Notes to Consolidated Financial Statements
Fiscal Years 2021 and 2020
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 seven Fuddruckers restaurants. Included in the counts for both Luby's cafeterias and Fuddruckers restaurants are three Combo units, where a Luby's cafeteria and a Fuddruckers restaurant occupy the same location. Also, as of August 25, 2021, our Culinary Services brand operated 27 contracts to manage food services for clients operating in primarily three lines of business: healthcare; senior living business, and schools.
The accompanying consolidated financial statements include the accounts of Luby’s, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Prior to Adoption of the Plan of Liquidation
The consolidated financial statements prior to November 19, 2020 were prepared on the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and were prepared in accordance with accounting principles generally accepted in the United States ("US GAAP").
Plan of Liquidation
On November 17, 2020 our shareholders approved the Plan of Liquidation and Dissolution (the “Plan of Liquidation“ or the “Plan”). The Plan provides for an orderly sale of our businesses, operations, and real estate, payment of our liabilities and other obligations, and an orderly wind down of any remaining operations and dissolution of the Company. We intend to convert all our assets into cash, satisfy or resolve our remaining liabilities and obligations, including contingent liabilities, claims and costs associated with the liquidation of the Company, and then file a certificate of dissolution with the State of Delaware. The assets to be sold include our Luby's Cafeterias, Fuddruckers, and Culinary Services ("CCS") operating divisions, as well as our real estate. We currently anticipate that our common stock will be delisted from the New York Stock Exchange ("NYSE") upon the filing of the certificate of dissolution, which is not expected to occur until the earlier of the completion of all or substantially all of the asset sales or three years. The delisting of our common stock may occur sooner in accordance with the applicable rules of the NYSE.
Following the Adoption of the Plan of Liquidation
We have determined, as a result of the approval of the Plan by our shareholders, that liquidation is imminent, as defined in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 205-30 Financial Statement Presentation, Liquidation Basis of Accounting ("ASC 205-30"). Liquidation is considered imminent when the likelihood is remote that we will return from liquidation and either (a) the Plan is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the Plan will be blocked by other parties, or (b) the Plan is being imposed by other forces (for example, involuntary bankruptcy).
Accordingly, we have changed our basis of accounting from the going concern basis to the liquidation basis effective November 19, 2020. Although shareholder approval of the Plan occurred on November 17, 2020, we are using the liquidation basis of accounting effective November 19, 2020 as a convenience date. Any activity between November 17, 2020 and November 19, 2020 would not be materially different under the liquidation basis of accounting.
The liquidation basis of accounting differs significantly from the going concern basis, as summarized below.
Under the liquidation basis of accounting, the consolidated balance sheet and consolidated statements of operations, equity and cash flows are no longer presented.
The liquidation basis of accounting requires a statement of net assets in liquidation, a statement of changes in net assets in liquidation and all disclosures necessary to present relevant information about our expected resources in liquidation. The liquidation basis of accounting may only be applied prospectively from the day liquidation becomes imminent and the initial statement of changes in net assets in liquidation may present only changes in net assets that occurred during the period since that date.
Under the liquidation basis of accounting, our assets are measured at their estimated net realizable value, or liquidation value, which represents the amount of their estimated cash proceeds or other consideration from liquidation, based on current contracts, estimates and other indications of sales value, and includes business unit valuations representing previously unrecognized assets that we may expect to either sell in the course of our liquidation or use in settling liabilities, such as trademarks or other intangibles. In developing these estimates, we utilized third party valuation experts, investment bankers, real estate brokers, the expertise of members of the Special Committee of our Board of Directors, and forecasts generated by our management. For estimated real estate values, we considered comparable sales transactions, our past experience selling real estate assets of the Company and, in certain instances, indicative offers, as well as capitalization rates observed for income-producing real estate. For estimated business unit valuations we considered estimated values of the economic components of possible transactions, the value of a buyer assuming certain liabilities in a purchase transaction, and, in certain instances, indicative offers, as well as the probabilities of certain outcomes. Estimates for the liquidation value of the business units, or subset of operating restaurants, were also tested for reasonableness through a multiple of historical and projected business cash flows. All estimates by nature involve a large degree of judgement and sensitivity to the underlying assumptions.
The liquidation basis of accounting requires us to accrue and present separately, without discounting, the estimated disposal and other costs, including any costs associated with the sale or settlement of our assets and liabilities and the estimated operating income or loss that we reasonably expect to incur, including providing for federal income taxes during the remaining expected duration of the liquidation period. In addition, deferred tax assets previously provided for under the going concern basis of accounting, which include net operating losses and other tax credits, may be realized partially or in full, subject to IRS limitations, to offset taxable income we expect to generate from the liquidation process.
Under the liquidation basis of accounting, we recognize liabilities as they would have been recognized under the going concern basis as adjusted for the timing assumptions related to the liquidation process and they will not be reduced to expected settlement values prior to settlement.
These estimates will be periodically reviewed and adjusted as appropriate. There can be no assurance that these estimated values will be realized. Such amounts should not be taken as an indication of the timing or the amount of future distributions or our actual dissolution.
The valuation of our assets and liabilities, as described above, represents estimates, based on present facts and circumstances, of the net realizable value of the assets and costs associated with carrying out the Plan. The actual values and costs associated with carrying out the Plan may differ from amounts reflected in the accompanying consolidated financial statements because of the Plan's inherent uncertainty. These differences may be material. In particular, these estimates will vary with the length of time necessary to complete the Plan. It is currently anticipated that a majority of the assets we owned on the date of the shareholder approval of the plan will be sold by December 31, 2021, with liquidation substantially complete by June 30, 2022. It is also anticipated that any assets and liabilities remaining at such time will be transferred to a liquidating entity and it is likely that the full realization of proceeds from sales will extend beyond that date.
Net assets in liquidation represents the estimated liquidation value to holders of common shares upon liquidation. It is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to our shareholders and no assurance can be given that the distributions will equal or exceed the estimate presented in these consolidated financial statements.
Accounting Periods
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically include three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year.
Subsequent Events
Events subsequent to the Company’s fiscal year ended August 25, 2021 through the date of issuance of the financial statements are evaluated to determine if the nature and significance of the events warrant inclusion in the Company’s consolidated financial statements. See Note 2. Subsequent Events.
COVID-19
The novel coronavirus disease (“COVID-19”) pandemic has had a significant impact on our level of operations, guest behavior, guest traffic, and the number of locations where we and our former Fuddruckers franchisees operate. As a result, at the onset of the COVID-19 pandemic in the spring of 2020, we modified our business operations within our restaurants and significantly reduced staffing at our corporate support office.
On March 13, 2020, President Donald Trump declared a national emergency in response to the COVID-19 pandemic. Throughout the remainder of calendar 2020, we cycled through periods initially when state government orders mandated a suspension of on-premise dining, followed by periods when our on-premise dining capacity was limited due to government order. Full on-premise dining resumed in Texas in March 2021, when government restrictions limiting on-premise dining were lifted. Prior to the onset of the COVID-19 pandemic, we operated 118 restaurants, of which 87 were closed as a result of the pandemic and 53 of those were reopened as permitted when restrictions were lifted. The 31 of our restaurants that remained open during the pandemic were open at reduced capacity levels or for takeout only.
Despite increasing vaccination rates, U.S. Treasury stimulus payments to U.S. citizens and other positive developments, risks and uncertainties remain as cases of COVID-19 infection continue within the communities where we operate, albeit at reduced levels. The COVID-19 pandemic could continue to materially impact our cash flows and value of net assets in liquidation, while we execute on our Plan of Liquidation.
