UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Fiscal Year Ended August 28, 2019
25, 2021
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the Transition Period From to
____________________________________
Commission file number 001-08308
Luby's, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 74-1335253 | ||||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) | ||||
13111 Northwest Freeway, Suite 600
Houston, Texas 77040
(Address of principal executive offices, including zip code)
(713) 329-6800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange at which registered | ||||||
| Common Stock ($0.32 par value per share) | LUB | New York Stock Exchange | ||||||
| Common Stock Purchase Rights | N/A | New York Stock Exchange | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No x☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||||||||||||||||
| Emerging growth company | ☐ | |||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x☒
The aggregate market value of the shares of common stock of the registrant held by non-affiliates of the registrant as of March 13, 2019,10, 2021, was approximately $32,205,000$62,053,000 (based upon the assumption that directors and executive officers are the only affiliates).
As of November 15, 2019,1, 2021, there were 30,041,42231,019,233 shares of the registrant’s common stock outstanding.
Luby’s, Inc.
Form 10-K
Year ended August 28, 201925, 2021
Table of Contents
| Page | ||||||||
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Additional Information
We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. The SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information that we file electronically. Our website address is www.lubysinc.com. Please note that our website address is provided as an inactive textual reference only. We make available free of charge through our website the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this report.
Compliance with New York Stock Exchange Requirements
We submitted to the New York Stock Exchange (“NYSE”) the CEO certification required by Section 303A.12(a) of the NYSE’s Listed Company Manual with respect to our fiscal year ended August 29, 2018. We expect to submit the CEO certification with respect to our fiscal year ended August 28, 2019 to the NYSE within 30 days after our annual meeting of shareholders.26, 2020. We are filing as an exhibit to this Form 10-K the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002. We expect to submit the CEO certification with respect to our fiscal year ended August 25, 2021 to the NYSE within 30 days after our annual meeting of shareholders.
FORWARD-LOOKING STATEMENTS
This Annual Report on this "Form 10-K” contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Form 10-K, other than statements of historical facts, are “forward-looking statements” for purposes of these provisions, including any statements regarding:
•the implementation of the Plan of Liquidation (as defined herein), including the timing and amount of any liquidating distribution made in connection with the Plan of Liquidation,
•future sales of assets in accordance with the Plan of Liquidation and the amount of proceeds that we may receive as a result of any such sales,
•future operating results;results,
•future capital expenditures and expected sources of funds for capital expenditures;expenditures,
•future debt, including liquidity and the sources and availability of funds related to debt, the expected repayment of debt and the expected sources of funds for working capital requirements;requirements, and
•closing existing units;
units
In some cases, investors can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “outlook,” “may”“may,” “should,” “will,” and “would” or similar words. Forward-looking statements are based on certain assumptions and analyses made by management in light of theirits experience and perception of historical trends, current conditions, expected future developments and other factors we believeit believes are relevant. Although management believes that ourits assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of ourits control. The following factors, as well as the factors set forth in Item 1A of this Form 10-K and any other cautionary language in this Form 10-K, provide examples of risks, uncertainties, and events that may cause our financial and operational results to differ materially from the expectations described in our forward-looking statements:
•our ability to pursue strategic alternatives;successfully implement the Plan of Liquidation,
•the duration of the COVID-19 pandemic and its impact on our business and general business and economic conditions;conditions,
•the impactability to realize property values,
•collectability of competition;accounts receivable,
•fluctuations in the costs of commodities, including beef, poultry, seafood, dairy, cheese, oils and produce;produce,
•increases in utility costs, including the costs of natural gas and other energy supplies;supplies,
•changes in the availability and cost of labor, including the ability to attract qualified managers and team members;members,
•decisions made in the allocation of capital resources,
•the impact of competition,
•the seasonality of the business;business,
•changes in governmental regulations, including changes in minimum wages and healthcarehealth care benefit regulation;regulation,
•the effects of inflation and changes in our customers’ disposable income, spending trends and habits;habits,
•the effectiveness of our credit card controls and Payment Card Industry ("PCI") compliance;compliance,
•impact of adoption of new accounting standards;standards,
•effects of actual or threatened future terrorist attacks in the United States;States,
•unfavorable publicity relating to operations, including publicity concerning food quality, illness or other health concerns or labor relations;relations, and
•the continued service of key management personnel.
Each forward-looking statement speaks only as of the date of this Form 10-K,report, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should be aware that the occurrence of the events described above and elsewhere in this Form 10-Kreport could have material adverse effect on our business resultsand our Plan of operations, cash flows, and financial condition.Liquidation.
PART I
Item 1. Business
Plan of Liquidation and Dissolution
The Plan of fiscal 2019 our internal organization and reporting structure supported three reportable segments; Company-owned restaurants, Fuddruckers franchiseLiquidation outlines an orderly sale of the Company's businesses, operations, and Culinary contract services.real estate, and an orderly wind down of any remaining operations. The Company-owned restaurants consistedCompany intends to attempt to convert all of its assets into cash, satisfy or resolve its remaining liabilities and obligations, including contingent liabilities and claims and costs associated with the liquidation of the three brands discussed above, which were aggregated into one reportable segment. InCompany, and then file a certificate of dissolution. The assets to be sold include operating divisions Luby’s Cafeterias, Fuddruckers, and the fourth quarter of fiscal 2019 we re-evaluated our reportable segments and disaggregatedCompany’s Culinary Services business, as well as the Company-owned restaurants into three reportable segments based on brand name. As such, asCompany’s real estate. The Company has completed the sales of the fourth quarter 2019, our five reportable segments are Luby’s cafeteria restaurants,Cafeterias and Fuddruckers restaurants, Cheeseburgeroperating divisions and several of its real estate assets.The Company currently anticipates that its common stock will be delisted from the NYSE upon the filing of the certificate of dissolution, which is not expected to occur until the earlier of the completion of the asset sales, the Company’s disposition of its remaining assets and liabilities to a liquidating entity or November 17, 2023 (three years from the date of the approval of the Plan of Liquidation), but the delisting of its common stock may occur sooner in Paradise restaurants, Fuddruckers franchise operations and Culinary contract services. Management believes this change better reflectsaccordance with applicable rules of the priorities and decision-making analysis aroundNYSE.
The Company cannot predict the allocationtiming or amount of our resources and better alignsany distributions to stockholders, as uncertainties exist as to the economic characteristics within similar restaurant brands. We began reportingvalue it may receive upon the sale of assets pursuant to its monetization strategy, the net value of any remaining assets after such sales are completed, the ultimate amount of expenses associated with implementing its monetization strategy, liabilities, operating costs and amounts to be set aside for claims, obligations and provisions during the liquidation and winding-up process and the related timing to complete such transactions and overall process.
The Company does not intend to comment on or disclose developments regarding the new structureprocess unless it deems further disclosure appropriate or required. Please see "Risk factors" in Item 1A.
Overview
Luby’s, Inc. operated as a multi-branded company in the fourth quarter of fiscal 2019 as reflectedrestaurant industry and in this Annual Report on Form 10-K.the contract food services industry. 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 ofCompany’s core brands included Luby’s Inc. for any of the periods presented.Cafeteria, Fuddruckers - World’s Greatest Hamburgers® and Luby’s Culinary Services.
As of November 15, 2019, we19, 2021, the Company operated 12018 restaurants, all of which are located throughout the United States, as set forth in the table below.Texas. These establishments are located in close proximity to retail centers, business developments and residential areas. Of the 12018 restaurants, 7112 are located on Company owned property and six are located on property that we own and 49 are located on property that we lease. Fiveleased. One of our owned locations and one of our leased locations consist of a side-by-side Luby’s Cafeteriacafeteria and Fuddruckers restaurant, to which we refer herein as a “Combo location.” The Combo location properties are included in both the Luby's CafeteriasCafeteria count and the Fuddruckers RestaurantsRestaurant count but only one location for each Combo location is included in the total restaurant count.
| Luby's Cafeterias | Fuddruckers Restaurants | Other | ||||||||||
| Owned | Leased | Owned | Leased | Leased | Total | |||||||
| Texas: | ||||||||||||
| Houston Metro | 16 | 12 | 8 | 9 | — | 45 | ||||||
| San Antonio Metro | 9 | 1 | — | — | — | 10 | ||||||
| Rio Grande Valley | 8 | 4 | — | — | — | 12 | ||||||
| Dallas/Fort Worth Metro | 10 | 2 | 1 | — | — | 13 | ||||||
| Austin | 4 | — | 1 | — | — | 5 | ||||||
| Other Texas Markets | 9 | 2 | — | 2 | — | 13 | ||||||
| California | — | — | — | 6 | — | 6 | ||||||
| Arizona | — | — | — | 4 | — | 4 | ||||||
| Illinois | — | — | 3 | — | — | 3 | ||||||
| Mississippi | 1 | — | 1 | — | — | 2 | ||||||
| Other States | — | — | — | 6 | 1 | 7 | ||||||
| Total | 57 | 21 | 14 | 27 | 1 | 120 | ||||||
Luby’s Cafeteria’s product offerings are home-style made-from-scratch favoritesitems priced to appeal to a broad range of customers, including those customers that focus on fast wholesome choices, quality, variety, and affordability. We haveLuby’s has had particular success among families with children, shoppers, travelers, seniors, and business people looking for a quick, freshly prepared meal at a fair price. All of our restaurants sell food-to-go orders and third party delivery orders which comprised approximately 17%31% of our Luby's Cafeteria restaurant sales in fiscal 2019.2021.
On August 26, 2021, the Company sold the Luby’s Cafeteria brand and 35 operating locations to Luby’s Restaurant Corporation, an unrelated third party.The Company continues to operate 14 Luby’s locations pursuant to a licensing agreement with the buyer of the brand until the Company can complete its orderly disposition of these assets.
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Fuddruckers
Fuddruckers Restaurants
Hamburgers®. While Fuddruckers’ signature burgers and fries account for the majority of its restaurant sales, its menu also includes exotic burgers, such as buffalo and elk, chicken breast sandwiches, hot dogs, a variety of salads, chicken tenders, hand breaded onion rings, soft drinks, handmade milkshakes, and bakery items. A variety of over 100 carbonated soft drinks including our own unique Sweet Cherry Cream Soda, which is exclusively offered at Fuddruckers restaurants, along with other varieties such as Powerade®, and flavored waters are offered through Coke Freestyle® self-service dispensers. Additionally, beer and wine are served and, generally, account for less than 2% of restaurant sales. Food-to-go sales comprise approximately 8% of Fuddruckers restaurant sales.
Culinary Services
The number of franchised restaurants was 102 at fiscal year-end 2019.
Culinary Contract Services
For additional information regarding our business segments, please read Notes 1 and 48 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K.
Real Estate
During the fiscal year ended August 25, 2021, the Company sold 11 real estate assets pursuant to its Plan of Liquidation.Subsequent to August 25, 2021, the Company has sold an additional 30 real estate assets pursuant to the Plan.As of the date of filing, the Company owns the underlying land and buildings on eight of our Luby’s cafeterias and four of our Fuddruckers restaurants. Additionally, the Company owns the land and buildings at 12 locations that are non-operating.
Other Assets and Liabilities
During the fiscal year ended August 25, 2021, the Company terminated its sub-license to the Cheeseburger in Paradise brand name in return for compensation from the sub-licensor and the Company sold its rights to the Koo Koo Roo brand name to an independent third party.
The Company’s liabilities as of August 25, 2021 are disclosed in the consolidated statement of net assets in liquidation included in Item 8. of this Annual Report. They consist of accounts payable, accrued expenses and other liabilities, credit facility debt, operating lease liabilities, liability of estimated costs in excess of estimated receipts during liquidation, and other liabilities. Subsequent to August 25, 2021, the Company paid all outstanding amounts due under its credit facility and the facility was terminated, effective September 30, 2021.
Under the Plan, the Company intends to attempt to convert all of its assets into cash, satisfy or resolve its remaining liabilities and obligations, including contingent liabilities and claims and costs associated with the liquidation of the Company.
Intellectual Property
Luby’s, Inc. owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information, including the Luby’s and Fuddruckers logos, trade names and trademarks, which are of material importance to our business. Depending on the jurisdiction, trademarks, and service marks generally are valid as long as they are used and/or registered. Patents, copyrights, and licenses are of varying durations. The success of our business depends on the continued ability to use existing trademarks, service marks, and other components of our brands in order to increase brand awareness and further develop branded products. We take prudent actions to protect our intellectual property.
The Company has been selling relevant intellectual property in connection with the sale of its operating divisions.The Company continues to maintain ownership or licenses necessary to operate its remaining operating divisions.
Employees
As of November 15, 2019,1, 2021, we had an active workforce of 6,1331,031 employees consisting of restaurant management employees, non-management restaurant employees, CCS management employees, CCS non-management employees, and office and facility service employees. Employee relations are considered to be good. We have never had a strike or work stoppage, and we are not subject to collective bargaining agreements.
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Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. Investors should consider carefully the risks and uncertainties described below, and all other information included in this Form 10-K, before deciding whether to invest in our common stock. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business, financial condition or results of operations. The occurrence of any of the following risks could harm our business, financial condition, and results of operations. The trading price of our common stock could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment.
Risks Related to the Plan of Liquidation and the Liquidation
We may not be able to pay liquidating distributions to our stockholders at the times and in the amounts expected.
We cannot predict the timing or amount of any liquidating distributions, as uncertainties exist as to the value we may receive upon the sale of our assets pursuant to our monetization strategy, the net value of any remaining assets after such sales are completed, the ultimate amount of our expenses associated with completing our monetization strategy, liabilities, the operating costs and amounts to be set aside for claims, obligations and provisions during the liquidation and winding-up process, and the related timing to complete such transactions. These and other factors make it impossible to predict with certainty the actual net cash amount that will ultimately be available for distribution to stockholders or the timing of any such distributions.
The amount of cash available to distribute to stockholders depends on our ability to successfully execute our monetization strategy and dispose of all or substantially all of our assets.
Our efforts to enhance stockholder value through our monetization strategy may not be successful, which would significantly reduce the cash available for distribution to stockholders. We cannot assure you that our efforts to enhance stockholder value through the conduct of our monetization strategy will succeed. There will be risks associated with any potential divestiture transaction, including whether we will attract potential acquirers for the Company’s businesses or its assets, and whether offers made by such potential acquirers, if any, will be at valuations that we deem reasonable. Moreover, we are not able to predict how long it will take to complete our monetization strategy, the delay of which may impact the timing of the dissolution. The timing and terms of any transaction in furtherance of our monetization strategy will depend on a variety of factors, many of which are beyond our control. A delay in, or failure to complete, any such transaction could have a material effect on our stock price and the amount of any potential distributions to stockholders.
In addition, our ability to successfully complete our monetization strategy could be materially negatively affected by economic conditions generally, including public health risks related to COVID-19. We are exploring and evaluating potential transactions, the success or timing of which may be impacted by the effects of the COVID-19 pandemic. In order to successfully monetize our assets, we must identify and complete one or more additional transactions with third parties. Our businesses and assets and the availability of potential buyers of our businesses and assets may be significantly impacted by public health issues or pandemics, including COVID-19. For example, the shutdown orders across the various strategic alternativesjurisdictions in which we operate and other effects of COVID-19 have resulted in, and may continue to enhance shareholdercause, decreased demand, and consequently decreased revenues, from the operation of our businesses. The uncertain severity and impact of COVID-19 could result in reduced demand to purchase our businesses and assets by third parties or reduced values such parties may ascribe to our businesses and assets.
Even if we are able to identify potential transactions in furtherance of our monetization strategy, such buyers may be operationally constrained or unable to locate financing on attractive terms or at all, which risk may be heightened due to the uncertainty of COVID-19 and its impact. If financing is unavailable to potential buyers of our businesses or assets, or if potential buyers are unwilling to engage in transactions due to the uncertainty in the market, our ability to complete such transactions would be significantly impaired or we may provide further seller financing, which could cause the amounts ultimately available for distribution to stockholders to be dependent on the operational success of the buyers of our businesses or assets.
Any negative impact on such third parties due to any of the foregoing events could cause costly delays and have a material adverse effect on our ability to return value but this strategic review processto stockholders, including our ability to realize full value from a sale or other disposition of our businesses and assets as part of our monetization strategy. Any such negative impacts could also reduce the amount of cash we are able to distribute to stockholders.
Notwithstanding stockholder approval of the Plan of Liquidation, the Board may determine not to proceed with the dissolution or may amend or modify the Plan of Liquidation without further stockholder approval.
Notwithstanding stockholder approval of the Plan of Liquidation, the Board may determine, in the exercise of its fiduciary duties, not to proceed with the dissolution or to amend or modify the Plan of Liquidation to the extent permitted by Delaware law without the necessity of further stockholder approval. If the Board elects to pursue any alternative to the Plan of Liquidation, stockholders may not receive any of the funds that might otherwise be available for distribution to stockholders. Similarly, pursuant to our monetization strategy, the Board may ultimately determine that the sale of the whole Company is advisable and in the best interests of the Company and its stockholders. We cannot assure you that the sale of the whole
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Company will result in the achievementsame amount of distributable cash proceeds to stockholders compared to the dissolution. After the effective date of the desired goalfiling of enhancing shareholder value.the certificate of dissolution, revocation of the dissolution would require stockholder approval under Delaware law.
Under Delaware law, in the event we fail to identify, examineretain sufficient funds to pay the expenses and consider a range of strategic alternatives availableliabilities actually owed to our creditors, each stockholder could be held liable for payment to our creditors for claims brought during the three-year period after the effective date, up to the lesser of (1) such stockholder’s pro rata share of amounts owed to creditors in excess of the contingency reserve and (2) the amounts previously received by such stockholder in dissolution from us and from any liquidating trust or trusts. Accordingly, in such event, a stockholder could be required to return part, or all, of the distributions previously made to such stockholder in the dissolution, and a stockholder could receive nothing from us under the Plan of Liquidation, but no stockholder will be liable for claims against the Company within excess of the objectiveamounts distributed to such stockholder. Moreover, in the event a stockholder has paid taxes on amounts previously received, a repayment of maximizing shareholder value. The processall or a portion of exploring strategic alternatives may be time consuming and disruptivesuch amount could result in a stockholder incurring a net tax cost if the stockholder’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable.
