, and certain restaurant service costs.
Occupancy Costs
|
| | | | | | | | | | | |
| Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
Occupancy costs: | | | | | |
Luby's cafeteria segment | $ | 9,315 |
| | $ | 8,935 |
| | $ | 380 |
|
Fuddruckers restaurants segment | 8,529 |
| | 10,420 |
| | (1,891 | ) |
Cheeseburger in Paradise segment | 289 |
| | 1,044 |
| | (755 | ) |
Total Restaurants | $ | 18,133 |
| | $ | 20,399 |
| | $ | (2,266 | ) |
| | | | | |
As a percentage of restaurant sales | | | | | |
Luby's cafeteria segment | 4.4 | % | | 3.9 | % | | 0.5 | % |
Fuddruckers restaurants segment | 12.7 | % | | 11.9 | % | | 0.8 | % |
Cheeseburger in Paradise segment | 9.3 | % | | 8.0 | % | | 1.3 | % |
Total Restaurants | 6.4 | % | | 6.1 | % | | 0.3 | % |
Occupancy costs include property lease expense, property taxes, and common area maintenance charges, property insurance, and permits and licenses. Occupancy costs decreased $2.3a 1.0% fee during year four. As of August 25, 2021, no make whole premium was paid or payable by the Company under the Credit Facility. Finally, the Company paid to the lenders a one-time fee of $1.6 million in connection with the closing of the Credit Facility.
Indebtedness under the Credit Facility was secured by a security interest in, among other things, all of the present and future personal property of the Company and its subsidiaries (other than certain excluded assets) and all Mortgaged Property (as defined in the Credit Agreement) of the Company and its subsidiaries. Under the Credit Facility, 80% of net proceeds from asset sales, including real property sales, were applied as mandatory prepayments of our Term Loan. Mandatory prepayments were not subject to the make whole premium described above.
The Credit Facility contained customary covenants and restrictions on our ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and contained customary events of default. Specifically, among other things, we were required to maintain minimum Liquidity (as defined in the Credit Agreement) of $3.0 million as of the last day of each fiscal 2019 comparedquarter and a minimum Asset Coverage Ratio (as defined in the Credit Agreement) of 2.50 to 1.00. As of August 25, 2021 we were in full compliance with all covenants with respect to the Credit Facility.
All amounts owing by the Company under the Credit Facility were guaranteed by the subsidiaries of the Company.
As of August 25, 2021, we had approximately $1.8 million committed under letters of credit, which are used as security for the payment of insurance obligations and are fully cash collateralized, and approximately $7 thousand in other indebtedness.
COMMITMENTS AND CONTINGENCIES
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Claims
From time to time, we are subject to various other private lawsuits, administrative proceedings and claims that arise in the ordinary course of our 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. We currently believe that the final disposition of these types of lawsuits, proceedings and claims will not have a material adverse effect on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal 2018.year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims.
AFFILIATIONS AND RELATED PARTIES
Christopher J. Pappas, our former Chief Executive Office and Harris J. Pappas, a former Director of the Company, own two restaurant entities (the “Pappas entities”) that may, from time to time, provide services to the Company and its subsidiaries, as detailed in the Amended and Restated Master Sales Agreement dated August 2, 2017 among the Company and the Pappas entities. Collectively, Messrs. Pappas and the Pappas entities own greater than 5% of the Company's common stock.
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities may provide specialized (customized) equipment fabrication and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. The decrease was primarily due to a decrease in rentCompany incurred $18 thousand and property taxes associated with operating 43 fewer restaurants$8 thousand under the Amended and Restated Master Sales Agreement for custom-fabricated and refurbished equipment in fiscal 2019 compared2021 and 2020, respectively. Services provided under this agreement are subject to fiscal 2018 (closure of 21 restaurants in fiscal 2018 closure of of 17 restaurants in fiscal 2019,review and transfer of five Fuddruckers restaurants to a franchisee), partially offsetapproval by the additionalFinance and Audit Committee of the Company’s Board of Directors.
Operating Leases
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partnership interest and a 50% general partnership interest in the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented 7% of the space in that center since July 1969. No changes were made to the Company’s lease expense at three properties that were sold and leased back. As a percentage of restaurant sales, occupancy costs increased 0.3%, to 6.4%, in fiscal 2019 compared to 6.1% in fiscal 2018 primarilyterms as a result of the change in the mixtransfer of ownership of the portfoliocenter 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 owned versus leased stores12 years with two subsequent five-year options and gives the landlord an option to buy out the tenant on or after the closurecalendar year 2015 by paying the then unamortized cost of 43improvements 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. Due to the COVID-19 pandemic, the landlord agreed to abate the rent for April, 2020. We entered into an amendment to the lease, effective July 1, 2020, whereby (1) the lease was terminated early on December 31, 2020, (2) the rent for May and June of 2020 is abated and (3) commencing July 1, 2020 through the early termination date, the monthly rent was a fixed gross amount. The amendment 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 for one of the Company’s Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of six years with two subsequent five-year options. Pursuant to the new ground lease agreement, the Company pays rent of $28.53 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until May 31, 2020. The lease agreement provided for increases in rent at set intervals. The lease agreement was approved by the Finance and Audit Committee of our Board of Directors. In December 2019 we exercised the first five-year renewal option, effective June 1, 2020. The renewal was approved by the Finance and Audit Committee of our Board of Directors. Due to the COVID-19 pandemic, Pappas Restaurants, Inc. agreed to abate the rent for April and May of 2020. The lease was terminated on February 26, 2021, in conjunction with the sale of certain owned property locationsthe Fuddruckers operations at this location to operate as wella franchised location, as adjustments to property tax estimates. A significantly higher percentage of our Fuddruckers restaurants are leased properties as compared to our Luby's cafeterias. As a result, our Fuddruckers restaurant segment's occupancy costsfurther described below.
For the fiscal years ended August 25, 2021 and August 26, 2020, affiliated rents incurred as a percentage of sales is higher than our Luby's cafeterias.
relative total Company cost was 0.25% and 0.52%, respectively. Rent payments under the two lease agreements described above were 133 thousand and $411 thousand in fiscal 2021 and 2020, respectively.
Fuddruckers Franchise Segment Profit
In February 2021, we completed the sale and transfer of a previously company-owned Fuddruckers restaurant to HPCP Investments, LLC, one of the Pappas entities, for cash proceeds of approximately $0.2 million and the termination of our operating lease on the property, discussed above. Concurrent with the sale, Pappas Restaurants, Inc. entered into a franchise agreement with us to operate as a Fuddruckers restaurant at this location. Each of these transactions was approved by the Finance and Audit Committee of our Board of Directors.
Key Management Personnel
Mr. Pappas resigned his position as President and Chief Executive Officer, effective January 27, 2021. Mr. Pappas remained a member of the Board of Directors of the Company until August 23, 2021. Previously, on December 11, 2017, the Company had entered into a new employment agreement with Mr. Pappas. Under the employment agreement, which is no longer effective as of January 27, 2021, the initial term of Mr. Pappas' employment ended on August 28, 2019 and automatically renewed for additional one year periods, unless terminated in accordance with its terms. The employment agreement had been unanimously
approved by the Executive Compensation Committee of our Board of Directors as well as by the full Board at that time. Previously, effective August 1, 2018, the Company and Mr. Pappas agreed to reduce his fixed annual base salary to one dollar.
Also, effective January 27, 2021, the Board of Directors appointed John Garilli as the Company’s Interim President and Chief Executive Officer. The Company and Mr. Garilli’s employer, Winthrop Capital Advisors LLC ("WCA"), have entered into an agreement (the “Agreement”), pursuant to which the Company paid WCA a one-time fee of $50,000 and will pay a monthly fee of $20,000 for so long as Mr. Garilli serves the Company in said positions. The Company has also entered into an Indemnity Agreement with Mr. Garilli and WCA. The Company and WCA had previously entered into a consulting agreement, pursuant to which WCA provided consulting services related to the Company’s adoption of the liquidation basis of accounting in the filing of our Quarterly Report on Form 10-Q for the quarter ended December 16, 2020. The Company and WCA also executed separate consulting agreements to provide similar services for the filing of our Quarterly Report on Form 10-Q for the quarters ended March 10, 2021 and June 2, 2021, and for the filing of our Annual Report on Form 10-K for the fiscal year ended August 25, 2021, respectively.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
|
| | | | | | | | | | |
| Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
Franchise revenue | $ | 6,690 |
| | $ | 6,365 |
| | 5.1 | % |
Cost of franchise operations | 1,633 |
| | 1,528 |
| | 6.9 | % |
Franchise operations segment profit | $ | 5,057 |
| | $ | 4,837 |
| | 4.5 | % |
Franchise profit as percent of Franchise revenue | 75.6 | % | | 76.0 | % | | (0.4 | )% |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We offer franchisesOur accounting policies are described in Note 1, “Nature of Operations and Significant Accounting Policies,” to our Consolidated Financial Statements included in Item 8 of Part II of this report. The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States. Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods. Management believes the following are critical accounting policies due to the significant, subjective and complex judgments and estimates used when preparing our consolidated financial statements. Management regularly reviews these assumptions and estimates with the Finance and Audit Committee of our Board of Directors.
Liquidation Basis of Accounting
Under the liquidation basis of accounting, our assets are measured at their estimated net realizable value, or liquidation value, which represents the amount of their estimated cash proceeds or other consideration from liquidation, based on current contracts, estimates and other indications of sales value, and may include previously unrecognized assets that we may expect to either sell in the course of our liquidation or use in settling liabilities, such as trademarks or other intangibles. The two areas that require the most significant, subjective and complex judgements and estimates are (i) properties and business units for sale and (ii) liability for estimated costs in excess of estimated receipts during liquidation.
Properties and business units for sale
In developing the estimated net realizable value for our properties and business units held for sale, we utilized third party valuation experts, investment bankers, real estate brokers, the expertise of members of the Special Committee of our Board of Directors, and forecasts generated by our management. For estimated real estate values, we consider comparable sales transactions, our past experience selling real estate assets of the Company and, in certain instances, indicative offers, as well as capitalization rates observed for income-producing real estate. For estimated business unit valuations we consider estimated values of the economic components of possible transactions, the value of a buyer assuming certain liabilities in a purchase transaction, and, in certain instances, indicative offers, as well as the probabilities of certain outcomes.Estimates for the Fuddruckers brand. Franchises are sold in markets where expansionliquidation value of the business units, or subset of operating restaurants, is deemed advantageousalso tested for reasonableness through a multiple of historical and projected business cash flows.All estimates by nature involve a large degree of judgement and sensitivity to the developmentunderlying assumptions.
Estimated costs in excess of estimated receipts during liquidation
The liquidation basis of accounting requires the Fuddruckers conceptestimation of net cash flows from operations and system of restaurants. Franchise revenue includes (1) royalties paid to us as the franchisor for the Fuddruckers brand; (2) funds paid to us as the franchisor for pooled advertising expenditures; and (3) franchise fees paid to us when franchise units are opened for business or transferred to new owners and when franchise agreements are renewed or certain milestones in franchise agreements are reached. Cost of franchise operations includes the directall costs associated with supporting franchiseesimplementing and completing the plan of liquidation. We project that we will have estimated costs in excess of estimated receipts during the liquidation period. These amounts can vary significantly due to, among other things, the timing and estimates for receipts and costs associated with openingthe operations of our business units until they are sold, the timing of business and property sales, estimates of direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities, the costs associated with the winding up of operations, and other costs that we may incur which are not currently foreseeable. These receipts and accruals will be adjusted periodically as projections and assumptions change. These receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period.
The valuation of our assets and liabilities, as described above, represents estimates, based on present facts and circumstances, of the net realizable value of the assets and costs associated with carrying out the Plan. The actual values and costs associated with carrying out the Plan may differ from amounts reflected in the accompanying consolidated financial statements because of the Plan's inherent uncertainty. These differences may be material. In particular, these estimates will vary with the length of time necessary to complete the Plan. It is currently anticipated that a majority of the assets we owned on the date of the shareholder approval of the plan will be sold by December 31, 2021, with liquidation substantially complete by June 30, 2022. It is also anticipated that any assets and liabilities remaining at such time will be transferred to a liquidating entity and it is likely that the full realization of proceeds from sales will extend beyond that date.
NEW ACCOUNTING PRONOUNCEMENTS
There are no new Fuddruckers franchised restaurantsaccounting pronouncements that are applicable or relevant to the Company under the Liquidation Basis of Accounting.
INFLATION
It is generally our policy to maintain stable menu prices without regard to seasonal variations in food costs. Certain increases in costs of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Luby’s, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated statement of net assets in liquidation of Luby’s, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of August 25, 2021, and the corporate overhead expenses associated with generating franchise revenue. These corporate expenses primarily includerelated consolidated statement of changes in net assets in liquidation for the salaries and benefits, travel and related expenses, and other expenses for employees whose primary job function involves supporting our franchise ownersperiod from November 19, 2020 through August 25, 2021, and the developmentconsolidated balance sheet as of new franchise locationsAugust 26, 2020, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the 12 week period ended November 18, 2020 and the year ended August 26, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Companyas of August 25, 2021 and August 26, 2020, and the results of its changes in net assets for the period from November 19, 2020 through August 25, 2021, and its operations and its cash flows for the 12 week period ended November 18, 2020 and the year ended August 26, 2020, in conformity with accounting principles generally accepted in the United States of America applied on the bases described below.
Basis of accounting
As discussed in Note 1 to the consolidated financial statements, the shareholders of the Company approved the Plan of Liquidation and Dissolution on November 17, 2020, and the Company determined liquidation is imminent. As a result, the Company changed its basis of accounting on November 19, 2020 from the going concern basis to the liquidation basis. This matter is also discussed below as a critical audit matter.
Basis for opinion
BeginningThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the first quarter fiscal 2019,Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a result of our adoption ofwhole, and we are not, by communicating the new revenue accounting standards more fullycritical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
As described in Note 1 to the consolidated financial statements, as a result of the November 17, 2020 approval by the Company’s shareholders of the Plan of Liquidation and Dissolution, it was determined that liquidation was imminent and the Company’s basis of accounting transitioned from the going concern basis of accounting to the liquidation basis of accounting on November 19, 2020, in accordance with generally accepted accounting principles. The total effect of adoption of the liquidation basis of accounting was a $46,578 thousand increase from consolidated net equity as of November 18, 2020 to net
assets in liquidation as of November 19, 2020. The changes in net assets and liabilities in liquidation from November 19, 2020 to August 25, 2021 was an increase of $37,452 thousand.
We identified the measurement of property and business unit assets at net realizable value and liabilities for estimated costs in excess of estimated receipts during liquidation at the adoption date of the liquidation basis of accounting and the Company’s year-end date as a critical audit matter. This matter is also discussed above in the Basis of Accounting paragraph.
The principal considerations for our determination that performing procedures relating to the measurement of property and business unit assets at net realizable value and liabilities for estimated costs in excess of estimated receipts during liquidation at the adoption date of the liquidation basis of accounting and the Company’s year-end date is a critical audit matter are the significant judgments made by management when determining the estimated net realizable value of properties and business units and the liability for estimated costs in excess of estimated receipts during liquidation. These judgments included significant assumptions related to estimated cash proceeds or other consideration of property and business unit assets, estimated disposal and other costs, and estimated operating income or loss that the Company reasonably expects to incur during the remaining expected duration of the liquidation period. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the measurement of these assets and the liability for estimated costs in excess of estimated receipts during liquidation. Also, the audit effort involved the use of professionals with specialized skill and knowledge.
Our audit procedures related to the measurement of property and business unit assets at net realizable value and liabilities for estimated costs in excess of estimated receipts during liquidation included the following, among others:
a.We tested management’s process for developing the estimates and assumptions used in the measurement of certain property and business unit assets and the liability for estimated costs in excess of estimated receipts during liquidation on November 19, 2020 and August 25, 2021.
b.We tested the completeness and accuracy of the data used by management in the developing of the estimates.
c.We evaluated the reasonableness of the significant assumptions used by management for certain property and business unit assets related to the estimated cash proceeds or other consideration from liquidation, and the estimated operating income or loss that the Company reasonably expects to incur during the remaining expected duration of the liquidation period.
d.We utilized professionals with specialized skill and knowledge to assist in evaluating management’s assumptions related to the estimated cash proceeds or other consideration from sales of property assets. These procedures included evaluating whether the assumptions used by management and management’s specialists were reasonable considering (i) the current and past performance of the Company; (ii) the consistency with external industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2007.
Houston, Texas
November 19, 2021
Luby’s, Inc.
Consolidated Statement of Net Assets in Liquidation
(Liquidation Basis)
| | | | | |
| August 25, 2021 |
| (in thousands) |
ASSETS | |
Cash and cash equivalents | $ | 14,392 | |
Accounts and notes receivable | 10,184 | |
Restricted cash and cash equivalents | 5,492 | |
Properties and business units for sale | 176,960 | |
Total Assets | $ | 207,028 | |
| |
LIABILITIES | |
Accounts payable | $ | 2,968 | |
Accrued expenses and other liabilities | 12,383 | |
Credit facility debt | 17,024 | |
| |
Operating lease liabilities | 7,181 | |
Liability for estimated costs in excess of estimated receipts during liquidation | 11,289 | |
Other liabilities | 1,390 | |
Total Liabilities | $ | 52,235�� | |
| |
Commitments and Contingencies | 0 |
| |
Net assets in liquidation (Note 4) | $ | 154,793 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statement of Changes in Net Assets in Liquidation
(Liquidation Basis)
(in thousands)
| | | | | | | | |
| | Period from November 19, 2020 through August 25, 2021 |
| | (40 weeks) |
| | (in thousands) |
Net assets in liquidation, beginning of period | | $ | 117,341 | |
Changes in net assets in liquidation | | |
Changes in liquidation value of properties and business units for sale | | 18,431 | |
Changes in accounts and notes receivable | | 3,615 | |
Changes in estimated cash flows during liquidation | | 15,083 | |
Net changes in liquidation value | | 37,129 | |
Proceeds received from exercise of stock options | | 323 | |
Changes in net assets in liquidation | | 37,452 | |
Net assets in liquidation, end of period | | $ | 154,793 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Balance Sheet
(Going Concern Basis)
| | | | | |
| August 26, 2020 |
| (In thousands, except share data) |
ASSETS | |
Current Assets: | |
Cash and cash equivalents | $ | 15,069 | |
Restricted Cash and cash equivalents | 6,756 | |
Trade accounts and other receivables, net | 6,092 | |
Food and supply inventories | 1,653 | |
Prepaid and other assets | 1,577 | |
| |
| |
Total current assets | 31,147 | |
Property held for sale | 11,249 | |
Assets related to discontinued operations | 1,715 | |
Property and equipment, net | 100,599 | |
Intangible assets, net | 15,343 | |
Goodwill | 195 | |
| |
Operating lease right-of-use assets | 16,756 | |
Other assets | 399 | |
Total assets | $ | 177,403 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
Current Liabilities: | |
Accounts payable | $ | 6,770 | |
Liabilities related to discontinued operations | 17 | |
| |
Operating lease liabilities - current | 3,903 | |
Accrued expenses and other liabilities | 19,569 | |
Total current liabilities | 30,259 | |
Long-term debt, less current portion | 54,118 | |
| |
Operating lease liabilities - non-current | 17,797 | |
Other liabilities | 1,630 | |
Total liabilities | 103,804 | |
Commitments and Contingencies | 0 |
| |
SHAREHOLDERS’ EQUITY | |
Common stock, $0.32 par value;100,000,000 shares authorized; Shares issued were 31,125,470 and shares outstanding were 30,625,470 at August 26, 2020. | 9,960 | |
Paid-in capital | 35,655 | |
Retained earnings | 32,759 | |
Less cost of treasury stock, 500,000 shares | (4,775) | |
Total shareholders’ equity | 73,599 | |
Total liabilities and shareholders’ equity | $ | 177,403 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Operations
(Going Concern Basis)
| | | | | | | | | | | | | | |
| Period Ended | | Year Ended | |
| November 18, 2020 | | August 26, 2020 | |
| (12 weeks) | | (52 weeks) | |
| (In thousands, except per share data) |
SALES: | | | | |
Restaurant sales | $ | 36,485 | | | $ | 183,511 | | |
Culinary contract services | 4,918 | | | 26,747 | | |
Franchise revenue | 530 | | | 3,634 | | |
Vending revenue | 14 | | | 130 | | |
TOTAL SALES | 41,947 | | | 214,022 | | |
COSTS AND EXPENSES: | | | | |
Cost of food | 9,348 | | | 52,505 | | |
Payroll and related costs | 12,964 | | | 69,833 | | |
Other operating expenses | 7,154 | | | 36,588 | | |
Occupancy costs | 2,634 | | | 15,130 | | |
Opening costs | — | | | 14 | | |
Cost of culinary contract services | 4,467 | | | 24,218 | | |
Cost of franchise operations | 294 | | | 1,543 | | |
Depreciation and amortization | 2,142 | | | 11,514 | | |
Selling, general and administrative expenses | 4,267 | | | 24,571 | | |
Other charges | 416 | | | 3,401 | | |
Net provision (gain) on asset impairments and restaurant closings | (85) | | | 10,193 | | |
Net loss (gain) on disposition of property and equipment | 117 | | | (11,557) | | |
Total costs and expenses | 43,718 | | | 237,953 | | |
LOSS FROM OPERATIONS | (1,771) | | | (23,931) | | |
Interest income | 8 | | | 60 | | |
Interest expense | (1,212) | | | (6,388) | | |
Other income, net | 30 | | | 1,195 | | |
Loss before income taxes and discontinued operations | (2,945) | | | (29,064) | | |
Provision for income taxes | 58 | | | 357 | | |
Loss from continuing operations | (3,003) | | | (29,421) | | |
Loss from discontinued operations, net of income taxes | (16) | | | (29) | | |
NET LOSS | $ | (3,019) | | | $ | (29,450) | | |
Loss per share from continuing operations: | | | | |
Basic and diluted | $ | (0.10) | | | $ | (0.97) | | |
Loss per share from discontinued operations: | | | | |
Basic and diluted | $ | 0.00 | | | $ | 0.00 | | |
Net loss per share: | | | | |
Basic and diluted | $ | (0.10) | | | $ | (0.97) | | |
Weighted-average shares outstanding: | | | | |
Basic and diluted | 30,662 | | | 30,294 | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Shareholders’ Equity
(Going Concern Basis)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | |
| Issued | | Treasury | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Retained Earnings | | Total Shareholders’ Equity |
Balance at August 28, 2019 | 30,478 | | | $ | 9,753 | | | (500) | | | $ | (4,775) | | | $ | 34,870 | | | $ | 61,182 | | | $ | 101,030 | |
Net loss for the year | — | | | — | | | — | | | — | | | — | | | (29,450) | | | (29,450) | |
Cumulative effect of accounting changes from the adoption of ASC Topic 842 | — | | | — | | | — | | | — | | | — | | | 1,027 | | | 1,027 | |
Common stock issued under nonemployee director benefit plans | 64 | | | 20 | | | — | | | — | | | (20) | | | — | | | — | |
Common stock issued under employee benefit plans | 73 | | | 24 | | | — | | | — | | | (66) | | | — | | | (42) | |
Share-based compensation expense | 509 | | | 163 | | | — | | | — | | | 871 | | | — | | | 1,034 | |
Balance at August 26, 2020 | 31,124 | | | $ | 9,960 | | | (500) | | | $ | (4,775) | | | $ | 35,655 | | | $ | 32,759 | | | $ | 73,599 | |
Net loss for the period | — | | | — | | | — | | | — | | | — | | | (3,019) | | | (3,019) | |
Common stock issued under employee benefit plans | 4 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | |
Share-based compensation expense | 51 | | | 16 | | | — | | | — | | | 167 | | | — | | | 183 | |
Balance at November 18, 2020 | 31,179 | | | $ | 9,977 | | | (500) | | | $ | (4,775) | | | $ | 35,821 | | | $ | 29,740 | | | $ | 70,763 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Cash Flows
(Going Concern Basis)
| | | | | | | | | | | |
| Period Ended | | Year Ended |
| November 18, 2020 | | August 26, 2020 |
| (12 weeks) | | (52 weeks) |
| (In thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net loss | $ | (3,019) | | | $ | (29,450) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Net provision (gain) for asset impairments and restaurant closings | (85) | | | 10,193 | |
Net loss (gain) on disposition of property and equipment | 117 | | | (11,557) | |
Depreciation and amortization | 2,142 | | | 11,514 | |
Amortization of debt issuance cost | 223 | | | 1,212 | |
Share-based compensation expense | 183 | | | 1,034 | |
Provision for doubtful accounts | — | | | 1,624 | |
| | | |
| | | |
Cash used in operating activities before changes in operating assets and liabilities | (439) | | | (15,430) | |
Changes in operating assets and liabilities: | | | |
Decrease in trade accounts and other receivables | 679 | | | 1,206 | |
| | | |
Decrease (increase) in food and supply inventories | (950) | | | 345 | |
Decrease in prepaid expenses and other assets | 909 | | | 651 | |
Decrease in operating lease assets | 1,928 | | | 5,054 | |
Decrease in operating lease liabilities | (3,154) | | | (10,862) | |
Increase (decrease) in accounts payable, accrued expenses and other liabilities | 1,046 | | | (2,561) | |
Net cash provided by (used) in operating activities | 19 | | | (21,597) | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Proceeds from disposal of assets and property held for sale | 114 | | | 24,902 | |
| | | |
| | | |
Purchases of property and equipment | (433) | | | (2,120) | |
Net cash provided by (used in) investing activities | (319) | | | 22,782 | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Revolver borrowings | — | | | 4,700 | |
| | | |
| | | |
Proceeds from term loan | — | | | 5,000 | |
Proceeds from PPP Loan | — | | | 10,000 | |
Term loan repayments | — | | | (11,816) | |
| | | |
| | | |
| | | |
Net cash provided by financing activities | — | | | 7,884 | |
Net increase (decrease) in cash and cash equivalents and restricted cash | (300) | | | 9,069 | |
Cash and cash equivalents and restricted cash at beginning of period | 21,825 | | | 12,756 | |
Cash and cash equivalents and restricted cash at end of period | $ | 21,525 | | | $ | 21,825 | |
Cash paid for: | | | |
Income taxes | $ | 4 | | | $ | 446 | |
Interest | $ | 1,059 | | | $ | 5,275 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Notes to Consolidated Financial Statements
Fiscal Years 2021and2020
Note 1. Nature of Operations and Significant Accounting Policies
Nature of Operations
Luby's, Inc. is a Delaware corporation with headquarters in Houston, TX, (collectively, with its subsidiaries, the "Company", "we", "our", "us", or "Luby's". We operated restaurants under the brands Luby's Cafeteria, Fuddruckers and Cheeseburger in Paradise. We also had royalty arrangements with Fuddruckers franchisees. Under the Plan of Liquidation and Dissolution discussed below, we terminated our sub-license to the Cheeseburger in Paradise brand name in December 2020 and we sold the Fuddruckers brand and franchise business in July 2021. Subsequent to August 25, 2021, we sold the Luby's Cafeteria brand and the operations at 35 locations (see Note 2. Subsequent Events).