Reportable Segments
Under the going concern basis of accounting, each restaurant was considered an operating segment because operating results and cash flows could be determined for each restaurant. We aggregated our operating segments into reportable segments by restaurant brand because the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, similarity of store level profit margins and the nature of the regulatory environment were alike. For the 12 week period ended November 18, 2020 and the fiscal year ended August 26, 2020, we had five reportable segments: Luby’s Cafeterias, Fuddruckers Restaurants, Cheeseburger in Paradise Restaurants, Fuddruckers franchise operations, and Culinary Services (“CCS”). Under the liquidation basis of accounting, although we continued to operate our restaurant, franchise and CCS businesses, we no longer make operating decisions or assess performance by segment, as all of our assets and businesses are considered held for sale. Accordingly, effective November 19, 2020, we have only one reporting and operating segment.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash and cash equivalents and restricted cash and cash equivalents include highly liquid investments such as money market funds that have a maturity of three months or less. Our bank account balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. Amounts in transit from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction.
Trade Accounts, Notes and Other Receivables
Under the going concern basis of accounting, receivables consisted principally of amounts due from franchises, CCS clients, catering customers and restaurant food sales to corporations. Receivables were recorded at the invoiced amount. The allowance for doubtful accounts was our best estimate of the amount of probable credit losses in our existing accounts receivable. We determined the allowance based on historical loss experience for CCS clients, catering customers and restaurant sales to corporations and, for CCS receivables and franchise royalty and marketing and advertising receivables. We also considered the franchisees’ and CCS clients’ unsecured default status. We periodically reviewed our allowance for doubtful accounts. Account balances were charged off against the allowance after all means of collection were exhausted and the potential for recovery was considered remote. Under the liquidation basis of accounting trade, notes and other receivables are stated at amount of their estimated cash proceeds.
Inventories
Under the going concern basis of accounting, food and supply inventories were stated at the lower of cost (first-in, first-out) or net realizable value. Under the liquidation basis of accounting, food and supply inventories have no net realizable value due to the nature of the inventory and the high turnover used in operating the remaining restaurants.
Property Held for Sale
Under the going concern basis of accounting, we periodically reviewed long-lived assets against our plans to retain or ultimately dispose of properties. If we decided to dispose of a property, it was moved to property held for sale and actively marketed. Property held for sale was recorded at amounts not in excess of what management expected to receive upon sale, less costs of disposal. Depreciation on assets moved to property held for sale was discontinued and gains were not recognized until the properties are sold. Under the liquidation basis of accounting, all of our property is for sale and is recorded on the statement of net assets in liquidation at the amount of their estimated cash proceeds or other consideration from liquidation.
Impairment of Long-Lived Assets
Under the going concern basis of accounting, impairment losses were recorded on long-lived assets used in operations when indicators of impairment were present and the undiscounted cash flows estimated to be generated by those assets were less than
the carrying amount. We evaluated impairments on a restaurant-by-restaurant basis and used cash flow results and other market conditions as indicators of impairment.
Debt Issuance Costs
Under the going concern basis of accounting, debt issuance costs included costs incurred in connection with the arrangement of long-term financing agreements. The debt issuance costs associated with our term loans were presented on our consolidated balance sheet as a direct deduction from long-term debt. The debt issuance costs associated with our revolving credit facility were included in other assets on our consolidated balance sheet. These costs were amortized using the effective interest method over the respective term of the debt to which they specifically relate. Under the liquidation basis of accounting, deferred debt issuance costs are not given a value.
Fair Value of Financial Instruments
Under the going concern basis of accounting, the carrying value of cash and cash equivalents, trade accounts and other receivables, accounts payable and accrued expenses approximated fair value based on the short-term nature of these accounts. The carrying value of credit facility debt also approximated fair value based on its recent renewal.
Self-Insurance Accrued Expenses
We self-insure a significant portion of expected losses under its workers’ compensation, employee injury and general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred claims, both reported and not yet reported. These recorded estimated liabilities are based on judgments and independent actuarial estimates, which include the use of claim development factors based on loss history; economic conditions; the frequency or severity of claims and claim development patterns; and claim reserve management settlement practices.
We maintain a self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits per third party insurance carriers. Under the going concern basis of accounting, we recorded expenses under the plan based on estimates of the costs of expected claims, administrative costs and stop-loss insurance premiums. Under both the going concern basis of accounting and the liquidation basis of accounting, our self-insurance liability is based on the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided by our third party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims may differ from what we have accrued as our estimated loss liability based on historical experience.
Revenue Recognition
See Note 6. Revenue Recognition.
Cost of CCS
Under the going concern basis of accounting, the cost of CCS included all food, payroll and related expenses, other operating expenses, and selling, general and administrative expenses related to culinary service sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with CCS were reported within those respective lines as applicable. Under the liquidation basis of accounting, estimated expenses during the liquidation period are included in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
Cost of Franchise Operations
Under the going concern basis of accounting, the cost of franchise operations included all food, payroll and related expenses, other operating expenses, and selling, general and administrative expenses related to franchise operations sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with franchise operations were reported within those respective lines as applicable. Under the liquidation basis of accounting, estimated expenses during the liquidation period are included in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
Marketing and Advertising Expenses
Under the going concern basis of accounting, marketing and advertising costs were expensed as incurred. Total advertising expense included in other operating expenses and selling, general and administrative expense was $0.6 million and $3.9 million in the 12 weeks ended November 18, 2020 and in fiscal 2020, respectively. We recorded advertising attributable to local store marketing and local community involvement efforts in other operating expenses and we recorded advertising attributable to our brand identity, our promotional offers, and our other marketing messages intended to drive guest awareness of our brands, in selling, general, and administrative expenses. We believed this separation of our marketing and advertising costs assisted with
measurement of the profitability of individual restaurant locations by associating only the local store marketing efforts with the operations of each restaurant.
Marketing and advertising expense included in other operating expenses attributable to local store marketing was $0.1 million and $0.5 million in the 12 weeks ended November 18, 2020 and in fiscal 2020, respectively.
Marketing and advertising expense included in selling, general and administrative expense was $0.5 million and $3.4 million in the 12 weeks ended November 18, 2020 and in fiscal 2020, respectively.
Under the liquidation basis of accounting, estimated expenses during the liquidation period are included in liability for estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets.
Depreciation and Amortization
Under the going concern basis of accounting, property and equipment were recorded at cost. We depreciated the cost of equipment over its estimated useful life using the straight-line method. Leasehold improvements were amortized over the lesser of their estimated useful lives or the related lease terms. Depreciation of buildings was provided on a straight-line basis over the estimated useful lives. There is no depreciation or amortization of our assets under the liquidation basis of accounting.
Other Charges
Under the going concern basis of accounting, other charges includes those expenses that we consider related to our restructuring efforts that are not part of our recurring operations.
Other charges were comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
12 weeks ended
|
|
Fiscal Year Ended
|
|
November 18, 2020
|
|
August 26, 2020
|
|
(in thousands)
|
OTHER CHARGES:
|
|
|
|
|
|
|
|
Employee Severances
|
$
|
—
|
|
|
$
|
1,332
|
|
Restructuring Related
|
416
|
|
|
2,069
|
|
Total Other Charges
|
$
|
416
|
|
|
$
|
3,401
|
|
Operating Leases
See Note 7. Leases.
Income Taxes
Under both the going concern basis of accounting and the liquidation basis of accounting, the estimated future income tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as operating loss and tax credit carrybacks and carryforwards are recorded. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established against deferred tax assets when the Company determines, based on the weight of available evidence, that they are more likely to not be realized than realized. In the event the Company subsequently determines that it would be able to realize deferred income tax assets in excess of their net recorded amount, the Company would reduce the valuation allowance, which would reduce the provision for income taxes. See Note 11. Income Taxes for further discussion of the valuation allowance.