Risks Related to our business operationsBusiness and may impair our ability to retain and motivate key personnel. We may incur substantial expenses associated with identifying, evaluating and preparing for any such strategic alternatives. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, regulatory limitations and the interest of third parties in us and our assets. There can be no assurance that the exploration of strategic alternatives will result in any specific action or transaction. Further, any such strategic alternative may not ultimately lead to increased shareholder value.
Industry
General economic and business conditions as well as those specific to the restaurant industry may adversely affect our business financial condition and results of operations.our net assets in liquidation.
Our business results depend on a number of industry-specific and general economic factors, many of which are beyond our control.control, such as the COVID-19 pandemic which affected the restaurant industry business conditions in the United States. These factors include consumer income, interest rates, inflation, consumer credit availability, consumer debt levels, tax rates and policy, unemployment trends, and other matters that influence consumer confidence and spending. The restaurant industry is affected by changes in national, regional and local economic conditions, seasonal fluctuation of sales volumes, and consumer spending patterns. Discretionary consumer spending, which is critical to our success, is influenced by general economic conditions and the availability of discretionary income. A deterioration in the global or local economy or other economic conditions affecting disposable consumer income, such as unemployment levels, reduced home values, investment losses, inflation, business conditions, fuel and other energy costs, consumer debt levels, lack of available credit, consumer confidence, interest rates, tax rates and changes in tax laws, may reduce consumer confidence and affected consumers’ ability or desire to spend disposable income. This may adversely affect our business by reducing overall consumer spending or by causing customers to reduce the frequency with which they dine out or to shift their spending to our competitors, any of which could result in lower revenues, increased costs, reduced traffic, or limits on pricing, any of which could have a material adverse effect on our financial conditionbusiness and results of operations.our net assets in liquidation.
Regional events can adversely affect our financial performance.
Additionally, we have been provided promissory notes by buyers of operations.
As of August 25, 2021, we had approximately $10.6 million of deferred tax assets related to our NOL carryforwards. The Company anticipates utilizing a portion, if not all, of its NOLs in connection with the anticipated sales of the Company’s assets and businesses pursuant to the Plan of Liquidation. If the Company is unsuccessful in completing the anticipated sales of the Company’s assets or restructure or refinance our debt. Ourotherwise limited in its ability to generate sufficient cash flow from operating activitiesuse its NOLs, the Company may be unable to payutilize a portion or all of its
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NOLs and the principalnet proceeds of the sales of our assets and interest on our indebtedness is subjectbusinesses being available to market conditions and other factors which are beyond our control.
distribute to shareholders may be less than anticipated.
The impact of inflation may adversely affect our results of operations.
financial performance.
The impact of inflation on food, labor and other aspects of our business can adversely affect our results of operations. Commodity inflation in food, beverages, and utilities can also impact our financial performance. Although we attempt to offset the effects of inflation through periodic menu price increases, cost controls, and incremental improvement in operating margins, we may not be able to completely eliminate such effects, which could adversely affect our results of operations.
financial performance and our net assets in liquidation.
We face the risk of adverse publicity and litigation, which could have a material adverse effect on our business and financial performance.
We may from, time to time, be the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Unfavorable publicity relating to one or more of our restaurants or to the restaurant industry in general may taint public perception of the Luby’s Cafeteria and Fuddruckers brands. Multi-unit restaurant businesses can be adversely affected by publicity resulting from poor food quality, illness, or other health concerns or operating issues stemming from one or a limited number of restaurants. Publicity resulting from these allegations may materially adversely affect our business and financial performance, regardless of whether the allegations are valid or whether we are liable. In addition, we are subject to employee claims alleging injuries, wage and hour violations, discrimination, harassment or wrongful termination. In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace, employment, and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend, and may divert time and money away from our operations and hurt our financial performance. A judgment significantly in excess of our insurance coverage, if any, for any claims could materially adversely affect our business, financial condition or results of operations.
liquidation.
We may be harmed by security risks we face in connection with our electronic processing and transmission of confidential customer and employee information.
We accept electronic payment cards for payment in our restaurants. During fiscal 2019, approximately 75% of our restaurant sales were attributable to credit and debit card transactions, and credit and debit card usage could continue to increase. A number of retailers have experienced actual or potential security breaches in which credit and debit card information may have been stolen, including a number of highly publicized incidents with well-known retailers in recent years. In addition,March, 2021, we have previously beenwere the victim of a cyber attack by hackers who deployed a version of the SamSam ransomware that encrypted electronic files, locking us out of many of our point-of-sale and other systems. These hackers requested a “ransom” payment in exchange for restoring
We may in the future become subject to additional claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Proceedings related to theft of credit or debit card information may be brought by payment card providers, banks and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit) and federal and state regulators. Any such proceedings could distract our management from running our business and cause us to incur significant unplanned losses and expenses. Consumer perception of our brand could also be negatively affected by these events, which could further adversely affect our results and prospects.
We also are required to collect and maintain personal information about our employees, and we collect information about customers as part of some of our marketing programs as well. The collection and use of such information is regulated at the federal and state levels, and the regulatory environment related to information security and privacy is increasingly demanding. At the same time, we are relying increasingly on cloud computing and other technologies that result in third parties holding significant amounts of customer or employee information on our behalf. If the security and information systems of ours or of outsourced third party providers we use to store or process such information are compromised or if we, or such third parties, otherwise fail to comply with these laws and regulations, we could face litigation and the imposition of penalties that could adversely affect our financial performance. Our reputation as a brand or as an employer could also be adversely affected from these types of security breaches or regulatory violations, which could impair our sales or ability to attract and keep qualified employees.
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Labor shortages or increases in labor costs could adversely affect our business, financial performance and results of operations.
net assets in liquidation.
Our successsuccessful implementation of our monetization plan depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including regional managers, restaurant general managers and chefs, in a manner consistent with our standards and expectations. Qualified individuals thatGiven the announced Plan of Liquidation, we needhave found it difficult to fill these positions are in short supplyrecruit and competition for these employees is intense.retain qualified individuals. If we are unable to recruit and retain sufficient qualified individuals, our operations and reputation could be adversely affected.affected, which may adversely affect the value of our business and ability to realize the proceeds for the sale of our assets to allow us to distribute the proceeds to stockholders. Additionally, competition for qualified employees could require us to pay higher wages, which could result in higher labor costs. Our financial condition and and announcement of our process of exploring strategic alternatives may result in difficulties in retaining and attracting qualified employees. Any increase in labor costs could adversely affect our results of operations.
The success of our business is highly dependent upon our key management personnel. The loss of the services of any key management personnel could have a material adverse effect upon our business. The process of exploring strategic alternatives may impair our ability to retain and motivate key management personnel.
If we are unable to anticipate and react to changes in food, utility and other costs, our results of operations could be materially adversely affected.
Many of the food and beverage products we purchase are affected by commodity pricing, and as such, are subject to price volatility caused by production problems, shortages, weather or other factors outside of our control. Our profitability depends, in part, on our successfully anticipating and reacting to changes in the prices of commodities. Therefore, we enter into purchase commitments with suppliers when we believe that it is advantageous for us to do so. If commodity prices were to increase, we may be forced to absorb the additional costs rather than transfer these increases to our customers in the form of menu price increases. Our success also depends, in part, on our ability to absorb increases in utility costs. Our operating results are affected by fluctuations in the price of utilities. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a material adverse effect on our resultsfinancial performance.
Our property taxes could increase due to reassessment or property tax rate changes
We are required to pay real property taxes in respect of operations.our properties and such taxes may increase as our properties are reassessed by taxing authorities or as property tax rates change. An increase in the assessed value of our properties or our property tax rates could adversely impact our financial condition and reduce the amount of future liquidating distributions to our stockholders.
Risks Related to Governmental Laws and Regulations
Our business is subject to extensive federal, state and local laws and regulations.
The restaurant industry is subject to extensive federal, state and local laws and regulations. We are also subject to licensing and regulation by state and local authorities relating to health, healthcare, employee medical plans, sanitation, safety and fire standards, building codes and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act and applicable minimum wage requirements, overtime, unemployment tax rates, family leave, tip credits, working conditions, safety standards, healthcare and citizenship requirements), federal and state laws which prohibit discrimination, potential healthcare benefits legislative mandates, and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990.
As a publicly traded corporation, we are subject to various rules and regulations as mandated by the SEC and the NYSE. Failure to timely comply with these rules and regulations could result in penalties and negative publicity.
We are subject to federal regulationrisks related to the provision of employee healthcare benefits, worker’s compensation and employee injury claims.
We maintain a self-insured health benefit plan which provides medical and prescription drug benefits to certain state lawsof our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop-loss limits. We record expenses under the plan based on estimates of the costs of expected claims, administrative costs and stop-loss insurance premiums. Self-insurance costs are accrued based upon the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on information on historical claims experience provided by our third 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. In the event our cost estimates differ from actual costs, we could incur additional unplanned costs, which govern the offer and sale of franchises. Many state franchise laws contain provisions that supersede the terms of franchise agreements, including provisions concerning the termination or non-renewal of a franchise. Some state franchise laws require that certain materials be registered before franchises can be offered or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect usimpact our financial performance and our net assets in liquidation.
Workers’ compensation coverage is provided through “self-insurance” by LFR. We record expenses under the franchisees.plan based on estimates of the costs of expected claims, administrative costs, stop-loss insurance premiums, and expected trends. These
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In March 2010, comprehensive healthcare reform legislation under the Patient Protection and Affordable Care Act (the "Affordable Care Act") and Healthcare Education and Affordability Reconciliation Act was passed and signed into law. Among other things, the healthcare reform legislation includes mandated coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and healthcare benefits. Although requirements were phased in over a period of time, the most impactful provisions began in the eventthird quarter of default byfiscal 2015.
Due to the franchisee after applicable cure periods. Upon the expirationbreadth and complexity of the initial termhealthcare reform legislation, the lack of a franchise agreement,implementing regulations in some cases, and interpretive guidance, and the franchisee generally has an option to renew the franchise agreement for an additional term. There is no assurance that franchisees will meet the criteria for renewal or will desire or be able to renew their franchise agreements. If not renewed, a franchise agreement, and payments required there under, will terminate. We may be unable to find a new franchisee to replace a non-renewing franchisee. Furthermore, while we will be entitled to terminate franchise agreements following a default that is not cured within the applicable grace period, if any, the disruption to the performancephased-in nature of the restaurantsimplementation, it is difficult to predict the overall impact of the healthcare reform legislation on our business over the coming years. Possible adverse effects of the healthcare reform legislation include reduced revenues, increased costs and exposure to expanded liability and requirements for us to revise the ways in which we conduct business or risk of loss of business. It is also possible that healthcare plans offered by other companies with which we compete for employees will make us less attractive to our current or potential employees. And in any event, implementing the requirements of the Affordable Care Act has imposed some additional administrative costs on us, and those costs may increase over time. In addition, financial performance and net assets in liquidation could be materially adversely affected. Our franchisees face the potential of similar adverse effects, and many of them are small business owners who may have significant difficulty absorbing the increased costs.
An increase in the minimum wage and regulatory mandates could adversely affect our businessfinancial performance.
From time to time, the U.S. Congress and revenues.
General Risk Factors
The price of our common stock may experience volatility.
The market price of our common stock can be volatile as we undertakeexecute the strategic review process,Plan of Liquidation, which may continue or become more severe if and when a transactionadditional transactions or business arrangement is announced or we announce that wearrangements are no longer exploring strategic alternatives.announced.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The following table summarizes our owned properties as of November 15, 2019:19, 2021:
| Number of Properties | ||||||||
| Operating Restaurants: | ||||||||
| Luby's cafeterias | 7 | |||||||
| Fuddruckers restaurants | 4 | |||||||
| Combos | 1 | |||||||
| Total Operating Properties | 12 | |||||||
| Non-operating locations | 12 | |||||||
| Total | 24 | |||||||
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| Number of Properties | Appraised Value * | ||||||
| (in millions) | |||||||
| Operating Restaurants: | |||||||
| Luby's cafeterias | 52 | $ | 153.7 | ||||
| Fuddruckers restaurants | 9 | 18.4 | |||||
| Combos | 5 | 21.9 | |||||
| Total Operating Properties | 66 | $ | 194.0 | ||||
| Leased to Fuddruckers franchisees | 3 | 6.1 | |||||
| Non-operating held for sale | 4 | 10.3 | |||||
| Bake Shop | 1 | 1.1 | |||||
| Total | 74 | $ | 211.5 | ||||
| Number of Properties | ||||||||
| Operating Restaurants: | ||||||||
| Luby's cafeterias | 5 | |||||||
| Combos | 1 | |||||||
| Total Operating Properties | 6 | |||||||
| Fuddruckers restaurant operated by Black Titan Holdings under a management agreement | 1 | |||||||
| Fuddruckers restaurant subleased to Black Titan Holdings | 1 | |||||||
| Luby's cafeterias operated by Luby's Restaurant Corporation under a management agreement | 8 | |||||||
| Abandoned restaurant property leases | 6 | |||||||
| Corporate office | 1 | |||||||
| Total | 23 | |||||||
At November 15, 2019,19, 2021, we have leases on 10six restaurant properties where we have ceased operations. Although the Company remains obligated under the terms of the leases for the rent and other costs that may be associated with the leases, the Company has ceased operations and has no foreseeable plans to occupy the spaces as a companyCompany restaurant in the future.
Our corporate office lease of approximately 26,00013,000 square feet of office space runs through June 2022.
We maintain general liability insurance and property damage insurance on all properties in amounts which management believes provide adequate coverage.
Item 3. Legal Proceedings
From time to time, we are subject to various 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, resultsnet assets or our Plan of operations, or liquidity. It is possible, however, that our future results of operations for a particular fiscal quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings, or claims.Liquidation.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the NYSE under the symbol “LUB.” As of November 15, 2019,1, 2021, there were 1,9531,893 holders of record of our common stock.
Equity Compensation Plans
Securities authorized under our equity compensation plans as of August 28, 2019,25, 2021, were as follows:
| (a) | (b) | (c) | ||||||||||||||||||
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Excluding Securities Reflected in Column (a) | |||||||||||||||||
| Equity compensation plans previously approved by security holders | 401,690 | $ | 4.09 | 2,191,960 | ||||||||||||||||
Equity compensation plans not previously approved by security holders (1) | 2,453 | — | — | |||||||||||||||||
| Total | 404,143 | $ | 4.09 | 2,191,960 | ||||||||||||||||
| (a) | (b) | (c) | ||||||||
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Excluding Securities Reflected in Column (a) | |||||||
| Equity compensation plans previously approved by security holders | 1,387,412 | $ | 4.06 | 1,753,457 | ||||||
Equity compensation plans not previously approved by security holders (1) | 17,801 | — | — | |||||||
| Total | 1,405,213 | $ | 4.00 | 1,753,457 | ||||||
(1) Represents the Luby’s, Inc. Nonemployee Director Phantom Stock Plan.
See Note 16,17. “Share-Based and Other Compensation,” to our Consolidated Financial Statements included in Item 8 of Part II of this report.
Stock Performance Graph
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
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Item 6. Selected Financial Data(Reserved)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and footnotes for the fiscal years ended August 28, 201925, 2021 (“fiscal 2019”2021”) and August 29, 2018,26, 2020, (“fiscal 2018”2020”) included in Part II, Item 8 of this Form 10-K.