As of August 25, 2021, we operated 53 Luby's cafeterias and 7 Fuddruckers restaurants. Included in the counts for both Luby's cafeterias and Fuddruckers restaurants are 3 Combo units, where a Luby's cafeteria and a Fuddruckers restaurant occupy the same location. Also, as of August 25, 2021, our Culinary Services brand operated 27 contracts to manage food services for clients operating in primarily three lines of business: healthcare; senior living business, and schools.
The accompanying consolidated financial statements include the accounts of Luby’s, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Prior to Adoption of the Plan of Liquidation
The consolidated financial statements prior to November 19, 2020 were prepared on the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and were prepared in accordance with accounting principles generally accepted in the United States ("US GAAP").
Plan of Liquidation
On November 17, 2020 our shareholders approved the Plan of Liquidation and Dissolution (the “Plan of Liquidation“ or the “Plan”). The Plan provides for an orderly sale of our businesses, operations, and real estate, payment of our liabilities and other obligations, and an orderly wind down of any remaining operations and dissolution of the Company. We intend to convert all our assets into cash, satisfy or resolve our remaining liabilities and obligations, including contingent liabilities, claims and costs associated with the liquidation of the Company, and then file a certificate of dissolution with the State of Delaware. The assets to be sold include our Luby's Cafeterias, Fuddruckers, and Culinary Services ("CCS") operating divisions, as well as our real estate. We currently anticipate that our common stock will be delisted from the New York Stock Exchange ("NYSE") upon the filing of the certificate of dissolution, which is not expected to occur until the earlier of the completion of all or substantially all of the asset sales or three years. The delisting of our common stock may occur sooner in accordance with the applicable rules of the NYSE.
Following the Adoption of the Plan of Liquidation
We have determined, as a result of the approval of the Plan by our shareholders, that liquidation is imminent, as defined in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 205-30 Financial Statement Presentation, Liquidation Basis of Accounting ("ASC 205-30"). Liquidation is considered imminent when the likelihood is remote that we will return from liquidation and either (a) the Plan is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the Plan will be blocked by other parties, or (b) the Plan is being imposed by other forces (for example, involuntary bankruptcy).
Accordingly, we have changed our basis of accounting from the going concern basis to the liquidation basis effective November 19, 2020. Although shareholder approval of the Plan occurred on November 17, 2020, we are using the liquidation basis of accounting effective November 19, 2020 as a convenience date. Any activity between November 17, 2020 and November 19, 2020 would not be materially different under the liquidation basis of accounting.
The liquidation basis of accounting differs significantly from the going concern basis, as summarized below.
Under the liquidation basis of accounting, the consolidated balance sheet and consolidated statements of operations, equity and cash flows are no longer presented.
The liquidation basis of accounting requires a statement of net assets in liquidation, a statement of changes in net assets in liquidation and all disclosures necessary to present relevant information about our expected resources in liquidation. The liquidation basis of accounting may only be applied prospectively from the day liquidation becomes imminent and the initial statement of changes in net assets in liquidation may present only changes in net assets that occurred during the period since that date.
Under the liquidation basis of accounting, our assets are measured at their estimated net realizable value, or liquidation value, which represents the amount of their estimated cash proceeds or other consideration from liquidation, based on current contracts, estimates and other indications of sales value, and includes business unit valuations representing previously unrecognized assets that we may expect to either sell in the course of our liquidation or use in settling liabilities, such as trademarks or other intangibles. In developing these estimates, we utilized third party valuation experts, investment bankers, real estate brokers, the expertise of members of the Special Committee of our Board of Directors, and forecasts generated by our management. For estimated real estate values, we considered comparable sales transactions, our past experience selling real estate assets of the Company and, in certain instances, indicative offers, as well as capitalization rates observed for income-producing real estate. For estimated business unit valuations we considered estimated values of the economic components of possible transactions, the value of a buyer assuming certain liabilities in a purchase transaction, and, in certain instances, indicative offers, as well as the probabilities of certain outcomes. Estimates for the liquidation value of the business units, or subset of operating restaurants, were also tested for reasonableness through a multiple of historical and projected business cash flows. All estimates by nature involve a large degree of judgement and sensitivity to the underlying assumptions.
The liquidation basis of accounting requires us to accrue and present separately, without discounting, the estimated disposal and other costs, including any costs associated with the sale or settlement of our assets and liabilities and the estimated operating income or loss that we reasonably expect to incur, including providing for federal income taxes during the remaining expected duration of the liquidation period. In addition, deferred tax assets previously provided for under the going concern basis of accounting, which include net operating losses and other tax credits, may be realized partially or in full, subject to IRS limitations, to offset taxable income we expect to generate from the liquidation process.
Under the liquidation basis of accounting, we recognize liabilities as they would have been recognized under the going concern basis as adjusted for the timing assumptions related to the liquidation process and they will not be reduced to expected settlement values prior to settlement.
These estimates will be periodically reviewed and adjusted as appropriate. There can be no assurance that these estimated values will be realized. Such amounts should not be taken as an indication of the timing or the amount of future distributions or our actual dissolution.
The valuation of our assets and liabilities, as described above, represents estimates, based on present facts and circumstances, of the net realizable value of the assets and costs associated with carrying out the Plan. The actual values and costs associated with carrying out the Plan may differ from amounts reflected in the accompanying consolidated financial statements because of the Plan's inherent uncertainty. These differences may be material. In particular, these estimates will vary with the length of time necessary to complete the Plan. It is currently anticipated that a majority of the assets we owned on the date of the shareholder approval of the plan will be sold by December 31, 2021, with liquidation substantially complete by June 30, 2022. It is also anticipated that any assets and liabilities remaining at such time will be transferred to a liquidating entity and it is likely that the full realization of proceeds from sales will extend beyond that date.
Net assets in liquidation represents the estimated liquidation value to holders of common shares upon liquidation. It is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to our shareholders and no assurance can be given that the distributions will equal or exceed the estimate presented in these consolidated financial statements.
Accounting Periods
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically include three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year.
Subsequent Events
Events subsequent to the Company’s fiscal year ended August 25, 2021 through the date of issuance of the financial statements are evaluated to determine if the nature and significance of the events warrant inclusion in the Company’s consolidated financial statements. See Note 2. Subsequent Events.
COVID-19
The novel coronavirus disease (“COVID-19”) pandemic has had a significant impact on our level of operations, guest behavior, guest traffic, and the number of locations where we and our former Fuddruckers franchisees operate. As a result, at the onset of the COVID-19 pandemic in the spring of 2020, we modified our business operations within our restaurants and significantly reduced staffing at our corporate support office.
On March 13, 2020, President Donald Trump declared a national emergency in response to the COVID-19 pandemic. Throughout the remainder of calendar 2020, we cycled through periods initially when state government orders mandated a suspension of on-premise dining, followed by periods when our on-premise dining capacity was limited due to government order. Full on-premise dining resumed in Texas in March 2021, when government restrictions limiting on-premise dining were lifted. Prior to the onset of the COVID-19 pandemic, we operated 118 restaurants, of which 87 were closed as a result of the pandemic and 53 of those were reopened as permitted when restrictions were lifted. The 31 of our restaurants that remained open during the pandemic were open at reduced capacity levels or for takeout only.
Despite increasing vaccination rates, U.S. Treasury stimulus payments to U.S. citizens and other positive developments, risks and uncertainties remain as cases of COVID-19 infection continue within the communities where we operate, albeit at reduced levels. The COVID-19 pandemic could continue to materially impact our cash flows and value of net assets in liquidation, while we execute on our Plan of Liquidation.
Reportable Segments
Under the going concern basis of accounting, each restaurant was considered an operating segment because operating results and cash flows could be determined for each restaurant. We aggregated 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, similarity of store level profit margins and the nature of the regulatory environment were alike. For the 12 week period ended November 18, 2020 and the fiscal year ended August 26, 2020, we had 5 reportable segments: Luby’s Cafeterias, Fuddruckers Restaurants, Cheeseburger in Paradise Restaurants, Fuddruckers franchise operations, and Culinary Services (“CCS”). Under the liquidation basis of accounting, although we continued to operate our restaurant, franchise and CCS businesses, we no longer make operating decisions or assess performance by segment, as all of our assets and businesses are considered held for sale. Accordingly, effective November 19, 2020, we have only one reporting and operating segment.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash and cash equivalents and restricted cash and cash equivalents include highly liquid investments such as money market funds that have a maturity of three months or less. Our bank account balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. Amounts in transit from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction.
Trade Accounts, Notes and Other Receivables
Under the going concern basis of accounting, receivables consisted principally of amounts due from franchises, CCS clients, catering customers and restaurant food sales to corporations. Receivables were recorded at the invoiced amount. The allowance for doubtful accounts was our best estimate of the amount of probable credit losses in our existing accounts receivable. We determined the allowance based on historical loss experience for CCS clients, catering customers and restaurant sales to corporations and, for CCS receivables and franchise royalty and marketing and advertising receivables. We also considered the franchisees’ and CCS clients’ unsecured default status. We periodically reviewed our allowance for doubtful accounts. Account balances were charged off against the allowance after all means of collection were exhausted and the potential for recovery was considered remote. Under the liquidation basis of accounting trade, notes and other receivables are stated at amount of their estimated cash proceeds.
Inventories
Under the going concern basis of accounting, food and supply inventories were stated at the lower of cost (first-in, first-out) or net realizable value. Under the liquidation basis of accounting, food and supply inventories have no net realizable value due to the nature of the inventory and the high turnover used in operating the remaining restaurants.
Property Held for Sale
Under the going concern basis of accounting, we periodically reviewed long-lived assets against our plans to retain or ultimately dispose of properties. If we decided to dispose of a property, it was moved to property held for sale and actively marketed. Property held for sale was recorded at amounts not in excess of what management expected to receive upon sale, less costs of disposal. Depreciation on assets moved to property held for sale was discontinued and gains were not recognized until the properties are sold. Under the liquidation basis of accounting, all of our property is for sale and is recorded on the statement of net assets in liquidation at the amount of their estimated cash proceeds or other consideration from liquidation.
Impairment of Long-Lived Assets
Under the going concern basis of accounting, impairment losses were recorded on long-lived assets used in operations when indicators of impairment were present and the undiscounted cash flows estimated to be generated by those assets were less than
the carrying amount. We evaluated impairments on a restaurant-by-restaurant basis and used cash flow results and other market conditions as indicators of impairment.
Debt Issuance Costs
Under the going concern basis of accounting, debt issuance costs included costs incurred in connection with the arrangement of long-term financing agreements. The debt issuance costs associated with our term loans were presented on our consolidated financial statements:balance sheet as a direct deduction from long-term debt. The debt issuance costs associated with our revolving credit facility were included in other assets on our consolidated balance sheet. These costs were amortized using the effective interest method over the respective term of the debt to which they specifically relate. Under the liquidation basis of accounting, deferred debt issuance costs are not given a value.
Fair Value of Financial Instruments
Under the going concern basis of accounting, the carrying value of cash and cash equivalents, trade accounts and other receivables, accounts payable and accrued expenses approximated fair value based on the short-term nature of these accounts. The carrying value of credit facility debt also approximated fair value based on its recent renewal.
Self-Insurance Accrued Expenses
We recognize as revenueself-insure a significant portion of expected losses under its workers’ compensation, employee injury and general liability programs. Accrued liabilities have been recorded based on estimates of the amounts dueultimate costs to us from franchisees for pooled advertising expenditures.settle incurred claims, both reported and not yet reported. These recorded estimated liabilities are based on judgments and independent actuarial estimates, which include the use of claim development factors based on loss history; economic conditions; the frequency or severity of claims and claim development patterns; and claim reserve management settlement practices.
We recognize initialmaintain a self-insured health benefit plan which provides medical and renewal franchise fees evenly overprescription drug benefits to certain of our employees electing coverage under the termplan. Our exposure is limited by individual and aggregate stop loss limits per third party insurance carriers. Under the going concern basis of franchise area development agreementsaccounting, we recorded expenses under the plan based on estimates of the costs of expected claims, administrative costs and stop-loss insurance premiums. Under both the going concern basis of accounting and the liquidation basis of accounting, our self-insurance liability is based on the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided by our third party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims may differ from what we recognize revenue when a franchise agreement is terminated early.have accrued as our estimated loss liability based on historical experience.
Additionally, we record an expense and liability in an amount equal to the unspent funds paid to us from franchisees for pooled advertising expenditures that will be incurred in a future period.Revenue Recognition
Franchise revenue increased approximately $0.3 million, or 5.1%, in fiscal 2019 compared to fiscal 2018. The $0.3 million increase in franchise revenue reflects (1) an approximate $0.3 million increase in franchise fees earned; and (2) recognition of approximately $0.4 million of revenue related to funds owed to us as the franchisor for pooled advertising expenditures; partially offset by (3) an approximate $0.4 million decline in franchise royalties on fewer franchise locations in operation in fiscal 2019.
See Note 6. Revenue Recognition.
Cost of franchise operations increased approximately $0.1 million, or 6.9%, in fiscal 2019 compared to fiscal 2018. The increase was due primarily to (1) recording an expense in fiscal 2019 related to pooled advertising expenditures, partially offset by lower salary and benefits expense as well as lower travel expense required to supportCCS
Under the franchise system.
Franchise operations segment profit, defined as Franchise revenue less Costgoing concern basis of franchise operations, increased approximately $0.2 million in in fiscal 2019 compared to fiscal 2018, due primarily toaccounting, the $0.3 million increase in franchise revenue partially offset by the $0.1 million increase in franchise costs, both discussed above.
During fiscal 2019, three new Fuddruckers franchise locations opened, 11 locations closed, and five locations in the San Antonio, Texas area transferred from company operated locations to franchise operated locations. We ended fiscal 2019 with 102 Fuddruckers franchise restaurants.
Culinary Contract Services Segment Profit
Culinary Contract Services is a business line servicing healthcare, sport stadiums, corporate dining clients, and sales through retail grocery stores. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service, and retail dining. Culinary Contract Services has contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, behavioral hospitals, sports stadiums, and business and industry clients. Culinary Contract Services has the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food services to our clients. We operated 31 Culinary Contract Services locations at the endcost of fiscal 2019 and 28 at the end of fiscal 2018. We focus on clients who are able to enter into agreements in whichCCS included all operating costs are reimbursed to us and we generally charge a fixed fee as opposed to agreements where we retain all revenues and operating costs and we are exposed to the variability of the operating results of the location. The fixed fee agreements typically present lower financial risk to the company.
|
| | | | | | | | | | |
| Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
Culinary contract services | $ | 31,888 |
| | $ | 25,782 |
| | 23.7 | % |
Cost of culinary contract services | 28,554 |
| | 24,161 |
| | 18.2 | % |
CCS segment profit | $ | 3,334 |
| | $ | 1,621 |
| | 105.7 | % |
Culinary contract profit as percent of Culinary contract services sales | 10.5 | % | | 6.3 | % | | 4.2 | % |
Culinary contract services revenue increased $6.1 million, or 23.7%, in fiscal 2019 compared to fiscal 2018. The $6.1 million increase in revenue was primarily due to (1) an increase in sales of approximately $4.5 million from newer accounts that were not in operation for the entirety of fiscal 2019 and fiscal 2018; (2) approximately $0.6 million from a location that was transferred from our restaurant business segment to our culinary contract services business segment; and (3) approximately $1.1 million increase in sales from locations continually operated over the prior full year; partially offset by loss of sales of approximately $0.1 million for locations that ceased operations.
Cost of culinary contract services includes the food, payroll and related costs,expenses, other direct operating expenses, and corporate overheadselling, general and administrative expenses related to culinary service sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with generating Culinary contract services sales. CCS were reported within those respective lines as applicable. Under the liquidation basis of accounting, estimated expenses during the liquidation period are included in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
Cost of culinary contract services increasedFranchise Operations
Under the going concern basis of accounting, the cost of franchise operations included all food, payroll and related expenses, other operating expenses, and selling, general and administrative expenses related to franchise operations sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with franchise operations were reported within those respective lines as applicable. Under the liquidation basis of accounting, estimated expenses during the liquidation period are included in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
Marketing and Advertising Expenses
approximately $4.4Under the going concern basis of accounting, marketing and advertising costs were expensed as incurred. Total advertising expense included in other operating expenses and selling, general and administrative expense was $0.6 million or 18.2%,and $3.9 million in the 12 weeks ended November 18, 2020 and in fiscal 2019 compared2020, respectively. We recorded advertising attributable to fiscal 2018 due primarilylocal store marketing and local community involvement efforts in other operating expenses and we recorded advertising attributable to a net increaseour brand identity, our promotional offers, and our other marketing messages intended to drive guest awareness of our brands, in culinary contract sales volume, partially offsetselling, general, and administrative expenses. We believed this separation of our marketing and advertising costs assisted with
measurement of the profitability of individual restaurant locations by reductionsassociating only the local store marketing efforts with the operations of corporate overheadeach restaurant.
Marketing and advertising expense included in other operating expenses requiredattributable to support this business segment. CCS segment profit (defined as Culinary contract cervices revenue less Cost of culinary contract services) increased in dollar terms by approximately $1.7local store marketing was $0.1 million and increased as a percent of Culinary contract services revenue to 10.5%$0.5 million in the 12 weeks ended November 18, 2020 and in fiscal 2019 from 6.3%2020, respectively.
Marketing and advertising expense included in selling, general and administrative expense was $0.5 million and $3.4 million in the 12 weeks ended November 18, 2020 and in fiscal 2018, due primarily to2020, respectively.
Under the changeliquidation basis of accounting, estimated expenses during the liquidation period are included in the mixliability for estimated costs in excess of culinary contract service agreements with clients.
Opening Costs
Opening costs includes labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were less than $0.1 million in fiscal 2019 compared to approximately $0.6 million in fiscal 2018. Opening costsestimated receipts during liquidation on our consolidated statement of $0.6 million in fiscal 2018 included the re-opening costs associated with one Fuddruckers location that was damaged during Hurricane Harvey and subsequently restored and re-opened for business just prior to the quarter ended June 6, 2018 as well as the carrying costs for one location where we previously operated a Cheeseburger in Paradise restaurant and one location that we lease where we previously intended to open a Fuddruckers restaurant.
net assets.
Depreciation and Amortization
|
| | | | | | | | | | |
| Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
Depreciation and amortization | $ | 13,998 |
| | $ | 17,453 |
| | (19.8 | )% |
As a percentage of total sales | 4.3 | % | | 4.8 | % | | (0.5 | )% |
DepreciationUnder the going concern basis of accounting, property and amortization expense decreased $3.5 million in fiscal 2019 compared to fiscal 2018 due primarily to certain assets reachingequipment were recorded at cost. We depreciated the endcost of equipment over its estimated useful life using the straight-line method. Leasehold improvements were amortized over the lesser of their depreciableestimated useful lives andor the removalrelated lease terms. Depreciation of certainbuildings was provided on a straight-line basis over the estimated useful lives. There is no depreciation or amortization of our assets upon sale. As a percentageunder the liquidation basis of total revenue, depreciation and amortization expense decreased to 4.3% in fiscal 2019, compared to 4.8% in fiscal 2018.
Selling, General and Administrative Expenses
|
| | | | | | | | | | |
| Fiscal Year 2019 Ended | | Fiscal Year 2018 Ended | | Fiscal 2019 vs Fiscal 2018 |
($000s) | August 28, 2019 | | August 29, 2018 | | Higher/(Lower) |
| (52 weeks) | | (52 weeks) | | (52 vs 52 weeks) |
General and administrative expenses | $ | 30,257 |
| | $ | 35,201 |
| | (14.0 | )% |
Marketing and advertising expenses | 3,922 |
| | 3,524 |
| | 11.3 | % |
Selling, general and administrative expenses | $ | 34,179 |
| | $ | 38,725 |
| | (11.7 | )% |
As percent of total sales | 10.6 | % | | 10.6 | % | | 0.0 | % |
Selling, general and administrative expenses include marketing and advertising expenses, corporate salaries and benefits-related costs, including restaurant area leaders and regional directors, share-based compensation, professional fees, travel and recruiting expenses and other office expenses. Selling, general and administrative expenses decreased by approximately $4.5 million, or 11.7%, in fiscal 2019 compared to fiscal 2018. The approximate $4.5 million decrease in Selling, general and administrative expenses include (1) an approximate $4.6 million decrease in salaries, benefits, and other compensation expenses; (2) an approximate $0.5 million reduction in corporate travel expense; (3) an approximate $0.4 million decrease related to lower general liability insurance expense; partially offset by (4) an approximate $0.4 million increase in marketing and advertising expense; (5) an approximate $0.5 million increase in outside professional services and telecommunications network costs; and (6) an approximate net $0.1 million increase in other corporate overhead costs. As a percentage of total sales, Selling, general and administrative expenses were 10.6% in fiscal 2019 and in fiscal 2018.
accounting.
Other Charges
OtherUnder the going concern basis of accounting, other charges includes those expenses that we consider related to our restructuring efforts that are not part of our recurring operations. We have identified these expenses amounting to approximately $4.3 million in fiscal 2019 and recorded in
Other charges. These expensescharges were included in our Selling, general, and administrative cost expense line in previously reported quarterscomprised of:
| | | | | | | | | | | |
| 12 weeks ended | | Fiscal Year Ended |
| November 18, 2020 | | August 26, 2020 |
| (in thousands) |
OTHER CHARGES: | | | |
| | | |
Employee Severances | $ | — | | | $ | 1,332 | |
Restructuring Related | 416 | | | 2,069 | |
Total Other Charges | $ | 416 | | | $ | 3,401 | |
Operating Leases
See Note 7. Leases.
Income Taxes
Under both the going concern basis of fiscal 2019.
|
| | | |
| Fiscal Year 2019 Ended |
($000s) | August 28, 2019 |
| (52 weeks) |
Proxy communication related | $ | 1,740 |
|
Employee severances | 1,325 |
|
Restructuring related | 1,205 |
|
Total Other Charges | $ | 4,270 |
|
In the first half of fiscal 2019, a shareholder of the company proposed alternative nominees to the Board of Directors and other possible changes to the corporate strategy resulting in a contested proxy at the company's annual meeting. We incurred approximately $1.7 million in proxy communication expense which was primarily for outside professional services and related costs in order to communicate with shareholders about management's strategyaccounting and the experienceliquidation basis of accounting, the Company's membersestimated future income tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as operating loss and tax credit carrybacks and carryforwards are recorded. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities (temporary differences) and are measured using the Board of Directors.
In fiscal 2019, we separated with a number of employees as part of our effortsenacted tax rates and laws that will be in effect when the differences are expected to streamline our corporate overhead costs and to support a reduced number of restaurants in operation. Employees who were separated fromreverse. A valuation allowance is established against deferred tax assets when the company were paid severanceCompany determines, based on the numberweight of yearsavailable evidence, that they are more likely to not be realized than realized. In the event the Company subsequently determines that it would be able to realize deferred income tax assets in excess of servicetheir net recorded amount, the Company would reduce the valuation allowance, which would reduce the provision for income taxes. See Note 11. Income Taxes for further discussion of the valuation allowance.
We make judgments regarding the interpretation of tax laws that might be challenged upon an audit and earnings with the organization, resulting in an approximate $1.3 million charge.
Also, in fiscal 2019, we engaged a professional consulting firmcause changes to evaluate initiatives to right-size corporate overhead costs and revenue enhancing measures.previous estimates of tax liability. In addition, we engaged other outside consultantsthe Company operates within multiple taxing jurisdictions and is subject to evaluate various other components of our strategy. We also incurred cost of other outside professionals as we began efforts to transition portions of our accounting, payroll, operational reporting, and other back-office functions to a leading multi-unit restaurant outsourcing firm.We anticipate completing the transitionaudit in the first calendar quarter of 2020 and expect to realize additional cost savings and enhanced capabilities from this transition. Lastly, we incurred expenses related to certain information technology systems that will be replaced by the capabilities of the outsourcing firm. We incurred an expense of $1.2 million for these restructuring efforts.
Other charges, as defined above, were not significant in fiscal 2018.
Provision for Asset Impairments and Restaurant Closings
The provision for asset impairment and restaurant closings of approximately $5.6 million in fiscal 2019 is primarily related to assets at nine property locations held for use, seven properties held for sale, one international joint venture investment, and spare inventory of restaurant equipment and parts at our maintenance facility, each written down to their estimated fair value. The provision for asset impairment and restaurant closings of approximately $8.9 million in fiscal 2018 is primarily related to assets impaired at 21 property locations, goodwill at three property locations, ten properties held for sale written down to their fair value, and a reserve for 15 restaurant closings of approximately $1.3 million.
Net Gain on Disposition of Property and Equipment
The approximate $12.8 million net gain on disposition of property and equipment in fiscal 2019 primarily reflects (1) the sale and leaseback of two property locations where we operate a total of three restaurants, including a portion related to amortization of deferred gains; (2) sale of one undeveloped property that was previously held for sale; (3) partially offset by net lease termination costs at other locationsjurisdictions as well as routine asset retirement activity.
by the Internal Revenue Service (“IRS”). In management’s opinion, adequate provisions for income taxes have been made for all open tax years. The approximate $5.4 million net gain on dispositionpotential outcomes of propertyexaminations are regularly assessed in determining the adequacy of the provision for income taxes and equipment in fiscal 2018 is primarilyincome tax liabilities. We believe that adequate provisions have been made for reasonably possible outcomes related to uncertain tax matters.
Discontinued Operations
Under the gaingoing concern basis of accounting, we reported the disposal of a component or a group of components of the Company in discontinued operations if the disposal of the components or group of components represented a strategic shift that had or was expected to have a major effect on the saleCompany’s operations and financial results.
Share-Based Compensation
Under the going concern basis of 10 properties of approximately $4.9 million and approximately $1.3 million of insurance proceeds received for property and equipment damaged by Hurricane Harvey, partially offset by lease termination costs at eight restaurant location closures and routine asset retirements.
Interest Income
Interest income was $30 thousand in fiscal 2019 compared to $12 thousand in fiscal 2018 due to higher net cash balances, including required restricted cash balances.
Interest Expense
Interestaccounting, share-based compensation expense was approximately $6.0 million in fiscal 2019 compared to $3.3 million in fiscal 2018. The increase in interest expense reflects higher average debt balances, higher interest rates inestimated for equity awards at fair value at the credit agreement entered into on December 13, 2018, and higher amortization expense related to pre-paid interest and fees association with the credit agreement into on December 13, 2018, as well as acceleration of the expensing of deferred financing fees associated with our previous debt agreement. Interest paid in cash was $4.5 million in fiscal 2019 and $2.5 million in fiscal 2018.
Other Income (Expense), Net
Other income, net, consisted primarily of the following components: net rental property income and expenses relating to property for which we are the landlord; prepaid sales tax discounts earned through our participation in state tax prepayment programs; oil and gas royalty income; and changes ingrant date. We determined the fair value of our interest rate swap agreement prior torestricted stock awards based on the average of the high and low price of its termination in December 2018.