We make judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions as well as by the Internal Revenue Service (“IRS”). In management’s opinion, adequate provisions for income taxes have been made for all open tax years. The potential outcomes of examinations are regularly assessed in determining the adequacy of the provision for income taxes and income tax liabilities. We believe that adequate provisions have been made for reasonably possible outcomes related to uncertain tax matters.
Discontinued Operations
Under the going concern basis of accounting, we reported the disposal of a component or a group of components of the Company in discontinued operations if the disposal of the components or group of components represented a strategic shift that had or was expected to have a major effect on the Company’s operations and financial results.
Share-Based Compensation
Under the going concern basis of accounting, share-based compensation expense was estimated for equity awards at fair value at the grant date. We determined the fair value of restricted stock awards based on the average of the high and low price of its common stock on the date awarded by the Board of Directors. We determined the fair value of stock option awards using a Black-Scholes option pricing model. The Black-Scholes option pricing model requires various judgmental assumptions including the expected dividend yield, stock price volatility, and the expected life of the award. The fair value of performance share based award liabilities were estimated based on a Monte Carlo simulation model. For further discussion, see Note 17. Share-Based and Other Compensation.
Earnings Per Share
Under the going concern basis of accounting, basic income per share is computed by dividing net income attributable to common shareholders by the weighted-average number of shares outstanding, including restricted stock units, during each period presented. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, determined using the treasury stock method.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting periods. Actual results could differ from these estimates.
Recently Accounting Pronouncements
There are no new accounting pronouncements that are applicable or relevant to the Company under the Liquidation Basis of Accounting.
Note 2. Subsequent Events
Subsequent to the end of fiscal year 2021, on August 26, 2021, we sold the Luby’s Cafeterias brand name and the business operations at 35 Luby’s locations to an unrelated third party for an adjusted aggregate consideration of approximately $28.4 million which includes the assumption of certain liabilities and the issuance of notes to us. There can be no assurance that we will realize or receive full value of such consideration. The net asset value of the sale is included in properties and business units for sale on the accompanying consolidated statement of net assets in liquidation at August 25, 2021 at a discounted rate that represents the amount we expect to receive upon liquidation of the notes.
On September 30, 2021, we completed the previously announced sale of 26 real estate properties, which properties were leased to and are operated by LRC, to Store Capital Acquisitions, LLC for cash consideration of $88.0 million. We utilized approximately $17.6 million of the proceeds to repay in full all amounts due under our Credit Facility (see Note 14. Debt) with MSD PCOF Partners VI, LLC. The Credit Facility was terminated effective September 30, 2021.
Subsequent to August 25, 2021, in addition to the properties sold to Store Capital, we sold four other properties for cash consideration of approximately $13.0 million.
On November 1, 2021, we paid a cash liquidating distribution of $2.00 per share to shareholders of record as of October 25, 2021. The liquidating distribution of approximately $62.2 million was paid from the net proceeds from recent property sales.
Note 3. Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation
The liquidation basis of accounting requires the estimation of net cash flows from operations and all costs associated with implementing and completing the plan of liquidation. We project that we will have estimated costs in excess of estimated receipts during the liquidation period. These amounts can vary significantly due to, among other things, the timing and estimates for receipts and costs associated with the operations of our business units until they are sold, the timing of business and property sales, estimates of direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities, the costs associated with the winding up of operations, and other costs that we may incur which are not currently foreseeable. These receipts and accruals will be adjusted periodically as projections and assumptions change. These receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period. Upon transition to the liquidation basis of accounting on November 19, 2020, the Company accrued revenues and expenses expected to be earned or incurred during liquidation. The liability for estimated costs in excess of estimated receipts during liquidation at August 25, 2021 and November 19, 2020 was comprised of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 25, 2021
|
|
November 19, 2020
|
Total estimated receipts during remaining liquidation period
|
|
$
|
25,045
|
|
|
$
|
92,017
|
|
Total estimated costs of operations
|
|
(20,763)
|
|
|
(76,151)
|
|
Selling, general and administrative expenses
|
|
(9,585)
|
|
|
(18,745)
|
|
|
|
|
|
|
Interest expense
|
|
(151)
|
|
|
(2,305)
|
|
Interest component of operating lease payments
|
|
(2,307)
|
|
|
(7,064)
|
|
Capital expenditures
|
|
(120)
|
|
|
(943)
|
|
Sales costs
|
|
(3,408)
|
|
|
(4,079)
|
|
Total estimated costs during remaining liquidation period
|
|
(36,334)
|
|
|
(109,287)
|
|
Liability for estimated costs in excess of estimated receipts during liquidation
|
|
$
|
(11,289)
|
|
|
$
|
(17,270)
|
|
The change in the liability for estimated costs in excess of estimated receipts during liquidation between November 19, 2020 and August 25, 2021 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 19, 2020
|
|
Net Change in Working Capital (3)
|
|
Changes in Estimated Future Cash Flows During Liquidation (4)
|
|
August 25, 2021
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Estimated net inflows from operations (1)
|
|
$
|
7,859
|
|
|
$
|
(21,423)
|
|
|
$
|
15,419
|
|
|
$
|
1,855
|
|
|
|
|
|
|
|
|
|
|
|
|
7,859
|
|
|
(21,423)
|
|
|
15,419
|
|
|
1,855
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Sales costs
|
|
(4,079)
|
|
|
1,876
|
|
|
(1,205)
|
|
|
(3,408)
|
|
Corporate expenditures (2)
|
|
(21,050)
|
|
|
10,445
|
|
|
869
|
|
|
(9,736)
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,129)
|
|
|
12,321
|
|
|
(336)
|
|
|
(13,144)
|
|
|
|
|
|
|
|
|
|
|
Liability for estimated costs in excess of estimated receipts during liquidation
|
|
$
|
(17,270)
|
|
|
$
|
(9,102)
|
|
|
$
|
15,083
|
|
|
$
|
(11,289)
|
|
(1) Estimated net inflows from operations consists of total estimated receipts during liquidation less the sum of total estimated (i) costs of operations, (ii) interest component of operating lease payments and (iii) capital expenditures.
(2) Corporate expenditures consists of (i) selling, general and administrative expenses and (ii) interest expense.
(3) Net change in working capital represents changes in cash, restricted cash, accounts receivable, accounts payable, and accrued expenses and other liabilities as a result of the Company's operating activities for the period from November 19, 2020 to August 25, 2021.
(4) Changes in estimated future cash flows during liquidation includes adjustments to previous estimates and changes in estimated holding periods of our assets.
Note 4. Net Assets in Liquidation
Initial Net Assets In Liquidation
The following is a reconciliation of total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the liquidation basis of accounting as of November 19, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
Total Shareholders' Equity as of November 18, 2020
|
|
$
|
70,763
|
|
Increase due to estimated net realizable value of properties and business units (1)
|
|
78,985
|
|
Decrease due to write-off of deferred financing costs
|
|
(2,260)
|
|
|
|
|
|
|
|
Decrease due to write-off of operating lease right-of-use assets
|
|
(14,829)
|
|
Net increase due to write-off of deferred assets, deferred income and goodwill
|
|
1,952
|
|
Liability for estimated costs in excess of estimated receipts during liquidation
|
|
(17,270)
|
|
Adjustment to reflect the change to the liquidation basis of accounting
|
|
46,578
|
|
Estimated value of net assets in liquidation as of November 19, 2020
|
|
$
|
117,341
|
|
(1) Under the liquidation basis of accounting, all assets are recorded at net realizable value which implicitly includes the tangible and intangible value of all assets. This adjustment at November 19, 2020 reflects adjusting real properties to net realizable value and recording an estimated value for our business units, Luby's Cafeterias, Fuddruckers Restaurants and franchise operations, and Culinary Services.
