Good Food
from Good People
LUBY’S, INC.
13111 Northwest Freeway
Suite 600
Houston, TX 77040
713.329.6800
lubysinc.com
LUBY’S, INC. ANNUAL REPORT
2019
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Gerald Bodzy (1+, 2+, 3, 4)
Chairman of the Board, Luby’s, Inc.
President and Owner
Showcase Custom Vinyl Windows and Doors
Gasper Mir, III (1, 2, 4)
Former Principal, MFR Group, Inc.
Retired Certified Public Accountant
Christopher J. Pappas
President and Chief Executive Officer
Luby’s, Inc.
John Morlock (2, 3+)
Randolph Read (1, 2+, 4)
President and Chief Executive Officer
Nevada Strategic Credit Investments, LLC
Jill Griffin (1, 3)
Principal,
Griffin Group
Frank Markantonis (1, 2, 4)
Attorney
Law Offices of Frank Markantonis
Joe C. McKinney (1, 2, 3, 4+)
Vice Chairman,
Broadway National Bank
Twila Day (2, 3, 4)
Chief Information Officer
Huntsman Corporation
(1) Nominating & Corporate Governance Committee
(2) Special Committee
(3) Compensation Committee
(4) Finance & Audit Committee
+ Indicates Chair
Current Board as of December 27, 2019
Gerald Bodzy
Chairman of the Board*
Christopher J. Pappas
President and Chief Executive Officer+*
Benjamin Todd Coutee
Chief Operating Officer*
K. Scott Gray
Senior Vice President, Chief Financial Officer,
Treasurer and Controller*
OFFICERS
Trent Taylor
Vice President, Luby’s Operations
Shan Peters
Vice President, Fuddruckers Operations
Michael Racusin
Associate General Council and Corporate Secretary*
Philip Rider
Vice President, Accounting and SEC Reporting
Paulette Gerukos
Vice President, Human Resources
Steve Goodweather
Vice President,
Financial Planning and Analysis and Investor Relations
Bill Gordon
Vice President, Real Estate
David Greenberg
Vice President, Brand and Marketing Strategy
Derrick Ross
Vice President, Risk Management
John Holzem
Vice President, Information Technology
* Officers of Luby’s, Inc.
Officers as of August 30, 2019
To Our Shareholders,
Fiscal 2019 proved to be a challenging year for our
these preferences, including enhanced options for din-
brands and the company. We are clearly not pleased
ing away from the stores and through our use of tech-
with continuing losses and their impact on our share-
nology.
holders. The business landscape for the restaurant in-
Recapping fiscal 2019 results, we grew adjusted
dustry is experiencing rapid change and we are taking
EBITDA (earnings before interest, taxes, depreciation
steps to effectively compete. Disruptive factors such as
and amortization) from zero in fiscal 2018 to $3.7 mil-
home delivery channels, on-line ordering, grocery store
lion in fiscal 2019 – this is before other charges reflect-
meal-replacement options, along with an environment
ing restructuring and other one-time costs. We never-
of low unemployment are challenging all restaurant op-
theless reported a loss from continuing operations of
erators to accept and adopt the new fulfillment options.
$15.2 million in fiscal 2019, compared to a loss of $33.0
Throughout the fiscal year, we evaluated every aspect of
million in the prior year. Fiscal 2019 same-store sales
our company: store operations, corporate overhead, the
declined 4.2%; however, guest traffic trends demon-
real estate portfolio, and our funding needs, along with
strated improvement throughout the year. Early in fiscal
ways to streamline operations throughout the organi-
2020, that positive trend persists as guest traffic con-
zation to be more efficient. We are focused on increas-
tinues to improve.
ing sales and guest traffic and improving our business
In Culinary Contract Services, we are very pleased
model at the restaurant and corporate office level, in-
with the continued growth momentum in this business
cluding reducing corporate overhead significantly to fit
where revenue increased $6.1 million, or 23.7% in fiscal
the current size of our business.
2019 compared to fiscal 2018 and has doubled over the
Our namesake Luby’s Cafeteria and our Fuddruckers
past four years. We continue to see additional opportu-
“World’s Greatest Hamburgers” have a long history with
nities for growth in this business segment.
loyal guests that seek us out in the marketplace. These
While working to grow guest traffic, we are also fo-
are iconic American brands that have served guests
cused on lowering expenses as we better align our over-
fresh, wholesome and delicious offerings for decades.
head with the reduced level of stores in operation. Over
So, while we enjoy terrific market recognition and guest
the last two fiscal years, we closed 38 underperforming
affinity for our brands, we realize we need to accomplish
restaurants: 9 Luby’s Cafeterias, 22 Fuddruckers, and
more to restore profitability. We have installed fresh
7 Cheeseburger in Paradise restaurants. This reduced
leadership with a new Chief Operating Officer, Marketing
operational footprint allows us to concentrate all ef-
Vice President, and Information Technology Vice Presi-
forts and capital on the better performing remaining
dent, as well as many highly capable field management
locations. In fiscal 2019, corporate overhead costs de-
individuals that are executing the changes necessary to
creased approximately 12%. In addition, we have several
change the performance of our brands. The turn-around
levers we plan to pull in 2020 to reduce costs further.
of the business in the highly competitive marketplace
Additionally, in early fiscal 2019, we entered into a
requires a multi-pronged approach. To grow guest traf-
new 5-year credit agreement, giving us additional time
fic, we must meet and exceed our guest expectations
to return to profitability.
for service as well as food quality and menu relevance.