Other income was approximately $0.2 million in fiscal 2019 compared to approximately $0.3 million in fiscal 2018. The approximate $0.2 millioncommon stock on the date awarded by the Board of income in fiscal 2019 is primarily net rental income, partially offset by sales tax discount expense and a reduction inDirectors. We determined the fair value of our interest rate swapstock option awards using a Black-Scholes option pricing model. The Black-Scholes option pricing model requires various judgmental assumptions including the expected dividend yield, stock price volatility, and the expected life of the award. The fair value of performance share based award liabilities were estimated based on a Monte Carlo simulation model. For further discussion, see Note 17. Share-Based and Other Compensation.
Earnings Per Share
Under the going concern basis of accounting, basic income per share is computed by dividing net income attributable to common shareholders by the weighted-average number of shares outstanding, including restricted stock units, during each period presented. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, determined using the treasury stock method.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the first quarter.United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting periods. Actual results could differ from these estimates.
Recently Accounting Pronouncements
There are no new accounting pronouncements that are applicable or relevant to the Company under the Liquidation Basis of Accounting.
Note 2. Subsequent Events
Subsequent to the end of fiscal year 2021, on August 26, 2021, we sold the Luby’s Cafeterias brand name and the business operations at 35 Luby’s locations to an unrelated third party for an adjusted aggregate consideration of approximately $28.4 million which includes the assumption of certain liabilities and the issuance of notes to us. There can be no assurance that we will realize or receive full value of such consideration. The approximate $0.3net asset value of the sale is included in properties and business units for sale on the accompanying consolidated statement of net assets in liquidation at August 25, 2021 at a discounted rate that represents the amount we expect to receive upon liquidation of the notes.
On September 30, 2021, we completed the previously announced sale of 26 real estate properties, which properties were leased to and are operated by LRC, to Store Capital Acquisitions, LLC for cash consideration of $88.0 million. We utilized approximately $17.6 million of incomethe proceeds to repay in fiscal 2018full all amounts due under our Credit Facility (see Note 14. Debt) with MSD PCOF Partners VI, LLC. The Credit Facility was terminated effective September 30, 2021.
Subsequent to August 25, 2021, in addition to the properties sold to Store Capital, we sold 4 other properties for cash consideration of approximately $13.0 million.
On November 1, 2021, we paid a cash liquidating distribution of $2.00 per share to shareholders of record as of October 25, 2021. The liquidating distribution of approximately $62.2 million was paid from the net proceeds from recent property sales.
Note 3. Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation
The liquidation basis of accounting requires the estimation of net cash flows from operations and all costs associated with implementing and completing the plan of liquidation. We project that we will have estimated costs in excess of estimated receipts during the liquidation period. These amounts can vary significantly due to, among other things, the timing and estimates for receipts and costs associated with the operations of our business units until they are sold, the timing of business and property sales, estimates of direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities, the costs associated with the winding up of operations, and other costs that we may incur which are not currently foreseeable. These receipts and accruals will be adjusted periodically as projections and assumptions change. These receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period. Upon transition to the liquidation basis of accounting on November 19, 2020, the Company accrued revenues and expenses expected to be earned or incurred during liquidation. The liability for estimated costs in excess of estimated receipts during liquidation at August 25, 2021 and November 19, 2020 was comprised of (in thousands):
| | | | | | | | | | | | | | |
| | August 25, 2021 | | November 19, 2020 |
Total estimated receipts during remaining liquidation period | | $ | 25,045 | | | $ | 92,017 | |
Total estimated costs of operations | | (20,763) | | | (76,151) | |
Selling, general and administrative expenses | | (9,585) | | | (18,745) | |
| | | | |
Interest expense | | (151) | | | (2,305) | |
Interest component of operating lease payments | | (2,307) | | | (7,064) | |
Capital expenditures | | (120) | | | (943) | |
Sales costs | | (3,408) | | | (4,079) | |
Total estimated costs during remaining liquidation period | | (36,334) | | | (109,287) | |
Liability for estimated costs in excess of estimated receipts during liquidation | | $ | (11,289) | | | $ | (17,270) | |
The change in the liability for estimated costs in excess of estimated receipts during liquidation between November 19, 2020 and August 25, 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 19, 2020 | | Net Change in Working Capital (3) | | Changes in Estimated Future Cash Flows During Liquidation (4) | | August 25, 2021 |
| | | | | | | | |
Assets: | | | | | | | | |
Estimated net inflows from operations (1) | | $ | 7,859 | | | $ | (21,423) | | | $ | 15,419 | | | $ | 1,855 | |
| | | | | | | | |
| | 7,859 | | | (21,423) | | | 15,419 | | | 1,855 | |
Liabilities: | | | | | | | | |
Sales costs | | (4,079) | | | 1,876 | | | (1,205) | | | (3,408) | |
Corporate expenditures (2) | | (21,050) | | | 10,445 | | | 869 | | | (9,736) | |
| | | | | | | | |
| | (25,129) | | | 12,321 | | | (336) | | | (13,144) | |
| | | | | | | | |
Liability for estimated costs in excess of estimated receipts during liquidation | | $ | (17,270) | | | $ | (9,102) | | | $ | 15,083 | | | $ | (11,289) | |
(1) Estimated net inflows from operations consists of total estimated receipts during liquidation less the sum of total estimated (i) costs of operations, (ii) interest component of operating lease payments and (iii) capital expenditures.
(2) Corporate expenditures consists of (i) selling, general and administrative expenses and (ii) interest expense.
(3) Net change in working capital represents changes in cash, restricted cash, accounts receivable, accounts payable, and accrued expenses and other liabilities as a result of the Company's operating activities for the period from November 19, 2020 to August 25, 2021.
(4) Changes in estimated future cash flows during liquidation includes adjustments to previous estimates and changes in estimated holding periods of our assets.
Note 4. Net Assets in Liquidation
Initial Net Assets In Liquidation
The following is a reconciliation of total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the liquidation basis of accounting as of November 19, 2020 (in thousands):
| | | | | | | | |
Total Shareholders' Equity as of November 18, 2020 | | $ | 70,763 | |
Increase due to estimated net realizable value of properties and business units (1) | | 78,985 | |
Decrease due to write-off of deferred financing costs | | (2,260) | |
| | |
| | |
Decrease due to write-off of operating lease right-of-use assets | | (14,829) | |
Net increase due to write-off of deferred assets, deferred income and goodwill | | 1,952 | |
Liability for estimated costs in excess of estimated receipts during liquidation | | (17,270) | |
Adjustment to reflect the change to the liquidation basis of accounting | | 46,578 | |
Estimated value of net assets in liquidation as of November 19, 2020 | | $ | 117,341 | |
(1) Under the liquidation basis of accounting, all assets are recorded at net realizable value which implicitly includes the tangible and intangible value of all assets. This adjustment at November 19, 2020 reflects adjusting real properties to net realizable value and recording an estimated value for our business units, Luby's Cafeterias, Fuddruckers Restaurants and franchise operations, and Culinary Services.
Current Fiscal Year Activity
Net assets in liquidation increased by $37.5 million during the period from November 19, 2020 through August 25, 2021. The increase was primarily reflectsdue to a $18.4 million increase in properties and business units for sale and a $15.1 million net rental incomeincrease due to a remeasurement of assets and liabilities.
The increase in properties and business units for sale was due to a change in value attributable to properties that have closed, or are under contract to sell with non-refundable deposits, at prices that were different than our previous liquidation values and to the sale and conversion to franchise locations of Fuddruckers restaurants. This increase was partially offset by a change in the estimated value of our business units and some of our real estate assets.
The $15.1 million increase generated by the remeasurement of assets and liabilities was mainly due to the $10.0 million forgiveness of our PPP loan, $1.8 million increase in projected future operating results for the remainder of the holding period, and $6.5 million increase from our actual operating results for the period from November 19, 2020 to August 25, 2021. This increase was partially offset by increases in actual and projected sale closing costs of $1.2 million and an increase in corporate general and administrative costs of $2.0 million.
We have one class of common stock. The net assets in liquidation at August 25, 2021 would result in liquidating distributions of $5.00 per common share based on 30,973,755 common shares outstanding at that date. This estimate is dependent on projections of costs and expenses to be incurred during the fairperiod required to complete the Plan and the realization of estimated net realizable value of our interest rate swap, partially offset by gift card expenses (specificallyproperties and business units. There is inherent uncertainty with these estimates, and they could change materially based on the expensetiming of discounting gift card sales).business and property sales, the performance of the underlying assets, any changes in the underlying assumptions of the projected cash flows, as well as the ultimate vesting of outstanding restricted share awards and exercise of vested stock options. The estimated liquidating distributions per share on a fully diluted basis, assuming all restricted stock awards vest and all in-the-money stock options are exercised, is not materially different than the amount stated above. No assurance can be given that the liquidating distributions will equal or exceed the estimate presented in these consolidated financial statements.
Lease Obligations
TaxesUnder both the going concern basis of accounting and the liquidation basis of accounting, lease obligations are recorded at the present value of the total fixed lease payments over the reasonably certain lease term using discount rates as of the effective date of the lease and the obligation is reduced as we make lease payments. As a result of the same accounting treatment, there is no reconciling entry to adjust total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the liquidation basis of accounting as of November 19, 2020.
During the fourth quarter of fiscal 2020 and all of fiscal 2021, we were able to settle 29 leases for closed restaurant properties and negotiated an early termination date and reduced lease payment at 1 operating restaurant property. While the amounts paid to settle our lease liabilities varied, in the aggregate, we have settled these 29 leases for approximately 21% of the total undiscounted base rent payments that would otherwise have been due under the leases through their original contractual termination date. We can offer no assurances that we will continue to settle any lease obligations for less than the total undiscounted base rent payments, or for less than their discounted value recorded within net assets in liquidation.
Note 5. Cash, Cash Equivalents and Restricted Cash
The income tax provision relatedfollowing table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our consolidated balance sheets that aggregate to continuing operations for fiscal 2019 was approximately $0.5 million compared to an income tax provision of approximately $7.7 million for fiscal 2018. The income tax provision in fiscal 2019 reflects $0.4 million of current state income tax and $0.1 million of international withholding taxes. The income tax provision in fiscal 2018 reflects the impacttotal of the U.S. tax reform, that is commonly referredsame such amounts shown in the consolidated statements of cash flows:
| | | | | | | | | | | |
| November 18, 2020 | | August 26, 2020 |
| (In thousands) |
Cash and cash equivalents | $ | 14,874 | | | $ | 15,069 | |
Restricted cash and cash equivalents | 6,651 | | | 6,756 | |
Total cash and cash equivalents shown in the statement of cash flows | $ | 21,525 | | | $ | 21,825 | |
Restricted cash and cash equivalents as of August 25, 2021 was $5.5 million. Amounts included in restricted cash represent those required to as Tax Cuts and Jobs Act (the "Tax Act"be set aside for (1) estimated amount of interest payable in the next 12 months under the Credit Agreement (see "Note 14. Debt"), (2) collateral for letters of $3.2 millioncredit 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 6. Revenue Recognition
Under the going concern basis of accounting, we recognized revenue as described below. Under the liquidation basis of accounting, we estimate the cash receipts from food and beverage sales at each of our restaurants, and fees under our CCS contracts. We estimate these expected cash receipts from operating these businesses through the point when we expect the operations of these businesses or individual income producing properties are sold to a new owner or when we otherwise estimate operations cease. This estimated ending period for operating these businesses and individual income producing property generally varies from first quarter of fiscal 2022 through the third quarter of fiscal 2022. These estimated revenues are included in deferred income taxes, an additional $4.1 millionthe calculation of deferred income tax provision, including an incremental valuation allowance, and $0.4 millionestimated costs in excess of current state income taxes.
The effective tax rate ("ETR) for continuing operations was a negative 3.2% for fiscal 2019 and a negative 30.6% for fiscal 2018. The ETR for fiscal 2019 differsestimated receipts during liquidation on our consolidated statement of net assets in liquidation. Estimated proceeds from the federal statutory ratesale of 21% due to the change in the valuation allowance, the federal jobs credits, state income taxes,our operating businesses and other discrete items. The Tax Act lowered the federal statutory tax rate from 35% to 21% effective January 1, 2018. In accordance with the application of Internal Revenue Code, Section 15, the Company's federal statutory tax rate for fiscal 2018 was 25%, representing a blended tax rate for the fiscal year. The ETR for fiscal 2018 differsreal estate assets are recorded separately from the blended federal statutory rate due to the changeestimated operating revenues and are included in the valuation allowance, the federal jobs credits, state income taxesproperties and other discrete items.
Discontinued Operations
|
| | | | | | | | |
| | Fiscal Year Ended |
($000s) | | August 28, 2019 | | August 29, 2018 |
| | (52 weeks) | | (52 weeks) |
Discontinued operating losses | | $ | (7 | ) | | $ | (21 | ) |
Impairments | | — |
| | (59 | ) |
Gains | | — |
| | — |
|
Pretax loss | | $ | (7 | ) | | $ | (80 | ) |
Income tax benefit (expense) from discontinued operations | | — |
| | (534 | ) |
Loss from discontinued operations, net of income taxes | | $ | (7 | ) | | $ | (614 | ) |
The loss from discontinued operations,business units for sale on our consolidated statement of net of income taxes was $7 thousandassets in fiscal 2019 compared to a loss of approximately $0.6 million in fiscal 2018. The loss of $7 thousand in fiscal 2019 primarily reflected net occupancy cost associated with assets that were related to discontinued operations. The loss of $0.6 million in fiscal 2018 included (1) less than $0.1 million in “carrying costs” (typically rent, property taxes, utilities, and maintenance) associated with assets that were related to discontinued operations; (2) less than $0.1 million impairment charges for certain assets related to discontinued operations; and (3) an approximate $0.5 million income tax provision related to increasing the deferred tax asset valuation allowance associated with discontinued operations.liquidation.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
In fiscal 2019 and 2018We have previously funded our primary sources of short-term and long-term liquidity wereoperations through borrowings from our Credit Facility, proceeds from our PPP Loan and from asset sales andsales. Since the adoption of our 2018 and 2016 Credit Facilities (as defined below). Cash and cash equivalents and restricted cash increased approximately $9.0 million from $3.7 million atPlan of Liquidation, our ability to meet our obligations is contingent upon the enddisposal of fiscal 2018 to $12.8 million atour assets in accordance with the end of fiscal 2019.Plan. We expect to continue to invest our available liquidity to reduce our debt, maintain our existing restaurants and infrastructure and provide working capital requirements as necessary. We plan to continue a level of capital and repair and maintenance expenditures to keep our restaurants attractive and operating efficiently. Based upon our level of past and projected capital requirements, we expect that the proceeds from the sale of our assets funding available under our 2018 Credit Facility and cash flows from operations,pursuant to the Plan will be sufficientadequate to meet our capital expenditures and working capital requirements during the next twelve months.
As is common in the restaurant industry,obligations; however, we maintain relatively low levels of accounts receivable and inventories and our vendors grant trade credit for purchases suchcannot provide assurance as food and supplies. However, higher levels of accounts receivable are typical in our CCS business segment and Fuddruckers franchise business segment. We also strategically invest in our business through the addition of new restaurant units and refurbishment of existing restaurant units, which are reflected as long-term assets.
The following table summarizes our cash flows from operating, investing and financing activities:
|
| | | | | | | | | |
| | Fiscal Year Ended |
| | August 28, 2019 | | August 29, 2018 | |
| | (52 weeks) | | (52 weeks) | |
| | (In thousands) |
Total cash provided by (used in): | | | | | |
Operating activities | | $ | (13,130 | ) | | $ | (8,453 | ) | |
Investing activities | | 17,849 |
| | 3,014 |
| |
Financing activities | | 4,315 |
| | 8,065 |
| |
Increase (Decrease) in cash and cash equivalents | | $ | 9,034 |
| | $ | 2,626 |
| |
Operating Activities. Cash flow from operating activities decreased from a use of cash of $8.5 million in fiscal 2018 to a use of cash of $13.1 million in fiscal 2019. The $4.7 million decrease in operating cash flow was primarily due to a $4.4 million decrease in cash used in operations before changes in operating assets and liabilities and a $0.3 million increase in cash used in changes in operating assets and liabilities.
The $4.4 million decrease in cash used in operating activities before changes in operating assets and liabilities was primarily due to uses of cash from a $1.8 million decrease total in total segment level profit and a $2.6 million increase in interest expense.
The $0.3 million increase in cash used in changes in operating assets and liabilities was primarily due to a $2.0 million higher decrease in accounts payable, accrued expenses and other liabilities, partially offset by a $0.7 million decrease in the change in trade accounts receivable and other receivables, a $0.2 million decrease in the change of food and supply inventories, and a $0.8 million decrease in the change of prepaid expenses and other assets, in fiscal 2019 compared to fiscal 2018.
Investing Activities. Cash provided by investing activities was $17.8 million in fiscal 2019, an increase of $14.8 million compared to cash used in investing activities of $3.0 million in fiscal 2018, primarily due to the prices or net proceeds we may receive from disposal of assets and property held for sale and proceeds from property and equipment insurance claims. We used cash to invest $4.0 million in the purchase of property and equipment in fiscal 2019, a decrease of $9.3 million from our investment of $13.2 million in fiscal 2018. Proceeds from disposal of assets and property held for sale was $21.8 million in fiscal 2019, an increase of $7.6 million from proceeds of $14.2 million in fiscal 2018. Proceeds on property and equipment insurance claims of $2.1 million was a source of cash in fiscal
2018. The purchases of property and equipment of $4.0 million in fiscal 2019 included $3.7 million for our Company-owned restaurants and $0.3 million in corporate related capital expenditures,. The purchases of property and equipment of $13.2 million in fiscal 2018 included $11.1 million for our Company-owned restaurants, $1.9 million in corporate related capital expenditures and $0.2 million for our CCS business segment.
Financing Activities. Cash provided by financing activities was $4.3 million in fiscal 2019, a decrease of $3.8 million from cash provided by financing activities of $8.1 million in fiscal 2018. Cash flows from financing activities was primarily the resultdisposition of our 2016 Credit facility, as amended through December 13, 2018 and our 2018 Credit Facility thereafter. During fiscal 2019, net cash provided by our 2018 term loan was $58.4 million and by Revolver borrowings was $42.3 million. Cash used for Revolver repayments was $57.0 million, for repayments of our 2016 term loan was $36.1 million and for debt issuance costs was $3.3 million.assets.
Net cash provided by financing activities of fiscal 2018 of $8.1 million consisted of net borrowings from our Revolver of $15.6 million, partially offset by payments on our 2015 term loan of $7.1 million and debt issuance costs paid of $0.4 million.
STATUS OF LONG-TERM INVESTMENTS AND LIQUIDITY
We had no long-term investments as of August 25, 2021. As noted in Note 2. Subsequent Events in our consolidated financial statements included in Item 8. of this Form 10-K, subsequent to August 25, 2021, as part of the transaction to sell the Luby's brand and the operations of 35 Luby's cafeterias, we paid $3.0 million to acquire preferred stock and common stock warrants in CAL Acquisition Corp, an unrelated third party. Luby's is restricted from selling the preferred stock or exercising the common stock warrants for a period of nine months, which may be extended an additional three months. Also, a portion of the purchase price for the above-mention sale was paid in notes. We will continue to monitor the underlying investments and notes to determine the future realizable value of the preferred stock and common stock warrants.
At August 28, 2019, we did not hold any long-term investments.
STATUS OF TRADE ACCOUNTS AND OTHERNOTES RECEIVABLES, NET
We monitor the aging of our receivables including Fuddruckers franchising related receivables, and record provisions for uncollectability,reserves to adjust to estimated net realizable value, as appropriate. Credit terms of accounts receivable associated with our CCS business vary from 30 to 45 days based on contract terms.
WORKING CAPITAL
At fiscal year-end 2019, currentOur notes receivable at August 25, 2021 are recorded in our consolidated statement of net assets increased $7.6 million including an decrease of $0.1 million in cash and an increase in restricted cash of $9.1 million. Trade accounts and other receivables increased $0.1 million while food and supply inventory and prepaid expenses decreased $0.6 million and $0.9 million, respectively. The $0.6 million decrease in food and supply inventory was primarily dueat the amount we expect to lower spending for restaurant supplies and food suppliesrealize based on lower sales volumes and the $0.9 million decrease in prepaid expenses was primarily due to reduction in prepayments of expenses.
At fiscal year-end 2019, current liabilities decreased $48.6 million due primarily to a $39.3 million decrease in Credit facility debt, a $7.3 million decrease in accrued expenses and other liabilities and a $2.0 million decrease in accounts payable. The decrease of $39.3 million in Credit facility debt due to the retirementcredit terms of the 2016 Credit Facility debt with the proceeds from the long-term 2018 Credit Facility. The $7.3 million decreasenotes. See Note 10. Accounts and Notes Receivable in accrued expenses and other liabilities is primarily a result of lower payroll related liabilities of $1.8 million, lower insurance claim and premium liabilities of $1.2 million, lower lease termination costs reserves of $0.6 million, and lower unredeemed gift and dining card liability of $3.4 million, partially offset by higher accrued interest payable of $0.3 million. The lower unredeemed gift and dining card liability includes $3.1 million related to the cumulative effect of adopting the new revenue recognition accounting standard as more fully described at Note 1 to the consolidatedour consolidate financial statements included in Item 8. of this Form 10-K. The $2.0 million decrease in accounts payable was due10-K for a further description of the notes. We continue to a $1.6 million decrease in checks in transit, a $0.8 million decrease in trade payables,monitor the terms of the notes receivable and a $0.4 million increase in accrued purchases.the payment history of the issuer to determine net realizable value.
CAPITAL EXPENDITURES
Capital expenditures generally consist of purchases of real estate for future restaurant sites, culinary contract services investments, new unit construction, purchases of new and replacement restaurant furniture and equipment, and ongoing remodeling programs. Capital expenditures for fiscal 2019year 2021 were approximately $4.0$1.2 million primarily related to recurring maintenance of our restaurant propertiesexisting units. Our future maintenance capital expenditures are difficult to predict and information technology infrastructure. In fiscalwill depend on the timing of the sales of our businesses and real estate as part of our Plan of Liquidation.
DEBT
| | | | | | | | | | | |
| |
| August 25, 2021 | | August 26, 2020 |
Long-Term Debt | (Liquidation Basis) | | (Going Concern Basis) |
2018 Credit Agreement - Revolver | $ | 5,000 | | | $ | 10,000 | |
2018 Credit Agreement - Term Loans | 12,024 | | | 36,583 | |
Total credit facility debt | $ | 17,024 | | | $ | 46,583 | |
2020 PPP Loan | $ | — | | | 10,000 | |
Total Long-Term Debt | N/A | | $ | 56,583 | |
Less: | | | |
Unamortized debt issue costs | N/A | | (1,410) | |
Unamortized debt discount | N/A | | (1,055) | |
Total Long Term Debt less unamortized debt issuance costs | N/A | | 54,118 | |
Current Portion | N/A | | — | |
Total Long Term Balance Sheet Debt | N/A | | $ | 54,118 | |
PPP Loan
On April 21, 2020. we entered into a promissory note with Texas Capital Bank, N.A., ("TCB") effective April 12, 2020, that provided for a loan in the amount of $10.0 million (the "PPP Loan") pursuant to the Paycheck Protection Program ("PPP") established under the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The PPP Loan was subject to forgiveness under the PPP upon our request to the extent that the proceeds were used to pay expenses permitted by the PPP, including payroll costs, covered rent and mortgage obligations, and covered utility payments. The PPP Loan was to mature on April 12, 2022, two years from the commencement date and bore interest at a rate of 1% per annum.
On November 12, 2020, we expect to invest up to $4.0submitted an application for forgiveness of the entire $10.0 million for recurring maintenance for our restaurant properties and information technology investments. We expect to be able to fund all planned capital expenditures in fiscal 2020 using cash flows from operations, proceedsdue on the PPP Loan. On June 29, 2021, we received notice from the sale of assets,Small Business Administration ("SBA") that our $10.0 million PPP Loan had been forgiven in full and the principal and accrued interest amounts on our available credit.
DEBTloan were settled on the same date.
2018 Credit Agreement
On December 13, 2018, the Companywe entered into a credit agreement (as amended by the First Amendment (as(amended 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$80.0 million consisting of a $10$10.0 million revolving credit facility (the “2018 Revolver”“Revolver”), a $10$10.0 million delayed draw term loan (“2018 Delayed Draw Term Loan”), and a $60$60.0 million term loan (the “2018 Term“Term Loan”, and together with the 2018 Revolver and the 2018 Delayed Draw Term Loan, the “2018 Credit“Credit Facility”). The 2018 Credit Facility terminateswas to terminate on, and all amounts owing thereunder mustwas to be repaid on December 13, 2023.
On July 31, 2019, the Company entered into the First AmendmentSubsequent 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 commitmentsAugust 25, 2021, we paid all outstanding amounts due 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)the Credit Agreement was terminated, effective September 13, 2020.30, 2021.
Borrowings under the 2018 Revolver, 2018 Delayed Draw Term Loan, and 2018 Term Loan will bearbore interest at the three month London InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest iswas payable quarterly and accruesaccrued daily. Under the terms of the 2018 Credit Agreement, the maximum amount of interest payable, based on the aggregate principal amount of $80$80.0 million and interest rates in effect at December 13, 2018, in the next 12 months was required to be pre-fundedprefunded at the closing date of the 2018 Credit Agreement. The pre-fundedprefunded amount at August 28, 201925, 2021 of approximately $6.4$3.2 million is recorded in restricted cash and cash equivalents on our consolidated balance sheet and is not available for other purposes. The interest rate forstatement of net assets in liquidation.
Through the 2018 Term Loan anddate of the 2018 Revolver was approximately 10.1% as of November 15, 2019.
The 2018 Credit Facility is subject toThird Amendment, the following minimum amortization payments: 1st anniversary: $10 million; 2nd anniversary: $10 million; 3rd anniversary: $15 million; and 4th anniversary: $15 million.
The Company also payspaid a quarterly commitment fee based on the unused portion of the 2018 Revolver and the 2018 Delayed Draw Term Loan at 0.5% per annum. Voluntary prepayments, refinancing and asset dispositions constituting a sale of all or substantially all assets, under the 2018 Delayed Draw Term Loan and the 2018 Term Loan arewere subject to a make whole premium during years one and two equal to the present value of all interest otherwise owed on the prepaid amount from the date of the pre-paymentprepayment through the end of year two, a 2.0% fee during year three, and a 1.0% fee during year four. As of August 25, 2021, no make whole premium was paid or payable by the Company under the Credit Facility. 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 iswas secured by a security interest in, among other things, all of the Company’s present and future personal property of the Company and its subsidiaries (other than certain excluded assets) and all Mortgaged Property (as defined in the 2018 Credit Agreement) of the Company and its subsidiaries. Under the Credit Facility, 80% of net proceeds from asset sales, including real property sales, were applied as mandatory prepayments of our Term Loan. Mandatory prepayments were not subject to the make whole premium described above.
The 2018 Credit Facility containscontained customary covenants and restrictions on the Company’sour ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and containscontained customary events of default. Specifically, among other things, the Company iswe were required to maintain minimum Liquidity (as defined in the 2018 Credit Agreement) of $3.0 million as of the last day of each fiscal quarter and a minimum Asset Coverage Ratio (as defined in the 2018 Credit Agreement) of 2.50 to 1.00.