Current Fiscal Year Activity
Net assets in liquidation increased by $37.5 million during the period from November 19, 2020 through August 25, 2021. The increase was primarily due to a $18.4 million increase in properties and business units for sale and a $15.1 million net increase due to a remeasurement of assets and liabilities.
The increase in properties and business units for sale was due to a change in value attributable to properties that have closed, or are under contract to sell with non-refundable deposits, at prices that were different than our previous liquidation values and to the sale and conversion to franchise locations of Fuddruckers restaurants. This increase was partially offset by a change in the estimated value of our business units and some of our real estate assets.
The $15.1 million increase generated by the remeasurement of assets and liabilities was mainly due to the $10.0 million forgiveness of our PPP loan, $1.8 million increase in projected future operating results for the remainder of the holding period, and $6.5 million increase from our actual operating results for the period from November 19, 2020 to August 25, 2021. This increase was partially offset by increases in actual and projected sale closing costs of $1.2 million and an increase in corporate general and administrative costs of $2.0 million.
We have one class of common stock. The net assets in liquidation at August 25, 2021 would result in liquidating distributions of $5.00 per common share based on 30,973,755 common shares outstanding at that date. This estimate is dependent on projections of costs and expenses to be incurred during the period required to complete the Plan and the realization of estimated net realizable value of our properties and business units. There is inherent uncertainty with these estimates, and they could change materially based on the timing of business and property sales, the performance of the underlying assets, any changes in the underlying assumptions of the projected cash flows, as well as the ultimate vesting of outstanding restricted share awards and exercise of vested stock options. The estimated liquidating distributions per share on a fully diluted basis, assuming all restricted stock awards vest and all in-the-money stock options are exercised, is not materially different than the amount stated above. No assurance can be given that the liquidating distributions will equal or exceed the estimate presented in these consolidated financial statements.
Lease Obligations
Under both the going concern basis of accounting and the liquidation basis of accounting, lease obligations are recorded at the present value of the total fixed lease payments over the reasonably certain lease term using discount rates as of the effective date of the lease and the obligation is reduced as we make lease payments. As a result of the same accounting treatment, there is no reconciling entry to adjust total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the liquidation basis of accounting as of November 19, 2020.
During the fourth quarter of fiscal 2020 and all of fiscal 2021, we were able to settle 29 leases for closed restaurant properties and negotiated an early termination date and reduced lease payment at one operating restaurant property. While the amounts paid to settle our lease liabilities varied, in the aggregate, we have settled these 29 leases for approximately 21% of the total undiscounted base rent payments that would otherwise have been due under the leases through their original contractual termination date. We can offer no assurances that we will continue to settle any lease obligations for less than the total undiscounted base rent payments, or for less than their discounted value recorded within net assets in liquidation.
Note 5. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our consolidated balance sheets that aggregate to the total of the same such amounts shown in the consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
November 18,
2020
|
|
August 26,
2020
|
|
(In thousands)
|
Cash and cash equivalents
|
$
|
14,874
|
|
|
$
|
15,069
|
|
Restricted cash and cash equivalents
|
6,651
|
|
|
6,756
|
|
Total cash and cash equivalents shown in the statement of cash flows
|
$
|
21,525
|
|
|
$
|
21,825
|
|
Restricted cash and cash equivalents as of August 25, 2021 was $5.5 million. Amounts included in restricted cash represent those required to be set aside for (1) estimated amount of interest payable in the next 12 months under the Credit Agreement (see "Note 14. Debt"), (2) collateral for letters of credit issued for potential insurance obligations, which letters of credit expire within 12 months and (3) prefunding of the credit limit under our corporate purchasing card program.
Note 6. Revenue Recognition
Under the going concern basis of accounting, we recognized revenue as described below. Under the liquidation basis of accounting, we estimate the cash receipts from food and beverage sales at each of our restaurants, and fees under our CCS contracts. We estimate these expected cash receipts from operating these businesses through the point when we expect the operations of these businesses or individual income producing properties are sold to a new owner or when we otherwise estimate operations cease. This estimated ending period for operating these businesses and individual income producing property generally varies from first quarter of fiscal 2022 through the third quarter of fiscal 2022. These estimated revenues are included in the calculation of estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets in liquidation. Estimated proceeds from the sale of our operating businesses and real estate assets are recorded separately from the estimated operating revenues and are included in properties and business units for sale on our consolidated statement of net assets in liquidation.
Restaurant Sales
Under the going concern basis of accounting, restaurant sales consisted of sales of food and beverage products to restaurant guests at our Luby’s cafeterias and our Fuddruckers and Cheeseburger in Paradise restaurants. Revenue from restaurant sales was recognized at the point of sale and was presented net of discounts, coupons, employee meals and complimentary meals. Sales taxes that we collected and remitted to the appropriate taxing authority related to these sales were excluded from revenue. Under the liquidation basis of accounting, we have estimated the sales to be collected at each restaurant through the point when we estimate that operations at each restaurant no longer occur under our ownership. This estimated point when we no longer operate restaurants varies based on whether the restaurant location is operated as a Luby's cafeteria or a Fuddruckers restaurant, whether the restaurant location is situated on property we own or lease, and other factors. While we have sold the Fuddruckers Restaurant brand in the fourth quarter of fiscal 2021 and we sold the Luby's Cafeteria brand in the first quarter of fiscal 2022 (see Note 2. Subsequent Events), we continue to own certain Luby's cafeterias and Fuddruckers restaurants that are operated under management agreements with the new owners of the brands. However, it is estimated that, as we sell the real estate or negotiate lease terminations for the properties, most of these restaurants will no longer be operating by the end of calendar year 2021. During this holding period when we operate restaurants, sales are estimated based on recent sales history and consideration of historical seasonal patterns.
We sell gift cards to our customers in our venues and through certain third-party distributors. These gift cards do not expire and do not incur a service fee on unused balances. Under the going concern basis of accounting, sales of gift cards to our restaurant customers were initially recorded as a contract liability, included in accrued expenses and other liabilities, at their expected redemption value. When gift cards were redeemed, we recognized revenue and reduced the contract liability. Discounts on gift cards sold by third parties were recorded as a reduction to accrued expenses and other liabilities and were recognized as a reduction to revenue over a period that approximated redemption patterns. The portion of gift cards sold to customers that are never redeemed is commonly referred to as gift card breakage. We 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 liquidation basis of accounting, the unredeemed gift card balance, net of estimated breakage, is included in accrued expenses and other liabilities on our consolidated statement of net assets in liquidation.
CCS revenue
Our CCS 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 in our CCS business:
Fee-Based Contracts
Revenue from fee-based contracts was 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 was allocated entirely to the management services performance obligation. Under the going concern basis of accounting, we recognized revenue from our management fee and payroll cost reimbursement over time as the services were performed; and we recognized revenue from our food and third party purchases reimbursement at the point in time when the vendor delivered the goods or performed the services.
Profit and Loss Contracts
Revenue from profit and loss contracts consisted primarily of sales made to consumers, typically with little or no subsidy charged to clients. Under the going concern basis of accounting, revenue was recognized at the point of sale to the consumer. Sales taxes that we collected and remitted to the appropriate taxing authority related to these sales were 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 were accounted for as operating costs when incurred.