Fiscal Year Ended | ||||||
| August 28, 2019 | August 29, 2018 | |||||
| (52 weeks) | (52 weeks) | |||||
| Restaurant sales | 88.0 | % | 91.1 | % | ||
| Culinary contract services | 9.9 | % | 7.1 | % | ||
| Franchise revenue | 2.1 | % | 1.7 | % | ||
| Vending revenue | 0.1 | % | 0.1 | % | ||
| TOTAL SALES | 100.0 | % | 100.0 | % | ||
| STORE COSTS AND EXPENSES: | ||||||
| (As a percentage of restaurant sales) | ||||||
| Cost of food | 27.9 | % | 28.3 | % | ||
| Payroll and related costs | 38.1 | % | 37.4 | % | ||
| Other operating expenses | 17.9 | % | 18.7 | % | ||
| Occupancy costs | 6.4 | % | 6.1 | % | ||
| Vending revenue | (0.1 | )% | (0.2 | )% | ||
| Store level profit | 9.8 | % | 9.5 | % | ||
COMPANY COSTS AND EXPENSES (as a percentage of total sales) | ||||||
| Opening costs | 0.0 | % | 0.2 | % | ||
| Depreciation and amortization | 4.3 | % | 4.8 | % | ||
| Selling, general and administrative expenses | 10.6 | % | 10.6 | % | ||
| Other charges | 1.3 | % | — | % | ||
| Provision for asset impairments and restaurant closings | 1.7 | % | 2.7 | % | ||
| Net gain on disposition of property and equipment | (4.0 | )% | (1.6 | )% | ||
Culinary Contract Services Costs (as a percentage of Culinary contract services sales) | ||||||
| Cost of culinary contract services | 89.5 | % | 93.7 | % | ||
| Culinary income | 10.5 | % | 6.3 | % | ||
Franchise Operations Costs (as a percentage of Franchise revenue) | ||||||
| Cost of franchise operations | 24.4 | % | 24.0 | % | ||
| Franchise income | 75.6 | % | 76.0 | % | ||
| (As a percentage of total sales) | ||||||
| LOSS FROM OPERATIONS | (2.8 | )% | (6.1 | )% | ||
| Interest income | 0.0 | % | 0.0 | % | ||
| Interest expense | (1.8 | )% | (0.9 | )% | ||
| Other income, net | 0.1 | % | 0.1 | % | ||
| Loss before income taxes and discontinued operations | (4.6 | )% | (6.9 | )% | ||
| Provision for income taxes | 0.1 | % | 2.1 | % | ||
| Loss from continuing operations | (4.7 | )% | (9.0 | )% | ||
| Loss from discontinued operations, net of income taxes | (0.0 | )% | (0.2 | )% | ||
| NET LOSS | (4.7 | )% | (9.2 | )% | ||
Fiscal Year Ended | ||||||||
| August 28, 2019 | August 29, 2018 | |||||||
| (52 weeks) | (52 weeks) | |||||||
| (In thousands) | ||||||||
| Store level profit | $ | 27,885 | $ | 31,648 | ||||
| Plus: | ||||||||
| Sales from culinary contract services | 31,888 | 25,782 | ||||||
| Sales from franchise operations | 6,690 | 6,365 | ||||||
| Less: | ||||||||
| Opening costs | 56 | 554 | ||||||
| Cost of culinary contract services | 28,554 | 24,161 | ||||||
| Cost of franchise operations | 1,633 | 1,528 | ||||||
| Depreciation and amortization | 13,998 | 17,453 | ||||||
Selling, general and administrative expenses(1) | 34,179 | 38,725 | ||||||
| Other charges | 4,270 | — | ||||||
| Provision for asset impairments and restaurant closings | 5,603 | 8,917 | ||||||
| Net gain on disposition of property and equipment | (12,832 | ) | (5,357 | ) | ||||
| Interest income | (30 | ) | (12 | ) | ||||
| Interest expense | 5,977 | 3,348 | ||||||
| Other income, net | (195 | ) | (298 | ) | ||||
| Provision for income taxes | 469 | 7,730 | ||||||
| Loss from continuing operations | $ | (15,219 | ) | $ | (32,954 | ) | ||
The following table shows our restaurant unit count as of August 28, 201925, 2021 and August 29, 2018.26, 2020.
Restaurant Counts:
| Beginning of Fiscal Year 2021 | Fiscal Year 2021 Openings | Fiscal Year 2021 Closings | Fiscal Year 2021 Franchise Conversion | August 25, 2021 | |||||||||||||||||||||||||
| Luby’s cafeterias | 61 | — | (8) | — | 53 | ||||||||||||||||||||||||
| Fuddruckers restaurants | 24 | — | (2) | (15) | 7 | ||||||||||||||||||||||||
| Total | 85 | — | (10) | (15) | 60 | ||||||||||||||||||||||||
Included in the above counts for both Luby's Cafeterias and Fuddruckers Restaurants are five Combo units, where a Luby's cafeteria and a Fuddruckers restaurant occupy the same location. Subsequent to August 25, 2021, we sold the Luby's brand and the operations of 35 Luby's restaurants, including one Combo unit (discussed below). As of November 19, 2021 we operate 14 Luby's cafeterias and six Fuddruckers restaurants (including two Combo units) under licensing agreements with the new owners of the respective brands until we can complete the orderly disposition of these assets.
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| Fiscal 2019 Year Begin | Fiscal 2019 Openings | Fiscal 2019 Closings | Fiscal 2019 Transfers to Franchisee | Fiscal 2019 Year End | |||||||||||
Luby’s Cafeterias(1) | 84 | — | (5 | ) | 79 | ||||||||||
Fuddruckers Restaurants(1) | 60 | — | (11 | ) | (5 | ) | 44 | ||||||||
| Cheeseburger in Paradise | 2 | — | (1 | ) | 1 | ||||||||||
| Total | 146 | — | (17 | ) | (5 | ) | 124 | ||||||||
Overview
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, operatesand then file a certificate of dissolution with five reportable operating segments:the State of Delaware. The assets to be sold as of the date the shareholders approved the Plan included our Luby's Cafeterias, Fuddruckers, Restaurants,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 November 17, 2023. 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
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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.
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. On November 1, 2021, we paid a cash liquidating distribution of $2.00 per common share, reducing the estimate of future liquidating distributions to $3.00 per share. 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.
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, but 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.
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Asset Disposal and Liquidation Activities
Brands
•In December 2020 we terminated our sub-license to the Cheeseburger in Paradise Fuddruckers Franchise Operations, and Culinary Contract Services. We generate revenues primarily by providing quality foodbrand name in return for compensation from the sub-licensor. Proceeds from the sale were immaterial.
•During the second quarter of fiscal 2021, we sold our rights to customers at our 79 Luby’s branded restaurants located mostly in Texas, 44 Fuddruckers restaurants located throughout the United States, 1 Cheeseburger in Paradise restaurant located in New Jersey, and 102 Fuddruckers franchises located primarily inKoo Koo Roo brand name to an independent third party. Proceeds from the United States. Included in the Luby's Cafeterias segment are six locations where we operate both a Luby's Cafeteria and a Fuddruckers restaurant. In addition to our restaurant business model, we also provide culinary contract services for organizations that offer on-site food service, such as healthcare facilities, colleges and universities, sports stadiums, businesses and institutions, as well as sales through retail grocery outlets.sale were immaterial.
•Subsequent to $45 million. At the end of the first quarter of fiscal 2019, we also re-financed our debt and entered into a five-year credit agreement with a subsidiary of MSD Capital, MSD PCOF Partners IV, LLC ("MSD") as our new lender. This new financing arrangement along with the proceeds from the sale of certain owned property locations is intended to provide the necessary liquidity as we work through our turn-around plan.
Fuddruckers
•In December 2020, we announced that we entered into an agreement to franchise 13 of our advertisingcompany-owned Fuddruckers restaurants to Black Titan Holdings, LLC.
◦In March 2021, we closed on the sale and messaging toward digital media astransfer of nine of these Fuddruckers restaurants. In each case, Black Titan Holdings, LLC entered into a franchise agreement with us to operate each of these nine Fuddruckers restaurants. Black Titan Holdings, LLC assumed the lease obligation or ownership of the tenant entity at each of these nine locations and thus Luby’s no longer has a lease obligation at these property locations.
◦In April 2021, we advanceclosed on the sale and transfer of two of these Fuddruckers restaurants and we entered into a management agreement on one of these Fuddruckers Restaurants with Black Titan Holdings, LLC. However, Luby's continues to be either directly or contingently liable for the next phaselease obligation at these property locations.
◦In May 2021, we closed on the sale and transfer of the remaining Fuddruckers location to Black Titan Holdings, LLC and Black Titan Holdings, LLC entered into a franchise agreement with us to operate this Fuddruckers restaurant. Black Titan Holdings, LLC assumed the lease obligation for this location and thus Luby's no longer has a lease obligation at this property location.
•In February 2021, we completed the sale and transfer of a previously company-owned Fuddruckers restaurant to HPCP Investments, LLC, a company affiliated with Christopher J. Pappas, a director, owner of greater than 5% of our loyaltycommon stock, and recognition programs. We continue to take these steps as part of our long-term strategy to increase our brand awareness and motivate increased guest visits, with a particular focus on our existing customer base that already knows us. As we continued to evaluate our portfolio of restaurant locations, we closed 17 restaurants so that resources could be focused onformer chief executive officer. Proceeds from the locations that exhibit the most promise for enhanced profitability. We also transitioned 5 Fuddruckers restaurants in fiscal 2019 and an additional two at the beginning of fiscal year 2020 to a franchisee.
Cafeterias
•We continue to pursue opportunitiesoperate an additional 14 Luby’s restaurants which are not part of the above referenced sales agreement. We are currently evaluating the remaining locations to transition company-owned Fuddruckersdetermine the best exit strategy for each location.
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Real Estate
•During fiscal year 2020, we sold nine properties for total gross proceeds of our existing markets and stores outsideapproximately $23.7 million.
•During fiscal year 2021, we have closed on the sale of our core Houston, TX market. 11 properties for total gross proceeds of approximately $32.1 million.
•Subsequent to August 25, 2021, through November 11 we have closed on the sale of 30 properties for total gross proceeds of approximately $101.0 million.
•As of August 28, 2019,November 19, 2021, the Company owns 24 properties.
Lease Settlements
In fiscal year 2020, we supportedterminated and settled our remaining lease obligation for 16 closed restaurant properties and negotiated an early termination date and reduced lease payment at one operating restaurant property. In fiscal year 2021, we terminated and settled our remaining lease obligation at 11 closed restaurant properties and we settled one additional lease obligation for a franchise network of 102 Fuddruckers franchise locations. In additionclosed restaurant property. While the amounts paid to five locations that transferred from company-operated stores to franchise-owned stores, three other franchise locations opened in fiscal 2019 (onesettle our lease liabilities varied, in the country of Panama, one in Georgia, and one in Mississippi). 11 locations closed in fiscal 2019 (three international locations, and eight in the United States). Our franchise network generated approximately $6.7 million in revenue in fiscal 2019.
General and Administrative Expenses
Accounting Periods
Our fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. Our first quarter consists of four four-week periods, while our last three quarters normally consist of three four-week periods. Fiscal year 2022 will be a 53 week, 371 day fiscal year. Comparability between quarters may be affected by the varying lengths of the quarters, as well as the seasonality associated with the restaurant business.
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| Fiscal 2019 | Fiscal 2018 | |||||||||||||||||||||||
| Increase (Decrease) | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
| Luby's Cafeterias | (3.2 | )% | (3.1 | )% | (2.2 | )% | (3.0 | )% | 3.9 | % | 2.4 | % | (1.8 | )% | 1.5 | % | ||||||||
| Combo Locations | (2.5 | )% | (4.8 | )% | (7.1 | )% | (11.1 | )% | (1.5 | )% | (3.3 | )% | (5.4 | )% | 1.3 | % | ||||||||
| Luby's cafeteria segment | (3.2 | )% | (3.3 | )% | (2.6 | )% | (3.7 | )% | 3.3 | % | 1.9 | % | (2.1 | )% | 1.5 | % | ||||||||
| Fuddruckers restaurants segment | (5.5 | )% | (6.1 | )% | (5.3 | )% | (11.2 | )% | (3.9 | )% | (5.8 | )% | (6.4 | )% | 0.6 | % | ||||||||
| Cheeseburger in Paradise Segment | (3.6 | )% | (4.4 | )% | (3.1 | )% | (0.6 | )% | (4.4 | )% | (11.7 | )% | (13.9 | )% | (10.5 | )% | ||||||||
| Same-store sales | (3.7 | )% | (4.0 | )% | (3.3 | )% | (5.5 | )% | 1.2 | % | (0.9 | )% | (3.7 | )% | 0.8 | % | ||||||||
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.
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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
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(“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.
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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
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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.
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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.
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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.
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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
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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
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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.
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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.
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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.
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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.
31
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.
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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.
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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.
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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
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.
35
| 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 | )% | ||||
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.
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.
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
36
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
37
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.
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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.
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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.
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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
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.
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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.
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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.
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 | )% | ||||
| 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 | )% | |||||
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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
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(“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.
| 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 | % | |||||
| 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 | )% | |||||
| 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 | % | |||||
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.
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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
22
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.
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| 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
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.
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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.
25
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
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
26
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
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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.
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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.
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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.
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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.
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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.
32
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.
33
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.
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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.
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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
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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.
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.
| 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 | % | ||||
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
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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.
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 | )% | ||||
| 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 | % | ||||
accounting.
Other Charges
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 | |
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.
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.
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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.
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.
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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.
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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
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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.
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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.
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 | ) | ||
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
| 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 | |||||
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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 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.
CAPITAL EXPENDITURES
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.
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
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(“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.
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.
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.
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.
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.
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AFFILIATIONS AND RELATED PARTIES
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.
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
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 | % | ||||
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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.
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.
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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
Properties and business units for sale
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.
NEW ACCOUNTING PRONOUNCEMENTS
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.
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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.
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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.
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
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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
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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.
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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.
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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.
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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.
31
| 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.
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| 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 | |||||||||||||||||
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.
33
Luby’s, Inc.
Notes to Consolidated Financial Statements
Fiscal Years 20192021and20182020
Note 1. Nature of Operations and Significant Accounting Policies
Nature of Operations
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.
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.
34
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.
35
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
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
Under the liquidation basis of accounting trade, notes and other receivables are stated at amount of their estimated cash proceeds.
Inventories
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 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
36
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
Under the liquidation basis of accounting, deferred debt issuance costs are not given a value.
Fair Value of Financial Instruments
Self-Insurance Accrued Expenses
Revenue Recognition
See Note 3.6. Revenue Recognition.
Cost of CCS
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 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
37
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
accounting.
Other Charges
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
See Note 7. Leases.
Income Taxes
Discontinued Operations
38
Share-Based Compensation
17. Share-Based and Other Compensation.
Earnings Per Share
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
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.
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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.
| 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.
(4) Changes in estimated future cash flows during liquidation includes adjustments to previous estimates and (2)changes in estimated holding periods of our assets.
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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.
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.
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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.
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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
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.
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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.
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.
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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 | ||||
| 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 | ||
| 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.
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
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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 | |||||||||||||||||||
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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.
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.
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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.
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.
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.
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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 | ||||||||||
49
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) | ||||||||||
| 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.
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
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.
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•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.
| 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 | ||||||||
| 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 | ||||||||
| 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.
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 | ) | ||||||||
Note 7. Trade Receivables10. Accounts and OtherNotes Receivable
| 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.
51
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
52
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.
53
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 | |||||||||||||||||||||||||||||
Depreciation expense for the 12 week period ended November 18, 2020 and fiscal years 2019 and 2018,year 2020 was $12.6$1.8 million and $16.1$10.1 million, respectively.
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Intangible assets, net, also includesincluded the license agreement and trade name related to Cheeseburger in Paradise and the value of the acquired licenses and permits allowing the sales of beverages with alcohol. These assets havehad an expected accounting life of 15 years from the date of acquisition December 2012.
The aggregate amortization expense related to intangible assets subject to amortization for 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 presents intangible assets as of August 28, 2019 and August 29, 2018:26, 2020:
| August 26, 2020 | |||||||||||||||||
| (In thousands) | |||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Intangible Assets Subject to Amortization: | |||||||||||||||||
| Fuddruckers trade name and franchise agreements | $ | 29,496 | $ | (14,189) | $ | 15,307 | |||||||||||
| Cheeseburger in Paradise trade name and license agreements | 146 | (110) | 36 | ||||||||||||||
| Intangible assets, net | $ | 29,642 | $ | (14,299) | $ | 15,343 | |||||||||||
| August 28, 2019 | August 29, 2018 | ||||||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| Intangible Assets Subject to Amortization: | |||||||||||||||||||||||
| Fuddruckers trade name and franchise agreements | $ | 29,486 | $ | (12,752 | ) | $ | 16,734 | $ | 29,701 | $ | (11,653 | ) | $ | 18,048 | |||||||||
| Cheeseburger in Paradise trade name and license agreements | $ | 146 | $ | (99 | ) | $ | 47 | $ | 206 | $ | (75 | ) | $ | 131 | |||||||||
| Intangible assets, net | $ | 29,632 | $ | (12,851 | ) | $ | 16,781 | $ | 29,907 | $ | (11,728 | ) | $ | 18,179 | |||||||||
Note 10.13. Current Accrued Expenses and Other Liabilities
The following table sets forth current accrued expenses and other liabilities as of August 28, 201925, 2021 and August 29, 2018:26, 2020:
| August 25, 2021 | August 26, 2020 | ||||||||||
| Liquidation Basis | Going Concern Basis | ||||||||||
| (In thousands) | |||||||||||
| Salaries, compensated absences, incentives, and bonuses | $ | 1,621 | $ | 1,506 | |||||||
| Operating expenses | 708 | 831 | |||||||||
| Unredeemed gift and dining cards | 956 | 4,084 | |||||||||
| Taxes, other than income | 4,675 | 7,265 | |||||||||
| Accrued claims and insurance | 1,051 | 1,753 | |||||||||
Income taxes, legal and other(1) | 3,371 | 4,130 | |||||||||
| Total | $ | 12,382 | $ | 19,569 | |||||||
| August 28, 2019 | August 29, 2018 | ||||||
| (In thousands) | |||||||
| Salaries, compensated absences, incentives, and bonuses | $ | 4,318 | $ | 6,073 | |||
| Operating expenses | 925 | 1,068 | |||||
| Unredeemed gift and dining cards | 3,862 | 7,213 | |||||
| Taxes, other than income | 9,056 | 9,247 | |||||
| Accrued claims and insurance | 1,796 | 2,958 | |||||
Income taxes, legal and other(1) | 4,518 | 5,195 | |||||
| Total | $ | 24,475 | $ | 31,754 | |||
(1) Income taxes, legal and other includes accrued lease termination costs. See Note 1315 to our consolidated financial statements in this Form 10-K for further discussion of lease termination costs.