In conjunction As of August 25, 2021 we were in full compliance with entering intoall covenants with respect to the 2018 Credit Agreement in December 2018, we obtained third party appraisals on all property used as collateral to maintain the debt covenant requirement of a minimum of 2.50 to 1.00 asset coverage ratio . The asset coverage ratio is defined as the aggregate value of all mortgaged property divided by the outstanding principle amount of term loans plus the average aggregate outstanding principle amount of revolving credit loans during the last full month prior to such date of determination. At August 28, 2019, our asset coverage ratio was 4.23 to 1.00.Facility.
All amounts owing by the Company under the 2018 Credit Facility arewere guaranteed by the subsidiaries of the Company.
As of August 28, 2019, we had no amounts due within the next 12 months under the 2018 Credit Facility due to principal repayments in excess of the required minimum. As of August 28, 201925, 2021, we had approximately $1.3$1.8 million committed under letters of credit, which isare used as security for the payment of insurance obligations and are fully cash collateralized, and approximately $0.1 million$7 thousand in other indebtedness.
At August 28, 2019, the Company had $4.7 million available to borrow under the 2018 Revolver and $10.0 million available to borrow under the 2018 Delayed Draw Term Loan.
As of November 26, 2019, the Company was in compliance with all covenants under the terms of the 2018 Credit Agreement.
2016 Credit Agreement (paid in full and terminated in December 2018)
On November 8, 2016, the Company entered into a $65.0 million Senior Secured Credit Facility with Wells Fargo Bank, National Association, as Administrative Agent and Cadence Bank, NA and Texas Capital Bank, NA, as lenders (“2016 Credit Agreement”). The 2016 Credit Agreement, prior to the amendments discussed below, was comprised of a $30.0 million 5-year Revolver (the “Revolver”) and a $35.0 million 5-year Term Loan (the “Term Loan”), and it also included sub-facilities for swingline loans and letters of credits. The original maturity date of the 2016 Credit Agreement was November 8, 2021.
Borrowings under the Revolver and Term Loan bore interest at (1) a base rate equal to the greater of (a) the federal funds effective rate plus one-half of 1% (the “Base Rate”), (b) prime and (c) LIBOR for an interest period of 1 month, plus, in any case, an applicable spread that ranges from 1.50% to 2.50% per annum the (“Applicable Margin”), or (2) the LIBOR, as adjusted for any Eurodollar reserve requirements, plus an applicable spread that ranges from 2.50% to 3.50% per annum. Borrowings under the swingline loan bore interest at the Base Rate plus the Applicable Margin. The applicable spread under each option was dependent upon certain measures of the Company’s financial performance at the time of election. Interest was payable quarterly, or in more frequent intervals if LIBOR applies.
The Company was obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based on the average daily unused amount of the commitment of such lender, ranged from 0.30% to 0.35% per annum depending upon the Company's financial performance.
The proceeds of the 2016 Credit Agreement were available for the Company to (i) pay in full all indebtedness outstanding under the 2013 Credit Agreement as of November 8, 2016, (ii) pay fees, commissions, and expenses in connection with our repayment of the 2013 Credit Agreement, initial extensions of credit under the 2016 Credit Agreement, and (iii) for working capital and general corporate purposes of the Company.
The 2016 Credit Agreement, as amended, contained the customary covenants and was secured by an all asset lien on all of the Company's real property and also included customary events of default. On December 13, 2018, the 2016 Credit Agreement was terminated with all outstanding amounts paid in full.
COMMITMENTS AND CONTINGENCIES
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements except for operating leases for our corporate office, facility service warehouse and certain restaurant properties.arrangements.
Claims
From time to time, we are subject to various other private lawsuits, administrative proceedings and claims that arise in the ordinary course of our 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. We currently believe that the final disposition of these types of lawsuits, proceedings and claims will not have a material adverse effect on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims.
From time to time, we enter into non-cancelable contracts for the construction of our new restaurants and restaurant remodels. This construction activity exposes us to the risks inherent in this industry including but not limited to rising material prices, labor shortages, delays in getting required permits and inspections, adverse weather conditions, and injuries sustained by workers.
Contractual Obligations
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide the contractual obligations table.
AFFILIATIONS AND RELATED PARTIES
Affiliate Services
The Company’sChristopher J. Pappas, our former Chief Executive Officer, Christopher J. Pappas,Office and Harris J. Pappas, a former Director of the Company, own two restaurant entities (the “Pappas entities”) that may, from time to time, provide services to the Company and its subsidiaries, as detailed in the Amended and Restated Master Sales Agreement dated August 2, 2017 among the Company and the Pappas entities. Collectively, Messrs. Pappas and the Pappas entities own greater than 5% of the Company's common stock.
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities continue tomay provide specialized (customized) equipment fabrication primarily for new construction, and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. The total costsCompany incurred $18 thousand and $8 thousand under the Amended and Restated Master Sales Agreement offor custom-fabricated and refurbished equipment in fiscal 20192021 and 2018 were approximately $19 thousand and $31 thousand,2020, respectively. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Company’s Board of Directors.
Operating Leases
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partnerpartnership interest and a 50% general partnerpartnership 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 property.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. The new lease also gaveoptions 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 is payingpays rent of $22.00 per square foot plus maintenance, taxes, and insurance forduring 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. Due to the COVID-19 pandemic, the landlord agreed to abate the rent for April, 2020. We entered into an amendment to the lease, effective July 1, 2020, whereby (1) the lease was terminated early on December 31, 2020, (2) the rent for May and June of 2020 is abated and (3) commencing July 1, 2020 through the early termination date, the monthly rent was a fixed gross amount. The amendment was approved by the Finance and Audit Committee of our Board of Directors in 2006.
Directors.
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement for one of the Company’s Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of approximately six years with two subsequent five-year options. Pursuant to the new ground lease agreement, the Company is payingpays rent of $28.53 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until May 31, 2020. Thereafter, the new groundThe lease agreement providesprovided for increases in rent at set intervals. The lease agreement was approved by the Finance and Audit Committee of our Board of Directors. In December 2019 we exercised the first five-year renewal option, effective June 1, 2020. The renewal was approved by the Finance and Audit Committee of our Board of Directors. Due to the COVID-19 pandemic, Pappas Restaurants, Inc. agreed to abate the rent for April and May of 2020. The lease was terminated on February 26, 2021, in conjunction with the sale of the Fuddruckers operations at this location to operate as a franchised location, as further described below.
AffiliatedFor the fiscal years ended August 25, 2021 and August 26, 2020, affiliated rents paid for the Houston property lease represented 2.9%incurred as a percentage of relative total Company cost was 0.25% and 3.1% of total rents for continuing operations for fiscal 2019 and 2018,0.52%, respectively. Rent payments under the two lease agreements described above were $593133 thousand and $628$411 thousand in fiscal 20192021 and 2018,2020, respectively.
Fuddruckers Franchise
In February 2021, we completed the sale and transfer of a previously company-owned Fuddruckers restaurant to HPCP Investments, LLC, one of the Pappas entities, for cash proceeds of approximately $0.2 million and the termination of our operating lease on the property, discussed above. Concurrent with the sale, Pappas Restaurants, Inc. entered into a franchise agreement with us to operate as a Fuddruckers restaurant at this location. Each of these transactions was approved by the Finance and Audit Committee of our Board of Directors.
Key Management Personnel
The following table compares currentMr. Pappas resigned his position as President and prior two fiscal years charges incurred underChief Executive Officer, effective January 27, 2021. Mr. Pappas remained a member of the Amended and Restated Master Sales Agreement, affiliated property leases, and other related party agreements to our total capital expenditures, as well as relative Selling, general and administrative expenses, and other operating expenses included in continuing operations:
|
| | | | | | | | |
| Fiscal Year Ended |
| August 28, 2019 | | August 29, 2018 | |
| (364 days) | | (364 days) | |
| (In thousands, except percentages) |
AFFILIATED COSTS INCURRED: | | | | |
Selling, general and administrative expenses—professional and other costs | $ | — |
| | $ | — |
| |
Capital expenditures—custom-fabricated and refurbished equipment | 19 |
| | 31 |
| |
Other operating expenses, occupancy costs and opening costs, including property leases | 593 |
| | 628 |
| |
Total | $ | 612 |
| | $ | 659 |
| |
RELATIVE TOTAL COMPANY COSTS: | | | | |
Selling, general and administrative expenses | $ | 34,179 |
| | $ | 38,725 |
| |
Capital expenditures | 3,987 |
| | 13,247 |
| |
Other operating expenses, occupancy costs and opening costs | 69,075 |
| | 83,239 |
| |
Total | $ | 107,241 |
| | $ | 135,211 |
| |
AFFILIATED COSTS INCURRED AS A PERCENTAGE OF RELATIVE TOTAL COMPANY COSTS | 0.57 | % | | 0.49 | % | |
TheBoard of Directors of the Company until August 23, 2021. Previously, on December 11, 2017, the Company had entered into a new employment agreement with Christopher Pappas on December 11, 2017.Mr. Pappas. Under the employment agreement, which is no longer effective as of January 27, 2021, the initial term of Mr. Pappas' employment ended on August 28, 2019 and automatically renewsrenewed 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 wasemployment agreement had been unanimously
approved by the Executive Compensation Committee (the “Committee”) of theour Board of Directors as well as by the full Board. EffectiveBoard at that time. Previously, effective August 1, 2018, the Company and Christopher J.Mr. Pappas agreed to reduce his fixed annual base salary to one dollar.
Peter Tropoli,Also, effective January 27, 2021, the Board of Directors appointed John Garilli as the Company’s Interim President and Chief Executive Officer. The Company and Mr. Garilli’s employer, Winthrop Capital Advisors LLC ("WCA"), have entered into an agreement (the “Agreement”), pursuant to which the Company paid WCA a former directorone-time fee of $50,000 and officerwill pay a monthly fee of $20,000 for so long as Mr. Garilli serves the Company in said positions. The Company has also entered into an Indemnity Agreement with Mr. Garilli and WCA. The Company and WCA had previously entered into a consulting agreement, pursuant to which WCA provided consulting services related to the Company’s adoption of the Company, is an attorney and stepsonliquidation basis of Frank Markantonis, who is a directoraccounting in the filing of our Quarterly Report on Form 10-Q for the Company. Mr. Tropoli resigned from thequarter ended December 16, 2020. The Company and is no longerWCA also executed separate consulting agreements to provide similar services for the filing of our General CounselQuarterly Report on Form 10-Q for the quarters ended March 10, 2021 and Corporate Secretary.
June 2, 2021, and for the filing of our Annual Report on Form 10-K for the fiscal year ended August 25, 2021, respectively.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are described in Note 1, “Nature of Operations and Significant Accounting Policies,” to our Consolidated Financial Statements included in Item 8 of Part II of this report. The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States. Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods. Management believes the following are critical accounting policies due to the significant, subjective and complex judgments and estimates used when preparing our consolidated financial statements. Management regularly reviews these assumptions and estimates with the Finance and Audit Committee of our Board of Directors.
Liquidation Basis of Accounting
Income TaxesUnder the liquidation basis of accounting, our assets are measured at their estimated net realizable value, or liquidation value, which represents the amount of their estimated cash proceeds or other consideration from liquidation, based on current contracts, estimates and other indications of sales value, and may include previously unrecognized assets that we may expect to either sell in the course of our liquidation or use in settling liabilities, such as trademarks or other intangibles. The two areas that require the most significant, subjective and complex judgements and estimates are (i) properties and business units for sale and (ii) liability for estimated costs in excess of estimated receipts during liquidation.
Properties and business units for sale
Our income tax expense, deferred taxIn developing the estimated net realizable value for our properties and business units held for sale, we utilized third party valuation experts, investment bankers, real estate brokers, the expertise of members of the Special Committee of our Board of Directors, and forecasts generated by our management. For estimated real estate values, we consider comparable sales transactions, our past experience selling real estate assets of the Company and, in certain instances, indicative offers, as well as capitalization rates observed for income-producing real estate. For estimated business unit valuations we consider estimated values of the economic components of possible transactions, the value of a buyer assuming certain liabilities in a purchase transaction, and, in certain instances, indicative offers, as well as the probabilities of certain outcomes.Estimates for the liquidation value of the business units, or subset of operating restaurants, is also tested for reasonableness through a multiple of historical and projected business cash flows.All estimates by nature involve a large degree of judgement and sensitivity to the underlying assumptions.
Estimated costs in excess of estimated receipts during liquidation
The liquidation basis of accounting requires the estimation of net cash flows from operations and all costs associated with implementing and completing the plan of liquidation. We project that we will have estimated costs in excess of estimated receipts during the liquidation period. These amounts can vary significantly due to, among other things, the timing and estimates for receipts and costs associated with the operations of our business units until they are sold, the timing of business and property sales, estimates of direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities, the costs associated with the winding up of operations, and other costs that we may incur which are not currently foreseeable. These receipts and accruals will be adjusted periodically as projections and assumptions change. These receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period.
The valuation of our assets and liabilities, as described above, represents estimates, based on present facts and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and a limited number of foreign jurisdictions, involving franchised locations in Panama, Mexico, and Canada. Significant judgments and estimates are required in the determinationcircumstances, of the consolidated income tax expense.
On December 22, 2017, U.S. tax reform legislation that is commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The enactment date occurred during the second quarter of fiscal 2018 and the impact on our income tax accounts of the Tax Act were accounted for in the period of enactment, in accordance with ASC 740. The Tax Act makes broad and complex changes to the U.S. tax code and most notably to the Company, the Tax Act lowered the federal statutory tax rate from 35% to 21% effective January 1, 2018. The Company's federal statutory tax rate for fiscal 2019 was 21%.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future, as well as from tax Net Operating Losses ("NOL") and tax credit carryovers. We establish a valuation allowance when we no longer consider it more likely than not that a deferred tax asset will be realized. In evaluating our ability to recover our deferred tax assets, we consider available positive and negative evidence, including scheduled reversals of deferred tax liabilities, tax-planning strategies and existing business conditions, including the results of recent operations. In the third quarter of fiscal 2018, management concluded that a full valuation allowance on the Company's net deferred tax assets was necessary. As of August 28, 2019, the Company considers the deferred tax assets not to be realizable and maintains a full valuation allowance against the Company's net deferred tax asset balance.
The composition of the Company’s deferred tax assets, excluding the offsetting impact of the valuation allowance, includes income tax NOL’s and tax credits of approximately $18.1 million, approximately $5.5 million relating to income tax NOL’s and $12.5 million relating to tax credit carryover, which expire in varying amounts between fiscal 2022 through 2039, except for the portion of the tax NOL's that have an indefinite carryforward period. At this time, the management is uncertain as to the realization of these deferred tax assets, which is otherwise dependent on numerous factors, including our ability to generate sufficient taxable income prospectively and, if necessary, gains on sale of owned property locations, prior to expiration of the tax NOL’s and tax credit carryovers.
Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. We operate within multiple taxing jurisdictions and are subject to examination in these tax jurisdictions, as well as by the Internal Revenue Service (“IRS”). In management’s opinion, adequate provisions for income taxes have been made for all open income tax periods. The potential outcomes of examinations are regularly assessed in determining the adequacy of the provision for income taxes and income tax liabilities. Management believes that adequate provisions have been made for reasonable and foreseeable outcomes related to uncertain tax matters.
Impairment of Long-Lived Assets
We periodically evaluate long-lived assets held for use and held for sale, whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. We analyze historical cash flows of operating locations and compare results of poorer performing locations to more profitable locations. We also analyze lease terms, conditionvalue of the assets and related need for capital expenditures or repairs, construction activitycosts associated with carrying out the Plan. The actual values and costs associated with carrying out the Plan may differ from amounts reflected in the surrounding area as well as the economic and market conditions in the surrounding area.
For assets held for use, we estimate future cash flows using assumptions based on possible outcomesaccompanying consolidated financial statements because of the areas analyzed. IfPlan's inherent uncertainty. These differences may be material. In particular, these estimates will vary with the undiscounted future cash flows are less than the carrying value of our location’s assets, we record an impairment based on an estimate of discounted cash flows. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgments. Assumptions and estimates used include operating results, changes in working capital, discount rate, growth rate, anticipated net proceeds from disposition of the property and if applicable, lease terms.
The spanlength of time for which future cash flows are estimatednecessary to complete the Plan. It is often lengthy, increasing the sensitivity to assumptions made. The time span is longer and could be 20 to 25 years for newer properties, but only 5 to 10 years for older properties. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary withincurrently anticipated that a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows. We operated 120 restaurants as of November 15, 2019 and periodically experience unanticipated changes in our assumptions and estimates. Those changes could have a significant impact on discounted cash flow models with a corresponding significant impact on the measurement of an impairment. Gains are not recognized until the assets are disposed.
We evaluate the useful lives of our other intangible assets, primarily the Fuddruckers trademarks and franchise agreements to determine if they are definite or indefinite-lived. Reaching a determination of useful life requires significant judgments and assumptions regarding the future effects of obsolescence, contract term, demand, competition, other economic factors (such as the stability of the industry, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets.
We periodically evaluate our intangible assets, primarily the Fuddruckers trademarks and franchise agreements, to determine if events or changes in circumstances such as economic or market conditions indicate that the carrying amountmajority of the assets may not be recoverable. We analyze historical cash flows of operating locations to determine trends that would indicate a need for impairment. We also analyze royalties and collectability from our franchisees to determine if there are trends that would indicate a need for impairment.
Property Held for Sale
We periodically review long-lived assets against our plans to retain or ultimately dispose of properties. If we decide to dispose of a property, it will be moved to property held for sale and actively marketed. Property held for sale is recorded at amounts not in excess of what management currently expects to receive upon sale, less costs of disposal. We analyze market conditions each reporting period and record additional impairments due to declines in market values of like assets. The fair value of the property is determined by observable inputs such as appraisals and prices of comparable properties in active markets for assets like ours. Gains are not recognized until the properties are sold.
Insurance and Claims
We self-insure a significant portion of risks and associated liabilities under our employee injury, workers’ compensation and general liability programs. We maintain insurance coverage with third party carriers to limit our per-occurrence claim exposure. We have recorded accrued liabilities for self-insurance based upon analysis of historical data and actuarial estimates, and we review these amounts on a quarterly basis to ensure that the liability is appropriate.
The significant assumptions made by the actuary to estimate self-insurance reserves, including incurred but not reported claims, are as follows: (1) historical patterns of loss development will continue in the future as they have in the past (Loss Development Method), (2) historical trend patterns and loss cost levels will continue in the future as they have in the past (Bornhuetter-Ferguson Method), and (3) historical claim counts and exposures are used to calculate historical frequency rates and average claim costs are analyzed to get a projected severity (Frequency and Severity Method). The results of these methods are blended by the actuary to provide the reserves estimates.
Actual workers’ compensation, employee injury and general liability claims expense may differ from estimated loss provisions. The ultimate level of claims under the in-house safety program are not known, and declines in incidence of claims as well as claims costs experiences or reductions in reserve requirements under the program may not continue in future periods.
Prior to January 1, 2018, employee health insurance coverage was offered through fully-insured contracts with insurance carriers and the liability for covered health claims was borne by the insurance carriers per the terms of each policy contract. Effective January 1, 2018, we maintain a self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits per 3rd party insurance carriers. Our self-insurance expense is accrued based upon the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided by our 3rd party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims expense may differ from estimated loss provisions based on historical experience. The liabilities for these claims are included as a component of accrued expenses and other liabilities on our consolidated balance sheets.
SHARE-BASED COMPENSATION
Share-based compensation is recognized as compensation expense in the income statement utilizing the fair valueowned on the date of the grant. The fair valueshareholder approval of performance share based awardthe plan will be sold by December 31, 2021, with liquidation substantially complete by June 30, 2022. It is also anticipated that any assets and liabilities are estimated based onremaining at such time will be transferred to a Monte Carlo simulation model. The fair valueliquidating entity and it is likely that the full realization of restricted stock units is valued at the closing market price of our common stock at the date of grant. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Assumptions for volatility, forfeitures, expected option life, risk free interest rate, and dividend yield are used in the model.proceeds from sales will extend beyond that date.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1There are no new accounting pronouncements that are applicable or relevant to the accompanying Consolidated Financial Statements for a discussionCompany under the Liquidation Basis of recent accounting guidance adopted and not yet adopted. Except as disclosed in Note 1, the adopted accounting guidance discussed in Note 1 did not have a significant impact on our consolidated financial position or results of operations. Except as disclosed in Note 1, Company either expects that the accounting guidance not yet adopted will not have a significant impact on the Company’s consolidated financial position or results of operations or is currently evaluating the impact of adopting the accounting guidance.Accounting.
INFLATION
It is generally our policy to maintain stable menu prices without regard to seasonal variations in food costs. Certain increases in costs of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Luby’s, Inc.
Opinion on the financial statements
We have audited the accompanying consolidatedbalance sheets statement of net assets in liquidation of Luby’s, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of August 28, 201925, 2021, and August 29, 2018, the related consolidated statement of changes in net assets in liquidation for the period from November 19, 2020 through August 25, 2021, and the consolidated balance sheet as of August 26, 2020, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years in the12 week period ended November 18, 2020 and the year ended August 28, 2019,26, 2020, and the related notes (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Companyas of August 28, 201925, 2021 and August 29, 2018,26, 2020, and the results of its changes in net assets for the period from November 19, 2020 through August 25, 2021, and its operations and itscash flows for each of the two years in the12 week period ended November 18, 2020 and the year ended August 28, 2019,26, 2020, in conformity with accounting principles generally accepted in the United States of America.America applied on the bases described below.
AdoptionBasis of new accounting standard
As discussed in Note 1 to the consolidated financial statements, the shareholders of the Company approved the Plan of Liquidation and Dissolution on November 17, 2020, and the Company determined liquidation is imminent. As a result, the Company changed its methodbasis of accounting for revenue recognition on August 30, 2018 dueNovember 19, 2020 from the going concern basis to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. The Company adopted the new revenue standard using the modified retrospective method.liquidation basis. This matter is also discussed below as a critical audit matter.
Basis for opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate.
As described in Note 1 to the consolidated financial statements, as a result of the November 17, 2020 approval by the Company’s shareholders of the Plan of Liquidation and Dissolution, it was determined that liquidation was imminent and the Company’s basis of accounting transitioned from the going concern basis of accounting to the liquidation basis of accounting on November 19, 2020, in accordance with generally accepted accounting principles. The total effect of adoption of the liquidation basis of accounting was a $46,578 thousand increase from consolidated net equity as of November 18, 2020 to net
assets in liquidation as of November 19, 2020. The changes in net assets and liabilities in liquidation from November 19, 2020 to August 25, 2021 was an increase of $37,452 thousand.
We identified the measurement of property and business unit assets at net realizable value and liabilities for estimated costs in excess of estimated receipts during liquidation at the adoption date of the liquidation basis of accounting and the Company’s year-end date as a critical audit matter. This matter is also discussed above in the Basis of Accounting paragraph.
The principal considerations for our determination that performing procedures relating to the measurement of property and business unit assets at net realizable value and liabilities for estimated costs in excess of estimated receipts during liquidation at the adoption date of the liquidation basis of accounting and the Company’s year-end date is a critical audit matter are the significant judgments made by management when determining the estimated net realizable value of properties and business units and the liability for estimated costs in excess of estimated receipts during liquidation. These judgments included significant assumptions related to estimated cash proceeds or other consideration of property and business unit assets, estimated disposal and other costs, and estimated operating income or loss that the Company reasonably expects to incur during the remaining expected duration of the liquidation period. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the measurement of these assets and the liability for estimated costs in excess of estimated receipts during liquidation. Also, the audit effort involved the use of professionals with specialized skill and knowledge.
Our audit procedures related to the measurement of property and business unit assets at net realizable value and liabilities for estimated costs in excess of estimated receipts during liquidation included the following, among others:
a.We tested management’s process for developing the estimates and assumptions used in the measurement of certain property and business unit assets and the liability for estimated costs in excess of estimated receipts during liquidation on November 19, 2020 and August 25, 2021.
b.We tested the completeness and accuracy of the data used by management in the developing of the estimates.
c.We evaluated the reasonableness of the significant assumptions used by management for certain property and business unit assets related to the estimated cash proceeds or other consideration from liquidation, and the estimated operating income or loss that the Company reasonably expects to incur during the remaining expected duration of the liquidation period.
d.We utilized professionals with specialized skill and knowledge to assist in evaluating management’s assumptions related to the estimated cash proceeds or other consideration from sales of property assets. These procedures included evaluating whether the assumptions used by management and management’s specialists were reasonable considering (i) the current and past performance of the Company; (ii) the consistency with external industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2007.
Houston, Texas
November 26, 201919, 2021
Luby’s, Inc.