Revenue from the sale of frozen foods included royalty fees based on a percentage of frozen food sales and was recognized at the point in time when product was 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 consisted primarily of royalties, marketing and advertising fund (“MAF”) contributions, initial and renewal franchise fees, and upfront fees from area development agreements related to our Fuddruckers Restaurant brand. Our performance obligations under franchise agreements consisted 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 accounted for them as a single performance obligation, which was 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 were recognized as franchise sales occur.
Under the going concern basis of accounting, initial and renewal franchise fees and area development fees were recognized as revenue over the term of the respective agreement. Area development fees are not distinct from franchise fees, so upfront fees paid by franchisees for exclusive development rights were deferred and apportioned to each franchise restaurant opened by the franchisee. The pro-rata amount apportioned to each restaurant was accounted for as an initial franchise fee.
Revenue from vending machine sales was recorded at the point in time when the sale occurred.
We sold our Fuddruckers Franchise business in the fourth quarter of fiscal 2021. As such, there are no estimated cash receipts from this business included in the calculation of estimated costs in excess of estimated receipts on our consolidated statement of net assets in liquidation as of August 25, 2021.
Contract Liabilities
Contract liabilities consisted of (1) deferred revenue resulting from initial and renewal franchise fees and upfront area development fees paid by franchisees, which, under 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 third party retailers. These contract liabilities are included in accrued expenses and other liabilities in our consolidated balance sheet as of August 26, 2020. The following table reflects the change in contract liabilities for the fiscal year ended August 26, 2020, under the going concern basis of accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 26, 2020, total sales of $214.0 million was comprised of revenue from performance obligations satisfied over time of $18.5 million and revenue from performance obligations satisfied at a point in time of $195.5 million.
See Note 8. Reportable Segments for disaggregation of revenue by reportable segment.
Note 7. Leases
Under the going 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 contract. Our material operating leases consist of restaurant locations and administrative facilities ("Property Leases"). U.S. GAAP requires that our leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the date on which the leased asset is available for our use (the “Commencement Date”) and the lease term used in the evaluation includes the non-cancellable period for which we have the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option would result in an economic penalty (the "Reasonably Certain Lease Term"). Our lease agreements generally contain a primary term of five years to 30 years with one or more options to renew or extend the lease generally from one year to five years each. In addition to leases for our restaurant locations and administrative facilities, we also lease vehicles and administrative equipment under operating leases.
At the inception of a new lease, we recognized an operating lease liability and a corresponding right-of-use asset, which are calculated as the present value of the total fixed lease payments over the reasonably certain lease term using discount rates as of the effective date.
Property lease agreements may include rent holidays, rent escalation clauses and contingent rent provisions based on a percentage of sales in excess of specified levels. Contingent rental expenses (“variable lease cost”) were recognized prior to the achievement of a specified target, provided that the achievement of the target was considered probable. Most of our lease agreements include renewal periods at our option. We included the rent holiday periods and scheduled rent increases in our calculation of straight-line rent expense.
Lease cost for operating leases was recognized on a straight-line basis and included the amortization of the right-of-use asset and interest expense related to the operating lease liability. We used the reasonably certain lease term in our calculation of straight-line rent expense. We expensed rent from commencement date through restaurant open date as opening expense. Once a restaurant opened for business, we recorded straight-line rent expense plus any additional variable contingent rent expense (such as common area maintenance, insurance and property tax costs) to the extent it is due under the lease agreement as occupancy expense for our restaurants and selling, general and administrative expense for our corporate office and support facilities. The interest expense related to the lease liability for abandoned leases was recorded to provision for asset impairments
and store closings. Rental expense for lease properties that were subsequently subleased to franchisees or other third parties was recorded as other income.
We made judgments regarding the reasonably certain lease term for each property lease, which impacted the classification and accounting for a lease as a finance lease or an operating lease, the rent holiday and/or escalations in payments that were taken into consideration when calculating straight-line rent, and the term over which leasehold improvements for each restaurant were amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.
The discount rate used to determine the present value of the lease payments is our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, we generally cannot determine the interest rate implicit in the lease.
Lessor
We have occasionally leased or subleased certain restaurant properties to our former franchisees or to third parties. The lease descriptions, terms, variable lease payments and renewal options are generally similar to our lessee leases described above. Similar to our lessee accounting, we elected the practical expedient that allows us to not separate non-lease components from lease components in regard to all property leases where we are the lessors.
Supplemental balance sheet (statement of net asset in liquidation) information related to our leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Balance Sheet Classification
|
|
August 25, 2021
|
|
August 26, 2020
|
|
|
|
|
|
(Liquidation Basis)
|
|
(Going Concern Basis)
|
|
|
|
|
|
(in thousands)
|
|
Right-of-use assets
|
|
Operating lease right-of-use assets
|
|
$
|
—
|
|
|
$
|
16,756
|
|
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
Operating lease liabilities-current
|
|
N/A
|
|
$
|
3,903
|
|
|
Non-current lease liabilities
|
|
Operating lease liabilities-noncurrent
|
|
N/A
|
|
17,797
|
|
|
Total lease liabilities
|
|
|
|
$
|
7,181
|
|
|
$
|
21,700
|
|
|
Weighted-average lease terms and discount rates at August 25, 2021 and August 26, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
4.72 years
|
|
5.73 years
|
|
|
|
|
|
|
Weighted-average discount rate
|
9.55%
|
|
9.57%
|
|
Under the going concern basis of accounting, components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
Fiscal Year Ended
|
|
|
|
|
|
November 18, 2020
|
|
August 26, 2020
|
|
|
|
|
|
(in thousands)
|
|
|
|
Operating lease expense
|
|
$
|
1,120
|
|
|
$
|
7,700
|
|
|
|
|
Variable lease expense
|
|
138
|
|
|
933
|
|
|
|
|
Short-term lease expense
|
|
92
|
|
|
247
|
|
|
|
|
Sublease expense
|
|
18
|
|
|
412
|
|
|
|
|
Total lease expense
|
|
$
|
1,368
|
|
|
$
|
9,292
|
|
|
|
|
Under the going concern of accounting, operating lease income was included in other income on our consolidated statements of 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 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 8. Reportable Segments
As more fully described at Note 1. Nature of Operations and Significant Accounting Policies, through November 18, 2020, we had five reportable segments: Luby’s Cafeterias, Fuddruckers Restaurants, Cheeseburger in Paradise Restaurants, Fuddruckers franchise operations, and CCS. In connection with our Plan of Liquidation, we have one reportable segment as of November 19, 2020.
Company-owned restaurants
Company-owned restaurants consisted of Luby’s Cafeterias, Fuddruckers Restaurants and Cheeseburger in Paradise Restaurant reportable segments. We considered each restaurant to be an operating segment because operating results and cash flow could be determined for each restaurant. We aggregated our restaurant operating segments into reportable segments by restaurant brand because the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, the long-term store level profit margins, and the nature of the regulatory environment were similar. The chief operating decision maker analyzed store level profit which is defined as restaurant sales and vending revenue, less cost of food, payroll and related costs, other operating expenses and occupancy costs. All Company-owned restaurants are casual dining restaurants.
The Luby’s Cafeterias segment included the results of our company-owned Luby’s cafeteria restaurants. The total number of Luby’s cafeterias operating at November 18, 2020 and August 26, 2020 were 60 and 61, respectively.
The Fuddruckers Restaurant segment included the results of our company-owned Fuddruckers restaurants. We were operating 24 Fuddruckers restaurants at both November 18, 2020 and August 26, 2020.
Included in the restaurant counts above are five Combo units, where a Luby's cafeteria and a Fuddruckers restaurant occupy the same location. The Combo units are included in the above counts for both Luby's Cafeterias and Fuddruckers Restaurants.
The last Cheeseburger in Paradise restaurant was permanently closed in March, 2020.