Note 11. Other Long-Term Liabilities
| August 28, 2019 | August 29, 2018 | ||||||
| (In thousands) | |||||||
| Workers’ compensation and general liability insurance reserve | $ | 736 | $ | 1,002 | |||
| Capital leases | 73 | 137 | |||||
| Deferred rent and unfavorable leases | 3,710 | 4,380 | |||||
| Deferred compensation | 80 | 106 | |||||
| Deferred gain on sale / leaseback transactions | 1,969 | — | |||||
| Other | 9 | 156 | |||||
| Total | $ | 6,577 | $ | 5,781 | |||
The following table summarizes credit facilityour debt less current portionbalances at August 28, 201925, 2021 and August 26, 2020 (in thousands):
| 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 matured 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, 2018:
| August 28, 2019 | August 29, 2018 | ||||||
| (In thousands) | |||||||
| Long-Term Debt | |||||||
| 2016 Credit Agreement - Term Loan | — | $ | 19,506 | ||||
| 2016 Credit Agreement - Revolver | — | 20,000 | |||||
| 2018 Credit Agreement - Revolver | 5,300 | — | |||||
| 2018 Credit Agreement - Term Loan | 43,399 | — | |||||
| Total credit facility debt | 48,699 | 39,506 | |||||
| Less: | |||||||
| Unamortized debt issue costs | (1,887 | ) | (168 | ) | |||
| Unamortized debt discount | (1,373 | ) | — | ||||
| Total credit facility debt, less unamortized discount and issuance costs | 45,439 | 39,338 | |||||
| Current portion of credit facility debt | — | 39,338 | |||||
| Total Credit facility debt, less current portion | $ | 45,439 | $ | — | |||
2018 Credit Agreement
On December 13, 2018, the 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 terminates on, and all amounts owing thereunder must be repaid on December 13, 2023.
On July 31, 2019, the Companywe entered into the First Amendment to the 2018 Credit Agreement (the “First Amendment”) to extend the 2018 Delayed Draw Term Loan expiration date for up to one year to the earlier to occur of (a) the date on which the commitments under the 2018 Delayed Draw Term Loan have been terminated or reduced to zero in accordance with the terms of the 2018 Credit Agreement and (b) September 13, 2020. On December 18, 2019, we entered into the Second Amendment to the Credit Agreement which did not change any terms of the agreement permanently. The amendment only decreased the amount of mandatory prepayment related to the sale of two properties in the quarter ended March 11, 2020. We entered into the Third Amendment to Credit Agreement, dated April 21, 2020 (the "Third Amendment"). The Third Amendment permitted us to incur indebtedness under the PPP Loan and terminated the $5.0 million undrawn portion of the delayed draw term loan upon receipt of the PPP Loan. On August 21, 2020, we entered into the Fourth Amendment to the Credit Agreement that decreased the amount of mandatory prepayments related to the sale of two properties in the quarter ended August 26, 2020. No other terms of the agreement were changed permanently by this amendment. On August 25, 2021, we entered into the Fifth Amendment to the Credit Agreement where, as regards the Luby's Transaction discussed at Note 2. Subsequent Events, MSD agreed to (i) consent to the consummation of the Luby's Transaction, (ii) consent to our ownership of the Notes issued by the buyer in the Luby's Transaction, (iii) consent to our ownership of the preferred stock issued by the buyer in the Luby's Transaction, (iv) agreed to waive the prepayment requirement as regards the non-cash proceeds from the Luby's Transaction, (v) agreed to waive any
56
default of event of default that may have arisen in connection with the Luby's Transaction, and (vi) agreed to waive the requirement to physically deliver the buyer's notes to MSD and clarifying that the buyer's notes and preferred stock and related warrant form part of the collateral for the Credit Agreement.
Borrowings under the 2018 Revolver, 2018 Delayed Draw Term Loan, and 2018 Term Loan will bear interest at the three-month LIBORthree month London InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest is payable quarterly and accrues daily. Under the terms of the 2018 Credit Agreement, the maximum amount of interest payable, based on the aggregate principal amount of $80$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 $6.4approximately $3.2 million is recorded in restricted cash and cash equivalents on our consolidated balance sheet and is not available for other purposes. LIBOR is set to terminatestatement of net assets in December 2021. We expect that to agree to a replacement rate with MSD prior toliquidation.
As of August 25, 2021, the LIBOR termination.
As of August 25, 2021, we had approximately no principal payments due under the Credit Facility in the next 12 months.
Indebtedness under the 2018 Credit Facility is secured by a security interest in, among other things, all of the Company’s present and future personal property 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. All amounts owing byUnder the Company under the 2018 Credit Facility, 80% of net proceeds from asset sales, including real property sales, are guaranteed byapplied as mandatory prepayments of our Term Loan. Mandatory prepayments are not subject to the subsidiaries of the Company.
make whole premium described above.
The 2018 Credit Facility contains customary covenants and restrictions on the Company’sour ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and contains customary events of default. Specifically, among other things, the Company iswe are required to maintain minimum Liquidity (as defined in the 2018 Credit Agreement) of $3.0 million as of the last day of each fiscal quarter and a minimum Asset Coverage Ratio (as defined in the 2018 Credit Agreement) of 2.50 to 1.00. As of August 28, 2019, the Company was25, 2021, we were in full compliance with all covenants with respect to the 2018 Credit Facility.
All amounts owing by the Company under the Credit Facility are guaranteed by the subsidiaries of the Company.
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. See Note 2. Subsequent Events.
As of August 28, 2019,25, 2021, we had no amounts due within the next 12 months under the 2018 Credit Facility due to principal repayments in excess of the required minimum. As of August 28, 2019 we had $1.3approximately $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 $0.1 millionapproximately $7 thousand in other indebtedness.
Interest Expense
Total interest expense incurred for the 12 week period ended November 18, 2020 and the fiscal 2019 and 2018year 2020 was $6.0$1.2 million and $3.3$6.4 million, respectively. No interest expense was allocated to discontinued operations in fiscal 2019 or 2018. Noand no interest was capitalized on properties in fiscal 2019 or 2018.either period.
Note 13.15. Impairment of Long-Lived Assets, Store Closings, Discontinued Operations and Property Held for Sale
Impairment of Long-Lived Assets and Store Closings
We periodically evaluated our intangible assets, primarily the Fuddruckers trademarks and franchise agreements, to determine if events or changes in circumstances such as economic or market conditions indicated that the carrying amount of the assets may not be recoverable. We analyzed historical cash flows of operating locations to determine trends that would indicate a need for impairment. We also analyzed royalties and collectability from our franchisees to determine if there are trends that would indicate a need for impairment. Due to the effects of the COVID-19 pandemic on our operations, we identified a triggering event in the third quarter of fiscal 2020 and determined that no impairment provision was necessary.
For assets held for use, the Company estimateswe estimated future cash flows using assumptions based on possible outcomes of the areas analyzed. If the estimated undiscounted future cash flows arewere less than the carrying value of the location’s assets, the Company recordswe recorded an impairment loss based on an estimate of discounted cash flows. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, requirerequired management’s subjective judgments. Assumptions and estimates used includeincluded operating results, changes in working capital, discount rate, growth rate, anticipated net proceeds from disposition of the property and if applicable, lease terms. The span of time for which future cash flows are estimated iswas 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 cancould vary within a wide range of outcomes. The Company considersWe considered the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss iswas then based on the fair value of the asset as determined by discounted cash flows.
The Company recognized the following impairment charges and gains on asset disposals to income from operations:
| 12 Week Period Ended | Fiscal Year Ended | ||||||||||||||||||
Fiscal Year Ended | November 18, 2020 | August 26, 2020 | |||||||||||||||||
| August 28, 2019 | August 29, 2018 | (In thousands, except per share data) | |||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||
| Provision for asset impairments and restaurant closings | $ | 5,603 | $ | 8,917 | |||||||||||||||
| Net gain on disposition of property and equipment | (12,832 | ) | (5,357 | ) | |||||||||||||||
| Net provision for (gain on) asset impairments and restaurant closings | Net provision for (gain on) 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) | ||||||||||||||||
| Total | $ | (7,229 | ) | $ | 3,560 | Total | $ | 32 | $ | (1,364) | |||||||||
| Effect on EPS: | Effect on EPS: | ||||||||||||||||||
| Basic | $ | 0.24 | $ | (0.12 | ) | Basic | $ | — | $ | 0.05 | |||||||||
| Assuming dilution | $ | 0.24 | $ | (0.12 | ) | Assuming dilution | $ | — | $ | 0.05 | |||||||||
The approximate $5.6$0.1 million impairment chargegain on asset impairments and restaurant closings in fiscal 2019the 12 week period ended November 18, 2020 is primarily related to the $0.7 million net gain on the termination of 7 leases for locations where we permanently ceased operations and negotiated buyouts of the leases. partially offset by the write off of $0.6 million of right-of-use assets impaired at nine propertyfor 1 of our leased locations where we permanently ceased operations during the period.
The $10.2 million provision for asset impairments and restaurant closings in fiscal 2020 is primarily related to the write off of $5.4 million of right-of-use assets for 24 of our leased locations where we permanently ceased operations during the period, impairment losses of $4.8 million on 24 of our restaurant locations and $0.3 million on the remaining goodwill at one property locations, seven properties heldrelated to our Cheeseburger in Paradise brand. $1.2 million for sale written down to their fair value, certain surplus equipment written down to fair value, and an impairment to a joint venture investment,as well as $1.8 million of store closing expenses. These losses were partially offset by a$3.3 million net decrease ingain on the reservetermination of 17 leases for restaurant closingslocations where we permanently ceased operations and negotiated buyouts of $0.2 million.
the leases. See Abandoned Lease Facilities - Liability for Store Closing section of this Note 15.
The $12.8$11.6 million net gain on disposition of property and equipment in fiscal 20192020 is primarily related to the $13.2$8.4 million gaingains on the sales of 7 previously held for sale of two properties discussed below,and $3.9 million gains on 2 previously held for use properties, partially offset by routine asset retirements at three locations.retirements.
58
Discontinued Operations
As a result of the first quarter fiscal 2010 adoption of the Company’s Cash Flow Improvement and Capital Redeployment Plan, the Company reclassified 24 Luby’s Cafeteriascafeterias to discontinued operations. AsUnder the going concern basis of August 28, 2019, oneaccounting, 1 location remainsremained held for sale.
sale at November 18, 2020.
The following table sets forth the assets and liabilities for all discontinued operations:
| August 26, 2020 | |||||
| Property and equipment | $ | 1,715 | |||
| Assets related to discontinued operations—non-current | $ | 1,715 | |||
| Accrued expenses and other liabilities | 17 | ||||
| Liabilities related to discontinued operations—current | $ | 17 | |||
| August 28, 2019 | August 29, 2018 | ||||||
| (In thousands) | |||||||
| Property and equipment | $ | 1,813 | $ | 1,813 | |||
| Deferred tax assets | — | — | |||||
| Assets related to discontinued operations—non-current | $ | 1,813 | $ | 1,813 | |||
| Deferred income taxes | $ | — | $ | — | |||
| Accrued expenses and other liabilities | 14 | 14 | |||||
| Liabilities related to discontinued operations—current | $ | 14 | $ | 14 | |||
| Other liabilities | $ | — | $ | 16 | |||
| Liabilities related to discontinued operations—non-current | $ | — | $ | 16 | |||
Fiscal Year Ended | ||||||||
| August 28, 2019 | August 29, 2018 | |||||||
| (In thousands, except locations) | ||||||||
| Sales | $ | — | $ | — | ||||
| Pretax loss | $ | (7 | ) | $ | (80 | ) | ||
| Income tax benefit on discontinued operations | $ | — | $ | (534 | ) | |||
| Loss on discontinued operations | $ | (7 | ) | $ | (614 | ) | ||
| Discontinued locations closed during the period | — | — | ||||||
Fiscal Year Ended | ||||||||
| August 28, 2019 | August 29, 2018 | |||||||
| (In thousands, except per share data) | ||||||||
| Discontinued operating losses | $ | (7 | ) | $ | (21 | ) | ||
| Impairments | — | (59 | ) | |||||
| Gains | — | — | ||||||
| Net loss | $ | (7 | ) | $ | (80 | ) | ||
| Income tax benefit (expense) from discontinued operations | — | (534 | ) | |||||
| Loss from discontinued operations, net of income taxes | $ | (7 | ) | $ | (614 | ) | ||
| Effect on EPS from discontinued operations—decrease—basic | $ | 0.00 | $ | (0.02 | ) | |||
year ended August 26, 2020 were not significant.
Property Held for Sale
Under the going concern basis of accounting, property held for sale included unimproved land, closed restaurant properties and related equipment for locations not classified as discontinued operations. The specific assets arewere valued at the lower of net depreciable value or net realizable value. The Company actively markets all locations classified as property held for sale.
At August 28, 2019,26, 2020, the Company had 1410 owned properties recorded at $16.5$11.2 million in property held for sale.
| Balance as of August 30, 2017 | $ | 3,372 | |
| Disposals | (7,916 | ) | |
| Net transfers to property held for sale | 27,075 | ||
| Adjustment to fair value | (3,062 | ) | |
| Balance as of August 29, 2018 | $ | 19,469 | |
| Disposals | (6,036 | ) | |
| Net transfers to property held for sale | 3,055 | ||
| Adjustment to fair value | — | ||
| Balance as of August 28, 2019 | $ | 16,488 | |
Abandoned Leased Facilities - ReserveLiability for Store Closing
As of August 28, 2019, the Company25, 2021 and August 26, 2020, we classified eleven7 and 18 leased restaurants locations in Arizona, Florida, Illinois, Maryland, Texas, and Virginia as abandoned. Although the Company remainswe remain obligated under the terms of the leases for the rent and other costs that may be associated with the leases, the Company has ceasedwe decided to cease operations and haswe have no foreseeable plans to occupy the spaces as a company restaurant in the future. Therefore,The total liability represents the Company recorded a liability and a corresponding charge to earnings, in provision for asset impairments and restaurant closings, equal topresent value of the estimated total amount of rent and other direct costs (such as common area costs, property taxes, and insurance allocated by the landlord) for the remaining period of time the properties will be unoccupied pluslease term less the present value calculated using a credit-adjusted risk free rate, of the estimated amount by which the rent paid by the Companyany sublease income expected to the landlord exceeds any rent paid to the Company by a tenant under a sublease over the remaining period of the lease terms. be collected. During fiscal 2021 we settled and terminated 11 abandoned leases.
The liability is adjusted for changes in estimates and when a final settlement is reached with and paid to the lessor. For fiscal years 2019 and 2018 net charges (credits) to provision for assets impairments and store closings related to theour abandoned lease facilitiesleases were $(0.2) million and $1.3 million, respectively. The accrued lease termination liability was $1.4 million and $2.0 million as of August 28, 2019 and August 29, 2018, respectively.follows (in thousands):
| August 25, 2021 | August 26, 2020 | |||||||
| (Liquidation Basis) | (Going Concern Basis) | |||||||
| Short-term lease liability | N/A | $ | 365 | |||||
| Long-term lease liability | N/A | 2,348 | ||||||
| Operating lease liabilities | $ | 1,656 | 2,713 | |||||
| Accrued expenses and other liabilities | 1,381 | 2,088 | ||||||
| Total | $ | 3,037 | $ | 4,801 | ||||
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Note 14.16. Commitments and Contingencies
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements, except for operating leases for the Company’s corporate office, facility service warehouse, and certain restaurant properties.arrangements.
Claims
From time to time, the Company is subject to various other private lawsuits, administrative proceedings and claims that arise in the ordinary course of its business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to issues common to the restaurant industry. The Company currently believes that the final disposition of these types of lawsuits, proceedings, and claims will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity. It is possible, however, that the Company’s future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings, or claims.
Note 15. Operating Leases
| Fiscal Year Ending: | (In thousands) | ||
| August 26, 2020 | $ | 8,841 | |
| August 25, 2021 | 7,155 | ||
| August 31, 2022 | 5,643 | ||
| August 30, 2023 | 4,410 | ||
| August 28, 2024 | 3,768 | ||
| Thereafter | 10,312 | ||
| Total minimum lease payments | $ | 40,129 | |
| Year Ended | ||||||||
| August 28, 2019 | August 29, 2018 | |||||||
| (In thousands, except percentages) | ||||||||
| Minimum rent-facilities | $ | 9,218 | $ | 10,584 | ||||
| Contingent rentals | 75 | 77 | ||||||
| Minimum rent-equipment | 761 | 801 | ||||||
| Total rent expense (including amounts in discontinued operations) | $ | 10,054 | $ | 11,462 | ||||
We have two2 active share-based stock plans, the Luby's Incentive Stock Plan, as amended and restated effective December 5, 2015 (the "Employee Stock Plan") and the Nonemployee Director Stock Plan.Plan, as amended and restated effective February 9, 2018. Both plans authorize the granting of stock options, restricted stock, and other types of awards consistent with the purpose of the plans.
Of the 4.1 million shares approved for issuance under the Employee Stock Plan (which amount includes shares authorized under the original plan and shares authorized pursuant to the amended and restated plan effective as of December 5, 2015), 7.37.4 million options and restricted stock units were granted, 4.35.5 million options and restricted stock units were canceled or expired and added back into the plan, since the plans inception in 2005. Approximately 1.12.2 million shares remain available for future issuance as of August 28, 2019.25, 2021. Compensation cost for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses for the 12 week period ended November 18, 2020 and fiscal 2019year 2020 was $25 thousand and 2018 was $0.3 million, and $0.9 million, respectively.
Stock Options
Stock options granted under either the Employee Stock Plan or the Nonemployee Director Stock Plan have exercise prices equal to the market price of the Company’s common stock at the date of the grant. The market price under the Employee Stock Plan is the closing price at the date of the grant. The market price under the Nonemployee Director Plan is the average of the high and the low price on the date of the grant.
Option awards under the Nonemployee Director Stock Plan generally vest 100% on the first anniversary of the grant date and expire ten years from the grant date. No options were granted under the Nonemployee Director Stock Plan in fiscal 20192021 or 2018,2020. No options to purchase shares remain outstanding under this plan, as of August 28, 2019.
25, 2021.
Options granted under the Employee Stock Plan generally vest 50% on the first anniversary of grant date, 25% on the second anniversary of the grant date and 25% on the third anniversary of the grant date, with all options expiring ten years from the grant date. AllNo options granted in fiscal 2018, and 2017 were granted under the Employee Stock Plan. No options were grantedPlan in fiscal 2019.2021 or 2020. Options to purchase 1,387,412401,690 shares at options prices from $2.82 to $5.95$4.89 per share remain outstanding as of August 28, 2019.25, 2021.