Consolidated Statement of Net Assets in Liquidation
(Liquidation Basis)
| | | | | |
| August 25, 2021 |
| (in thousands) |
ASSETS | |
Cash and cash equivalents | $ | 14,392 | |
Accounts and notes receivable | 10,184 | |
Restricted cash and cash equivalents | 5,492 | |
Properties and business units for sale | 176,960 | |
Total Assets | $ | 207,028 | |
| |
LIABILITIES | |
Accounts payable | $ | 2,968 | |
Accrued expenses and other liabilities | 12,383 | |
Credit facility debt | 17,024 | |
| |
Operating lease liabilities | 7,181 | |
Liability for estimated costs in excess of estimated receipts during liquidation | 11,289 | |
Other liabilities | 1,390 | |
Total Liabilities | $ | 52,235�� | |
| |
Commitments and Contingencies | 0 |
| |
Net assets in liquidation (Note 4) | $ | 154,793 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statement of Changes in Net Assets in Liquidation
(Liquidation Basis)
(in thousands)
| | | | | | | | |
| | Period from November 19, 2020 through August 25, 2021 |
| | (40 weeks) |
| | (in thousands) |
Net assets in liquidation, beginning of period | | $ | 117,341 | |
Changes in net assets in liquidation | | |
Changes in liquidation value of properties and business units for sale | | 18,431 | |
Changes in accounts and notes receivable | | 3,615 | |
Changes in estimated cash flows during liquidation | | 15,083 | |
Net changes in liquidation value | | 37,129 | |
Proceeds received from exercise of stock options | | 323 | |
Changes in net assets in liquidation | | 37,452 | |
Net assets in liquidation, end of period | | $ | 154,793 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Balance SheetsSheet
(Going Concern Basis)
|
| | | | | | |
| August 28, 2019 | August 29, 2018 |
| (In thousands, except share data) |
ASSETS | | |
Current Assets: | | |
Cash and cash equivalents | $ | 3,640 |
| $ | 3,722 |
|
Restricted cash and cash equivalents | 9,116 |
| — |
|
Trade accounts and other receivables, net | 8,852 |
| 8,787 |
|
Food and supply inventories | 3,432 |
| 4,022 |
|
Prepaid expenses | 2,355 |
| 3,219 |
|
Total current assets | 27,395 |
| 19,750 |
|
Property held for sale | 16,488 |
| 19,469 |
|
Assets related to discontinued operations | 1,813 |
| 1,813 |
|
Property and equipment, net | 121,743 |
| 138,287 |
|
Intangible assets, net | 16,781 |
| 18,179 |
|
Goodwill | 514 |
| 555 |
|
Other assets | 1,266 |
| 1,936 |
|
Total assets | $ | 186,000 |
| $ | 199,989 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
Current Liabilities: | | |
Accounts payable | $ | 8,465 |
| $ | 10,457 |
|
Liabilities related to discontinued operations | 14 |
| 14 |
|
Current portion of credit facility debt | — |
| 39,338 |
|
Accrued expenses and other liabilities | 24,475 |
| 31,755 |
|
Total current liabilities | 32,954 |
| 81,564 |
|
Credit facility debt, less current portion | 45,439 |
| — |
|
Liabilities related to discontinued operations | — |
| 16 |
|
Other liabilities | 6,577 |
| 5,781 |
|
Total liabilities | 84,970 |
| 87,361 |
|
Commitments and Contingencies |
|
|
SHAREHOLDERS’ EQUITY | | |
Common stock, $0.32 par value; 100,000,000 shares authorized; Shares issued were 30,478,972 and 30,003,642 at August 28, 2019 and August 29, 2018, respectively; Shares outstanding were 29,978,972 and 29,503,642 at August 28, 2019 and August 29, 2018, respectively | 9,753 |
| 9,602 |
|
Paid-in capital | 34,870 |
| 33,872 |
|
Retained earnings | 61,182 |
| 73,929 |
|
Less cost of treasury stock, 500,000 shares | (4,775 | ) | (4,775 | ) |
Total shareholders’ equity | 101,030 |
| 112,628 |
|
Total liabilities and shareholders’ equity | $ | 186,000 |
| $ | 199,989 |
|
| | | | | |
| August 26, 2020 |
| (In thousands, except share data) |
ASSETS | |
Current Assets: | |
Cash and cash equivalents | $ | 15,069 | |
Restricted Cash and cash equivalents | 6,756 | |
Trade accounts and other receivables, net | 6,092 | |
Food and supply inventories | 1,653 | |
Prepaid and other assets | 1,577 | |
| |
| |
Total current assets | 31,147 | |
Property held for sale | 11,249 | |
Assets related to discontinued operations | 1,715 | |
Property and equipment, net | 100,599 | |
Intangible assets, net | 15,343 | |
Goodwill | 195 | |
| |
Operating lease right-of-use assets | 16,756 | |
Other assets | 399 | |
Total assets | $ | 177,403 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
Current Liabilities: | |
Accounts payable | $ | 6,770 | |
Liabilities related to discontinued operations | 17 | |
| |
Operating lease liabilities - current | 3,903 | |
Accrued expenses and other liabilities | 19,569 | |
Total current liabilities | 30,259 | |
Long-term debt, less current portion | 54,118 | |
| |
Operating lease liabilities - non-current | 17,797 | |
Other liabilities | 1,630 | |
Total liabilities | 103,804 | |
Commitments and Contingencies | 0 |
| |
SHAREHOLDERS’ EQUITY | |
Common stock, $0.32 par value;100,000,000 shares authorized; Shares issued were 31,125,470 and shares outstanding were 30,625,470 at August 26, 2020. | 9,960 | |
Paid-in capital | 35,655 | |
Retained earnings | 32,759 | |
Less cost of treasury stock, 500,000 shares | (4,775) | |
Total shareholders’ equity | 73,599 | |
Total liabilities and shareholders’ equity | $ | 177,403 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Operations
(Going Concern Basis)
| | | | | | | | | | | | | | |
| Period Ended | | Year Ended | |
| November 18, 2020 | | August 26, 2020 | |
| (12 weeks) | | (52 weeks) | |
| (In thousands, except per share data) |
SALES: | | | | |
Restaurant sales | $ | 36,485 | | | $ | 183,511 | | |
Culinary contract services | 4,918 | | | 26,747 | | |
Franchise revenue | 530 | | | 3,634 | | |
Vending revenue | 14 | | | 130 | | |
TOTAL SALES | 41,947 | | | 214,022 | | |
COSTS AND EXPENSES: | | | | |
Cost of food | 9,348 | | | 52,505 | | |
Payroll and related costs | 12,964 | | | 69,833 | | |
Other operating expenses | 7,154 | | | 36,588 | | |
Occupancy costs | 2,634 | | | 15,130 | | |
Opening costs | — | | | 14 | | |
Cost of culinary contract services | 4,467 | | | 24,218 | | |
Cost of franchise operations | 294 | | | 1,543 | | |
Depreciation and amortization | 2,142 | | | 11,514 | | |
Selling, general and administrative expenses | 4,267 | | | 24,571 | | |
Other charges | 416 | | | 3,401 | | |
Net provision (gain) on asset impairments and restaurant closings | (85) | | | 10,193 | | |
Net loss (gain) on disposition of property and equipment | 117 | | | (11,557) | | |
Total costs and expenses | 43,718 | | | 237,953 | | |
LOSS FROM OPERATIONS | (1,771) | | | (23,931) | | |
Interest income | 8 | | | 60 | | |
Interest expense | (1,212) | | | (6,388) | | |
Other income, net | 30 | | | 1,195 | | |
Loss before income taxes and discontinued operations | (2,945) | | | (29,064) | | |
Provision for income taxes | 58 | | | 357 | | |
Loss from continuing operations | (3,003) | | | (29,421) | | |
Loss from discontinued operations, net of income taxes | (16) | | | (29) | | |
NET LOSS | $ | (3,019) | | | $ | (29,450) | | |
Loss per share from continuing operations: | | | | |
Basic and diluted | $ | (0.10) | | | $ | (0.97) | | |
Loss per share from discontinued operations: | | | | |
Basic and diluted | $ | 0.00 | | | $ | 0.00 | | |
Net loss per share: | | | | |
Basic and diluted | $ | (0.10) | | | $ | (0.97) | | |
Weighted-average shares outstanding: | | | | |
Basic and diluted | 30,662 | | | 30,294 | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
|
| | | | | | | | |
| Year Ended |
| August 28, 2019 | | August 29, 2018 | |
| (In thousands, except per share data) |
SALES: | | | | |
Restaurant sales | $ | 284,513 |
| | $ | 332,518 |
| |
Culinary contract services | 31,888 |
| | 25,782 |
| |
Franchise revenue | 6,690 |
| | 6,365 |
| |
Vending revenue | 379 |
| | 531 |
| |
TOTAL SALES | 323,470 |
| | 365,196 |
| |
COSTS AND EXPENSES: | | | | |
Cost of food | 79,479 |
| | 94,238 |
| |
Payroll and related costs | 108,509 |
| | 124,478 |
| |
Other operating expenses | 50,886 |
| | 62,286 |
| |
Occupancy costs | 18,133 |
| | 20,399 |
| |
Opening costs | 56 |
| | 554 |
| |
Cost of culinary contract services | 28,554 |
| | 24,161 |
| |
Cost of franchise operations | 1,633 |
| | 1,528 |
| |
Depreciation and amortization | 13,998 |
| | 17,453 |
| |
Selling, general and administrative expenses | 34,179 |
| | 38,725 |
| |
Other charges | 4,270 |
| | — |
| |
Provision for asset impairments and restaurant closings | 5,603 |
| | 8,917 |
| |
Net gain on disposition of property and equipment | (12,832 | ) | | (5,357 | ) | |
Total costs and expenses | 332,468 |
| | 387,382 |
| |
LOSS FROM OPERATIONS | (8,998 | ) | | (22,186 | ) | |
Interest income | 30 |
| | 12 |
| |
Interest expense | (5,977 | ) | | (3,348 | ) | |
Other income, net | 195 |
| | 298 |
| |
Loss before income taxes and discontinued operations | (14,750 | ) | | (25,224 | ) | |
Provision for income taxes | 469 |
| | 7,730 |
| |
Loss from continuing operations | (15,219 | ) | | (32,954 | ) | |
Loss from discontinued operations, net of income taxes | (7 | ) | | (614 | ) | |
NET LOSS | $ | (15,226 | ) | | $ | (33,568 | ) | |
Loss per share from continuing operations: | | | | |
Basic | $ | (0.51 | ) | | $ | (1.10 | ) | |
Assuming dilution | $ | (0.51 | ) | | $ | (1.10 | ) | |
Loss per share from discontinued operations: | | | | |
Basic | $ | 0.00 |
| | $ | (0.02 | ) | |
Assuming dilution | $ | 0.00 |
| | $ | (0.02 | ) | |
Net loss per share: | | | | |
Basic | $ | (0.51 | ) | | $ | (1.12 | ) | |
Assuming dilution | $ | (0.51 | ) | | $ | (1.12 | ) | |
Weighted-average shares outstanding: | | | | |
Basic | 29,786 |
| | 29,901 |
| |
Assuming dilution | 29,786 |
| | 29,901 |
| |
Luby’s, Inc.
Consolidated Statements of Shareholders’ Equity
(Going Concern Basis)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | |
| Issued | | Treasury | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Retained Earnings | | Total Shareholders’ Equity |
Balance at August 28, 2019 | 30,478 | | | $ | 9,753 | | | (500) | | | $ | (4,775) | | | $ | 34,870 | | | $ | 61,182 | | | $ | 101,030 | |
Net loss for the year | — | | | — | | | — | | | — | | | — | | | (29,450) | | | (29,450) | |
Cumulative effect of accounting changes from the adoption of ASC Topic 842 | — | | | — | | | — | | | — | | | — | | | 1,027 | | | 1,027 | |
Common stock issued under nonemployee director benefit plans | 64 | | | 20 | | | — | | | — | | | (20) | | | — | | | — | |
Common stock issued under employee benefit plans | 73 | | | 24 | | | — | | | — | | | (66) | | | — | | | (42) | |
Share-based compensation expense | 509 | | | 163 | | | — | | | — | | | 871 | | | — | | | 1,034 | |
Balance at August 26, 2020 | 31,124 | | | $ | 9,960 | | | (500) | | | $ | (4,775) | | | $ | 35,655 | | | $ | 32,759 | | | $ | 73,599 | |
Net loss for the period | — | | | — | | | — | | | — | | | — | | | (3,019) | | | (3,019) | |
Common stock issued under employee benefit plans | 4 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | |
Share-based compensation expense | 51 | | | 16 | | | — | | | — | | | 167 | | | — | | | 183 | |
Balance at November 18, 2020 | 31,179 | | | $ | 9,977 | | | (500) | | | $ | (4,775) | | | $ | 35,821 | | | $ | 29,740 | | | $ | 70,763 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | |
| Issued | | Treasury | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Paid-In Capital | | Retained Earnings | | Total Shareholders’ Equity |
Balance at August 30, 2017 | 29,624 |
| | $ | 9,480 |
| | (500 | ) | | $ | (4,775 | ) | | $ | 31,850 |
| | $ | 107,497 |
| | $ | 144,052 |
|
Net loss for the year | — |
| | — |
| | — |
| | — |
| | — |
| | (33,568 | ) | | (33,568 | ) |
Common stock issued under nonemployee director benefit plans | 87 |
| | 28 |
| | — |
| | — |
| | (28 | ) | | — |
| | — |
|
Common stock issued under employee benefit plans | 183 |
| | 59 |
| | — |
| | — |
| | (59 | ) | | — |
| | — |
|
Share-based compensation expense | 109 |
| | 35 |
| | — |
| | — |
| | 2,109 |
| | — |
| | 2,144 |
|
Balance at August 29, 2018 | 30,003 |
| | $ | 9,602 |
| | (500 | ) | | $ | (4,775 | ) | | $ | 33,872 |
| | $ | 73,929 |
| | $ | 112,628 |
|
Net loss for the year | — |
| | — |
| | — |
| | — |
| | — |
| | (15,226 | ) | | (15,226 | ) |
Cumulative effect of accounting changes from the adoption of ASC Topic 606 | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,479 |
| 2,479 |
| 2,479 |
|
Common stock issued under nonemployee director benefit plans | 53 |
| | 17 |
| | — |
| | — |
| | (17 | ) | | — |
| | — |
|
Common stock issued under employee benefit plans | 93 |
| | 30 |
| | — |
| | — |
| | (30 | ) | | — |
| | — |
|
Share-based compensation expense | 329 |
| | 104 |
| | — |
| | — |
| | 1,045 |
| | — |
| | 1,149 |
|
Balance at August 28, 2019 | 30,478 |
| | $ | 9,753 |
| | (500 | ) | | $ | (4,775 | ) | | $ | 34,870 |
| | $ | 61,182 |
| | $ | 101,030 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Consolidated Statements of Cash Flows
(Going Concern Basis)
| | | | | | | | Period Ended | | Year Ended |
| Year Ended | | November 18, 2020 | | August 26, 2020 |
| August 28, 2019 | | August 29, 2018 | | (12 weeks) | | (52 weeks) |
| (In thousands) | | (In thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net loss | $ | (15,226 | ) | | $ | (33,568 | ) | Net loss | $ | (3,019) | | | $ | (29,450) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Provision for asset impairments and net loss (gain) on property dispositions | (7,229 | ) | | 3,619 |
| |
Net provision (gain) for asset impairments and restaurant closings | | Net provision (gain) for asset impairments and restaurant closings | (85) | | | 10,193 | |
Net loss (gain) on disposition of property and equipment | | Net loss (gain) on disposition of property and equipment | 117 | | | (11,557) | |
Depreciation and amortization | 13,998 |
| | 17,453 |
| Depreciation and amortization | 2,142 | | | 11,514 | |
Amortization of debt issuance cost | 1,317 |
| | 534 |
| Amortization of debt issuance cost | 223 | | | 1,212 | |
Share-based compensation expense | 1,140 |
| | 2,144 |
| Share-based compensation expense | 183 | | | 1,034 | |
Deferred tax provision | — |
| | 8,192 |
| |
Provision for doubtful accounts | | Provision for doubtful accounts | — | | | 1,624 | |
| Cash used in operating activities before changes in operating assets and liabilities | (6,000 | ) | | (1,626 | ) | Cash used in operating activities before changes in operating assets and liabilities | (439) | | | (15,430) | |
Changes in operating assets and liabilities: | | | | Changes in operating assets and liabilities: | | | |
Increase in trade accounts and other receivables | (65 | ) | | (775 | ) | |
Decrease in food and supply inventories | 590 |
| | 432 |
| |
Decrease in trade accounts and other receivables | | Decrease in trade accounts and other receivables | 679 | | | 1,206 | |
| Decrease (increase) in food and supply inventories | | Decrease (increase) in food and supply inventories | (950) | | | 345 | |
Decrease in prepaid expenses and other assets | 1,657 |
| | 808 |
| Decrease in prepaid expenses and other assets | 909 | | | 651 | |
Decrease in accounts payable, accrued expenses and other liabilities | (9,312 | ) | | (7,292 | ) | |
Net cash used in operating activities | (13,130 | ) | | (8,453 | ) | |
Decrease in operating lease assets | | Decrease in operating lease assets | 1,928 | | | 5,054 | |
Decrease in operating lease liabilities | | Decrease in operating lease liabilities | (3,154) | | | (10,862) | |
Increase (decrease) in accounts payable, accrued expenses and other liabilities | | Increase (decrease) in accounts payable, accrued expenses and other liabilities | 1,046 | | | (2,561) | |
Net cash provided by (used) in operating activities | | Net cash provided by (used) in operating activities | 19 | | | (21,597) | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Proceeds from disposal of assets and property held for sale | 21,836 |
| | 14,191 |
| Proceeds from disposal of assets and property held for sale | 114 | | | 24,902 | |
Insurance proceeds | — |
| | 2,070 |
| |
| Purchases of property and equipment | (3,987 | ) | | (13,247 | ) | Purchases of property and equipment | (433) | | | (2,120) | |
Net cash provided by investing activities | 17,849 |
| | 3,014 |
| |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | (319) | | | 22,782 | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Revolver borrowings | 42,300 |
| | 147,600 |
| Revolver borrowings | — | | | 4,700 | |
Revolver repayments | (57,000 | ) | | (132,000 | ) | |
Debt issuance costs | (3,266 | ) | | (386 | ) | |
Proceeds on term loan | 58,400 |
| | — |
| |
| Proceeds from term loan | | Proceeds from term loan | — | | | 5,000 | |
Proceeds from PPP Loan | | Proceeds from PPP Loan | — | | | 10,000 | |
Term loan repayments | (36,107 | ) | | (7,079 | ) | Term loan repayments | — | | | (11,816) | |
Tax paid on equity withheld | (12 | ) | | (70 | ) | |
| Net cash provided by financing activities | 4,315 |
| | 8,065 |
| Net cash provided by financing activities | — | | | 7,884 | |
Net increase in cash and cash equivalents and restricted cash | 9,034 |
| | 2,626 |
| |
Net increase (decrease) in cash and cash equivalents and restricted cash | | Net increase (decrease) in cash and cash equivalents and restricted cash | (300) | | | 9,069 | |
Cash and cash equivalents and restricted cash at beginning of period | 3,722 |
| | 1,096 |
| Cash and cash equivalents and restricted cash at beginning of period | 21,825 | | | 12,756 | |
Cash and cash equivalents and restricted cash at end of period | $ | 12,756 |
| | $ | 3,722 |
| Cash and cash equivalents and restricted cash at end of period | $ | 21,525 | | | $ | 21,825 | |
Cash paid for: | | | | Cash paid for: | |
Income taxes | $ | 470 |
| | $ | 426 |
| Income taxes | $ | 4 | | | $ | 446 | |
Interest | $ | 4,452 |
| | $ | 2,499 |
| Interest | $ | 1,059 | | | $ | 5,275 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Luby’s, Inc.
Notes to Consolidated Financial Statements
Fiscal Years 20192021and20182020
Note 1. Nature of Operations and Significant Accounting Policies
Nature of Operations
Luby’s,Luby's, Inc. is baseda Delaware corporation with headquarters in Houston, Texas. TX, (collectively, with its subsidiaries, the "Company", "we", "our", "us", or "Luby's". We operated restaurants under the brands Luby's Cafeteria, Fuddruckers and Cheeseburger in Paradise. We also had royalty arrangements with Fuddruckers franchisees. Under the Plan of Liquidation and Dissolution discussed below, we terminated our sub-license to the Cheeseburger in Paradise brand name in December 2020 and we sold the Fuddruckers brand and franchise business in July 2021. Subsequent to August 25, 2021, we sold the Luby's Cafeteria brand and the operations at 35 locations (see Note 2. Subsequent Events).
As of August 28, 2019,25, 2021, we operated 53 Luby's cafeterias and 7 Fuddruckers restaurants. Included in the Company ownedcounts for both Luby's cafeterias and operated 124Fuddruckers restaurants with 101 in Texasare 3 Combo units, where a Luby's cafeteria and a Fuddruckers restaurant occupy the remainder in other states. In addition, the Company received royalties from 102 Fuddruckers franchisessame location. Also, as of August 28, 2019 located primarily throughout the United States. The Company’s owned and franchised restaurant locations are convenient to shopping and business developments, as well as, to residential areas. Accordingly, the restaurants appeal to a variety of customers at breakfast, lunch, and dinner.25, 2021, our Culinary Contract Services consists of contract arrangementsbrand operated 27 contracts to manage food services for clients operating in primarily fourthree lines of business: healthcare; senior living; business;living business, and venues.
Principles of Consolidation
schools.
The accompanying consolidated financial statements include the accounts of Luby’s, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Going Concern
Prior to Adoption of the Plan of Liquidation
The consolidated financial statements prior to November 19, 2020 were prepared on the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and were prepared in accordance with accounting principles generally accepted in the United States ("US GAAP").
Plan of Liquidation
On November 17, 2020 our shareholders approved the Plan of Liquidation and Dissolution (the “Plan of Liquidation“ or the “Plan”). The Plan provides for an orderly sale of our businesses, operations, and real estate, payment of our liabilities and other obligations, and an orderly wind down of any remaining operations and dissolution of the Company. We intend to convert all our assets into cash, satisfy or resolve our remaining liabilities and obligations, including contingent liabilities, claims and costs associated with the liquidation of the Company, and then file a certificate of dissolution with the State of Delaware. The assets to be sold include our Luby's Cafeterias, Fuddruckers, and Culinary Services ("CCS") operating divisions, as well as our real estate. We currently anticipate that our common stock will be delisted from the New York Stock Exchange ("NYSE") upon the filing of the certificate of dissolution, which is not expected to occur until the earlier of the completion of all or substantially all of the asset sales or three years. The delisting of our common stock may occur sooner in accordance with the applicable rules of the NYSE.
Following the Adoption of the Plan of Liquidation
We have determined, as a result of the approval of the Plan by our shareholders, that liquidation is imminent, as defined in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 205-30 Financial Statement Presentation, Liquidation Basis of Accounting ("ASC 205-30"). Liquidation is considered imminent when the likelihood is remote that we will return from liquidation and either (a) the Plan is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the Plan will be blocked by other parties, or (b) the Plan is being imposed by other forces (for example, involuntary bankruptcy).
Accordingly, we have changed our basis of accounting from the going concern basis to the liquidation basis effective November 19, 2020. Although shareholder approval of the Plan occurred on November 17, 2020, we are using the liquidation basis of accounting effective November 19, 2020 as a convenience date. Any activity between November 17, 2020 and November 19, 2020 would not be materially different under the liquidation basis of accounting.
The liquidation basis of accounting differs significantly from the going concern basis, as summarized below.
Under the liquidation basis of accounting, the consolidated balance sheet and consolidated statements of operations, equity and cash flows are no longer presented.
The liquidation basis of accounting requires a statement of net assets in liquidation, a statement of changes in net assets in liquidation and all disclosures necessary to present relevant information about our expected resources in liquidation. The liquidation basis of accounting may only be applied prospectively from the day liquidation becomes imminent and the initial statement of changes in net assets in liquidation may present only changes in net assets that occurred during the period since that date.
Under the liquidation basis of accounting, our assets are measured at their estimated net realizable value, or liquidation value, which represents the amount of their estimated cash proceeds or other consideration from liquidation, based on current contracts, estimates and other indications of sales value, and includes business unit valuations representing previously unrecognized assets that we may expect to either sell in the course of our liquidation or use in settling liabilities, such as trademarks or other intangibles. In developing these estimates, we utilized third party valuation experts, investment bankers, real estate brokers, the expertise of members of the Special Committee of our Board of Directors, and forecasts generated by our management. For estimated real estate values, we considered comparable sales transactions, our past experience selling real estate assets of the Company and, in certain instances, indicative offers, as well as capitalization rates observed for income-producing real estate. For estimated business unit valuations we considered estimated values of the economic components of possible transactions, the value of a buyer assuming certain liabilities in a purchase transaction, and, in certain instances, indicative offers, as well as the probabilities of certain outcomes. Estimates for the liquidation value of the business units, or subset of operating restaurants, were also tested for reasonableness through a multiple of historical and projected business cash flows. All estimates by nature involve a large degree of judgement and sensitivity to the underlying assumptions.
The liquidation basis of accounting requires us to accrue and present separately, without discounting, the estimated disposal and other costs, including any costs associated with the sale or settlement of our assets and liabilities and the estimated operating income or loss that we reasonably expect to incur, including providing for federal income taxes during the remaining expected duration of the liquidation period. In addition, deferred tax assets previously provided for under the going concern basis of accounting, which include net operating losses and other tax credits, may be realized partially or in full, subject to IRS limitations, to offset taxable income we expect to generate from the liquidation process.
Under the liquidation basis of accounting, we recognize liabilities as they would have been recognized under the going concern basis as adjusted for the timing assumptions related to the liquidation process and they will not be reduced to expected settlement values prior to settlement.
These estimates will be periodically reviewed and adjusted as appropriate. There can be no assurance that these estimated values will be realized. Such amounts should not be taken as an indication of the timing or the amount of future distributions or our actual dissolution.
The valuation of our assets and liabilities, as described above, represents estimates, based on present facts and circumstances, of the net realizable value of the assets and costs associated with carrying out the Plan. The actual values and costs associated with carrying out the Plan may differ from amounts reflected in the accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. We have assessed our ability to continue as a going concern asbecause of the balance sheet date and for at least one year beyondPlan's inherent uncertainty. These differences may be material. In particular, these estimates will vary with the issuancelength of time necessary to complete the Plan. It is currently anticipated that a majority of the assets we owned on the date of the shareholder approval of the plan will be sold by December 31, 2021, with liquidation substantially complete by June 30, 2022. It is also anticipated that any assets and liabilities remaining at such time will be transferred to a liquidating entity and it is likely that the full realization of proceeds from sales will extend beyond that date.
Net assets in liquidation represents the estimated liquidation value to holders of common shares upon liquidation. It is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to our shareholders and no assurance can be given that the distributions will equal or exceed the estimate presented in these consolidated financial statements. Based on an evaluation of both quantitative and qualitative information, including available liquidity under our 2018 Credit Facility, related to known conditions and events in the aggregate, it is probable that we will be able to meet our obligations as they become due within one year after the date the consolidated financial statements are issued.
Accounting Periods
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically include three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year.
Subsequent Events
Events subsequent to the Company’s fiscal year ended August 25, 2021 through the date of issuance of the financial statements are evaluated to determine if the nature and significance of the events warrant inclusion in the Company’s consolidated financial statements. See Note 2. Subsequent Events.
COVID-19
The novel coronavirus disease (“COVID-19”) pandemic has had a significant impact on our level of operations, guest behavior, guest traffic, and the number of locations where we and our former Fuddruckers franchisees operate. As a result, at the onset of the COVID-19 pandemic in the spring of 2020, we modified our business operations within our restaurants and significantly reduced staffing at our corporate support office.
On March 13, 2020, President Donald Trump declared a national emergency in response to the COVID-19 pandemic. Throughout the remainder of calendar 2020, we cycled through periods initially when state government orders mandated a suspension of on-premise dining, followed by periods when our on-premise dining capacity was limited due to government order. Full on-premise dining resumed in Texas in March 2021, when government restrictions limiting on-premise dining were lifted. Prior to the onset of the COVID-19 pandemic, we operated 118 restaurants, of which 87 were closed as a result of the pandemic and 53 of those were reopened as permitted when restrictions were lifted. The 31 of our restaurants that remained open during the pandemic were open at reduced capacity levels or for takeout only.
Despite increasing vaccination rates, U.S. Treasury stimulus payments to U.S. citizens and other positive developments, risks and uncertainties remain as cases of COVID-19 infection continue within the communities where we operate, albeit at reduced levels. The COVID-19 pandemic could continue to materially impact our cash flows and value of net assets in liquidation, while we execute on our Plan of Liquidation.
Reportable Segments
EachUnder the going concern basis of accounting, each restaurant iswas considered an operating segment because operating results and cash flow canflows could be determined for each restaurant. We aggregateaggregated our operating segments into reportable segments by restaurant brand due tobecause the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, similarity of store level profit margins and the nature of the regulatory environment arewere alike. The Company has fiveFor the 12 week period ended November 18, 2020 and the fiscal year ended August 26, 2020, we had 5 reportable segments: Luby’s cafeterias,Cafeterias, Fuddruckers restaurants,Restaurants, Cheeseburger in Paradise restaurant,Restaurants, Fuddruckers franchise operations, and Culinary Contract Services (“CCS”).