CCS
CCS, branded as Luby’s Culinary Services, consists of a business line has 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 CCS 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. We were operating 26 CCS contracts at both November 18, 2020 and August 26, 2020.
Fuddruckers Franchise Operations
We only offered franchises for the Fuddruckers brand. Initial franchise agreements generally have a term of 20 years. Franchise agreements typically granted franchisees an exclusive territorial license to operate a single restaurant within a specified area.
Franchisees bore all direct costs involved in the development, construction, and operation of their restaurants. In exchange for a franchise fee, we provided 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 were required to operate their restaurants in accordance with Fuddruckers standards and specifications, including controls over menu items, food quality, and preparation. The Company required the successful completion of its training program by a minimum of three managers for each franchised restaurant. In addition, franchised restaurants were 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.
We had 71 franchised restaurants at both November 18, 2020 and August 26, 2020.
Segment Table
The tables below show segment financial information under the 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $6.9 million at August 26, 2020.
(2) Includes Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles of $34 thousand at August 26, 2020.
(3) Fuddruckers franchise operations segment includes royalty intangibles of $8.4 million at August 26, 2020.
Note 9. Fair Value Measurement
GAAP establishes a framework for using fair value to measure assets and liabilities, and expands disclosure about fair value measurements. Fair value measurements guidance applies whenever other statements require or permit assets or liabilities to be measured at fair value.
GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These include:
•Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
•Level 2: Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.
•Level 3: Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value.
There were no recurring fair value measurements related to assets at August 26, 2020.
There were no recurring fair value measurements related to liabilities at August 26, 2020.
Under the going concern basis of accounting, non-recurring fair value measurements related to impaired property and equipment for the fiscal year ended August 26, 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
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)
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
Property and equipment related to Company-owned restaurants(1)
|
$
|
481
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
481
|
|
|
$
|
(4,831)
|
|
Goodwill(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(320)
|
|
Property held for sale(3)
|
3,362
|
|
|
—
|
|
|
—
|
|
|
3,362
|
|
|
(14)
|
|
Operating lease right-of-use assets(4)
|
272
|
|
|
—
|
|
|
—
|
|
|
272
|
|
|
(5,380)
|
|
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 $5.3 million were written down to their fair value of $0.5 million, resulting in an impairment charge of $4.8 million.
(2) In accordance with Subtopic 350-20, goodwill with a carrying amount of $0.3 million was written down to its implied fair value of zero resulting in an impairment charge of $0.3 million.
(3) In accordance with Subtopic 360-10, long-lived assets held for sale with carrying values of $3.4 million were written down to their fair value, less cost to sell, of $3.4 million, resulting in an impairment charge of $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.
(5) Total impairments are included in provision for asset impairments and restaurant closings in the our consolidated statement of operations.
Note 10. Accounts and Notes Receivable
Under the going concern basis of accounting, trade and other receivables, net, consisted of the following:
|
|
|
|
|
|
|
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 26, 2020 was $3.1 million, primarily the result of 28 contracts with balances of $0.1 million to $0.7 million per contract entity. These 28 contracts collectively represented 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 $1.7 million at August 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 26, 2020 was $1.0 million. At August 26, 2020, the Company had 71 operating franchise restaurants with no significant concentration of accounts receivables.
The change in allowances for doubtful accounts was as follows:
|
|
|
|
|
|
|
Fiscal Year 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 $1.5 million Balance Sheet write-off in fiscal 2020 is comprised of $0.3 million of CCS customer accounts, $0.4 million of receivables from franchisees and $0.8 million of other receivables (including $0.4 million of former tenant accounts) that were reserved in fiscal years 2018 through and including 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 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 25,
2021
|
|
August 26,
2020
|
|
(In thousands)
|
Deferred income tax assets:
|
|
|
|
Workers’ compensation, employee injury, and general liability claims
|
$
|
402
|
|
|
$
|
562
|
|
Deferred compensation
|
80
|
|
|
162
|
|
Net operating losses
|
10,603
|
|
|
9,916
|
|
General business and foreign tax credits
|
12,105
|
|
|
12,105
|
|
Depreciation, amortization and impairments
|
2,291
|
|
|
3,125
|
|
Interest expense
|
1,953
|
|
|
1,886
|
|
Lease liabilities
|
1,551
|
|
|
4,731
|
|
Straight-line rent, dining cards, accruals, and other
|
416
|
|
|
1,413
|
|
Subtotal
|
29,401
|
|
|
33,900
|
|
Valuation allowance
|
(28,506)
|
|
|
(29,478)
|
|
Total deferred income tax assets
|
895
|
|
|
4,422
|
|
Deferred income tax liabilities:
|
|
|
|
Property taxes and other
|
680
|
|
|
769
|
|
Lease assets
|
924
|
|
|
3,653
|
|
Total deferred income tax liabilities
|
1,604
|
|
|
4,422
|
|
Net deferred income tax asset
|
$
|
(709)
|
|
|
$
|
—
|
|
At August 25, 2021, we recognized a net deferred tax liability of $0.7 million after valuation allowance as a result of anticipated taxable gains to be generated from future property sales as part of our Plan of Liquidation and our ability to utilize our deferred
tax assets. The most significant deferred tax asset prior to valuation allowance is our general business tax credits carryovers to future years of $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.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 the Plan of Liquidation. In the third quarter of fiscal 2018, we concluded that a full valuation allowance on our net deferred tax assets was necessary. As of August 25, 2021, we recognized a deferred tax 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
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Week Period Ended
|
|
Fiscal Year Ended
|
|
November 18,
2020
|
|
August 26,
2020
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
(in thousands, except percentages)
|
Income tax benefit from continuing operations at the federal rate
|
$
|
(618)
|
|
|
21.0
|
%
|
|
$
|
(6,104)
|
|
|
21.0
|
%
|
Permanent and other differences:
|
|
|
|
|
|
|
|
Federal jobs tax credits (wage deductions)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock options and restricted stock
|
4
|
|
|
(0.1)
|
|
|
17
|
|
|
(0.1)
|
|
Other permanent differences
|
1
|
|
|
—
|
|
|
3
|
|
|
—
|
|
State income tax, net of federal benefit
|
53
|
|
|
(1.8)
|
|
|
189
|
|
|
(0.7)
|
|
General Business Tax Credits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Other
|
70
|
|
|
(2.4)
|
|
|
580
|
|
|
(1.9)
|
|
Change in valuation allowance
|
548
|
|
|
(18.7)
|
|
|
5,672
|
|
|
(19.5)
|
|
Provision for income taxes from continuing operations
|
$
|
58
|
|
|
(2.0)
|
%
|
|
$
|
357
|
|
|
(1.2)
|
%
|
For the fiscal year ended August 25, 2021, including both continuing and discontinued operations, the Company is estimated to report a federal taxable loss of $3.4 million. For the fiscal year ended August 26, 2020, including both continuing and discontinued operations, the Company generated federal taxable loss of $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 jurisdictions. The Company's U.S. federal income tax return remains open to examination for fiscal 2018 through fiscal 2020.
There were no payments of federal income taxes in fiscal 2021 or fiscal 2020. The Company has income tax filing requirements in over 30 states. State income tax payments were $0.3 million and $0.4 million in fiscal 2021 and 2020, respectively.
The following table is a reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of fiscal 2020 and 2021 (in thousands):
|
|
|
|
|
|
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 25, 2021. Under the going concern basis of accounting, the Company had 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 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.