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The Company has segregated option awards into two homogeneous groups for the purpose of determining fair values for its options because of differences in option terms and historical exercise patterns among the plans. Valuation assumptions arewere determined separately for the two groups which represent, respectively, the Employee Stock Plan and the Nonemployee Director Stock Option Plan. The assumptions are as follows:
•The Company estimated volatility using its historical share price performance over the expected life of the option. Management believes the historical estimated volatility is materially indicative of expectations about expected future volatility.
•The Company usesused an estimate of expected lives for options granted during the period based on historical data.
•The risk-free interest rate iswas based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.
•The expected dividend yield iswas based on the Company’s current dividend yield and the best estimate of projected dividend yield for future periods within the expected life of the option.
A summary of the Company’s stock option activity for fiscal 20192021 and 20182020 is presented in the following table:
| Shares Under Fixed Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
| (Years) | (In thousands) | ||||||||||||
| Outstanding at August 30, 2017 | 1,345,916 | $ | 4.76 | 6.6 | $ | 178 | |||||||
| Granted | 449,410 | 2.82 | — | — | |||||||||
| Cancelled | — | 0.00 | — | — | |||||||||
| Forfeited | (97,111 | ) | 4.80 | — | — | ||||||||
| Expired | (44,801 | ) | 7.89 | — | — | ||||||||
| Outstanding at August 29, 2018 | 1,653,414 | $ | 4.10 | 6.4 | $ | — | |||||||
| Granted | — | 0.00 | — | — | |||||||||
| Forfeited | (178,700 | ) | 3.68 | — | — | ||||||||
| Expired | (87,302 | ) | 5.54 | — | — | ||||||||
| Outstanding at August 28, 2019 | 1,387,412 | $ | 4.06 | 5.7 | $ | — | |||||||
| Exercisable at August 28, 2019 | 1,217,957 | $ | 4.19 | 5.4 | $ | — | |||||||
| Shares Under Fixed Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||
| (Per share) | (In Years) | (In thousands) | |||||||||||||||||||||
| Outstanding at August 28, 2019 | 1,387,412 | $ | 4.06 | 5.7 | $ | — | |||||||||||||||||
| Forfeited / Cancelled | (366,911) | 4.31 | — | — | |||||||||||||||||||
| Expired | (160,000) | 3.44 | — | — | |||||||||||||||||||
| Outstanding at August 26, 2020 | 860,501 | $ | 4.07 | 5.0 | $ | — | |||||||||||||||||
| Exercised | (138,289) | 2.82 | — | 115 | |||||||||||||||||||
| Forfeited / Cancelled | (301,991) | 4.52 | — | — | |||||||||||||||||||
| Expired | (18,531) | 5.37 | — | — | |||||||||||||||||||
| Outstanding at August 25, 2021 | 401,690 | $ | 4.09 | 4.2 | $ | 138 | |||||||||||||||||
| Exercisable at August 25, 2021 | 401,690 | $ | 4.09 | 4.2 | $ | 138 | |||||||||||||||||
The intrinsic value for stock options is defined as the difference between the grant price and market value at the exercise date options exercised or August 28, 201925, 2021 for options outstanding and the grant price.
options exercisable.
At August 28, 2019,25, 2021, there was $0.1 million of totalno unrecognized compensation cost related to unvestedstock options thatas all outstanding stock options are expected to be recognized over a weighted-average period of 1.1 years.vested.
We issued 138,289 new shares of common stock during fiscal 2021 for the exercise of stock options.
Restricted Stock Units
Grants of restricted stock units consist of the Company’s common stock and generally vest after three years. All restricted stock units are cliff-vested. Restricted stock units are valued at market price of the Company’s common stock at the date of grant. The market price under the Employee Stock Plan is the closing price at the date of the grant. The market price under the Nonemployee Director Plan is the average of the high and the low price on the date of the grant. In July 2021 our Board of Directors approved the early vesting of all unvested restricted stock units held by members of the Board of Directors.
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A summary of the Company’s restricted stock unit activity during fiscal years 20182020 and 20192021 and is presented in the following table:
| Restricted Stock Units | Weighted Average Fair Value | Weighted- Average Remaining Contractual Term | ||||||||||||||||||||||||
Restricted Stock Units | Weighted Average Fair Value | Weighted- Average Remaining Contractual Term | (Per share) | (In years) | ||||||||||||||||||||||
| (Per share) | (In years) | |||||||||||||||||||||||||
| Unvested at August 30, 2017 | 404,364 | $ | 5.23 | 1.9 | ||||||||||||||||||||||
| Unvested at August 28, 2019 | Unvested at August 28, 2019 | 274,009 | $ | 3.39 | 1.2 | |||||||||||||||||||||
| Granted | 244,748 | 2.83 | — | Granted | 65,236 | 2.27 | — | |||||||||||||||||||
| Vested | (99,495 | ) | 4.42 | — | Vested | (152,139) | 3.96 | — | ||||||||||||||||||
| Forfeited | (32,326 | ) | 3.87 | — | Forfeited | (13,298) | 2.82 | — | ||||||||||||||||||
| Unvested at August 29, 2018 | 517,291 | $ | 3.79 | 1.8 | ||||||||||||||||||||||
| Granted | 4,410 | 1.15 | — | |||||||||||||||||||||||
| Unvested at August 26, 2020 | Unvested at August 26, 2020 | 173,808 | $ | 2.57 | 2.0 | |||||||||||||||||||||
| Vested | (153,757 | ) | 4.66 | — | Vested | (168,572) | 2.59 | — | ||||||||||||||||||
| Forfeited | (93,935 | ) | 3.41 | — | ||||||||||||||||||||||
| Unvested at August 28, 2019 | 274,009 | $ | 3.39 | 1.2 | ||||||||||||||||||||||
| Unvested at August 25, 2021 | Unvested at August 25, 2021 | 5,236 | $ | 1.92 | 1.1 | |||||||||||||||||||||
At August 28, 2019,25, 2021, there was $0.2 million$3 thousand of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 1.21.1 years.
Performance Based Incentive Plan
The 2018 TSR Performance Based Incentive Plan provides(the "2018 TSR Plan") provided for a specified number of shares of common stock under the Employee Stock Plan based on the total shareholder return ranking compared to a selection of peer companies over a three-year cycle. The Fair Valuegrant date fair value of the 2018 TSR Plan has beenwas determined based on a Monte Carlo simulation model for the three-year period.a period of three years. The target number of shares for distribution at 100% of the plan is 373,294.award was 373,294 shares on the grant date. The 2018 TSR Performance Based Incentive Plan iswas accounted for as an equity award since the Plan providesprovided for a specified number of shares. The expense for this Plan year iswas amortized over the three-year period based on 100% target award.
The measurement period ended on August 26, 2020. Based on our total shareholder return ranking, no shares were vested and distributed.
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.
| Units | Weighted Average Fair Value | |||||
| (Per share) | ||||||
| Unvested at August 30, 2017 | — | — | ||||
| Granted | 561,177 | 3.33 | ||||
| Vested | (187,883 | ) | 2.64 | |||
| Forfeited | — | — | ||||
| Unvested at August 29, 2018 | 373,294 | 3.68 | ||||
| Granted | — | — | ||||
| Vested | — | — | ||||
| Forfeited | (106,851 | ) | 3.68 | |||
| Unvested at August 28, 2019 | $ | 266,443 | 3.68 | |||
Restricted Stock Awards
Under the Nonemployee Director Stock Plan, directors are grantedreceived grants of restricted stock in lieu of cash payments, for all or a portion of their compensation as directors. Directors may receivereceived a 20% premium of additional restricted stock by opting to receive stock over a minimum required amount of stock, in lieu of cash. The number of shares granted iswas valued at the average of the high and low price of the Company’s stock at the date of the grant. Restricted stock awards vest when granted because they are granted in lieu of a cash payment. However, directors are restricted from selling their shares until after the third anniversary of the date of the grant. As of October 1, 2020, there are no shares available for issuance under the Non-employee Director Stock Plan and directors compensation subsequent to that date is being paid in cash.
Cash and Restricted Share Bonus Plan
On August 12 2020, the Board of Directors approved a bonus opportunity agreement by which 6 members of management, including the Chief Operating Officer, the Chief Financial Officer and the Chief Accounting Officer are eligible to receive both a cash bonus and a restricted stock award bonus (collectively, the "retention awards"). The retention awards are intended to retain certain key employees in their roles with the Company and to carry out the Plan of Dissolution. A portion of the retention awards is earned for each of the closing of the sale of (1) our CCS business line, (2) the Fuddruckers business line and (3) 30 or more of our Luby's cafeterias (each being a "Triggering Event"). The cash bonus will be paid on the next payroll cycle following such Triggering Event. The restricted stock award will be considered earned as of such Triggering Event and shall vest on the 1st anniversary of the Triggering Event, unless the individual's employment with us is terminated prior to the restriction lapsing. As of August 25, 2021, one member of management had resigned and the bonus opportunity agreement was terminated for that individual.
The total number of restricted stock issued under the bonus opportunity (after the forfeiture described above) was 103,000 shares, of which 36,000 shares are considered earned as of the July 28, 2021 closing of the sale of the Fuddruckers brand and franchise business. The grant date for the restricted stock award was August 25, 2020 and the grant date fair value was $139 thousand, based on the average share price of our common stock on the grant date of $1.095. The total cash bonus available to
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be earned (after the forfeiture described above) was $154 thousand., of which $54 thousand was paid in the fourth quarter of fiscal 2021 upon the closing of the sale of the Fuddruckers brand and franchise business.
Supplemental Executive Retirement Plan
The Company has an unfunded Supplemental Executive Retirement Plan (“SERP”). In 2005, the Board of Directors voted to amend the SERP and suspend the further accrual of benefits and participation. The net benefit recognized for the SERP for the 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.
Nonemployee Director Phantom Stock Plan
The Company has a Nonemployee Director Phantom Stock Plan (“Phantom Stock Plan”). Authorized shares ( shares) under the Phantom Stock Plan were fully depleted in early fiscal 2003; since that time, no deferrals, incentives or dividends have been credited to phantom stock accounts. As participants cease to be directors, their phantom shares are converted into an equal number of shares of common stock and issued from the Company’s treasury stock. As of August 28, 2019, 17,80125, 2021, 2,453 phantom shares remained outstanding and unconverted under the Phantom Stock Plan.
401(k) Plan
The Company has a voluntary 401(k) employee savings plan to provide substantially all employees of the Company an opportunity to accumulate personal funds for their retirement. The Company 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.
Severance Agreements
On August 12, 2020, the Board of Directors approved severance agreements for 8 members of management, including the Chief Operating Officer, the Chief Financial Officer and the Chief Accounting Officer. The agreements provide for a separation payment upon (1) termination by the Company of employment without cause (as defined in the severance agreement), (2) resignation for Good Reason (as defined in the Appendix to the severance agreement), in either case the individual ceases to be an employed by us or a successor to all or part of our business. The separation payment will not be paid if the individual is offered, but declines comparable employment with a successor. The separation payment is calculated as a percentage of the individual's annual base salary, ranging from 25% to 100%. Two members of management have since resigned from the Company and their severance agreements were terminated. The total amount of severance that would be paid to the 6 remaining members of management with severance agreements as of August 25, 2021 is $871 thousand.
Note 17.18. Related Parties
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.
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.
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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.
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 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.
Fuddruckers Franchise
Key Management Personnel
June 2, 2021, and for the filing of our Annual Report on Form 10-K for the fiscal year ended August 15, 2021, respectively.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
Note 18.19. Common Stock
At August 28, 2019,25, 2021, the Company had 500,000 shares of common stock reserved for issuance upon the exercise of outstanding stock options.
Treasury Shares
In February 2008, the Company acquired 500,000 treasury shares for $4.8 million.
Note 19.20. Earnings Per Share
A reconciliation of the numerators and denominators of basic earnings per share and earnings per share assuming dilution is shown in the table below:
| 12 Week Period Ended | Fiscal Year Ended | ||||||||||
| November 18, 2020 | August 26, 2020 | ||||||||||
| (In thousands, except per share data) | |||||||||||
| Numerator: | |||||||||||
| Loss from continuing operations | $ | (3,003) | $ | (29,421) | |||||||
| Net Loss | $ | (3,019) | $ | (29,450) | |||||||
| Denominator: | |||||||||||
| Denominator for basic earnings per share—weighted-average shares | 30,662 | 30,294 | |||||||||
| Effect of potentially dilutive securities: | |||||||||||
| Employee and non-employee stock options | — | — | |||||||||
| Denominator for earnings per share assuming dilution | 30,662 | 30,294 | |||||||||
| Loss from continuing operations: | |||||||||||
| Basic | $ | (0.10) | $ | (0.97) | |||||||
Assuming dilution (a) | $ | (0.10) | $ | (0.97) | |||||||
| Net loss per share: | |||||||||||
| Basic | $ | (0.10) | $ | (0.97) | |||||||
Assuming dilution (a) | $ | (0.10) | $ | (0.97) | |||||||
Fiscal Year Ended | ||||||||
| August 28, 2019 | August 29, 2018 | |||||||
| (In thousands, except per share data) | ||||||||
| Numerator: | ||||||||
| Loss from continuing operations | $ | (15,219 | ) | $ | (32,954 | ) | ||
| Net Loss | $ | (15,226 | ) | $ | (33,568 | ) | ||
| Denominator: | ||||||||
| Denominator for basic earnings per share—weighted-average shares | 29,786 | 29,901 | ||||||
| Effect of potentially dilutive securities: | ||||||||
| Employee and non-employee stock options | — | — | ||||||
| Denominator for earnings per share assuming dilution | 29,786 | 29,901 | ||||||
| Loss from continuing operations: | ||||||||
| Basic | $ | (0.51 | ) | $ | (1.10 | ) | ||
Assuming dilution (a) | $ | (0.51 | ) | $ | (1.10 | ) | ||
| Net loss per share: | ||||||||
| Basic | $ | (0.51 | ) | $ | (1.12 | ) | ||
Assuming dilution (a) | $ | (0.51 | ) | $ | (1.12 | ) | ||
(a) Potentially dilutive shares, not included in the computation of net incomeloss per share because to do so would have been anti-dilutive, totaled 63,000115,515 shares infor the 12 week period ended November 18, 2020 and 76,572 shares for the fiscal 2019 and no shares in fiscal 2018.year ended August 26, 2020. Additionally, stock options with exercise prices exceeding market close prices that were excluded from the computation of net income per share amounted to 1,387,000849,970 shares infor the 12 week period ended November 18, 2020and 860,501 shares for the fiscal 2019and 1,653,000 shares in fiscal 2018.year ended August 26, 2020.
Note 20.21. Shareholder Rights Plan
The Board of Directors adopted the shareholder rights plan in view of the concentrated ownership of Luby’s common stock as a means to ensure that all of Luby’s stockholders are treated equally. The shareholder rights plan is designed to limit the ability of any person or group to gain control of Luby’s without paying all of Luby’s stockholders a premium for that control. The shareholder rights plan was not adopted in response to any specific takeover bid or other plan or proposal to acquire control of Luby’s.
If a person or group acquires 10% or more of the outstanding shares of Luby’s common stock (including in the form of synthetic ownership through derivative positions), each right will entitle its holder (other than such person or members of such group) to purchase, for $12.00, a number of shares of Luby’s common stock having a then-current market value of twice such price. The shareholder rights plan exempts any person or group owning 10% or more (35.5% or more in the case of Harris J. Pappas, Christopher J. Pappas and their respective affiliates and associates) of Luby’s common stock immediately prior to the adoption of the shareholder rights plan. However, the rights will be exercisable if any such person or group acquires any additional shares of Luby’s common stock (including through derivative positions) other than as a result of equity grants made by Luby’s to its directors, officers or employees in their capacities as such.
Prior to the acquisition by a person or group of beneficial ownership of 10% or more of the outstanding shares of Luby’s common stock, the rights are redeemable for 1 cent$0.01 per right at the option of Luby’s Board of Directors.
The dividend distribution was made on February 28, 2018 to stockholders of record on that date. Unless and until a triggering event occurs and the rights become exercisable, the rights will trade with shares of Luby’s common stock.
Luby’s financial condition, operations, and earnings per share waswere not affected by the adoption of the shareholder rights plan.