Prior Under the liquidation basis of accounting, although we continued to the fourth quarter of fiscal 2019operate our internal organizationrestaurant, franchise and reporting structure supported three reportable segments; Company-owned restaurants, Franchise operations and Culinary Contract Services. The Company-owned restaurants consists of the three brands discussed above, which were aggregated into one reportable segment. In the fourth quarter of fiscal 2019CCS businesses, we re-evaluated and disaggregated the Company-owned restaurants into three reportable segments based on brand name. As such,no longer make operating decisions or assess performance by segment, 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 allocationall of our resourcesassets and better aligns to the economic characteristics within similar restaurant brands. We beganbusinesses are considered held for sale. Accordingly, effective November 19, 2020, we have only one reporting on the new structure in the fourth quarter of fiscal 2019 as reflected in this Annual Report on Form 10-K. The segment data for the comparable periods presented has been recast to conform to the current period presentation. Recasting this historical information did not have an impact on the consolidated financial performance of Luby’s Inc. for any of the periods presented.
and operating segment.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash and cash equivalents and restricted cash and cash equivalents include highly liquid investments such as money market funds that have a maturity of three months or less. The Company’sOur bank account balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. However, balances in money market fund accounts are not insured. Amounts in transit from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction.
Trade Accounts, Notes and Other Receivables net
Receivables consistUnder the going concern basis of accounting, receivables consisted principally of amounts due from franchises, culinary contract serviceCCS clients, catering customers and restaurant food sales to corporations. Receivables arewere recorded at the invoiced amount. The allowance for doubtful accounts is the Company’swas our best estimate of the amount of probable credit losses in the Company’sour existing accounts receivable. The Company determinesWe determined the allowance based on historical loss experience for CCS clients, catering customers and restaurant sales to corporations and, for CCS receivables and franchise royalty and marketing and advertising receivables, the Companyreceivables. We also considersconsidered the franchisees’ and CCS clients’ unsecured default status. The CompanyWe periodically reviews itsreviewed our allowance for doubtful accounts. Account balances arewere charged off against the allowance after all means of collection have beenwere exhausted and the potential for recovery iswas considered remote.
Under the liquidation basis of accounting trade, notes and other receivables are stated at amount of their estimated cash proceeds.
Inventories
FoodUnder the going concern basis of accounting, food and supply inventories arewere stated at the lower of cost (first-in, first-out) or net realizable value.
Under the liquidation basis of accounting, food and supply inventories have no net realizable value due to the nature of the inventory and the high turnover used in operating the remaining restaurants.
Property Held for Sale
The CompanyUnder the going concern basis of accounting, we periodically reviewsreviewed long-lived assets against itsour plans to retain or ultimately dispose of properties. If the Company decideswe decided to dispose of a property, it will bewas moved to property held for sale and actively marketed. Property held for sale iswas recorded at amounts not in excess of what management currently expectsexpected to receive upon sale, less costs of disposal. Depreciation on assets moved to property held for sale iswas discontinued and gains arewere not recognized until the properties are sold.
Under the liquidation basis of accounting, all of our property is for sale and is recorded on the statement of net assets in liquidation at the amount of their estimated cash proceeds or other consideration from liquidation.
Impairment of Long-Lived Assets
ImpairmentUnder the going concern basis of accounting, impairment losses arewere recorded on long-lived assets used in operations when indicators of impairment arewere present and the undiscounted cash flows estimated to be generated by those assets arewere less than
the carrying amount. The Company evaluatesWe evaluated impairments on a restaurant-by-restaurant basis and usesused cash flow results and other market conditions as indicators of impairment.
Debt Issuance Costs
DebtUnder the going concern basis of accounting, debt issuance costs includeincluded costs incurred in connection with the arrangement of long-term financing agreements. The debt issuance costs associated with our term loans arewere presented on the our consolidated balance sheet as a direct deduction from long-term debt. The debt issueissuance costs associated with the our revolving credit facility arewere included in other assets on our consolidated balance sheet. These costs arewere amortized using the effective interest method over the respective term of the debt to which they specifically relate.
Under the liquidation basis of accounting, deferred debt issuance costs are not given a value.
Fair Value of Financial Instruments
TheUnder the going concern basis of accounting, the carrying value of cash and cash equivalents, trade accounts and other receivables, accounts payable and accrued expenses approximatesapproximated fair value based on the short-term nature of these accounts. The carrying value of credit facility debt also approximatesapproximated fair value based on its recent renewal.
Self-Insurance Accrued Expenses
The Company self-insuresWe self-insure a significant portion of expected losses under its workers’ compensation, employee injury and general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred claims, both reported and not yet reported. These recorded estimated liabilities are based on judgments and independent actuarial estimates, which include the use of claim development factors based on loss history; economic conditions; the frequency or severity of claims and claim development patterns; and claim reserve management settlement practices.
Effective January 1, 2018, weWe maintain a self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits per 3rdthird party insurance carriers. We recordUnder the going concern basis of accounting, we recorded expenses under the plan based on estimates of the costs of expected claims, administrative costs and stop-loss insurance premiums. OurUnder both the going concern basis of accounting and the liquidation basis of accounting, our self-insurance expenseliability is accrued based uponon the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided by our 3rdthird party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims expense may differ from what we have accrued as our estimated loss provisionsliability based on historical experience.
Revenue Recognition
See Note 3.6. Revenue Recognition.
Cost of CCS
TheUnder the going concern basis of accounting, the cost of CCS includesincluded all food, payroll and related expenses, other operating expenses, and selling, general and administrative expenses related to culinary contract service sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with CCS arewere reported within those respective lines as applicable.
Under the liquidation basis of accounting, estimated expenses during the liquidation period are included in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
Cost of Franchise Operations
TheUnder the going concern basis of accounting, the cost of franchise operations includesincluded all food, payroll and related expenses, other operating expenses, and selling, general and administrative expenses related to franchise operations sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with franchise operations arewere reported within those respective lines as applicable.
Under the liquidation basis of accounting, estimated expenses during the liquidation period are included in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
Marketing and Advertising Expenses
MarketingUnder the going concern basis of accounting, marketing and advertising costs arewere expensed as incurred. Total advertising expense included in other operating expenses and selling, general and administrative expense was $4.0$0.6 million and $4.1$3.9 million in the 12 weeks ended November 18, 2020 and in fiscal 2019 and 2018,2020, respectively. We recordrecorded advertising attributable to local store marketing and local community involvement efforts in other operating expenses;expenses and we recordrecorded advertising attributable to our brand identity, our promotional offers, and our other marketing messages intended to drive guest awareness of our brands, in selling, general, and administrative expenses. We believebelieved this separation of our marketing and advertising costs assistsassisted with
measurement of the profitability of individual restaurant locations by associating only the local store marketing efforts with the operations of each restaurant.
Marketing and advertising expense included in other operating expenses attributable to local store marketing was $0.1 million and $0.6$0.5 million in the 12 weeks ended November 18, 2020 and in fiscal 2019 and 2018,2020, respectively.
Marketing and advertising expense included in selling, general and administrative expense was $3.9$0.5 million and $3.5$3.4 million in the 12 weeks ended November 18, 2020 and in fiscal 2019 and 2018,2020, respectively.
Under the liquidation basis of accounting, estimated expenses during the liquidation period are included in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
Depreciation and Amortization
PropertyUnder the going concern basis of accounting, property and equipment arewere recorded at cost. The Company depreciatesWe depreciated the cost of equipment over its estimated useful life using the straight-line method. Leasehold improvements arewere amortized over the lesser of their estimated useful lives or the related lease terms. Depreciation of buildings iswas provided on a straight-line basis over the estimated useful lives.
Opening Costs
Opening costs are expenditures related to There is no depreciation or amortization of our assets under the openingliquidation basis of new restaurants through its opening periods, other than those for capital assets. Such costs are charged to expense when incurred.
accounting.
Other Charges
OtherUnder the going concern basis of accounting, other charges includes those expenses that we consider related to our restructuring efforts orthat are not part of our recurring operations.
In the first half of fiscal 2019, a shareholder of the company proposed alternative nominees to the Board of Directors and other possible changes to the corporate strategy resulting in a contested proxy at the Company's 2019 annual meeting. We incurred $1.7 million in proxy communication expense which was primarily for outside professional services and related costs in order to communicate with shareholders about management's strategy and the experience of the Company's members on the Board of Directors.
Also, in fiscal 2019, we engaged a professional consulting firm to evaluate initiatives to right-size corporate overhead costs and revenue enhancing measures. In addition, we engaged other outside consultants to evaluate various other components of our strategy. We also incurred cost of other outside professionals as we began efforts to transition portions of our accounting, payroll, operational reporting, and other back-office functions to a leading multi-unit restaurant outsourcing firm. We anticipate completing the transition in the first calendar quarter of 2020 and expect to realize additional cost savings and enhanced capabilities from this transition. Lastly, we incurred expenses related to certain information technology systems that will be replaced by the capabilities of the outsourcing firm. We incurred an expense of $1.3 million for these restructuring efforts.
In fiscal 2019, we separated with a number of employees as part of our efforts to streamline our corporate overhead costs and to support a reduced number of restaurants in operation. Employees who were separated from the company were paid severance based on the number of years of service and earnings with the organization, resulting in a $1.2 million charge.
Other charges as defined above, were not significant in fiscal 2018.comprised of:
| | | | | | | | | | | |
| 12 weeks ended | | Fiscal Year Ended |
| November 18, 2020 | | August 26, 2020 |
| (in thousands) |
OTHER CHARGES: | | | |
| | | |
Employee Severances | $ | — | | | $ | 1,332 | |
Restructuring Related | 416 | | | 2,069 | |
Total Other Charges | $ | 416 | | | $ | 3,401 | |
Operating Leases
The Company leases restaurant and administrative facilities, vehicles and administrative equipment under operating leases. Building lease agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for a percentage of sales in excess of specified levels. Contingent rental expenses are recognized prior to the achievement of a specified target, provided that the achievement of the target is considered probable. Most of the Company’s lease agreements include renewal periods at the Company’s option. The Company recognizes rent holiday periods and scheduled rent increases on a straight-line basis over the lease term beginning with the date the Company takes possession of the leased space.
See Note 7. Leases.
Income Taxes
TheUnder both the going concern basis of accounting and the liquidation basis of accounting, the estimated future income tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities, and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carrybacks and carryforwards are recorded. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recognized if,established against deferred tax assets when the Company determines, based on the weight of available evidence, it isthat they are more likely to not be realized than not a portion or allrealized. In the event the Company subsequently determines that it would be able to realize deferred income tax assets in excess of their net recorded amount, the Company would reduce the valuation allowance, which would reduce the provision for income taxes. See Note 11. Income Taxes for further discussion of the deferred tax asset will not be recognized. During fiscal 2018, management concluded to increase their valuation allowance to reduce fully the Company’s net deferred tax asset balances, net of deferred tax liabilities, including through the fiscal year ended August 28, 2019.allowance.
Management makesWe make judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions as well as by the Internal Revenue Service (“IRS”). In management’s opinion, adequate provisions for income taxes have been made for all open tax years. The potential outcomes of examinations are regularly assessed in determining the adequacy of the provision for income taxes and income tax liabilities. Management believesWe believe that adequate provisions have been made for reasonably possible outcomes related to uncertain tax matters.
Discontinued Operations
We will reportUnder the going concern basis of accounting, we reported the disposal of a component or a group of components of the Company in discontinued operations if the disposal of the components or group of components representsrepresented a strategic shift that hashad or willwas expected to have a major effect on the Company’s operations and financial results. Adoption of this standard did not have a material impact on our consolidated financial statements.
Share-Based Compensation
Share-basedUnder the going concern basis of accounting, share-based compensation expense iswas estimated for equity awards at fair value at the grant date. The Company determinesWe determined the fair value of restricted stock awards based on the average of the high and low price of its common stock on the date awarded by the Board of Directors. The Company determinesWe determined the fair value of stock option awards using a Black-Scholes option pricing model. The Black-Scholes option pricing model requires various judgmental assumptions including the expected dividend yield, stock price volatility, and the expected life of the award. If any of the assumptions used in the model change significantly, share-based compensation expense may differ materially in the future, from that recorded in the current period. The fair value of performance share based award liabilities arewere estimated based on a Monte Carlo simulation model. For further discussion, see Note 16, “Share-Based Compensation,” below.
17. Share-Based and Other Compensation.
Earnings Per Share
BasicUnder the going concern basis of accounting, basic income per share is computed by dividing net income attributable to common shareholders by the weighted-average number of shares outstanding, including restricted stock units, during each period presented. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, determined using the treasury stock method.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period.periods. Actual results could differ from these estimates.
Recently Adopted Accounting Pronouncements
We transitionedThere are no new accounting pronouncements that are applicable or relevant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) from ASC Topic 605, Revenue Recognition and ASC Topic 953-605, Franchisors - Revenue Recognition (together,Company under the “Previous Standards”)Liquidation Basis of Accounting.
Note 2. Subsequent Events
Subsequent to the end of fiscal year 2021, on August 26, 2021, we sold the Luby’s Cafeterias brand name and the business operations at 35 Luby’s locations to an unrelated third party for an adjusted aggregate consideration of approximately $28.4 million which includes the assumption of certain liabilities and the issuance of notes to us. There can be no assurance that we will realize or receive full value of such consideration. The net asset value of the sale is included in properties and business units for sale on the accompanying consolidated statement of net assets in liquidation at August 25, 2021 at a discounted rate that represents the amount we expect to receive upon liquidation of the notes.
On September 30, 2018. Our2021, we completed the previously announced sale of 26 real estate properties, which properties were leased to and are operated by LRC, to Store Capital Acquisitions, LLC for cash consideration of $88.0 million. We utilized approximately $17.6 million of the proceeds to repay in full all amounts due under our Credit Facility (see Note 14. Debt) with MSD PCOF Partners VI, LLC. The Credit Facility was terminated effective September 30, 2021.
Subsequent to August 25, 2021, in addition to the properties sold to Store Capital, we sold 4 other properties for cash consideration of approximately $13.0 million.
On November 1, 2021, we paid a cash liquidating distribution of $2.00 per share to shareholders of record as of October 25, 2021. The liquidating distribution of approximately $62.2 million was paid from the net proceeds from recent property sales.
Note 3. Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation
The liquidation basis of accounting requires the estimation of net cash flows from operations and all costs associated with implementing and completing the plan of liquidation. We project that we will have estimated costs in excess of estimated receipts during the liquidation period. These amounts can vary significantly due to, among other things, the timing and estimates for receipts and costs associated with the operations of our business units until they are sold, the timing of business and property sales, estimates of direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities, the costs associated with the winding up of operations, and other costs that we may incur which are not currently foreseeable. These receipts and accruals will be adjusted periodically as projections and assumptions change. These receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period. Upon transition to ASC 606 represents a change inthe liquidation basis of accounting principle. ASC 606 eliminates industry-specific guidance and provides a single model for recognizing revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depicton November 19, 2020, the transfer of promised goods and services to customers in an amount that reflects the consideration to which the reporting entity expects to be entitled for the exchange of those goods or services.
We adopted ASC 606 using the modified retrospective method applied to contracts that were not completed at August 29, 2018. Due to the short term nature of a significant portion of our contracts with customers, we have elected to apply the practical expedients under ASC 606 to: (1) not adjust the consideration for the effects of a significant financing component, (2) recognize incremental costs of obtaining a contract as expense when incurred and (3) not disclose the value of our unsatisfied performance obligations for contracts with an original expected duration of one year or less.
The adoption of ASC 606 did not have an impact on the recognition of revenues from our primary source of revenue from our Company owned restaurants (except for recognition of breakage and discounts on gift cards, as discussed below), revenues from our culinary contract services, vending revenue or ongoing franchise royalty fees, which are based on a percentage of franchisee sales. The adoption did impact the recognition of initial franchise fees and area development fees and gift card breakage.
The adoption of ASC 606 requires us to recognize initial and renewal franchise and development fees on a straight-line basis over the term of the franchise agreement, which is usually 20 years. Historically, we have recognized revenue from initial franchise and development fees upon the opening of a franchised restaurant when we have completed all our material obligations and initial services.
Additionally, ASC 606 requires gift card breakage to be recognized as revenue in proportion to the pattern of gift card redemptions exercised by our customers. Historically, we recorded breakage income within other (expense) income (and not within revenue) when it was deemed remote that the unused gift card balance will be redeemed.
Upon adoption of ASC 606 we changed our reporting of marketing and advertising fund (“MAF”) contributions from franchisees and the related marketing and advertising expenditures. Under the Previous Standards, we did not reflect MAF contributions from franchisees and MAF expenditures in our statements of operations. Although the gross amounts of ouraccrued revenues and expenses are impacted byexpected to be earned or incurred during liquidation. The liability for estimated costs in excess of estimated receipts during liquidation at August 25, 2021 and November 19, 2020 was comprised of (in thousands):
| | | | | | | | | | | | | | |
| | August 25, 2021 | | November 19, 2020 |
Total estimated receipts during remaining liquidation period | | $ | 25,045 | | | $ | 92,017 | |
Total estimated costs of operations | | (20,763) | | | (76,151) | |
Selling, general and administrative expenses | | (9,585) | | | (18,745) | |
| | | | |
Interest expense | | (151) | | | (2,305) | |
Interest component of operating lease payments | | (2,307) | | | (7,064) | |
Capital expenditures | | (120) | | | (943) | |
Sales costs | | (3,408) | | | (4,079) | |
Total estimated costs during remaining liquidation period | | (36,334) | | | (109,287) | |
Liability for estimated costs in excess of estimated receipts during liquidation | | $ | (11,289) | | | $ | (17,270) | |
The change in the recognitionliability for estimated costs in excess of franchisee MAF fund contributionsestimated receipts during liquidation between November 19, 2020 and relatedAugust 25, 2021 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | November 19, 2020 | | Net Change in Working Capital (3) | | Changes in Estimated Future Cash Flows During Liquidation (4) | | August 25, 2021 |
| | | | | | | | |
Assets: | | | | | | | | |
Estimated net inflows from operations (1) | | $ | 7,859 | | | $ | (21,423) | | | $ | 15,419 | | | $ | 1,855 | |
| | | | | | | | |
| | 7,859 | | | (21,423) | | | 15,419 | | | 1,855 | |
Liabilities: | | | | | | | | |
Sales costs | | (4,079) | | | 1,876 | | | (1,205) | | | (3,408) | |
Corporate expenditures (2) | | (21,050) | | | 10,445 | | | 869 | | | (9,736) | |
| | | | | | | | |
| | (25,129) | | | 12,321 | | | (336) | | | (13,144) | |
| | | | | | | | |
Liability for estimated costs in excess of estimated receipts during liquidation | | $ | (17,270) | | | $ | (9,102) | | | $ | 15,083 | | | $ | (11,289) | |
(1) Estimated net inflows from operations consists of total estimated receipts during liquidation less the sum of total estimated (i) costs of operations, (ii) interest component of operating lease payments and (iii) capital expenditures.
(2) Corporate expenditures consists of MAF funds we manage, increases to gross revenues(i) selling, general and administrative expenses did not resultand (ii) interest expense.
(3) Net change in a material net impact to our statement of operations.
Our consolidated financial statements reflect the application of ASC 606 beginningworking capital represents changes in fiscal year 2019, while our consolidated financial statements for prior periods were prepared under the guidance of the Previous Standards. The $2.5 million cumulative effect of our adoption of ASC 606 is reflected as an increase to our August 30, 2018 shareholders’ equity with a corresponding decrease tocash, restricted cash, accounts receivable, accounts payable, and accrued expenses and other liabilities and was comprisedas a result of (1) a reduction to accrued expense and other liabilities of $3.1 million to adjust the unused gift card liability balance as ifCompany's operating activities for the gift card breakage guidance had been applied priorperiod from November 19, 2020 to August 30, 201825, 2021.
(4) Changes in estimated future cash flows during liquidation includes adjustments to previous estimates and (2)changes in estimated holding periods of our assets.
Note 4. Net Assets in Liquidation
Initial Net Assets In Liquidation
The following is a reconciliation of total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the liquidation basis of accounting as of November 19, 2020 (in thousands):
| | | | | | | | |
Total Shareholders' Equity as of November 18, 2020 | | $ | 70,763 | |
Increase due to estimated net realizable value of properties and business units (1) | | 78,985 | |
Decrease due to write-off of deferred financing costs | | (2,260) | |
| | |
| | |
Decrease due to write-off of operating lease right-of-use assets | | (14,829) | |
Net increase due to write-off of deferred assets, deferred income and goodwill | | 1,952 | |
Liability for estimated costs in excess of estimated receipts during liquidation | | (17,270) | |
Adjustment to reflect the change to the liquidation basis of accounting | | 46,578 | |
Estimated value of net assets in liquidation as of November 19, 2020 | | $ | 117,341 | |
(1) Under the liquidation basis of accounting, all assets are recorded at net realizable value which implicitly includes the tangible and intangible value of all assets. This adjustment at November 19, 2020 reflects adjusting real properties to net realizable value and recording an estimated value for our business units, Luby's Cafeterias, Fuddruckers Restaurants and franchise operations, and Culinary Services.
Current Fiscal Year Activity
Net assets in liquidation increased by $37.5 million during the period from November 19, 2020 through August 25, 2021. The increase was primarily due to a $18.4 million increase in properties and business units for sale and a $15.1 million net increase due to a remeasurement of assets and liabilities.
The increase in properties and business units for sale was due to a change in value attributable to properties that have closed, or are under contract to sell with non-refundable deposits, at prices that were different than our previous liquidation values and to the sale and conversion to franchise locations of Fuddruckers restaurants. This increase was partially offset by a change in the estimated value of our business units and some of our real estate assets.
The $15.1 million increase generated by the remeasurement of assets and liabilities was mainly due to the $10.0 million forgiveness of our PPP loan, $1.8 million increase in projected future operating results for the remainder of the holding period, and $6.5 million increase from our actual operating results for the period from November 19, 2020 to August 25, 2021. This increase was partially offset by increases in actual and projected sale closing costs of $1.2 million and an increase in corporate general and administrative costs of $2.0 million.
We have one class of common stock. The net assets in liquidation at August 25, 2021 would result in liquidating distributions of $5.00 per common share based on 30,973,755 common shares outstanding at that date. This estimate is dependent on projections of costs and expenses to accrued expensebe incurred during the period required to complete the Plan and other liabilitiesthe realization of $0.6 million to adjustestimated net realizable value of our properties and business units. There is inherent uncertainty with these estimates, and they could change materially based on the unearned franchise fees fortiming of business and property sales, the fees received through the end of fiscal year 2018 that would have been deferred and recognized over the termperformance of the franchise agreement if the new guidance had been applied prior to August 30, 2018.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. This update provides clarification regarding how certain cash receipts and disbursements are presented and classifiedunderlying assets, any changes in the statementunderlying assumptions of the projected cash flows.flows, as well as the ultimate vesting of outstanding restricted share awards and exercise of vested stock options. The update addresses eight specific cash flow issues withestimated liquidating distributions per share on a fully diluted basis, assuming all restricted stock awards vest and all in-the-money stock options are exercised, is not materially different than the objective of reducingamount stated above. No assurance can be given that the existing diversityliquidating distributions will equal or exceed the estimate presented in practice. We adopted ASU 2016-15 on August 30, 2018 using the retrospective method of adoption. The adoption of this standard did not have a material impact on ourthese consolidated financial statements.
In November 2016,Lease Obligations
Under both the FASB issued ASU 2016-18, Statementgoing concern basis of Cash Flows (Topic 230), Restricted Cash. This update addressesaccounting and the diversity in practice on how to classify andliquidation basis of accounting, lease obligations are recorded at the present changes in restricted cash or restricted cash equivalents in the statement of cash flows. The update requires that a statement of cash flows explain the change during the period in restricted cash or restricted cash equivalents in addition to changes in cash and cash equivalents. Entities are also required to disclose information about the naturevalue of the restrictions and amounts described as restricted cash and restricted cash equivalents. Also, when cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line on the balance sheet, an entity must reconcile these amounts to the total shown on the statement of cash flows. We adopted ASU 2016-18 effective August 30, 2018 using the retrospective method of adoption. Our adoption of ASU 2016-18 represents a change in accounting principle. Our adoption had no effect on our consolidated statement of cash flows for the fiscal year ended August, 29, 2018. See Note 2 for the reconciliation and disclosures regarding the restrictions required by this update. The adoption of this standard did not have a material impact on our consolidated financial statements.
New Accounting Pronouncements - "to be Adopted"
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Subsequently, the FASB issued ASU 2018-01, 2018-10, 2018-11, 2018-20 and 2019-01, which were targeted improvements to ASU 2016-02 (collectively, with ASU 2016-02, “ASC 842”) and provided entities with an additional (and optional) transition method to adopt the new lease standard. ASC 842 requires a lessee to recognize a liability to makefixed lease payments and a corresponding right-of-use asset onover the balance sheet, as well as provide additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. ASC 842 is effective for annual and interim periods beginning after December 15, 2018. ASC 842 may be adoptedreasonably certain lease term using the modified retrospective method, which requires application to all comparative periods presented (the “comparative method”) or alternatively,discount rates as of the effective date of initial application without restating comparative period financial statements (the “effective date method”). We will adopt ASC 842the lease and the obligation is reduced as we make lease payments. As a result of the same accounting treatment, there is no reconciling entry to adjust total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the firstliquidation basis of accounting as of November 19, 2020.
During the fourth quarter of fiscal year 2020 usingand all of fiscal 2021, we were able to settle 29 leases for closed restaurant properties and negotiated an early termination date and reduced lease payment at 1 operating restaurant property. While the effective date method. The ASC 842 also provides several practical expedients and policiesamounts paid to settle our lease liabilities varied, in the aggregate, we have settled these 29 leases for approximately 21% of the total undiscounted base rent payments that companies may electwould otherwise have been due under either transition method.
the leases through their original contractual termination date. We are implementing a new lease tracking and accounting system in connection with the adoption of ASC 842. Based on a preliminary assessment, we expectcan offer no assurances that most of our operating lease commitments will be subject to the new standard and we will record operatingcontinue to settle any lease liabilities and right-of-useobligations for less than the total undiscounted base rent payments, or for less than their discounted value recorded within net assets upon adoption, resulting in a significant increase in the assets and liabilities on our consolidated balance sheet. We do not expect the adoption of ASC 42 to have a significant impact on our consolidated statements of operations or our consolidated statements of cash flows.We expect to elect the package of practical expedients which will allow us not to reassess previous accounting conclusions regarding lease identification and classification for existing or expired leases as of the date of adoption. We also expect to elect the short-term lease recognition exemption, which provides the option to not recognize right-of-use assets and related liabilities for leases with terms of 12 months or less.liquidation.