Note 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 26, 2020, together with the related estimated useful lives used in computing depreciation and amortization, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26, 2020
|
|
Estimated
Useful Lives (years)
|
|
|
|
|
|
|
|
|
Land
|
$
|
42,572
|
|
|
|
|
—
|
|
|
Restaurant equipment and furnishings
|
60,685
|
|
|
3
|
|
to
|
|
15
|
Buildings
|
114,909
|
|
|
20
|
|
to
|
|
33
|
Leasehold and leasehold improvements
|
20,429
|
|
|
|
|
Lesser of lease term or
estimated useful life
|
|
|
Office furniture and equipment
|
3,178
|
|
|
3
|
|
to
|
|
10
|
|
|
|
|
|
|
|
|
|
241,773
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
(141,174)
|
|
|
|
|
|
|
|
Property and equipment, net
|
$
|
100,599
|
|
|
|
|
|
|
|
Intangible assets, net
|
$
|
15,343
|
|
|
15
|
|
to
|
|
21
|
Goodwill
|
$
|
195
|
|
|
|
|
|
|
|
Depreciation expense for the 12 week period ended November 18, 2020 and fiscal year 2020 was $1.8 million and $10.1 million, respectively.
Under the going concern basis of accounting, intangible assets, net, consisted primarily of the Fuddruckers trade name and franchise agreements that were being amortized over the expected accounting life of 21 years from the date of acquisition based on the expected use of its assets and the restaurant environment in which it was being used. The trade name represented a respected brand with customer loyalty and the Company intended to cultivate and protect the use of the trade name. The franchise agreements, after considering renewal periods, had an estimated accounting life of 21 years from the date of acquisition, July 2010, and was being amortized over this period of time.
Intangible assets, net, also included 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 had 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 2020 was $0.3 million and $1.4 million, respectively.
The following table presents intangible assets as of August 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
|
|
Under the going concern basis of accounting, goodwill, net of accumulated impairment was approximately $0.2 million as of August 26, 2020. We recorded no goodwill impairment charges during the 12 week period ended November 18, 2020. Due to the effects of the COVID-19 pandemic on our operations, we identified a triggering event in the third quarter of fiscal 2020. We performed an impairment test of goodwill and recorded an impairment loss related to our Cheeseburger in Paradise restaurants of $0.3 million. Under the liquidation method of accounting, there is no goodwill included in our statement of net assets in liquidation.
Note 13. Current Accrued Expenses and Other Liabilities
The following table sets forth current accrued expenses and other liabilities as of August 25, 2021 and August 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
|
|
(1) Income taxes, legal and other includes accrued lease termination costs. See Note 15 to our consolidated financial statements in this Form 10-K for further discussion of lease termination costs.
Note 14. Debt
The following table summarizes our debt balances at August 25, 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, 2021, we received notice from the Small Business Administration ("SBA") that our $10.0 million PPP Loan had been forgiven in full and the principal and accrued interest amounts on our loan were settled on the same date.
2018 Credit Agreement
On December 13, 2018, we entered into a credit agreement (amended as defined below), the (“Credit Agreement”) among the Company, the lenders from time to time party thereto, and a subsidiary of MSD Capital, MSD PCOF Partners VI, LLC (“MSD”), as Administrative Agent, pursuant to which the lenders party thereto agreed to make loans to the Company from time to time up to an aggregate principal amount of $80.0 million consisting of a $10.0 million revolving credit facility (the “Revolver”), a $10.0 million delayed draw term loan (“Delayed Draw Term Loan”), and a $60.0 million term loan (the “Term Loan”, and together with the Revolver and the Delayed Draw Term Loan, the “Credit Facility”). The Credit Facility terminates on, and all amounts owing thereunder must be repaid on December 13, 2023.
On July 31, 2019, we entered into the First Amendment to the Credit Agreement (the “First Amendment”) to extend the 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 Delayed Draw Term Loan have been terminated or reduced to zero in accordance with the terms of the 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
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 Revolver, Delayed Draw Term Loan, and Term Loan bear interest at the three month London InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest is payable quarterly and accrues 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.
As of August 25, 2021, the amount due under the Credit Facility of $17.0 million (including the Revolver and the Delayed Draw Term Loan outstanding balances of $5.0 million and $5.0 million, respectively) was payable on the 5th Anniversary of the Credit Facility (December 13, 2023): .
As of August 25, 2021, we had approximately no principal payments due under the Credit Facility in the next 12 months.
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 are subject to a make whole premium during years one and two equal to the present value of all interest otherwise owed from the date of the prepayment through the end of year two, a 2.0% fee during year three, and a 1.0% fee during year four. 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 is 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, are applied as mandatory prepayments of our Term Loan. Mandatory prepayments are not subject to the make whole premium described above.
The Credit Facility contains customary covenants and restrictions on our ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and contains customary events of default. Specifically, among other things, we are 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 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 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.
Interest Expense
Total interest expense incurred for the 12 week period ended November 18, 2020 and the fiscal year 2020 was $1.2 million and $6.4 million, respectively. No interest expense was allocated to discontinued operations and no interest was capitalized in either period.
Note 15. Impairment of Long-Lived Assets, Store Closings, Discontinued Operations and Property Held for Sale
Impairment of Long-Lived Assets and Store Closings
Under the going concern basis of accounting, we periodically evaluated long-lived assets held for use and held for sale whenever events or changes in circumstances indicated that the carrying amount of those assets may not be recoverable. We analyzed historical cash flows of operating locations and compared results of poorer performing locations to more profitable locations. We also analyzed lease terms, condition of the assets and related need for capital expenditures or repairs, as well as construction activity and the economic and market conditions in the surrounding area.
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, we estimated future cash flows using assumptions based on possible outcomes of the areas analyzed. If the estimated undiscounted future cash flows were less than the carrying value of the location’s assets, we 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, required management’s subjective judgments. Assumptions and estimates used included 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 was 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 could vary within a wide range of outcomes. We considered the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss was 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
|
|
November 18, 2020
|
|
August 26, 2020
|
|
(In thousands, except per share data)
|
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
|
$
|
32
|
|
|
$
|
(1,364)
|
|
Effect on EPS:
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
0.05
|
|
Assuming dilution
|
$
|
—
|
|
|
$
|
0.05
|
|
The $0.1 million gain on asset impairments and restaurant closings in the 12 week period ended November 18, 2020 is primarily related to the $0.7 million net gain on the termination of seven 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 for one 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 related to our Cheeseburger in Paradise brand. $1.2 million for certain surplus equipment written down to fair value, as well as $1.8 million of store closing expenses. These losses were partially offset by $3.3 million net gain on the termination of 17 leases for locations where we permanently ceased operations and negotiated buyouts of the leases. See Abandoned Lease Facilities - Liability for Store Closing section of this Note 15.
The $11.6 million net gain on disposition of property and equipment in fiscal 2020 is primarily related to $8.4 million gains on the sales of seven previously held for sale properties and $3.9 million gains on two previously held for use properties, partially offset by routine asset retirements.
Discontinued Operations
As a result of the first quarter fiscal 2010 adoption of the Company’s Cash Flow Improvement and Capital Redeployment Plan, the Company reclassified 24 Luby’s cafeterias to discontinued operations. Under the going concern basis of accounting, one location remained held for 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
|
|
|
|
|
|
Under the going concern basis of accounting, losses from discontinued operations for the 12 week period ended November 18, 2020 and the fiscal year ended August 26, 2020 were not significant.
Property Held for Sale
Under the going concern basis of accounting, property held for sale was accounted for as discussed below. Under the liquidation basis of accounting, all of our property is held for sale and is recorded on the consolidated statement of net assets in liquidation at the amount of their estimated cash proceeds or other consideration from liquidation.
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 were valued at the lower of net depreciable value or net realizable value.
At August 26, 2020, the Company had 10 owned properties recorded at $11.2 million in property held for sale.