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Quarter Ended | |||||||||||||||
| August 28, 2019 | June 6, 2019 | March 14, 2019 | December 20, 2018 | ||||||||||||
| (84 days) | (84 days) | (84 days) | (112 days) | ||||||||||||
| (In thousands, except per share data) | |||||||||||||||
| Restaurant sales | $ | 62,434 | $ | 65,611 | $ | 65,370 | $ | 91,098 | |||||||
| Franchise revenue | 1,563 | 1,482 | 1,421 | 2,224 | |||||||||||
| Culinary contract services | 7,278 | 7,571 | 7,543 | 9,496 | |||||||||||
| Vending revenue | 88 | 102 | 90 | 99 | |||||||||||
| Total sales | $ | 71,363 | $ | 74,766 | $ | 74,424 | $ | 102,917 | |||||||
| Loss from continuing operations | (9,081 | ) | (5,295 | ) | 6,640 | (7,483 | ) | ||||||||
| Loss from discontinued operations | 12 | (6 | ) | (8 | ) | (5 | ) | ||||||||
| Net loss | $ | (9,069 | ) | $ | (5,301 | ) | $ | 6,632 | $ | (7,488 | ) | ||||
| Net loss per share: | |||||||||||||||
| Basic | $ | (0.30 | ) | $ | (0.18 | ) | $ | 0.22 | $ | (0.25 | ) | ||||
| Assuming dilution | $ | (0.30 | ) | $ | (0.18 | ) | $ | 0.22 | $ | (0.25 | ) | ||||
Costs and Expenses (as a percentage of restaurant sales) | |||||||||||||||
| Cost of food | 28.5 | % | 28.2 | % | 27.8 | % | 27.5 | % | |||||||
| Payroll and related costs | 38.8 | % | 38.1 | % | 37.8 | % | 37.9 | % | |||||||
| Other operating expenses | 18.4 | % | 17.5 | % | 17.5 | % | 18.1 | % | |||||||
| Occupancy costs | 6.5 | % | 6.1 | % | 6.4 | % | 6.4 | % | |||||||
| Quarter Ended | |||||||||||||||
| August 29, 2018 | June 6, 2018 | March 14, 2018 | December 20, 2017 | ||||||||||||
| (91 days) | (84 days) | (84 days) | (112 days) | ||||||||||||
| (In thousands, except per share data) | |||||||||||||||
| Restaurant sales | $ | 75,782 | $ | 77,803 | $ | 74,351 | $ | 104,582 | |||||||
| Franchise revenue | 1,633 | 1,444 | 1,401 | 1,887 | |||||||||||
| Culinary contract services | 6,369 | 6,639 | 5,889 | 6,885 | |||||||||||
| Vending revenue | 119 | 118 | 151 | 143 | |||||||||||
| Total sales | $ | 83,903 | $ | 86,004 | 81,792 | $ | 113,497 | ||||||||
| Loss from continuing operations | (1,858 | ) | (14,133 | ) | (11,461 | ) | (5,502 | ) | |||||||
| Loss from discontinued operations | (6 | ) | (463 | ) | (110 | ) | (35 | ) | |||||||
| Net loss | $ | (1,864 | ) | $ | (14,596 | ) | $ | (11,571 | ) | $ | (5,537 | ) | |||
| Net loss per share: | |||||||||||||||
| Basic | $ | (0.06 | ) | $ | (0.48 | ) | $ | (0.39 | ) | $ | (0.19 | ) | |||
| Assuming dilution | $ | (0.06 | ) | $ | (0.48 | ) | $ | (0.39 | ) | $ | (0.19 | ) | |||
Costs and Expenses (as a percentage of restaurant sales) | |||||||||||||||
| Cost of food | 27.8 | % | 28.6 | % | 28.5 | % | 28.5 | % | |||||||
| Payroll and related costs | 37.5 | % | 37.8 | % | 38.3 | % | 36.5 | % | |||||||
| Other operating expenses | 17.7 | % | 19.3 | % | 19.3 | % | 18.6 | % | |||||||
| Occupancy costs | 6.4 | % | 5.9 | % | 6.3 | % | 6.0 | % | |||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
We have had no disagreements with our accountants on any accounting or financial disclosures.
Item 9A. Controls and Procedures
Evaluation of Disclosure Control and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of August 28, 2019.25, 2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of August 28, 2019,25, 2021, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework-2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, we concluded that our internal control over financial reporting was effective as of August 28, 2019.
25, 2021.
Changes in Internal Control over Financial Reporting
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
DIRECTORS
 | GERALD W. BODZY, 70, was President and owner of Showcase Custom Vinyl Windows and Doors, a manufacturer of residential windows and doors in Houston, Texas, from 2004 until he retired in November 2020. He has been an independent director of the Company since 2016 and serves as Chairman of the Board, a member of Nominating and Corporate Governance Committee, Co-Chair of the Board Special Committee, a member of the Finance and Audit Committee, and a member of the Compensation Committee. From 1990 to 2000, Mr. Bodzy was a Managing Director of Stephens, Inc. where he headed the investment banking firm’s Houston office. From 1979 to 1990, he was employed by Smith Barney, Inc. in New York where he was a Managing Director from 1986 to 1990. From 1976 to 1990, he worked in the real estate group at General Crude Oil Company in Houston. Mr. Bodzy is a former director of Oshman’s Sporting Goods, Benchmark Electronics, and Republic Bankshares of Texas. Mr. Bodzy earned a B.A. Degree in Economics from the University of Texas in 1973 and a J.D. Degree from the University of Texas School of Law in 1976, and is a member of Phi Beta Kappa. Mr. Bodzy serves on the board of the Boys & Girls Clubs of Greater Houston and is Chairman of the Board of the Boys & Girls Clubs of Greater Houston Foundation. Qualifications, Experience, Key Attributes and Skills. Mr. Bodzy has 45 years of experience in business management, investment banking, and investments, including 11 years at Smith Barney and 10 years at Stephens Inc., representing clients in equity and debt offerings and mergers and acquisitions. Most recently, he served 16 years at Showcase Custom Vinyl Windows and Doors. Mr. Bodzy also has significant experience from his service on boards of banks, retail, and manufacturing companies, where he has also served on audit, compensation, and nominating committees. | ||||
 | TWILA DAY, 59, is currently the Vice President and Chief Information Officer for Huntsman Corporation as of November 2018. As CIO, she is accountable for the global technology investments and operations, leading strategic planning, and ensuring compliance with the company covenants and regulatory controls including SOX, cyber security, and Global Data Protection Regulation (GDPR). Prior to Huntsman, from August 2013 until October 2018, Ms. Day was Managing Director, National Practice Lead for Technology Services, and a member of the Executive Technology Advisor Group for Alvarez and Marsal. While at Alvarez and Marsal, she advised companies in the national restaurant, energy, pharmaceutical, construction, and engineering/manufacturing sectors providing them with objective and independent advice on technology strategies, process improvement, IT initiatives, post-merger integration and security risk management. In 1992, Ms. Day began working for Sysco Corporation as a programmer/analyst and advanced through various Information Technology positions where she ultimately became Chief Information Officer in January 2006 and held that role through June 2013. While at Sysco, she focused on driving strategic change initiatives that intersected business transformation with information technology solutions. Ms. Day also served as a member of Sysco’s enterprise risk management executive committee as the risk owner for data protection, cyber security, and information technology availability. Ms. Day graduated from Our Lady of Lake University in 1989 with a Bachelor of Arts degree in Business Management. Ms. Day has been an independent director of the Company since 2019 and serves as Vice-Chair of the Board, Chair of the Finance and Audit Committee, and is a member of the Compensation Committee, a member of the Nominating and Governance Committee and a member of the Special Committee. Qualifications, Experience, Key Attributes, and Skills. Ms. Day has more than 30 years of experience connecting Information Technology with the business. With her broad technology expertise, she has served as a trusted advisor to executives translating technology into “plain English” and helping them ensure their technology investments create value and competitive advantage. | ||||
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 | JOE C. McKINNEY, 74, was Vice-Chairman of Broadway National Bank, a locally owned and operated San Antonio-based bank, from October 2002 until his retirement in March 2020. He formerly served as Chairman of the board of directors and Chief Executive Officer of JPMorgan Chase Bank-San Antonio from November 1987 until his retirement there in March 2002. Mr. McKinney graduated from Harvard University in 1969 with a Bachelor of Arts in Economics, and he graduated from the Wharton School of the University of Pennsylvania in 1973 with a Master of Business Administration in Finance. Mr. McKinney has been an independent director of the Company since January 2003 and is a member of the Finance and Audit Committee, a member of the Nominating and Corporate Governance Committee, a member of the Compensation Committee, and a co-Chair of the Special Committee. He is a former director of Broadway National Bank, Broadway Bancshares, Inc., New York REIT Liquidating LLC, a successor to New York REIT, Inc., a publicly traded real estate investment trust, USAA Real Estate Company; US Industrial REIT I, II, and III; US Global Investors Funds; and Prodigy Communications Corporation. Qualifications, Experience, Key Attributes, and Skills: Mr. McKinney has over 45 years of experience in banking, finance, and management from his distinguished career in banking, culminating in a tenure of over 14 years as Chairman of the Board and Chief Executive Officer of JPMorgan Chase Bank-San Antonio and 18 years as Vice-Chairman of Broadway National Bank. He further brings significant board experience from his service on over six boards of banks, investment funds, and corporations. | ||||
 | GASPER MIR, III, 74, since his retirement as a principal owner of the professional services firm MFR Group, Inc. (formerly known as MFR P.C.) (“MFR”), which he founded in 1988, Mr. Mir has served as an independent business consultant. From 2008 and until his retirement, he served as MFR’s Chief Administrative Officer, and prior to that his work included financial audit and accounting services for clients in the retail industry. From January 2003 through January 2008, Mr. Mir took a leave of absence from MFR and served as Executive General Manager of Strategic Partnerships for the Houston Independent School District. From 1969 until 1987, he worked at KPMG LLP, an international accounting and professional services firm, serving as a partner of the firm from 1978 until 1987. Mr. Mir has been an independent director of the Company since January 2002 and is the Chair of the Nominating and Corporate Governance Committee, a member of the Finance and Audit Committee, a member of the Compensation Committee, and a member of the Special Committee. Mr. Mir is also a director of the Galveston-Houston Archdiocese Council of the Society of St. Vincent de Paul and the Houston A+ Challenge. Qualifications, Experience, Key Attributes, and Skills: Mr. Mir has more than 46 years of experience in accounting, finance, and audit from his distinguished tenure at the accounting firms KPMG LLP and MFR. He is an active member of NACD and regularly participates in their professional development conferences. Additionally, Mr. Mir has experience in public relations, government, education, health care and community outreach from his board service on several community-based organizations. | ||||
 | JOHN MORLOCK, 65, is currently working as a consultant of Guzman Y Gomez, a fast food Mexican Kitchen concept with approximately 150 stores in Australia. His main role is to help provide guidance on operations and future U.S. development (there is currently 1 restaurant in the U.S. in Naperville, Illinois). Mr. Morlock was previously Chief Executive Officer of Hale and Hearty for eighteen months where he helped with the successful selling of the company in June of 2019. Prior to that, he served as the Chief Operating Officer of Sbarro, working with company stores as they were converting to a franchise system. From 2002 to 2015 he served as Chief Operating Officer of Potbelly Sandwich Works as they grew from 16 to 450 stores and was instrumental in its initial public offering in 2013. In 1993, Mr. Morlock became a co-owner of Boston Chicken where he served as Senior Vice President of Operations before going on to be its largest franchisee. Following the start of his career in 1977, Mr. Morlock has also held various positions with Steak and Ale restaurants, Grady’s Goodtimes, the first and largest Blockbuster franchise, and Blockbuster corporate. Mr. Morlock has been an independent director of the Company since July 2019, an serves as Chair of the Compensation Committee and is a member of the Special Committee, a member of the Finance and Audit Committee, and a member of the Corporate Governance Committee. Qualifications, Experience, Key Attributes, and Skills: Mr. Morlock has over 40 years of restaurant and retail management experience and has been involved with companies both on the franchise and franchisee side. Further, he has been directly involved in both start-up and turnaround situations in the public and private sector, and he has been a Chief Operating Officer of a public company as well as having served on 4 privately held board of directors. | ||||
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EXECUTIVE OFFICERS
Certain information is incorporatedset forth below concerning the executive officers of the Company, each of whom has been elected to serve until his successor is duly elected and qualified:
Name | Served as Officer Since | Positions with Luby's, Inc. | Age | |||||||||||||||||
| John Garilli | 2021 | Interim President and CEO (since January 2021) | 56 | |||||||||||||||||
| Benjamin T. Coutee | 2007 | Chief Operating Officer (since October 2018); Senior Vice President of Operations (2011 to 2018); Division Vice President, Culinary Services (2007 to 2011) | 55 | |||||||||||||||||
| Eric Montague | 2021 | Interim Chief Financial Officer and Treasurer | 52 | |||||||||||||||||
| Philip J. Rider | 2019 | Chief Accounting Officer and Controller (since April 2020); Vice President - Accounting and SEC Reporting (October 2019 to April 2020) | 63 | |||||||||||||||||
CORPORATE GOVERNANCE
Governance Highlights
The Company remains committed to maintaining sound corporate governance practices, including:
a separate independent chairman and CEO;
a large majority of independent directors; and
regular executive session meetings of non-management directors.
Committees of the Board
The Board currently maintains the following standing committees: Finance and Audit, Nominating and Corporate Governance and Compensation. All committees meet as necessary to fulfill their responsibilities. The Board has directed each committee to consider matters within its areas of responsibility and to make recommendations to the full Board for action on these matters.
Finance and Audit Committee
The Finance and Audit Committee is a standing audit committee established to oversee the Company’s accounting and financial reporting processes and the audit of the Company’s financial statements. Its primary functions are to monitor and evaluate corporate financial plans and performance and to assist the Board in this Item 10monitoring: (1) the integrity of the financial statements of the Company; (2) the review of the Company’s filings; (3) the Company’s compliance with legal and regulatory requirements; (4) the qualifications and independence of the Company’s independent registered public accounting firm; (5) the performance of the Company’s internal audit function and its independent registered public accounting firm; (6) the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures; and (7) the review of the Company’s financial status and plans. Management is responsible for preparing the financial statements, and the independent registered public accounting firm is responsible for auditing those financial statements. The Finance and Audit Committee is directly responsible for the appointment, compensation, retention, and oversight of the work of the Company’s independent registered public accounting firm and the preparation of the Finance and Audit Committee Report below. In addition, the Finance and Audit Committee is responsible for reviewing and approving any related party transactions. A copy of the current Finance and Audit Committee Charter adopted by referencethe Board is available in print to any shareholder upon request and can be found on the Company’s website at www.lubysinc.com. All members of the Finance and Audit Committee are independent directors as described under “Corporate Governance Guidelines-Director Independence” on page 21. The Finance and Audit Committee met 12 times during the last fiscal year.
As of August 25, 2021, the members of the Finance and Audit Committee are: Twila Day (Chair), Joe McKinney, Gasper Mir, III, Gerald W. Bodzy, and John Morlock . The Board determined that portionJoe McKinney, Gasper Mir, III and Gerald W. Bodzy are “audit committee financial experts” as defined in rules of the SEC adopted pursuant to the Sarbanes-Oxley Act of 2002 and each is “independent” as defined in the corporate governance standards of the NYSE.
At least quarterly, members of the Finance and Audit Committee have the opportunity to meet privately with representatives of the Company’s independent registered public accounting firm and with the Company’s internal auditor.
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Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is a standing committee of the Board whose primary functions are: (1) to maintain oversight of the development, structure, performance, and evaluation of the Board; (2) to seek and recommend candidates to fill vacancies on the Board; (3) to review Board and committee performance; (4) to recommend appropriate Board action on renewal terms of service for incumbent members as their terms near completion; (5) to oversee the evaluation of management performance; and (6) to develop and periodically review the Company’s Corporate Governance Guidelines and recommend such changes as may be determined appropriate to the Board so as to reflect the responsibilities of the Board and the manner in which the enterprise should be governed in compliance with best practices. The Nominating and Corporate Governance Committee recommended that the Board decrease its size from nine directors to five directors as of the Annual Meeting, which the Committee believes is an appropriate size for the Board, given the Company’s diminishing size and pending liquidation pursuant to the Company’s Plan of Liquidation and Dissolution A copy of the current Nominating and Corporate Governance Committee Charter is available in print to any shareholder upon request and can be found on the Company’s website at www.lubysinc.com. All members of the Nominating and Corporate Governance Committee are independent directors as described below. The Nominating and Corporate Governance Committee met three times during the last fiscal year.
As of August 25, 2021, the members of the Nominating and Corporate Governance Committee are: Gerald W. Bodzy (Chair), Twila Day, Joe C. McKinney, Gasper Mir, III, and John Morlock.
Compensation Committee
The Compensation Committee is a standing committee of the Board, consisting of independent directors, whose primary functions are: (1) to discharge the Board’s responsibilities relating to compensation of our definitive proxy statementNamed Executive Officers; (2) to administer the Company’s equity-based compensation plans; and (3) to communicate to shareholders the Company’s executive compensation policies and the reasoning behind such policies. The Compensation Committee may delegate its responsibilities to a subcommittee consisting of one or more of its members. The Compensation Committee Charter is available in print to any shareholder upon request and can be found on the Company’s website at www.lubysinc.com. All members of the Compensation Committee are independent directors as described under "Director Independence” on page 83. The Compensation Committee met two times during the last fiscal year.
For information concerning policies and procedures relating to the consideration and determination of executive compensation, including the role of the Compensation Committee, see “Executive Compensation” beginning on page 72.
The members of the Compensation Committee are: John Morlock (Chair), Gerald W. Bodzy, Gasper Mir III, Joe McKinney, and Twila Day.
Special Committee
In September 2019, the Company’s Board of Directors formed a Special Committee comprised of independent directors with the purpose of establishing a strategic review process to identify, examine, and consider a range of strategic alternatives available to the Company with the objective of maximizing shareholder value. The Special Committee has authority to sell the Company’s real estate, subject to certain limitations, and has been overseeing the sale of the Company’s assets in connection with its Plan of Liquidation and Dissolution, including entry into purchase and sale agreements for the 2020 annual meetingsale of shareholders appearing therein under the captions “ElectionFuddruckers franchise operations and the Luby’s Cafeteria Restaurant business in 2021. The Board Special Committee consists of Directors,” “Corporate Governance,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Officers,”the following members: Gerald Bodzy, Twila Day, Joe McKinney, Gasper Mir III, and “Certain RelationshipsJohn Morlock, The Board Special Committee is co-chaired by Messrs. Bodzy and Related Transactions.”McKinney.
Code of Conduct and Ethics for All Directors, Officers, and Employees
Copies of the Policy Guide on Standards of Conduct and Ethics are available in print to shareholders upon request and can be found on the Company’s website at www.lubysinc.com.
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Code of Ethics for the Chief Executive Officer and Senior Financial Officers:
The Board has adopted Supplemental Standards of Conduct and Ethics that apply to the Company’s Chief Executive Officer, Chief Financial Officer, Controller, and all senior financial officers (“Senior Officers’ Code”). The Senior Officers’ Code is designed to deter wrongdoing and to promote, among other things
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
full, fair, accurate, timely, and understandable disclosure in reports and documents that the Company files with, or submits to, the SEC and in other public communications made by the Company;
compliance with all securities laws and other laws, rules and regulations applicable to the Company and the operation of its business;
the prompt internal reporting to an appropriate person or persons identified in the Senior Officers’ Code of violations of the Senior Officers’ Code; and
accountability for adherence to the Senior Officers’ Code.