Upon adoption, our lease liability will generally be based on the present value of the operating lease payments and the related right-of-use asset will generally be based on the lease liability, adjusted for amounts reclassified from other lease-related assets and liabilities, in accordance with the new guidance, and impairment of certain right-of-use assets recognized as a charge to retained earnings. We expect to recognize operating lease liabilities of approximately $32.0 million and corresponding right-of-use assets of approximately $27.0 million.In addition, we expect to record an initial adjustment to retained earnings to derecognize the deferred gain from the sale / leaseback transactions using the cumulative effect transition method, and we will no longer recognize the amortization of this gain to net gain on disposition of properties in our consolidated statements of operations starting in fiscal 2020. For any future sale / leaseback transactions, the gain (adjusted for any off-market items) will be recognized immediately in most cases. As of August 28, 2019, we had $2.0 million of deferred gain on sale / leaseback transactions recorded in other long-term liabilities in our consolidated balance sheet.
The amounts of right-of-use-assets, lease liabilities and cumulative effect adjustment to retained earnings we ultimately recognized may differ from these estimates as we finalize the calculations upon adoption.
Subsequent Events
Events subsequent to the Company’s fiscal year ended August 28, 2019 through the date of issuance of the financial statements are evaluated to determine if the nature and significance of the events warrant inclusion in the Company’s consolidated financial statements.
Note 2.5. 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 sumaggregate to the total of the same such amounts shown in the consolidated statements of cash flows:
| | | | | | | | | | | |
| November 18, 2020 | | August 26, 2020 |
| (In thousands) |
Cash and cash equivalents | $ | 14,874 | | | $ | 15,069 | |
Restricted cash and cash equivalents | 6,651 | | | 6,756 | |
Total cash and cash equivalents shown in the statement of cash flows | $ | 21,525 | | | $ | 21,825 | |
|
| | | | | | | |
| August 28, 2019 | | August 29, 2018 |
| (in thousands) |
Cash and cash equivalents | $ | 3,640 |
| | $ | 3,722 |
|
Restricted cash and cash equivalents | 9,116 |
| | — |
|
Total cash and cash equivalents shown in the statement of cash flows | $ | 12,756 |
| | $ | 3,722 |
|
Restricted cash and cash equivalents as of August 25, 2021 was $5.5 million. Amounts included in restricted cash represent amountsthose required to be set aside for (1) maximumestimated amount of interest payable in the next 12 months under the 2018 Credit Agreement (see Note 12. Debt)"Note 14. Debt"), (2) collateral for letters of credit issued for potential insurance obligations, which letters of credit expire in less thanwithin 12 months and (3) pre-fundingprefunding of the credit limit under our corporate purchasing card program.
Note 3.6. Revenue Recognition
Under the going concern basis of accounting, we recognized revenue as described below. Under the liquidation basis of accounting, we estimate the cash receipts from food and beverage sales at each of our restaurants, and fees under our CCS contracts. We estimate these expected cash receipts from operating these businesses through the point when we expect the operations of these businesses or individual income producing properties are sold to a new owner or when we otherwise estimate operations cease. This estimated ending period for operating these businesses and individual income producing property generally varies from first quarter of fiscal 2022 through the third quarter of fiscal 2022. These estimated revenues are included in the calculation of estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets in liquidation. Estimated proceeds from the sale of our operating businesses and real estate assets are recorded separately from the estimated operating revenues and are included in properties and business units for sale on our consolidated statement of net assets in liquidation.
Restaurant Sales
RestaurantUnder the going concern basis of accounting, restaurant sales consistconsisted of sales of food and beverage products to restaurant guests at our Luby’s Cafeteria,cafeterias and our Fuddruckers and Cheeseburger in Paradise restaurants. Revenue from restaurant sales iswas recognized at the point of sale and iswas presented net of discounts, coupons, employee meals and complimentary meals. Sales taxes that we collectcollected and remitremitted to the appropriate taxing authority related to these sales arewere excluded from revenue. Under the liquidation basis of accounting, we have estimated the sales to be collected at each restaurant through the point when we estimate that operations at each restaurant no longer occur under our ownership. This estimated point when we no longer operate restaurants varies based on whether the restaurant location is operated as a Luby's cafeteria or a Fuddruckers restaurant, whether the restaurant location is situated on property we own or lease, and other factors. While we have sold the Fuddruckers Restaurant brand in the fourth quarter of fiscal 2021 and we sold the Luby's Cafeteria brand in the first quarter of fiscal 2022 (see Note 2. Subsequent Events), we continue to own certain Luby's cafeterias and Fuddruckers restaurants that are operated under management agreements with the new owners of the brands. However, it is estimated that, as we sell the real estate or negotiate lease terminations for the properties, most of these restaurants will no longer be operating by the end of calendar year 2021. During this holding period when we operate restaurants, sales are estimated based on recent sales history and consideration of historical seasonal patterns.
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. SalesUnder the going concern basis of accounting, sales of gift cards to our restaurant customers arewere initially recorded as a contract liability, included in accrued expenses and other liabilities, at their expected redemption value. When gift cards arewere redeemed, we recognizerecognized revenue and reducereduced the contract liability. Discounts on gift cards sold by third parties arewere recorded as a reduction to accrued expenses and other liabilities and arewere recognized as a reduction to revenue over a period that approximatesapproximated redemption patterns. The portion of gift cards sold to customers that are never redeemed is commonly referred to as gift card breakage. Under ASC 606 we recognizeWe recognized gift card breakage revenue in proportion to the pattern of gift card redemptions exercised by our customers, using an estimated breakage rate based on our historical experience. Under the Previous Standards, we recognized gift card breakage income within other (expense) income (and not within revenue) when it was deemed remote thatliquidation basis of accounting, the unusedunredeemed gift card balance, would be redeemed.net of estimated breakage, is included in accrued expenses and other liabilities on our consolidated statement of net assets in liquidation.
Culinary contract services
CCS revenue
Our Culinary Contract ServicesCCS 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:contracts in our CCS business:
Fee-Based Contracts. Contracts
Revenue from fee-based contracts iswas 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 iswas allocated entirely to the management services performance obligation. We recognizeUnder the going concern basis of accounting, we recognized revenue from our management fee and payroll cost reimbursement over time as the services are performed. We recognizewere performed; and we recognized revenue from our food and 3rdthird party purchases reimbursement at the point in time when the vendor deliversdelivered the goods or performsperformed the services.
Profit and Loss Contracts. Contracts
Revenue from profit and loss contracts consistconsisted primarily of sales made to consumers, typically with little or no subsidy charged to clients. Revenue isUnder the going concern basis of accounting, revenue was recognized at the point of sale to the consumer. Sales taxes that we collectcollected and remitremitted to the appropriate taxing authority related to these sales arewere 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 arewere accounted for as operating costs when incurred.
Revenue from the sale of frozen foods includesincluded royalty fees based on a percentage of frozen food sales and iswas recognized at the point in time when product iswas delivered by our contracted manufacturers to the retail outlet.
Under the liquidation basis of accounting, we have estimated the cash receipts, based on recent cash collections and forecasted level of operations for our CCS contracts through the expected holding period for this business unit. The estimated cash receipts are included in the calculation of estimated costs in excess of estimated receipts on our consolidated statement of net assets in liquidation.
Franchise revenues
Franchise revenues consistconsisted 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 restaurantRestaurant brand. Our performance obligations under franchise agreements consistconsisted 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 accountaccounted for them under ASC 606 as a single performance obligation, which iswas 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 arewere recognized as franchise sales occur.
InitialUnder the going concern basis of accounting, initial and renewal franchise fees and area development fees arewere recognized as revenue over the term of the respective agreement unless the franchise agreement is terminated early, in which case the remaining initial or renewal franchise fee is fully recognized in the period of termination.agreement. Area development fees are not distinct from franchise fees, so upfront fees paid by franchisees for exclusive development rights arewere deferred and apportioned to each franchise restaurant opened by the franchisee. The pro ratapro-rata amount apportioned to each restaurant iswas accounted for as an initial franchise fee.
Under the Previous Standards, initial franchise fees and area development fees were recognized as revenue when the related restaurant commenced operations and we completed all material pre-opening services and conditions. Renewal franchise fees were recognized as revenue upon execution of a new franchise agreement. MAF contributions from franchisees and the related MAF expenditures were accounted for on a net basis in our consolidated balance sheets.
Revenue from vending machine sales iswas recorded at the point in time when the sale occurs.occurred.
We sold our Fuddruckers Franchise business in the fourth quarter of fiscal 2021. As such, there are no estimated cash receipts from this business included in the calculation of estimated costs in excess of estimated receipts on our consolidated statement of net assets in liquidation as of August 25, 2021.
Contract Liabilities
Contract liabilities consistconsisted of (1) deferred revenue resulting from initial and renewal franchise fees and upfront area development fees paid by franchisees, which, areunder the going concern basis of accounting, were 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 3rdthird party retailers. These contract liabilities are included in accrued expenses and other liabilities in our consolidated balance sheets.sheet as of August 26, 2020. The following table reflects the change in contract liabilities betweenfor the datefiscal year ended August 26, 2020, under the going concern basis of adoption (August 30, 2018) and August 28, 2019:accounting:
|
| | | | | | | | |
| | Gift Cards, net of discounts | | Franchise Fees |
| | (In thousands) |
Balance at August 30, 2018 | | $ | 2,707 |
| | $ | 1,891 |
|
Revenue recognized that was included in the contract liability balance at the beginning of the year | | (1,308 | ) | | (564 | ) |
Increase (decrease), net of amounts recognized as revenue during the period | | 1,481 |
| | (40 | ) |
Balance at August 28, 2019 | | $ | 2,880 |
| | $ | 1,287 |
|
The following table illustrates the estimated revenues expected to be recognized in the future related to our deferred franchise fees that are unsatisfied (or partially unsatisfied) as of August 28, 2019 (in thousands):
|
| | | | |
| | Franchise Fees |
| (In thousands) |
Fiscal 2020 | | $ | 37 |
|
Fiscal 2021 | | 37 |
|
Fiscal 2022 | | 37 |
|
Fiscal 2023 | | 37 |
|
Fiscal 2024 | | 37 |
|
Thereafter | | 347 |
|
Total operating franchise restaurants | | $ | 495 |
|
Franchise restaurants not yet opened(1) | | 755 |
|
Total | | $ | 1,250 |
|
(1) Amortization of the deferred franchise fees will begin when the restaurant commences operations and revenue will be recognized straight-line over the franchise term (which is typically 20 years). If the franchise agreement is terminated, the deferred franchise fee will be recognized in full in the period of termination. | | | | | | | | | | | | | | |
| | Gift Cards, net of discounts | | Franchise Fees |
| | (In thousands) |
Balance at August 28, 2019 | | $ | 2,880 | | | $ | 1,287 | |
Revenue recognized that was included in the contract liability balance at the beginning of the year | | (1,011) | | | (128) | |
Increase, net of amounts recognized as revenue during the period | | 1,541 | | | — | |
Balance at August 26, 2020 | | $ | 3,410 | | | $ | 1,159 | |
Disaggregation of Total Revenues
For the 12 week period ended November 18, 2020, total sales of $41.9 million was comprised of revenue from performance obligations satisfied at a point in time of $38.5 million and revenue from performance obligations satisfied over time of $3.4 million. For the fiscal year ended August 28, 2019,26, 2020, total sales of $323.5$214.0 million was comprised of revenue from performance obligations satisfied over time of $23.0$18.5 million and revenue from performance obligations satisfied at a point in time of $300.5$195.5 million.
See Note 4.8. Reportable Segments for disaggregation of revenue by reportable segment.
With
Note 7. Leases
Under the exceptiongoing concern basis of accounting, we accounted for our operating leases as described below. Under the liquidation basis of accounting, we value the operating lease right-of-use assets at zero, since we do not expect to receive cash proceeds or other consideration for the right-of-use assets.
We determine if a contract contains a lease at the inception date of the cumulative effect adjustmentcontract. 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 years to 30 years with one or more options to renew or extend the lease generally from one year 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.
At the inception of a new lease, we recognized an operating lease liability and a corresponding right-of-use asset, which are calculated as 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”) were recognized prior to the achievement of a specified target, provided that the achievement of the target was considered probable. Most of our lease agreements include renewal periods at our option. We included the rent holiday periods and scheduled rent increases in our calculation of straight-line rent expense.
Lease cost for operating leases was recognized on a straight-line basis and included the amortization of the right-of-use asset and interest expense related to the operating lease liability. We used the reasonably certain lease term in our calculation of straight-line rent expense. We expensed rent from commencement date through restaurant open date as opening expense. Once a restaurant opened for business, we recorded 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 was recorded to provision for asset impairments
and store closings. Rental expense for lease properties that were subsequently subleased to franchisees or other third parties was recorded as other income.
We made judgments regarding the reasonably certain lease term for each property lease, which impacted the classification and accounting for a lease as a finance lease or an operating lease, the rent holiday and/or escalations in payments that were taken into consideration when calculating straight-line rent, and the term over which leasehold improvements for each restaurant were 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 our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, we generally cannot determine the interest rate implicit in the lease.
Lessor
We have occasionally leased or subleased certain restaurant properties to our former 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 practical expedient that allows us to not separate non-lease components from lease components in Note 1,regard to all property leases where we are the adoptionlessors.
Supplemental balance sheet (statement of ASC 606 did not have a material effectnet asset in liquidation) information related to our leases was as follows:
| | | | | | | | | | | | | | | | | | | | | |
Operating Leases | | Balance Sheet Classification | | August 25, 2021 | | August 26, 2020 | |
| | | | (Liquidation Basis) | | (Going Concern Basis) | |
| | | | (in thousands) | |
Right-of-use assets | | Operating lease right-of-use assets | | $ | — | | | $ | 16,756 | | |
| | | | | | | |
Current lease liabilities | | Operating lease liabilities-current | | N/A | | $ | 3,903 | | |
Non-current lease liabilities | | Operating lease liabilities-noncurrent | | N/A | | 17,797 | | |
Total lease liabilities | | | | $ | 7,181 | | | $ | 21,700 | | |
Weighted-average lease terms and discount rates at August 25, 2021 and August 26, 2020 were as follows:
| | | | | | | | | | | | |
Weighted-average remaining lease term | 4.72 years | | 5.73 years | |
| | | | |
Weighted-average discount rate | 9.55% | | 9.57% | |
Under the going concern basis of accounting, components of lease expense were as follows:
| | | | | | | | | | | | | | | | | |
| | 12 Weeks Ended | | Fiscal Year Ended | | | |
| | November 18, 2020 | | August 26, 2020 | | | |
| | (in thousands) | | | |
Operating lease expense | | $ | 1,120 | | | $ | 7,700 | | | | |
Variable lease expense | | 138 | | | 933 | | | | |
Short-term lease expense | | 92 | | | 247 | | | | |
Sublease expense | | 18 | | | 412 | | | | |
Total lease expense | | $ | 1,368 | | | $ | 9,292 | | | | |
Under the going concern of accounting, operating lease income was included in other income on our consolidated financial statements for the fiscal year endedof operations and was comprised of (in thousands):
| | | | | | | | | | | | | | |
| | 12 Weeks Ended | | Fiscal Year Ended |
| | November 18, 2020 | | August 26, 2020 |
| | (In thousands) |
Operating lease income | | $ | 62 | | | $ | 734 | |
Sublease income | | 18 | | | 412 | |
Variable lease income | | 5 | | | 136 | |
Total lease income | | $ | 85 | | | $ | 1,282 | |
Supplemental disclosures of cash flow information related to leases were as follows:
| | | | | | | | | | | | | | | | | | |
| | 12 Weeks Ended | | Fiscal Year Ended | | | | |
| | November 18, 2020 | | August 26, 2020 | | | | |
| | (In thousands) | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 2,358 | | | $ | 9,958 | | | | | |
| | | | | | | | |
Right-of-use assets obtained in exchange for lease liabilities | | $ | — | | | $ | 1,868 | | | | | |
Operating lease obligations maturities in accordance with Topic 842 as of August 28, 2019.25, 2021 were as follows:
| | | | | | | | | | | |
| | (In thousands) | | | |
Less than One Year | | $ | 1,908 | | | | |
One to Three Years | | 3,004 | | | | |
Three to Five Years | | 3,301 | | | | |
Thereafter | | 1,305 | | | | |
| | | | | |
| | | | | |
Total lease payments | | 9,518 | | | | |
Less: imputed interest | | (2,337) | | | | |
Present value of operating lease obligations | | $ | 7,181 | | | | |
Note 4.8. Reportable Segments
As more fully discusseddescribed at Note 1. Nature of Operations and Significant Accounting Policies, through November 18, 2020, we had 5 reportable segments: Luby’s Cafeterias, Fuddruckers Restaurants, Cheeseburger in the fourth quarterParadise Restaurants, Fuddruckers franchise operations, and CCS. In connection with our Plan of fiscal 2019, the Company has reevaluated itsLiquidation, we have 1 reportable segments and has disaggregated its segment as of November 19, 2020.
Company-owned restaurants
Company-owned restaurants into three reportable segments;consisted of Luby’s cafeterias,Cafeterias, Fuddruckers restaurantsRestaurants and Cheeseburger in Paradise restaurants. We began reporting on the new structure in the fourth quarter of fiscal 2019. The segment data for the comparable periods presented has been recast to conform to the current period presentation. We have five reportable segments: Luby’s cafeterias, Fuddruckers restaurants, Cheeseburger in Paradise restaurants, Fuddruckers franchise operations, and Culinary contract services.
Company-owned restaurants
Company-owned restaurants consists of Luby’s Cafeterias, Fuddruckers and Cheeseburger in ParadiseRestaurant reportable segments. We considerconsidered each restaurant to be an operating segment because operating results and cash flow cancould be determined for each restaurant. We aggregateaggregated our restaurant 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 arewere similar. The chief operating decision maker analyzesanalyzed 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 includesincluded the results of our company-owned Luby’s Cafeteriascafeteria restaurants. The total number of Luby’s restaurantscafeterias operating at the end of fiscal 2019November 18, 2020 and 2018August 26, 2020 were 7960 and 84,61, respectively.
The Fuddruckers Restaurant segment includesincluded the results of our company-owned Fuddruckers restaurants. The total number ofWe were operating 24 Fuddruckers restaurants at both November 18, 2020 and August 26, 2020.
Included in the end of fiscal 2019restaurant counts above are 5 Combo units, where a Luby's cafeteria and 2018 were 44a Fuddruckers restaurant occupy the same location. The Combo units are included in the above counts for both Luby's Cafeterias and 60, respectively.
Fuddruckers Restaurants.
The Cheeseburger and Paradise segment includes the results of ourlast Cheeseburger in Paradise restaurants. The total number of Cheeseburgerrestaurant was permanently closed in Paradise restaurants at the end of fiscal 2019 and 2018 were one and two, respectively.March, 2020.
Culinary Contract Services
CCS
CCS, branded as Luby’s Culinary Services, consists of a business line servicinghas serviced 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 servicesCCS 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 ofWe were operating 26 CCS contracts at the end of fiscal 2019both November 18, 2020 and 2018 were 31 and 28, respectively.August 26, 2020.
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 offeroffered 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 grantgranted franchisees an exclusive territorial license to operate a single restaurant within a specified area.
Franchisees bearbore all direct costs involved in the development, construction, and operation of their restaurants. In exchange for a franchise fee, we provideprovided 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 arewere required to operate their restaurants in accordance with Fuddruckers standards and specifications, including controls over menu items, food quality, and preparation. The Company requiresrequired the successful completion of its training program by a minimum of three managers for each franchised restaurant. In addition, franchised restaurants arewere 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 ofWe had 71 franchised restaurants at the end of fiscal 2019both November 18, 2020 and 2018 were 102 and 105, respectively.August 26, 2020.
Segment Table
The table on the following page showstables below show segment financial information as required by ASC 280 for segment reporting. ASC 280 requires depreciation and amortization be disclosed for each reportable segment, even if not used byunder the chief operating decision maker.going concern basis of accounting. 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.
| | | | | | | | | | | | | | |
| 12 Week Period Ended | | Fiscal Year Ended | |
| November 18, 2020 | | August 26, 2020 | |
| (In thousands) |
Sales: | | | | |
Luby's cafeterias | $ | 31,949 | | | $ | 149,691 | | |
Fuddruckers restaurants | 4,550 | | | 32,428 | | |
Cheeseburger in Paradise restaurants | — | | | 1,522 | | |
Culinary contract services | 4,918 | | | 26,747 | | |
Fuddruckers franchise operations | 530 | | | 3,634 | | |
Total | $ | 41,947 | | | $ | 214,022 | | |
Segment level profit: | | | | |
Luby's cafeterias | $ | 4,896 | | | $ | 12,087 | | |
Fuddruckers restaurants | (412) | | | (2,196) | | |
Cheeseburger in Paradise restaurants | (85) | | | (308) | | |
Culinary contract services | 451 | | | 2,529 | | |
Fuddruckers franchise operations | 236 | | | 2,093 | | |
Total | $ | 5,086 | | | $ | 14,205 | | |
Depreciation and amortization: | | | | |
Luby's cafeterias | $ | 1,530 | | | $ | 7,598 | | |
Fuddruckers restaurants | 167 | | | 1,507 | | |
Cheeseburger in Paradise restaurants | — | | | 77 | | |
Culinary contract services | 8 | | | 34 | | |
Fuddruckers franchise operations | 1 | | | 298 | | |
Corporate | 436 | | | 2,000 | | |
Total | $ | 2,142 | | | $ | 11,514 | | |
| | | | | | | | | | | | | | |
| 12 Week Period Ended | | Fiscal Year Ended | |
| November 18, 2020 | | August 26, 2020 | |
| (In thousands) |
Capital expenditures: | | | | |
Luby's cafeterias | $ | 416 | | | $ | 1,841 | | |
Fuddruckers restaurants | 17 | | | 148 | | |
Cheeseburger in Paradise restaurants | — | | | 34 | | |
| | | | |
Fuddruckers franchise operations | — | | | 9 | | |
Corporate | — | | | 88 | | |
Total | $ | 433 | | | $ | 2,120 | | |
|
| | | | | | | | |
| Fiscal Year Ended |
| August 28, 2019 | | August 29, 2018 | |
| (In thousands) |
Sales: | | | | |
Luby's cafeterias | $ | 214,074 |
| | $ | 231,859 |
| |
Fuddruckers restaurants(1) | 67,710 |
| | 88,139 |
| |
Cheeseburger in Paradise restaurants | 3,108 |
| | 13,051 |
| |
Culinary contract services | 31,888 |
| | 25,782 |
| |
Fuddruckers franchise operations | 6,690 |
| | 6,365 |
| |
Total | $ | 323,470 |
| | $ | 365,196 |
| |
Segment level profit: | | | | |
Luby's cafeterias | $ | 25,423 |
| | $ | 29,050 |
| |
Fuddruckers restaurants | 2,702 |
| | 3,873 |
| |
Cheeseburger in Paradise restaurants | (240 | ) | | (1,275 | ) | |
Culinary contract services | 3,334 |
| | 1,621 |
| |
Fuddruckers franchise operations | 5,057 |
| | 4,837 |
| |
Total | $ | 36,276 |
| | $ | 38,106 |
| |
Depreciation and amortization: | | | | |
Luby's cafeterias | $ | 8,886 |
| | $ | 10,455 |
| |
Fuddruckers restaurants | 2,844 |
| | 3,900 |
| |
Cheeseburger in Paradise restaurants | 117 |
| | 386 |
| |
Culinary contract services | 82 |
| | 71 |
| |
Fuddruckers franchise operations | 767 |
| | 769 |
| |
Corporate | 1,302 |
| | 1,872 |
| |
Total | $ | 13,998 |
| | $ | 17,453 |
| |
Total assets: | | | | |
Luby's cafeterias | $ | 107,287 |
| | $ | 113,259 |
| |
Fuddruckers restaurants (2) | 25,725 |
| | 36,345 |
| |
Cheeseburger in Paradise restaurants (3) | 829 |
| | 1,907 |
| |
Culinary contract services | 6,703 |
| | 4,569 |
| |
Fuddrucker franchise operations (4) | 10,034 |
| | 10,982 |
| |
Corporate | 35,422 |
| | 32,927 |
| |
Total | $ | 186,000 |
| | $ | 199,989 |
| |
| | | | | | | | | | | | | | |
| 12 Week Period Ended | | Fiscal Year Ended | |
| November 18, 2020 | | August 26, 2020 | |
| (In thousands) |
Loss before income taxes and discontinued operations: | | | | |
Segment level profit | $ | 5,086 | | | $ | 14,205 | | |
Opening costs | — | | | (14) | | |
Depreciation and amortization | (2,142) | | | (11,514) | | |
Selling, general and administrative expenses | (4,267) | | | (24,571) | | |
Other charges | (416) | | | (3,401) | | |
Net provision for asset impairments and restaurant closings | 85 | | | (10,193) | | |
Net gain on disposition of property and equipment | (117) | | | 11,557 | | |
Interest income | 8 | | | 60 | | |
Interest expense | (1,212) | | | (6,388) | | |
Other income, net | 30 | | | 1,195 | | |
Total | $ | (2,945) | | | $ | (29,064) | | |
(1) Includes vending revenue of $379 thousand and $531 thousand for the years ended August 28, 2019 and August 29, 2018, respectively.
| | | | | | | | | | |
| | | August 26, 2020 | |
| | | (in thousands) | |
Total assets: | | | | |
Luby's cafeterias | | | $ | 90,349 | | |
Fuddruckers restaurants (1) | | | 26,502 | | |
Cheeseburger in Paradise restaurants (2) | | | 164 | | |
Culinary contract services | | | 4,744 | | |
Fuddruckers franchise operations (3) | | | 8,973 | | |
Corporate | | | 46,671 | | |
Total | | | $ | 177,403 | | |
(1) Includes Fuddruckers trade name intangible of $7.5 million and $8.3$6.9 million at August 28, 2019 and August 29, 2018, respectively.26, 2020.
(3)(2) Includes Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles of $46 thousand and $131$34 thousand at August 28, 2019 and August 29, 2018, respectively.26, 2020.
(4)(3) Fuddruckers franchise operations segment includes royalty intangibles of $9.2 million and $9.9$8.4 million at August 28, 2019 and August 29, 2018, respectively.26, 2020.
|
| | | | | | | | |
| Fiscal Year Ended |
| August 28, 2019 | | August 29, 2018 | |
| (In thousands) |
Capital expenditures: | | | | |
Luby's cafeterias | $ | 3,195 |
| | $ | 7,474 |
| |
Fuddruckers restaurants | 513 |
| | 3,258 |
| |
Cheeseburger in Paradise restaurants | 16 |
| | 377 |
| |
Culinary contract services | — |
| | 235 |
| |
Corporate | 263 |
| | 1,903 |
| |
Total | $ | 3,987 |
| | $ | 13,247 |
| |
|
| | | | | | | | |
| Fiscal Year Ended |
| August 28, 2019 | | August 29, 2018 | |
| (In thousands) |
Loss before income taxes and discontinued operations: | | | | |
Segment level profit | $ | 36,276 |
| | $ | 38,106 |
| |
Opening costs | (56 | ) | | (554 | ) | |
Depreciation and amortization | (13,998 | ) | | (17,453 | ) | |
Selling, general and administrative expenses | (34,179 | ) | | (38,725 | ) | |
Other charges | (4,270 | ) | | — |
| |
Provision for asset impairments and restaurant closings | (5,603 | ) | | (8,917 | ) | |
Net gain on disposition of property and equipment | 12,832 |
| | 5,357 |
| |
Interest income | 30 |
| | 12 |
| |
Interest expense | (5,977 | ) | | (3,348 | ) | |
Other income, net | 195 |
| | 298 |
| |
Total | $ | (14,750 | ) | | $ | (25,224 | ) | |
Note 5. Derivative Financial Instruments
The Company enters into derivative instruments, from time to time, to manage its exposure to changes in interest rates on a percentage of its long-term variable rate debt. On December 14, 2016, the Company entered into an interest rate swap, pay fixed- receive floating, with a constant notional amount of $17.5 million. The fixed rate we paid was 1.965% and the variable rate we receive is one-month LIBOR. The term of the interest rate swap was 5 years. The Company did not apply hedge accounting treatment to this derivative; therefore, changes in fair value of the instrument were recognized in other income (expense), net in our consolidated statements of operations. The changes in the interest rate swap fair value resulted in expense of $0.1 million and income of $0.7 million in fiscal 2019 and 2018, respectively. The Company terminated its interest rate swap in the quarter ended December 19, 2018 and received $0.3 million million in cash proceeds
The Company does not hold or use derivative instruments for trading purposes.