Abandoned Leased Facilities - Liability for Store Closing
As of August 25, 2021 and August 26, 2020, we classified seven and 18 leased restaurants locations as abandoned. Although we remain obligated under the terms of the leases for the rent and other costs that may be associated with the leases, we decided to cease operations and we have no foreseeable plans to occupy the spaces as a company restaurant in the future. The total liability represents the present value of the total amount of rent and other direct costs (such as common area costs, property taxes, and insurance allocated by the landlord) for the remaining lease term less the present value of any sublease income expected to be collected. During fiscal 2021 we settled and terminated 11 abandoned leases.
The liability for our abandoned leases were as 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
|
|
Note 16. Commitments and Contingencies
Off-Balance Sheet Arrangements
The Company has no off-balance sheet 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 17. Share-Based and Other Compensation
We have two active share-based stock plans, the Luby's Incentive Stock Plan, as amended and restated effective December 5, 2015 (the "Employee Stock Plan") and the Nonemployee Director Stock Plan, 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.
No shares remain available for future issuance as of August 25, 2021 under the Non-employee Director Stock Plan. Compensation cost for share-based payment arrangements under the Nonemployee Director Stock Plan, recognized in selling, general and administrative expenses for the 12 week period ended November 18, 2020 and fiscal year 2020 was $0.2 million and $0.8 million, respectively.
Of the 4.1 million shares approved for issuance under the Employee Stock Plan (which amount includes shares authorized under the original plan and shares authorized pursuant to the amended and restated plan effective as of December 5, 2015), 7.4 million options and restricted stock units were granted, 5.5 million options and restricted stock units were canceled or expired and added back into the plan, since the plans inception in 2005. Approximately 2.2 million shares remain available for future issuance as of August 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 year 2020 was $25 thousand and $0.3 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 2021 or 2020. No options to purchase shares remain outstanding under this plan, as of August 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. No options were granted under the Employee Stock Plan in fiscal 2021 or 2020. Options to purchase 401,690 shares at options prices from $2.82 to $4.89 per share remain outstanding as of August 25, 2021.
The Company 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 were 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 used an estimate of expected lives for options granted during the period based on historical data.
•The risk-free interest rate was 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 was 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 2021 and 2020 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Under
Fixed
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
(Per share)
|
|
(In Years)
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 28, 2019
|
1,387,412
|
|
|
$
|
4.06
|
|
|
5.7
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 25, 2021 for options outstanding and options exercisable.
At August 25, 2021, there was no unrecognized compensation cost related to stock options as all outstanding stock options are vested.
No options were granted in fiscal 2021and fiscal 2020.
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.
A summary of the Company’s restricted stock unit activity during fiscal years 2020 and 2021 and is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Units
|
|
Weighted
Average
Fair Value
|
|
Weighted-
Average
Remaining
Contractual Term
|
|
|
|
(Per share)
|
|
(In years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at August 28, 2019
|
274,009
|
|
|
$
|
3.39
|
|
|
1.2
|
Granted
|
65,236
|
|
|
2.27
|
|
|
—
|
|
Vested
|
(152,139)
|
|
|
3.96
|
|
|
—
|
|
Forfeited
|
(13,298)
|
|
|
2.82
|
|
|
—
|
|
Unvested at August 26, 2020
|
173,808
|
|
|
$
|
2.57
|
|
|
2.0
|
|
|
|
|
|
|
Vested
|
(168,572)
|
|
|
2.59
|
|
|
—
|
|
|
|
|
|
|
|
Unvested at August 25, 2021
|
5,236
|
|
|
$
|
1.92
|
|
|
1.1
|
At August 25, 2021, there was $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 1.1 years.
Performance Based Incentive Plan
The 2018 TSR Performance Based Incentive Plan (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 grant date fair value of the 2018 TSR Plan was determined based on a Monte Carlo simulation model for a period of three years. The target number of shares for distribution at 100% of the award was 373,294 shares on the grant date. The 2018 TSR Plan was accounted for as an equity award since the Plan provided for a specified number of shares. The expense for this Plan year was 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 2020 was a credit to expense of $0.1 million and is recorded in selling, general and administrative expenses on our consolidated statement of operations.
Restricted Stock Awards
Under the Nonemployee Director Stock Plan, directors received grants of restricted stock in lieu of cash payments, for all or a portion of their compensation as directors. Directors received 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 was 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 six 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
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 year ended August 26, 2020 was zero, and the unfunded accrued liability included in “Other Liabilities” on the consolidated statement of net assets as of August 25, 2021 and on the Company’s consolidated balance August 26, 2020 was $20 thousand and $24 thousand, respectively.
Nonemployee Director Phantom Stock Plan
The Company has a Nonemployee Director Phantom Stock Plan (“Phantom Stock Plan”). Authorized 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 25, 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. Through 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 year ended August 26, 2020 was zero and $0.2 million, respectively.
Severance Agreements
On August 12, 2020, the Board of Directors approved severance agreements for eight 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 six remaining members of management with severance agreements as of August 25, 2021 is $871 thousand.
Note 18. 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 be operated 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 a Fuddruckers restaurant at this location. Each of these transactions was approved by the Finance and Audit Committee of our Board of Directors.
Key Management Personnel
Mr. Pappas resigned his position as President and Chief Executive Officer, effective January 27, 2021. Mr. Pappas remained a member of the Board of Directors of the Company until August 23, 2021. Previously, on December 11, 2017, the Company had entered into a new employment agreement with Mr. Pappas. Under the employment agreement, which is no longer effective as of January 27, 2021, the initial term of Mr. Pappas' employment ended on August 28, 2019 and automatically renewed for additional one year periods, unless terminated in accordance with its terms. The employment agreement had been unanimously approved by the Executive Compensation Committee of our Board of Directors as well as by the full Board at that time. Previously, effective August 1, 2018, the Company and Mr. Pappas agreed to reduce his fixed annual base salary to one dollar.
Also, effective January 27, 2021, the Board of Directors appointed John Garilli as the Company’s Interim President and Chief Executive Officer. The Company and Mr. Garilli’s employer, Winthrop Capital Advisors LLC ("WCA"), have entered into an agreement (the “Agreement”), pursuant to which the Company paid WCA a one-time fee of $50,000 and will pay a monthly fee of $20,000 for so long as Mr. Garilli serves the Company in said positions. The Company has also entered into an Indemnity Agreement with Mr. Garilli and WCA. The Company and WCA had previously entered into a consulting agreement, pursuant to which WCA provided consulting services related to the Company’s adoption of the liquidation basis of accounting in the filing of our Quarterly Report on Form 10-Q for the quarter ended December 16, 2020. The Company and WCA also executed separate consulting agreements to provide similar services for the filing of our Quarterly Report on Form 10-Q for the quarters ended March 10, 2021 and June 2, 2021, and for the filing of our Annual Report on Form 10-K for the fiscal year ended August 15, 2021, respectively.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
Note 19. Common Stock
At August 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 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)
|
|
(a) Potentially dilutive shares, not included in the computation of net loss per share because to do so would have been anti-dilutive, totaled 115,515 shares for the 12 week period ended November 18, 2020 and 76,572 shares for the fiscal 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 849,970 shares for the 12 week period ended November 18, 2020 and 860,501 shares for the fiscal year ended August 26, 2020.
Note 21. Shareholder Rights Plan
The Board of Directors adopted a shareholder rights plan with a 10% triggering threshold and declared a dividend distribution of one right initially representing the right to purchase one half of a share of Luby’s common stock, upon specified terms and conditions.
The 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 $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 were not affected by the adoption of the shareholder rights plan.
The shareholder rights plan will terminate on February 15, 2022 unless earlier terminated or extended by the Board of Directors.