Waivers of the Senior Officers’ Code for the Chief Executive Officer, Chief Financial Officer, Vice Presidentand Controller are permitted only by a vote of Accounting,the Board or a designated Board committee that will ascertain whether a waiver is appropriate under all the circumstances. The Company intends to disclose any waivers of the Senior Officers’ Code granted to the Chief Executive Officer, Chief Financial Officer, or Controller on the Company’s website at www.lubysinc.com and all senior financial officers. This Policy Guidein print to any shareholder upon request.
Copies of the Senior Officers’ Code are available in print to shareholders upon request and can be found on the Company’s website at www.lubysinc.com.
Item 11. Executive Compensation
The Company’s executive compensation program was designed to enable the Company to execute its business objectives by attracting, retaining, and motivating the highest quality of management talent. The Compensation Committee administers the Company’s stock option, ownership, and any other equity-based compensation plans with respect to our Named Executive Officers.
The following discussion reflects the executive compensation programs and policies in place for fiscal 2021, which reflects the needs of the Company as it pursues the Plan of Liquidation and Dissolution.
Base salaries are typically reviewed annually or biannually by the Compensation Committee to evaluate continuing consistency within the industry and the Supplemental StandardsCompany’s level of performance during the previous fiscal year. No executive officer salaries were filedincreased related to the Company’s fiscal 2020 or fiscal 2021 performance.
In prior years, the Compensation Committee granted performance-based compensation awards, which included non-equity incentive compensation in the form of a cash payment based on the Company’s overall performance, short-term equity incentive awards in the form of stock options and restricted stock, and long-term equity incentive awards in the form of a long-term incentive opportunity settled in Common Stock at the end of a three-year performance period based on the Company’s relative total shareholder return. The Compensation Committee maintains full discretion with regard to annual incentive compensation and may decide to award or withhold an incentive compensation award for an individual based upon overall Company or individual performance during the year. The Compensation Committee did not grant performance-based compensation awards related to fiscal 2020 or fiscal 2021.
The Company’s executive compensation program does not include any pension benefits. None of our Named Executive Officers participate in any retirement or defined benefit plan maintained by the Company other than the Company’s 401(k) retirement plan. The Company has no compensation agreements or benefits which provide for tax gross-ups. Further, executive officers do not receive perquisites or other personal benefits which exceed $10,000 in the aggregate for any executive officer in any fiscal year.
Employment Agreements with Named Executive Officers
Effective January 27, 2021, the Board of Directors appointed John Garilli as exhibitsthe 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 the Quarterly Report on Form 10-Q for the quarter ended December 16, 2020. The Company and WCA also executed
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separate consulting agreements to provide similar services for the filing of the Quarterly Report on Form 10-Q for the quarters ended March 10, 2021 and June 2, 2021, respectively, and for the filing of this Annual Report on Form 10-K10-K.
On August 12, 2020, the Board approved a severance agreement, pursuant to which certain executive officers, including Benjamin T. Coutee, Steven Goodweather, Philip Rider and other specified senior level employees will receive separation payments upon the occurrence of certain events. Pursuant to the severance agreements, each recipient will be eligible to receive a separation payment, based on a percentage of such recipient’s current annual base salary, if such recipient is terminated without Cause (as defined in the severance agreement), resign for Good Reason (as defined in the severance agreement), or are not hired by a successor or buyer of the Company’s assets. The separation payment amount for the Company's named executive officers is calculated as follows: Benjamin T. Coutee—100% of Base Salary; Steven Goodweather—100% of Base Salary; and Philip Rider—83.3% of Base Salary.
The Compensation Committee reviews the Company’s executive compensation program, including advising the Board on and approving the compensation to be paid to the Company’s executive officers. The Company annually provides shareholders with an advisory vote to approve the Company’s executive compensation as required under Section 14A of the Exchange Act. At the Company’s 2021 annual meeting of shareholders, the compensation of our Named Executive Officers was approved with an affirmative vote of approximately 91 percent of the votes cast on the proposal. The Compensation Committee did not make any changes to the Company’s executive compensation program and policies as a result of the 2021 advisory vote on the compensation of our Named Executive Officers.
Bonus Opportunity Agreement
On August 12, 2020, the Board of Directors approved, upon the recommendation of the Compensation Committee, a bonus opportunity agreement, pursuant to which certain executive officers, including Messrs. Coutee, Goodweather, and Rider, and other specified senior level employees will receive separation payments upon the occurrence of certain events and will be eligible to receive both a cash bonus and a restricted stock award bonus (collectively, the “retention awards”). The retention awards are designed to retain certain key employees in their roles with the Company and to carry out the Plan of Liquidation. The restricted stock award bonus portion of the retention awards, granted pursuant to the Luby’s Incentive Stock Plan, was issued upon entering into the bonus opportunity agreement and is subject to vesting and a one-third of the total being earned upon the occurrence of the contemplated sales of each of: (1) the Company's Fuddruckers brand, (2) the Company's Culinary Services brand; and (3) at least 30 of the Company's Luby’s cafeterias.
Neither the Company nor the Compensation Committee has a program, plan, or practice to time equity grants to the Company’s executive officers in coordination with the release of material nonpublic information.
Role of Executive Officers
Our Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer had roles in determining executive compensation policies and programs. They based their recommendation on a variety of factors such as their appraisal of the officer’s performance and contribution to the Company and on market data. All compensation decisions made with respect to the Company’s Named Executive Officers are made by the Compensation Committee.
Stock Ownership Guidelines
The Board has suspended guidelines for ownership of Common Stock by executive officers as the Company has implemented the Plan of Liquidation.
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COMPENSATION TABLES AND INFORMATION
Fiscal 2021 Summary Compensation Table
The table below contains information concerning annual and long-term compensation of our Named Executive Officers (each a "Named Executive Officer") for the fiscal year ended August 25, 2021.
Awards granted in the fiscal year ended August 26, 20032020 are pursuant to the bonus opportunity agreement designed to retain certain key employees in their roles with the Company and canto carry out the Plan of Liquidation.
| Name and Principal Position | Year | Salary | Bonus | Stock awards (1) | Option awards (2) | Non-Equity Incentive Plan Compensation | Nonqualified Deferred Compen- sation Earnings | All Other Compensation (3) | Total | ||||||||||||||||||||
John Garilli Interim President and Chief Executive Officer (4) | 2021 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Benjamin T. Coutee Chief Operating Officer (5) | 2021 | 302,288 | 27,000 | — | — | — | — | — | 329,288 | ||||||||||||||||||||
| 2020 | 263,952 | — | 32,850 | — | — | — | — | 296,802 | |||||||||||||||||||||
Steven B. Goodweather Former Chief Financial Officer and Treasurer (6) | 2021 | 215,000 | 34,225 | — | — | — | — | — | 249,225 | ||||||||||||||||||||
| 2020 | 178,798 | — | 26,280 | — | — | — | — | 205,078 | |||||||||||||||||||||
Philip J. Rider Chief Accounting Officer and Controller (7) | 2021 | 205,000 | 39,050 | — | — | — | — | — | 244,050 | ||||||||||||||||||||
| 2020 | 160,048 | — | 36,333 | — | — | — | — | 196,381 | |||||||||||||||||||||
Christopher J. Pappas Former President and Chief Executive Officer (8) | 2021 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| 2020 | 1 | — | — | — | — | — | — | 1 | |||||||||||||||||||||
K. Scott Gray Former Senior Vice President and Chief Financial Officer (5) | 2021 | 32,379 | — | — | — | — | — | — | 32,379 | ||||||||||||||||||||
| 2020 | 283,314 | — | — | — | — | — | — | 283,314 | |||||||||||||||||||||
(1)There were no "Stock Awards" granted to Named Executive Officers in the fiscal year ended August 25, 2021. The amounts shown in the "Stock Awards" column reflect the full aggregate grant date fair value of stock-based awards granted during fiscal year end August 26, 2020, computed in accordance with FASB ASC Topic 718, determined without regard to forfeitures, as required by SEC rules, and do not reflect the actual value that may be foundrecognized by each Named Executive Officer. For assumptions made in the valuation of the awards in this column, see Note 17, Share-Based Compensation, to our audited financial statements included in Item 8. of this Annual Report on our website at www.lubys.com. We intendForm 10-K. For a description of the retention awards, which are subject to satisfyvesting requirements, shown in the disclosure requirement under Item 5.05"Stock Awards" column, relate to the Bonus Opportunity Agreement, see "Bonus Opportunity Agreement" beginning on page 73 for more information.
(2)There were no "Option Awards" granted in the fiscal years ended August 25, 2021 and August 26, 2020.
(3)Perquisites and other personal benefits that did not exceed $10,000 in the aggregate for any Named Executive Officer have been excluded.
(4)Effective January 27, 2021, the Board of Form 8-K regarding amendmentsDirectors 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 or waiverswhich 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.
(5)Mr. Coutee's annual base salary was increased to $300,000, effective July 2, 2020.
(6)Mr. Goodweather was appointed Chief Financial Officer and Treasurer of the Company, effective April 4, 2020, and his annual base salary was increased to $215,000. Mr. Goodweather resigned from the codeCompany effective as of ethicsSeptember 6, 2021. There was no disagreement between Mr. Goodweather and the Company. On August 31, 2021, we entered into a final separation agreements with Mr. Goodweather, pursuant to which Mr. Goodweather was entitled to receive a lump sum amount equal to 100% of his annual base salary in accordance with his Severance Protection Agreement.
(7)Mr. Rider was appointed Chief Accounting Officer and Controller of the Company, effective April 4, 2020, and his annual base salary was increased to $205,000.
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(8)Mr. Pappas' employment with the Company was terminated on January 27, 2021.
(9)Mr. Gray's employment with the Company was terminated on April 3, 2020. On April 24, 2020, Mr. Gray and the Company entered into a Final Separation Agreement and Release pursuant to which Mr. Gray is entitled to receive, in addition to other payments, severance pay in an amount equal to $105,231 payable in equal bi-weekly installments over a period of 26 weeks following April 4, 2020.
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The following table provides information regarding outstanding equity awards at fiscal year-end for each of our Named Executive Officers granted under the Luby's Incentive Stock Plan, as amended.
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($)(3) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |||||||||||||||||||||||||||||||||||||||||||||||
| John Garilli Interim President and Chief Executive Officer | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||||||||
| Benjamin T. Coutee Chief Operating Officer | 4,664 | N/A | N/A | 4.42 | 11/15/2021 | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||||||||
| 81,967 | N/A | N/A | 4.49 | 1/23/2025 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||
| 26,042 | N/A | N/A | 4.89 | 11/11/2025 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||
| 21,174 | N/A | N/A | 4.26 | 11/30/2026 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||
| 47,809 | N/A | N/A | 2.82 | 11/30/2027 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||
| N/A | N/A | N/A | N/A | N/A | 30,000 (1) | $124,800 (3) | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||
| Steven B. Goodweather Former Chief Financial Officer and Treasurer | 11,816 | N/A | N/A | 4.49 | 1/23/2025 | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||||||||
| 7,426 | N/A | N/A | 4.89 | 11/11/2025 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||
| 8,187 | N/A | N/A | 4.26 | 11/30/2026 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||
| 13,865 | N/A | N/A | 2.82 | 11/30/2027 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||
| N/A | N/A | N/A | N/A | N/A | 24,000 (1) | $99,840 (3) | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||
| Philip J. Rider Chief Accounting Officer and Controller | N/A | N/A | N/A | N/A | N/A | 5,236 (2) | $21,782 (3) | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||||||||
| N/A | N/A | N/A | N/A | N/A | 24,000 (1) | $99,840 (3) | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||
| Christopher J. Pappas Former President and Chief Executive Officer | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||||||||
| K. Scott Gray Former Senior Vice President and Chief Financial Officer | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||||||||
(1)This award of restricted stock units was made under the bonus opportunity agreement and one-third of the restricted shares is earned upon the closing of a sale of each of the following assets of the Company or supplementary codeits subsidiaries: the Culinary Services business line, the Fuddruckers business line, and 30 or more of ethics by postingthe Company's Luby's cafeterias. The restricted stock units vest on the first anniversary of date earned. On July 28, 2021 one-third of the grant was earned upon the closing of the sale of the Fuddruckers business line.
(2)The award of restricted stock vests on the third anniversary date of the grant date, October 3, 2019.
(3)Market value based on closing price of $4.16 per share of Common Stock on August 25, 2021.
Additional Narrative Disclosure
Equity Awards
Grants of stock options may be exercised in the event of the termination of the grantee’s employment with the Company as a result of such informationgrantee’s death or disability within the time period ending on our website at www.lubys.com.the earlier of: (a) the date 12 months following such termination of the grantee’s employment or (b) the last day of the term of such stock option. Grants of restricted stock units will immediately vest and become unrestricted in the event of the death or disability of the grantee or a change of control of the Company.
Retirement Plans
We maintain a qualified 401(k) savings plan which allows participants to defer cash compensation up to the maximum amount allowed under Internal Revenue Service guidelines. The Company matches 25% of participants’ contributions made to the plan up to 6% of their salary, subject to Internal Revenue Service guidelines.
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2021 DIRECTOR COMPENSATION
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($)(1)(2) (3) | Option Awards ($)(4) | Non-Equity Incentive Plan Compensation ($) | Non-qualified Deferred Compensation Earnings | All Other Compensation ($)(5) | Total ($) | ||||||||||||||||
| Gerald W. Bodzy | $ | 160,783 | $ | 32,217 | $ | — | $ | — | $ | — | $ | — | $ | 193,000 | |||||||||
| Twila Day | 80,006 | 19,494 | — | — | — | — | 99,500 | ||||||||||||||||
Jill Griffin (6) | 70,788 | 3,750 | — | — | — | — | 74,538 | ||||||||||||||||
Frank Markantonis (6) | 47,076 | 10,261 | — | — | — | — | 57,337 | ||||||||||||||||
| Joe C. McKinney | 91,135 | 22,365 | — | — | — | — | 113,500 | ||||||||||||||||
| Gasper Mir, III | 80,006 | 19,494 | — | — | — | — | 99,500 | ||||||||||||||||
| John Morlock | 105,750 | 3,750 | — | — | — | — | 109,500 | ||||||||||||||||
Randolph C. Read (6) | 172,034 | 19,494 | — | — | — | — | 191,528 | ||||||||||||||||
Christopher J Pappas (7) | — | — | — | — | — | — | — | ||||||||||||||||
(1)Amounts shown reflect the aggregate grant date fair value of the restricted stock granted to directors in fiscal 2020, calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Share-Based Payment ("FASB ASC Topic 718"). The grant date fair value for each share is based on the average of the high and low stock price of our Common Stock on the date of grant.
(2)Represents the grant date fair value of the October 1, 2020 equity award granted to each director.
(3)As of August 25 2021, each non-employee director held the following outstanding shares of restricted stock: Mr. Bodzy, 172,942 shares; Ms. Day, 100,170 shares; Mr. McKinney, 147,178 shares; Mr. Mir, 139,088 shares, and Mr. Morlock 12,818 shares.
(4)As of August 25, 20201 none of our non-employee directors held outstanding stock options.
(5)Perquisites and other personal benefits that did not exceed $10,000 in the aggregate for any non-employee director have been excluded.
(6)Fees earned or paid in cash includes the final retainer payment, prorated through August 23, 2021, for retiring members of the Board of Directors: Ms. Griffin ($9,538), Mr. Markantonis ($7,337), and Mr. Read ($27,147).
(7)Mr. Pappas continued to serve as a non-employee director through August 23, 2021, after ceasing to serve as our President and Chief Executive CompensationOfficer. Mr Pappas did not receive compensation for his service as a non-employee director.
Each nonemployee director other than the Chairman of the Board is paid an annual retainer fee of $50,000 and a single fee of $15,000 for all other committees in which each such nonemployee director is a member. Nonemployee directors do not receive meeting fees. The Chairman of the Board is paid an annual retainer fee of $85,000. Further, the Chair of the Finance and Audit Committee is paid an additional annual retainer fee of $14,000, and the Chair of each other committee of the Board is paid an additional annual retainer fee of $10,000. The Chairman of the Board does not receive any additional annual retainer fee for service as the Chair of any other committee of the Board, except for his service as co-chair of the Special Committee. Effective October 1, 2020, the monthly retainer for each nonemployee director serving on the Special Committee was increased to $3,000 and the monthly retainer for the co-chairs of the Special Committee was increased to $10,000.
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Award also received an additional number of whole shares of restricted stock equal to 20% of the number of whole shares of restricted stock issued in payment of the Elective Retainer Award for the quarterly period beginning on that date.
On October 1, 2020, annual meetingshares of shareholders appearing thereinCommon Stock available for issuance under the captions “Compensation DiscussionPlan were exhausted and Analysis—Executivethe remaining portion of each director’s Mandatory Retainer Award and other fees were paid in cash. Accordingly, the Mandatory Retainer Award and the Elective Retainer Award under the plan have been suspended and each director’s retainer and other fees will be paid in cash until such time, if ever, as there are shares of Common Stock available under the Plan.
Further, under the Plan, nonemployee directors may be periodically granted shares of restricted stock or nonqualified options to purchase shares of Common Stock at an option price equal to 100% of the fair market value on the date of grant. Each option terminates on the earlier of the tenth anniversary of the grant date or one year after the optionee ceases to be a director. An option may not be exercised prior to the first anniversary of the grant date, subject to certain exceptions specified in the Plan. No nonemployee director may receive options to purchase more than 7,500 shares in any 12-month period. No options were granted under the Plan in the 2021 fiscal year.