Note 6.9. Fair Value Measurement
GAAP establishes a framework for using fair value to measure assets and liabilities, and expands disclosure about fair value measurements. Fair value measurements guidance applies whenever other statements require or permit assets or liabilities to be measured at fair value.
GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These include:
•Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
•Level 2: Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.
•Level 3: Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value.
RecurringThere were no recurring fair value measurements related to assets are presented below:at August 26, 2020.
|
| | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement Using | | |
| Fiscal Year Ended August 29, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Valuation Method |
Recurring Fair Value - Assets | | | (In thousands) | | | | |
Continuing Operations: | | | | | | | | | |
Derivative - Interest Rate Swap(1) | $ | 435 |
| | $ | — |
| | $ | 435 |
| | $ | — |
| | Discounted Cash Flow |
(1) The fair value of the interest rate swap is recorded in other assets on our consolidated balance sheet.
We terminated the interest rate swap in the first quarter of fiscal 2019 and received proceeds of $0.3 million.
RecurringThere were no recurring fair value measurements related to liabilities are presented below:at August 26, 2020.
|
| | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement Using | | |
| Fiscal Year Ended August 29, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Valuation Method |
Recurring Fair Value - Liabilities | | | (In thousands) | | | | |
Continuing Operations: | | | | | | | | | |
TSR Performance Based Incentive Plan(1) | $ | 21 |
| | $ | — |
| | $ | 21 |
| | $ | — |
| | Monte Carlo Approach |
(1) The fair valueUnder the going concern basis of the Company's 2017 Performance Based Incentive Plan liabilities was $21 thousand. See Note 16 to the our consolidated financial statements in this Form 10-K for further discussion of Performance Based Incentive Plan.
Non-recurringaccounting, non-recurring fair value measurements related to impaired property and equipment consistfor the fiscal year ended August 26, 2020 consisted of the following: | | | | | Fair Value Measurement Using | | | | | | Fair Value Measurement Using | | |
| Fiscal Year Ended August 28, 2019 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Impairments (4) | | Fiscal Year Ended August 26, 2020 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Impairments (5) |
Nonrecurring Fair Value Measurements | (In thousands) | | | Nonrecurring Fair Value Measurements | (In thousands) | | |
Continuing Operations: | | | | | | | | | | Continuing Operations: | | | | | | | | | |
Property and equipment related to Company-owned restaurants(1) | $ | 1,220 |
| | $ | — |
| | $ | — |
| | $ | 1,220 |
| | $ | (5,627 | ) | Property and equipment related to Company-owned restaurants(1) | $ | 481 | | | $ | — | | | $ | — | | | $ | 481 | | | $ | (4,831) | |
Goodwill(2) | 514 |
| | — |
| | — |
| | $ | 514 |
| | $ | (41 | ) | Goodwill(2) | — | | | — | | | — | | | — | | | (320) | |
Property held for sale(3) | 8,030 |
| | — |
| | — |
| | 8,030 |
| | (124 | ) | Property held for sale(3) | 3,362 | | | — | | | — | | | 3,362 | | | (14) | |
Operating lease right-of-use assets(4) | | Operating lease right-of-use assets(4) | 272 | | | — | | | — | | | 272 | | | (5,380) | |
Total Nonrecurring Fair Value Measurements | $ | 9,764 |
| | $ | — |
| | $ | — |
| | $ | 9,764 |
| | $ | (5,792 | ) | Total Nonrecurring Fair Value Measurements | $ | 4,115 | | | $ | — | | | $ | — | | | $ | 4,115 | | | $ | (10,545) | |
|
(1) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of $7.2$5.3 million were written down to their fair value of $1.2$0.5 million, resulting in an impairment charge of $5.6$4.8 million.
(2) In accordance with Subtopic 350-20, goodwill with a carrying amount of $0.6$0.3 million was written down to its implied fair value of $0.5 millionzero resulting in an impairment charge of $41 thousand See Note 9 and Note 13 to the our consolidated financial statements in this Form 10-K for further discussion of goodwill.$0.3 million.
(3) In accordance with Subtopic 360-10, long-lived assets held for sale with carrying values of $8.2$3.4 million were written down to their fair value, less cost to sell, of $8.0$3.4 million, resulting in an impairment charge of $0.1$14 thousand.
(4) In accordance with Subtopic 360-10, operating lease right-of-use assets with a carrying value of $5.7 million were written down to their fair value of $0.3 million, resulting in an impairment charge of $5.4 million. Proceeds on the sale of two property previously recorded in Property held for sale amounted to $19.6 million. See Note 13. Impairment of Long-Lived Assets, Discontinued Operations, Property Held for Sale and Store Closings.
(4)(5) Total impairments are included in provision for asset impairments and restaurant closings in the our consolidated statement of operations.
|
| | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement Using | | |
| Fiscal Year Ended August 29, 2018 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Impairments(4) |
Nonrecurring Fair Value Measurements | | | (In thousands) | | | | |
Continuing Operations: | | | | | | | | | |
Property and equipment related to Company-owned restaurants(1) | $ | 1,519 |
| | $ | — |
| | $ | — |
| | $ | 1,519 |
| | $ | (4,052 | ) |
Goodwill(2) | — |
| | — |
| | — |
| | — |
| | (513 | ) |
Property held for sale(3) | 5,132 |
| | — |
| | — |
| | 5,132 |
| | (3,062 | ) |
Total Nonrecurring Fair Value Measurements | $ | 6,651 |
| | $ | — |
| | $ | — |
| | $ | 6,651 |
| | $ | (7,627 | ) |
(1) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of $5.6 million were written down to their fair value of $1.5 million, resulting in an impairment charge of $4.1 million.
(2) In accordance with Subtopic 350-20, goodwill with a carrying amount of $513 thousand was written down to its implied fair value of zero, resulting in an impairment charge of $513 thousand. See Note 9 and Note 13 to the our consolidated financial statements in this Form 10-K for further discussion of goodwill.
(3) In accordance with Subtopic 360-10, long-lived assets held for sale with carrying values of $12.9 million were written down to their fair value, less costs to sell, of $5.1 million, resulting in an impairment charge of $3.1 million. Proceeds on the sale of six properties previously recorded in Property held for sale amounted to $4.7 million.
(4) Total impairments are included in Provision for asset impairments and restaurant closings in the or consolidated statement of operations.
Note 7. Trade Receivables10. Accounts and OtherNotes Receivable
TradeUnder the going concern basis of accounting, trade and other receivables, net, consistconsisted of the following: |
| | | | | | | |
| August 28, 2019 | | August 29, 2018 |
| (In thousands) |
Trade and other receivables | $ | 6,326 |
| | $ | 6,697 |
|
Franchise royalties and marketing and advertising receivables | 1,040 |
| | 764 |
|
Unbilled revenue | 1,913 |
| | 1,557 |
|
Allowance for doubtful accounts | (427 | ) | | (231 | ) |
Total Trade accounts and other receivables, net | $ | 8,852 |
| | $ | 8,787 |
|
| | | | | |
| August 26, 2020 |
| (In thousands) |
Trade and other receivables | $ | 4,037 | |
Franchise royalties and marketing and advertising receivables | 957 | |
Unbilled revenue | 1,677 | |
Allowance for doubtful accounts | (579) | |
Total Trade accounts and other receivables, net | $ | 6,092 | |
CCS receivable balance at August 28, 201926, 2020 was $4.7$3.1 million, primarily the result of 2428 contracts with balances of $0.1 million to $1.5$0.7 million per contract entity. These 2428 contracts collectively represented 49%47% of the Company’s total accounts receivables. Contract payment terms for its CCS customers’ receivables are due within 30 to 45 days. Unbilled revenue, was $1.9$1.7 million at August 28, 2019 and $1.6 million at August 29, 2018.26, 2020. CCS contracts are billed on a calendar month end basis and represent the total balance of unbilled revenue.
The Company recorded receivables related to Fuddruckers franchise operations royalty and marketing and advertising payments from the franchisees, as required by their franchise agreements. Franchise royalty and marketing and advertising fund receivables balance at August 28, 201926, 2020 was $1.0 million. At August 28, 2019,26, 2020, the Company had 10271 operating franchise restaurants with no significant concentration of accounts receivable.receivables.
The change in allowances for doubtful accounts for each of the years in the three-year periods endedwas as of the dates below is as follows: |
| | | | | | | | |
| Fiscal Year Ended |
| August 28, 2019 | | August 29, 2018 | |
| (In thousands) |
Beginning balance | $ | 231 |
| | $ | 275 |
| |
Provisions for doubtful accounts, net of reversals | 196 |
| | 464 |
| |
Write-offs(1) | — |
| | (508 | ) | |
Ending balance | $ | 427 |
| | $ | 231 |
| |
| | | | | |
| FiscalYear Ended |
| August 26, 2020 |
| (In thousands) |
Beginning balance | $ | 427 | |
Provisions for doubtful accounts, net of reversals | 1,624 | |
Write-offs(1) | (1,472) | |
Ending balance | $ | 579 | |
(1) The $0.5$1.5 million Balance Sheet write-off in fiscal 2018 primarily resulted2020 is comprised of $0.3 million of CCS customer accounts, $0.4 million of receivables from uncollectablefranchisees and $0.8 million of other receivables at seven Culinary Contract Services accounts(including $0.4 million of former tenant accounts) that were reserved in fiscal years 20152018 through and including 2018.2020.
The buyer of the Fuddruckers brand and franchise business has executed and delivered secured promissory notes in the aggregate amount of $15.5 million.The notes bear interest at rates ranging from 5% to 15% per annum and are scheduled to mature between December 31, 2027 and January 15, 2030.
Under the liquidation basis of accounting, the secured promissory notes have been included in the consolidated statement of net assets at a discounted rate that represents the amount we currently expect to receive upon liquidation of the notes.
Note 8.11. Income Taxes
The following table details the categories of total income tax assets and liabilities for both continuing and discontinued operations resulting from the cumulative tax effects of temporary differences:
| | | August 28, 2019 | | August 29, 2018 | | August 25, 2021 | | August 26, 2020 |
| (In thousands) | | (In thousands) |
Deferred income tax assets: | | | | Deferred income tax assets: | | | |
Workers’ compensation, employee injury, and general liability claims | $ | 395 |
| | $ | 507 |
| Workers’ compensation, employee injury, and general liability claims | $ | 402 | | | $ | 562 | |
Deferred compensation | 193 |
| | 280 |
| Deferred compensation | 80 | | | 162 | |
Net operating losses | 5,541 |
| | 4,401 |
| Net operating losses | 10,603 | | | 9,916 | |
General business and foreign tax credits | 12,529 |
| | 12,105 |
| General business and foreign tax credits | 12,105 | | | 12,105 | |
Depreciation, amortization and impairments | 8,561 |
| | 6,796 |
| Depreciation, amortization and impairments | 2,291 | | | 3,125 | |
Interest expense | | Interest expense | 1,953 | | | 1,886 | |
Lease liabilities | | Lease liabilities | 1,551 | | | 4,731 | |
Straight-line rent, dining cards, accruals, and other | 2,594 |
| | 2,917 |
| Straight-line rent, dining cards, accruals, and other | 416 | | | 1,413 | |
Subtotal | 29,813 |
| | 27,006 |
| Subtotal | 29,401 | | | 33,900 | |
Valuation allowance | (28,865 | ) | | (25,873 | ) | Valuation allowance | (28,506) | | | (29,478) | |
Total deferred income tax assets | 948 |
| | 1,133 |
| Total deferred income tax assets | 895 | | | 4,422 | |
Deferred income tax liabilities: | | | | Deferred income tax liabilities: | | | |
Property taxes and other | 948 |
| | 1,133 |
| Property taxes and other | 680 | | | 769 | |
Lease assets | | Lease assets | 924 | | | 3,653 | |
Total deferred income tax liabilities | 948 |
| | 1,133 |
| Total deferred income tax liabilities | 1,604 | | | 4,422 | |
Net deferred income tax asset | $ | — |
| | $ | — |
| Net deferred income tax asset | $ | (709) | | | $ | — | |
At August 28, 2019, the Company considered the deferred tax assets not to be realizable and maintains25, 2021, we recognized a full valuation allowance against the Company’s net deferred tax asset balance.liability of $0.7 million after valuation allowance as a result of anticipated taxable gains to be generated from future property sales as part of our Plan of Liquidation and our ability to utilize our deferred
tax assets. The most significant deferred tax asset prior to valuation allowance is the Company’sour general business tax credits carryovers to future years of $12.5$12.1 million. This item may be carried forward up to twenty years for possible utilization in the future. The carryover of general business tax credits, beginning in fiscal 2002, will begin to expire at the end of fiscal 2022 through 2039, if not utilized by then.
then.The utilization of general business credits is subject to limitations based on the federal income tax liability before applying the general business credits within a tax year. Deferred tax assets available to be utilized against state taxable gains generated on future property sales will differ per state jurisdiction. The net deferred tax liability is included in other liabilities on our consolidated statement of net assets in liquidation at August 25, 2021.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future, as well as from tax net operating losses and tax credit carryovers. We establish a valuation allowance when we no longer consider it more likely than not that a deferred tax asset will be realized. In evaluating our ability to recover our deferred tax assets, we consider available positive and negative evidence, including scheduled reversals of deferred tax liabilities, tax-planning strategies and existing business conditions, including amendment to our credit agreement(s) to avoid default and resultsthe Plan of recent operations.Liquidation. In the third quarter of fiscal 2018, managementwe concluded that a full valuation allowance on the Company'sour net deferred tax assets was necessary. As of August 28, 2019, the Company continues to maintain25, 2021, we recognized a full valuation allowance against the net deferred tax asset balance.liability due to our expectation that we will be able to utilize our deferred tax assets as a result of implementing our Plan of Liquidation.
An analysis of the provision for income taxes for continuing operations is as follows:
| | | | | | | | | | | |
| 12 Week Period Ended | | Fiscal Year Ended |
| November 18, 2020 | | August 26, 2020 |
| (In thousands) |
Current federal and state income tax expense | $ | 54 | | | $ | 327 | |
Current foreign income tax expense | 4 | | | 30 | |
| | | |
Provision for income taxes | $ | 58 | | | $ | 357 | |
|
| | | | | | | |
| August 28, 2019 | | August 29, 2018 |
| (In thousands) |
Current federal and state income tax expense | $ | 418 |
| | $ | 405 |
|
Current foreign income tax expense | 51 |
| | 71 |
|
Deferred income tax expense | — |
| | 7,254 |
|
Provision for income taxes | $ | 469 |
| | $ | 7,730 |
|
Relative only to continuing operations, the reconciliation of the expense for income taxes to the expected income tax expense, computed using the statutory tax rate, was as follows:
| | | Fiscal Year Ended | | 12 Week Period Ended | | Fiscal Year Ended |
| August 28, 2019 | | August 29, 2018 | | November 18, 2020 | | August 26, 2020 |
| Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
| (In thousands and as a percent of pretax loss from continuing operations) | | (in thousands, except percentages) |
Income tax benefit from continuing operations at the federal rate | $ | (3,098 | ) | | 21.0 | % | | $ | (6,405 | ) | | 25.4 | % | Income tax benefit from continuing operations at the federal rate | $ | (618) | | | 21.0 | % | | $ | (6,104) | | | 21.0 | % |
Permanent and other differences: | | | | | | | | Permanent and other differences: | | | | | | | |
Federal jobs tax credits (wage deductions) | 89 |
| | (0.6 | ) | | 129 |
| | (0.5 | ) | Federal jobs tax credits (wage deductions) | — | | | — | | | — | | | — | |
Stock options and restricted stock | 19 |
| | (0.1 | ) | | 67 |
| | (0.3 | ) | Stock options and restricted stock | 4 | | | (0.1) | | | 17 | | | (0.1) | |
Other permanent differences | 31 |
| | (0.2 | ) | | 41 |
| | (0.2 | ) | Other permanent differences | 1 | | | — | | | 3 | | | — | |
State income tax, net of federal benefit | 273 |
| | (1.9 | ) | | 145 |
| | (0.6 | ) | State income tax, net of federal benefit | 53 | | | (1.8) | | | 189 | | | (0.7) | |
General Business Tax Credits | (422 | ) | | 2.9 |
| | (506 | ) | | 2.0 |
| General Business Tax Credits | — | | | — | | | — | | | — | |
Impact of U.S. Tax Reform | — |
| | — |
| | 3,167 |
| | (12.6 | ) | |
| Other | 117 |
| | (0.8 | ) | | 487 |
| | (1.8 | ) | Other | 70 | | | (2.4) | | | 580 | | | (1.9) | |
Change in valuation allowance | 3,460 |
| | (23.5 | ) | | 10,605 |
| | (42.0 | ) | Change in valuation allowance | 548 | | | (18.7) | | | 5,672 | | | (19.5) | |
Provision for income taxes from continuing operations | $ | 469 |
| | (3.2 | )% | | $ | 7,730 |
| | (30.6 | )% | Provision for income taxes from continuing operations | $ | 58 | | | (2.0) | % | | $ | 357 | | | (1.2) | % |
For the fiscal year ended August 28, 2019,25, 2021, including both continuing and discontinued operations, the Company is estimated to report a federal taxable loss of $5.1$3.4 million. For the fiscal year ended August 29, 2018,26, 2020, including both continuing and discontinued operations, the Company generated federal taxable loss of $14.2$19.3 million.
Our income tax filings are periodically examined by various federal and state jurisdictions. There are no open examinations by federal and state income tax jurisdiction.jurisdictions. The Company's U.S. federal income tax return remains open to examination for fiscal 20162018 through fiscal 2018.
2020.
There were no payments of federal income taxes in fiscal 20192021 or fiscal 2018.2020. The Company has income tax filing requirements in over 30 states. State income tax payments were $0.5$0.3 million and $0.4 million in fiscal 20192021 and 2018,2020, respectively.
The following table is a reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of fiscal 20182020 and 20192021 (in thousands):
|
| | | |
Balance as of August 30, 2017 | $ | 25 |
|
Decrease based on prior year tax positions | — |
|
Interest Expense | — |
|
Balance as of August 29, 2018 | $ | 25 |
|
Decrease based on prior year tax positions | — |
|
Interest Expense | — |
|
Balance as of August 28, 2019 | $ | 25 |
|
| | | | | |
Balance as of August 28, 2019 | $ | 25 | |
Decrease based on prior year tax positions | — | |
Interest Expense | — | |
Balance as of August 26, 2020 | $ | 25 | |
Decrease based on prior year tax positions | — | |
Interest Expense | — | |
Balance as of August 25, 2021 | $ | 25 | |
The unrecognized tax benefits would favorably affect the Company’s effective tax rate in future periods if they are recognized. There is no interest associated with unrecognized benefits as of August 28, 2019. The25, 2021. Under the going concern basis of accounting, the Company hashad included interest or penalties related to income tax matters as part of income tax expense.
It is reasonably possible that the amount of unrecognized tax benefits with respect to our uncertain tax positions could significantly increase or decrease within 12 months. However, based on the current status of examinations, it is not possible to estimate the future impact, if any, to recorded uncertain tax positions as of August 28, 2019.
25, 2021.
Management believes that adequate provisions for income taxes have been reflected in the financial statements and is not aware of any significant exposure items that have not been reflected in the financial statements. Amounts considered probable of settlement within one year have been included in the accrued expenses and other liabilities in the accompanying consolidated balance sheet.
Note 9.12. Property and Equipment, Intangible Assets and Goodwill
Under the going concern basis of accounting, our property and equipment, intangible assets and goodwill was accounted for as described below. Under the liquidation basis of accounting, our property and equipment and intangible assets, including intangible assets not recognized on the going concern basis, are recorded on the statement of net assets in liquidation at the amount of their estimated cash proceeds or other consideration from liquidation.
The cost, net of impairment, and accumulated depreciation of property and equipment at August 28, 2019 and August 29, 2018,26, 2020, together with the related estimated useful lives used in computing depreciation and amortization, werewas as follows:follows (in thousands):
| | | August 28, 2019 | | August 29, 2018 | | Estimated Useful Lives (years) | | August 26, 2020 | | Estimated Useful Lives (years) |
| (In thousands) | | | | | | | | | | | | | | |
Land | $ | 45,845 |
| | $ | 46,817 |
| | | | — | | | Land | $ | 42,572 | | | | | — | | |
Restaurant equipment and furnishings | 67,015 |
| | 69,678 |
| | 3 | | to | | 15 | Restaurant equipment and furnishings | 60,685 | | | 3 | | to | | 15 |
Buildings | 126,957 |
| | 131,557 |
| | 20 | | to | | 33 | Buildings | 114,909 | | | 20 | | to | | 33 |
Leasehold and leasehold improvements | 22,098 |
| | 27,172 |
| | | | Lesser of lease term or estimated useful life | | Leasehold and leasehold improvements | 20,429 | | | | | Lesser of lease term or estimated useful life | |
Office furniture and equipment | 3,364 |
| | 3,596 |
| | 3 | | to | | 10 | Office furniture and equipment | 3,178 | | | 3 | | to | | 10 |
| 265,279 |
| | 278,820 |
| | | | | | | |
| | | 241,773 | | | | | | | |
Less accumulated depreciation and amortization | (143,536 | ) | | (140,533 | ) | | | | | | | Less accumulated depreciation and amortization | (141,174) | | | | | | | |
Property and equipment, net | $ | 121,743 |
| | $ | 138,287 |
| | | | | | | Property and equipment, net | $ | 100,599 | | | | | | | |
Intangible assets, net | $ | 16,781 |
| | $ | 18,179 |
| | 15 | | to | | 21 | Intangible assets, net | $ | 15,343 | | | 15 | | to | | 21 |
Goodwill | $ | 514 |
| | $ | 555 |
| | | | | | | Goodwill | $ | 195 | | | | | | | |
The aggregate amortization expense related to intangible assets subject to amortization for the 12 week period ended November 18, 2020 and fiscal 2019 and 20182020 was $1.4$0.3 million and $1.4 million, respectively. The aggregate amortization expense related to intangible assets subject to amortization is expected to be $1.4 million in each of the next five successive years.
The following table sets forth current accrued expenses and other liabilities as of August 28, 201925, 2021 and August 29, 2018:26, 2020:
Non-cash compensation expense related to the Company's TSR Performance Based Incentive Plans in fiscal 2019 and 20182020 was a credit to expense of $0.3$0.1 million and $15 thousand, respectively, and is recorded in selling, general and administrative expenses on our consolidated statement of operations.
The Company has an unfunded Supplemental Executive Retirement Plan (“SERP”). In 2005, the Board of Directors voted to amend the SERP and suspend the further accrual of benefits and participation. The net benefit recognized for the SERP for the yearsyear ended August 28, 2019 and August 29, 201826, 2020 was zero, and the unfunded accrued liability included in “Other Liabilities” on the Company’s consolidated Balance Sheetsstatement of net assets as of August 28, 201925, 2021 and on the Company’s consolidated balance August 29, 201826, 2020 was $32$20 thousand and $39$24 thousand, respectively.
The Company has a Nonemployee Director Phantom Stock Plan (“Phantom Stock Plan”). Authorized shares ( shares) under the Phantom Stock Plan were fully depleted in early fiscal 2003; since that time, no deferrals, incentives or dividends have been credited to phantom stock accounts. As participants cease to be directors, their phantom shares are converted into an equal number of shares of common stock and issued from the Company’s treasury stock. As of August 28, 2019, 17,80125, 2021, 2,453 phantom shares remained outstanding and unconverted under the Phantom Stock Plan.
The Company has a voluntary 401(k) employee savings plan to provide substantially all employees of the Company an opportunity to accumulate personal funds for their retirement. The Company matchesThrough March 18, 2020, we matched 25% of participants’ contributions made to the plan up to 6% of their salary. We temporarily suspended Company matching March 19, 2020 in response to the effect of the COVID-19 Pandemic on our operations. We resumed Company matching effective December 19, 2020. The net expense recognized in connection with the employer match feature of the voluntary 401(k) employee savings plan for the 12 week period ended November 18, 2020 and the fiscal yearsyear ended August 28, 201926, 2020 was zero and August 29, 2018 was $279 thousand and $243 thousand,$0.2 million, respectively.
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities may provide specialized (customized) equipment fabrication and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. The Company incurred $19$18 thousand and $31$8 thousand under the Amended and Restated Master Sales Agreement for custom-fabricated and refurbished equipment in fiscal 20192021 and 2018, respectively and incurred $2 thousand in other operating costs in fiscal 2018.2020, respectively. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Company’s Board of Directors.
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partnership interest and a 50% general partnership interest in the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented 7% of the space in that center since July 1969. No changes were made to the Company’s lease terms as a result of the transfer of ownership of the center to the new partnership.
On November 22, 2006, the Company executed a new lease agreement with respect to this shopping center. Effective upon the Company’s relocation and occupancy into the new space in July 2008, the new lease agreement provides for a primary term of 12 years with two2 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. Due to the COVID-19 pandemic, the landlord agreed to abate the rent for April, 2020. We entered into an amendment to the lease, effective July 1, 2020, whereby (1) the lease was terminated early on December 31, 2020, (2) the rent for May and June of 2020 is abated and (3) commencing July 1, 2020 through the early termination date, the monthly rent was a fixed gross amount. The amendment was approved by the Finance and Audit Committee in 2006.
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement for one of the Company’s Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of six years with two2 subsequent five-year options. Pursuant to the new ground lease agreement, the Company pays rent of $28.53 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until May 31, 2020. Thereafter, the new groundThe lease agreement providesprovided for increases in rent at set intervals. The lease agreement was approved by the Finance and Audit Committee of our Board of Directors. In December 2019 we exercised the first five-year renewal option, effective June 1, 2020. The renewal was approved by the Finance and Audit Committee of our Board of Directors. Due to the COVID-19 pandemic, Pappas Restaurants, Inc. agreed to abate the rent for April and May of 2020. The lease was terminated on February 26, 2021, in conjunction with the sale of the Fuddruckers operations at this location to be operated as a franchised location, as further described below.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
In February 2008, the Company acquired 500,000 treasury shares for $4.8 million.