The Company’s Corporate Governance Guidelines establish guidelines for share ownership. Currently, all directors are expected to accumulate shares of Common Stock with a market value of at least $100,000 prior to the five-year anniversary of their appointment to the Board. As of November 19, 2021, each of our non-employee directors satisfied our non-employee director share ownership guideline or is within the five-year transition period.
The Company’s Nonemployee Director Deferred Compensation” “—Executive Compensation Committee Report,” “—Compensation Tables Plan permits nonemployee directors to defer all or a portion of their directors’ fees in accordance with applicable regulations under the Internal Revenue Code of 1986, as amended (the “Code”). Deferred amounts bear interest at the average interest rate of U.S. Treasury ten-year obligations. The Company’s obligation to pay deferred amounts is unfunded and Information,” “—Director Compensation,” and “Corporate Governance—Executive Compensation Committee—Compensation Committee Interlocks.”is payable from the general assets of the Company.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
OWNERSHIP OF EQUITY SECURITIES IN THE COMPANY
The following table sets forth information concerning the beneficial ownership of Common Stock, as of August 25, 2021 for (a) each director currently serving on the Board, (b) each of the officers and former officers named in the Summary Compensation Table and (c) all directors and executive officers as a group. In general, “beneficial ownership” includes those shares a director or executive officer has the power to vote or transfer and those shares that the director or executive officer has the right to acquire within 60 days after August 25, 2021.
Name (1) | Shares Beneficially Owned | Percent of Common Stock | ||||||||||||
Gerald W. Bodzy(2) | 240,854 | * | ||||||||||||
Benjamin T. Coutee(3) | 288,733 | * | ||||||||||||
Twila Day(4) | 107,670 | * | ||||||||||||
Steven B. Goodweather (5) | 88,388 | * | ||||||||||||
Joe C. McKinney(6) | 319,845 | 1.03% | ||||||||||||
Gasper Mir, III (7) | 278,782 | * | ||||||||||||
John Morlock(8) | 20,318 | * | ||||||||||||
Christopher J. Pappas(9) | 5,667,153 | 18.30 | % | |||||||||||
Philip J. Rider (10) | 24,000 | * | ||||||||||||
All directors and executive officers of the Company, as a group (9 persons)(11) | 7,038,196 | 22.72 | % | |||||||||||
* Represents beneficial ownership of less than one percent of the shares of Common Stock issued and outstanding on August 25, 2021.
(1)Except as indicated in these notes and subject to applicable community property laws, each person named in the table owns directly the number of shares indicated and has the sole power to vote and to dispose of such shares. Shares of phantom stock held by a nonemployee director convert into an equivalent number of shares of Common Stock when the nonemployee director ceases to be a director of the Company due to resignation, retirement, death, disability, removal, or any other circumstance. The shares of Common Stock payable upon conversion of the phantom stock are included in this table because it is possible for the holder to acquire the shares of Common Stock within 60 days if his or her directorship were to be terminated. Under the Company’s Nonemployee Director Stock Plan, restricted stock awards may become unrestricted when a nonemployee director ceases to be a director of the Company. Unless otherwise specified, the mailing address of each person named in the table is 13111 Northwest Freeway, Suite 600, Houston, Texas 77040.
(2)The shares shown for Mr. Bodzy include 78,119 shares held for his benefit in a custodial account and 162,735 shares of restricted stock.
(3)The shares shown for Mr. Coutee include 77,077 shares held for his benefit in a custodial account, 30,000 shares of restricted stock and 181,656 shares that he has a right to acquire within 60 days under Luby's Incentive Stock Plan.
(4)The shares shown for Ms. Day include 7,500 shares held for her benefit in a custodial account, and 100,170 shares of restricted stock.
(5)The shares shown for Mr. Goodweather include 23,094 shares held for his benefit in a custodial account, 24,000 shares of restricted stock and 41,294 shares that he has a right to acquire within 60 days under Luby's Incentive Stock Plan.
(6)The shares shown for Mr. McKinney include 176,661 shares held in certificate form and 143,184 shares of restricted stock.
(7)The shares shown for Mr. Mir include 143,688 shares held for his benefit in a custodial account, 2,453 shares of phantom stock held under the Nonemployee Director Phantom Stock Plan, and 135,094 shares of restricted stock.
(8)The shares shown for Mr. Morlock include 7,500 shares held for his benefit in a custodial account and 12,818 shares of restricted stock.
(9)The shares shown for Christopher J. Pappas include 4,595,773 shares held for his benefit in a custodial account and 1,071,380 shares owned by Pappas Restaurants, Inc. Each of Christopher J. Pappas and Harris J. Pappas owns a 50% interest in Pappas Restaurants, Inc. and therefore Christopher J. Pappas owns a corresponding beneficial interest in the 1,071,380 shares owned by Pappas Restaurants, Inc.
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(10)The 24,000 shares shown for Mr. Rider are shares of restricted stock.
(11)The shares shown for all directors and executive officers as a group include 4,932,751 shares held in custodial accounts, 176,661 shares held in certificate form, 222,950 shares which they have the right to acquire within 60 days under the Company’s various benefit plans, 632,001 shares of restricted stock, 2,453 shares of phantom stock held by nonemployee directors under the Nonemployee Director Phantom Stock Plan, and 1,071,380 shares owned by Pappas Restaurants, Inc., of which Christopher J. Pappas owns a 50% interest, as described above.
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PRINCIPAL SHAREHOLDERS
Name and Address of Beneficial Owner (1) | Shares Beneficially Owned | Percent of Common Stock | ||||||||||||
Christopher J. Pappas(2) | 5,667,153 | 18.30% | ||||||||||||
13939 Northwest Freeway Houston, Texas 77040 | ||||||||||||||
Harris J. Pappas(3) | 5,491,020 | 17.73% | ||||||||||||
13939 Northwest Freeway Houston, Texas 77040 | ||||||||||||||
Hodges Capital Management, Inc.(5) | 4,342,314 | 14.02% | ||||||||||||
2905 Maple Ave. Dallas, Texas 75201 | ||||||||||||||
Bandera Partners LLC(4) | 2,859,926 | 9.23% | ||||||||||||
50 Broad Street, Suite 1820 New York, New York 10004 | ||||||||||||||
BML Investment Partners, L.P. (6) | 1,582,235 | 5.11% | ||||||||||||
| 65 E. Cedar, Suite 2 Zionville, IN 46077 | ||||||||||||||
(1)Except as indicated in these notes and subject to applicable community property laws, each person named in the Company”table owns directly the number of shares indicated and “Principal Shareholders.”has the sole power to vote and to dispose of such shares.
(2)The shares shown for Christopher J. Pappas consist of 5,667,153 shares of Common Stock held for his benefit in a custodial account, which includes 1,071,380 shares owned by Pappas Restaurants Inc., such shares being deemed beneficially owned by him due to his 50% ownership interest in Pappas Restaurants Inc.
(3)The shares shown for Harris J. Pappas consist of 5,491,020 shares of Common Stock held for his benefit in a custodial account, which includes 1,071,380 shares owned by Pappas Restaurants Inc., such shares being deemed beneficially owned by him due to his 50% ownership in Pappas Restaurants Inc.
(4)Information based solely on Form 13F-HR filed on May 27, 2021 with the SEC by Bandera Partners L.L.C. Bandera Partners L.L.C. has sole voting authority with respect to zero shares.
(5)Information based solely on Form 13F-HR filed with the SEC on October 6, 2021 by Hodges Capital Management, Inc. Hodges Capital Management, Inc. has sole voting authority with respect to 2,192,682 shares.
(6)Information based solely on Form 13F-HR filed with the SEC on July 22, 2021 by BML Investment Partners. BML Investment Partners has sole voting authority with respect to 231,683 shares.
Item 13. Certain Relationships and Related Transactions, and Director Independence
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
On July 23, 2002, the Company entered into an Indemnification Agreement with each member of the Board under which the Company obligated itself to indemnify each director to the fullest extent permitted by applicable law so that he or she will continue to serve the Company free from undue concern regarding liabilities. The Company has also entered into an Indemnification Agreement with each person becoming a member of the Board since July 23, 2002. The Board has determined that uncertainties relating to liability insurance and indemnification have made it advisable to provide directors with assurance that liability protection will be available in the future.
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The Company obtains certain goods and/or services from entities owned or controlled by Christopher J. Pappas, former Chief Executive Officer and former director of the Company, and Harris J. Pappas, a former director of the Company (the “Pappas Entities”), pursuant to the terms of an Amended and Restated Master Sales Agreement, dated August 2, 2017 (the “Master Sales Agreement”). Under the terms of the 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. During fiscal 2021, the Pappas Entities provided goods and services to the Company under the Master Sales Agreement in the amount of approximately $18,000. The Company anticipates that there will be minimal transactions with or payments to the Pappas Entities under the Master Sales Agreement during fiscal 2022.
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partner interest and a 50% general partner interest in the limited partnership. A third-party company manages the center. One of the Company’s Luby’s cafeteria 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, due to the approaching expiration of the previous lease, the Company executed a new lease agreement with respect to this Item 13property. The new lease agreement was approved by reference that portionthe Finance and Audit Committee and provided for a primary term of approximately 12 years with two subsequent five-year options. The new lease was effective upon the Company’s relocation and occupancy into the new space in July 2008. Through July 1, 2020, the Company paid $22.00 per square foot plus maintenance, taxes, and insurance. The lease provided for increases in rent at set intervals Due to the COVID-19 pandemic, the landlord agreed to abate the rent for April 2020. The Company 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 was abated and (3) commencing July 1, 2020 through the early termination date, the monthly rent was a fixed gross amount.
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 2 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 definitive proxy statementBoard 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.
On February 23, 2021, a subsidiary of the Company entered into a lease termination agreement and release (the “Lease Termination”) with HPCP Investments, LLC (“HPCP Investments”). Pursuant to the Lease Termination, the lease relating to one of the Company’s Fuddruckers restaurants in Houston, Texas (the “Franchise Location”) will terminate effective as of February 25, 2021, in exchange for the 2020 annual meetingpayment by HPCP Investments to the subsidiary of shareholders appearing thereinthe Company of $200,000. In addition, the Lease Termination releases the subsidiary of the Company from its remaining obligations under the captions, “Corporatelease agreement, which included payment obligations of approximately $723,374.20 as of February 23, 2021. In connection with the Lease Termination, the subsidiary of the Company agreed to grant to an affiliate of HPCP Investments a Fuddruckers franchise for the Franchise Location. HPCP Investments is an affiliate of Harris J. Pappas and Christopher J. Pappas.
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.
To allow the Company to continue to receive the benefit of Mr. Read's expertise and experience now that he is no longer a member of our Board of Directors, the Company entered into an agreement with an advisory firm, of which Mr. Read is an equity owner, for the provision of financial advisory services in connection with the completion of the Company's Plan of Liquidation and Dissolution. The agreement calls for monthly payments, pro-rated for any partial months, of $22,500 per month for the period August 24, 2021 through October 31, 2021 and then $20,000 per month thereafter until the later of March 31, 2022 or the date on which the Company transfers its remaining assets and liabilities to a liquidating entity. The agreement also provides for the payment of a bonus of up to $1.0 million, which payment is at the discretion of the Company's Board of Directors.
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Policies and Procedures Regarding Related Person Transactions
The Board has adopted a written Related Person Transaction Approval Policy, which requires the Finance and Audit Committee to review each related person transaction (as defined below) and determine whether it will approve or ratify that transaction.
For purposes of the policy, a “related person transaction” is any transaction, arrangement, or relationship where the Company is a participant, the Related Person (defined below) had, has, or will have a direct or indirect material interest and the aggregate amount involved is expected to exceed $120,000 in any calendar year. “Related Person” includes: (a) any person who is or was (at any time during the last fiscal year) an executive officer, director or nominee for election as a director; (b) any person or group who is a beneficial owner of more than 5% of the Company’s voting securities; (c) any immediate family member of a person described in provisions (a) or (b) of this sentence; or (d) any entity in which any of the foregoing persons is employed, is a partner or has a greater than 5% beneficial ownership interest.
In determining whether a related person transaction will be approved or ratified, the Finance and Audit Committee may consider factors such as: (a) the extent of the Related Person’s interest in the transaction; (b) the availability of other sources of comparable products or services; (c) whether the terms are competitive with terms generally available in similar transactions with persons that are not Related Persons; (d) the benefit to the Company; and (e) the aggregate value of the transaction.
DIRECTOR INDEPENDENCE
The Board, with recommendation by the Nominating and Corporate Governance Guidelines—Committee, has evaluated the independence of the members of the Board under the Luby’s Director Independence”Independence Test. In conducting this evaluation, the Board considered transactions and “Certain Relationshipsrelationships between each director or his or her immediate family and Related Transactions.”the Company to determine whether any such transactions or relationships were material and, therefore, inconsistent with a determination that each such director is independent. Based upon that evaluation, the Board determined that the following directors are independent:
Gerald W. Bodzy
Joe C. McKinney
Gasper Mir, III
John Morlock
The Board also has determined that each member of the Finance and Audit Committee, the Nominating and Corporate Governance Committee, and the Compensation Committee meets the independence requirements applicable to such committees required by the NYSE and the SEC. The Luby’s Director Independence Test is available in print to any shareholder upon request and can be found on the Company’s website at www.lubysinc.com.
Item 14. Principal Accountant Fees and Services
Firm
The table below shows aggregate fees for professional services rendered for the Company by Grant Thornton LLP for fiscal 2021 and 2020:
| 2021 | 2020 | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Audit Fees | $ | 408 | $ | 505 | ||||||||||||||||
| Audit-Related Fees | — | — | ||||||||||||||||||
| Tax Fees | — | — | ||||||||||||||||||
| All Other Fees | — | — | ||||||||||||||||||
| Total | $ | 408 | $ | 505 | ||||||||||||||||
Audit Fees for fiscal 2021 and 2020 consisted of fees associated with the audit of the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K and reviews of the Company’s interim financial statements included in the Company’s Quarterly Reports on Form 10-Q.
Audit-Related Fees. The Company did not incur any Audit-Related Fees for fiscal 2021 or 2020.
Tax Fees. The Company did not incur any Tax Fees from Grant Thornton LLP for fiscal 2021 or 2020.
All Other Fees. The Company did not incur any other fees for fiscal 2021 or 2020.
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Preapproval Policies and Procedures
All auditing services provided by Grant Thornton LLP must be preapproved by the Finance and Audit Committee. Generally, this approval occurs each year at the August meeting of the Finance and Audit Committee for the subsequent fiscal year and as necessary during the rest of the fiscal year for unforeseen requests. The non-audit services specified in Section 10A(g) of the Exchange Act may not be, and are not, provided by Grant Thornton LLP. Grant Thornton LLP provides a report to the Chair of the Finance and Audit Committee prior to each regularly scheduled Finance and Audit Committee meeting detailing all fees, by project, incurred by Grant Thornton LLP year-to-date and an estimate for the fiscal year. The Chair of the Finance and Audit Committee reviews such fees at each Finance and Audit Committee meeting. The Finance and Audit Committee periodically reviews these fees with the full Board. During fiscal 2021 and 2020, no preapproval requirements were waived for services included in the Audit-Related Fees, Tax Fees, and All Other Fees captions of the fee table above pursuant to the limited waiver provisions in applicable rules of the SEC.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
1. | Financial Statements | ||||
| The following financial statements are filed as part of this Report: | |||||
| Consolidated statement of net assets in liquidation as of August 25, 2021 | |||||
| Consolidated statement of changes in net assets in liquidation for the period from November 19, 2020 to August 25, 2021 | |||||
| Consolidated balance | |||||
| Consolidated statements of operations for | |||||
| Consolidated statements of shareholders’ equity for | |||||
| Consolidated statements of cash flows for | |||||
| Notes to consolidated financial statements | |||||
| Report of Independent Registered Public Accounting Firm Grant Thornton LLP | |||||
2. | Financial Statement Schedules | ||||
All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto.
3. | Exhibits | ||||
The following exhibits are filed as a part of this Report:
| 2 | |||||
| 3(a) | |||||
| 3(b) | |||||
| 3(c) | |||||
| 3(d) | |||||
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| 10(h) | |||||
| 10(i) | |||||
| 10(j) | |||||
| 10(k) | |||||
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| 32.1 | |||||
| 32.2 | |||||
| 99(a) | |||||
| 101.INS | XBRL Instance Document | ||||
| 101.SCH | XBRL Schema Document | ||||
| 101.CAL | XBRL Calculation Linkbase Document | ||||
| 101.DEF | XBRL Definition Linkbase Document | ||||
| 101.LAB | XBRL Label Linkbase Document | ||||
| 101.PRE | XBRL Presentation Linkbase Document | ||||
__________________________
| Denotes management contract or compensatory plan or arrangement. | |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| November 19, 2021 | LUBY’S, INC. | |||||||
| Date | (Registrant) | |||||||
| By: | ||||||||
| Interim President and Chief Executive Officer | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature and Title | Date | ||||
| /S/ GERALD W. BODZY | November | ||||
| Gerald W. Bodzy, Director and Chairman of the Board | |||||
| /S/ | November | ||||
Executive Officer (Principal Executive Officer) | |||||
| /S/ | November | ||||
Officer (Principal Financial Officer) | |||||
| /S/ PHILIP J. RIDER | November 19, 2021 | ||||
| Philip J. Rider, Chief Accounting Officer and Controller (Principal Accounting Officer) | |||||
| /S/ TWILA DAY | November | ||||
| Twila Day, Director | |||||
| /S/ JOE C. MCKINNEY | November | ||||
| Joe C. McKinney, Director | |||||
| /S/ GASPER MIR, III | November | ||||
| Gasper Mir, III, Director | |||||
| /S/ JOHN B. MORLOCK | November | ||||
| John B. Morlock, Director | |||||
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