To enhance short-term financial flexibility while
As guest preferences evolve, we are changing to meet
working to improve our financial performance, we also
sold several restaurant properties generating $41 mil-
ing through digital channels on social media, websites
lion over the last 18 months. The company continues to
such as Yelp, and in-application banner ads and much
own 74 real estate properties, a very significant asset
more.
which we intend to manage for the long-term benefit of
Within our Luby’s Cafeteria business, we continue
our shareholders.
to provide guests with convenient, great tasting, home
Turning now to the capital investment side, our ex-
style meals at an excellent value in a comfortable en-
penditures in fiscal 2019 were less than $4.0 million,
vironment. We continue to see positive results as we
a significant decrease from over $13.0 million in fiscal
maintain a consistent pricing structure that allows the
2018. We continue to conserve capital, while investing
value-minded guest an opportunity to dine with us
at a level to maintain our restaurants’ overall function
multiple times per week. As we continue to grow traffic,
and guest appeal.
our marketing efforts focus on existing frequent guests
At the board level, we replaced three retiring direc-
who are loyal to the brand. Our Cafeterias are a Texas
tors during fiscal 2019 with three new independent di-
born brand, and we are speaking to that proud heri-
rectors, adding significant public board and restaurant
tage in a way that resonates to this key demographic
industry experience to our board. In addition, Gerald
throughout our Texas markets.
Bodzy assumed the role of Independent Chairman in
Fuddruckers remains a strong brand that is widely
August 2019. In September 2019, the company’s Board
known and well-regarded. While our same-store sales
of Directors formed a new Board special committee,
fell short of expectations in 2019, we believe we are on
comprised of independent directors, with the purpose
the right path to improve those results in 2020 in a very
of establishing a strategic review process to identify,
competitive restaurant category segment. A primary fo-
examine and consider a range of strategic alternatives
cus at Fuddruckers, similar to the value orientation in
that are available to the company with the objective of
our cafeteria restaurants, is promoting our $7.00, $8.00
maximizing shareholder value.
and $9.00 burger combo options, along with high-
Within our operations, we evaluated guest prefer-
er-priced specialty chef-inspired premium offerings
ences and technological trends, as our team has been
such as our Angus truffle-infused burger and our amaz-
focused on off-premise dining as the emerging factor
ing Nashville hot chicken sandwich. We strive to distin-
in guest traffic and sales growth. Understanding that
guish ourselves in the crowded and hypercompetitive
we must also provide the opportunity to meet guests
burger segment with offerings that are imaginative and
where they are, online ordering, third-party delivery,
crave-able and with differentiation using our you top it
and curbside delivery have all become a bigger part of
your way fresh produce bar and free melted cheese. No
our strategy and a driver of sales growth. Convenience,
one else does it that way.
especially at the dinner meal, has become an import-
The Luby’s Culinary Contract Services business, our
ant component in executing this plan. We are testing
contract foodservice brand, continues to be a terrific
product, packaging, and pricing that will maintain the
area of growth for our company. As an amenity to the
integrity of our product and support our endeavors to
health care, senior living communities, and corporate
compete in this segment.
dining facilities, as well as stadium venues, we custom
From a marketing perspective, we ramped up our
tailor solutions that meet the unique requirements and
advertising efforts in the digital space. The responses
preferences of each valued client. This not only appeals
confirm the value we offer and the familiarity that our
to our clients, but also provides us with a competitive
guests cherish. We know that loyal guests have an emo-
brand advantage in this business segment. In addi-
tional connection to our brands which we are re-enforc-
tion, within our Culinary Services business segment,
our retail packaged goods continue to be a focus as our
structure. These efforts are all aimed at increasing cash
culinary team is testing new items to sell through our
flow and restoring profitability. While this is obviously
valued Texas partner, H-E-B supermarkets. Our exist-
a process, we have confidence in our restaurant teams,
ing offerings include Luby’s famous mac and cheese,
field support teams, and leadership team, as they strive
our traditional square fried fish, and chicken tetrazzini
for progress on our turnaround plans. For over 70 years,
and broccoli rice casserole, all of which have been very
one of our core values has been “Good Food from Good
strong performers. This line of business is an excellent
People” – a message that continues to ring true. Luby’s
area of opportunity for us to extend brand and food of-
best brand assets to turn around the company are the
ferings beyond the restaurant locations.
6,000 employees that serve our guests every day, one
As part of our efforts to align corporate overhead with
meal at a time. I applaud their hard work in showcasing
the size of our current business we are transitioning
our brands’ value. The Board of Directors, management
portions of accounting, payroll, operational reporting
and employee teams are all aligned with the initiatives
and other back-office functions to a leading multi-unit
and singular mission of improving Luby’s financial
restaurant outsourcing firm. We hope to complete the
health and growing shareholder value.
transition in the first calendar quarter of 2020 on some
of these changes, and we hope to realize additional cost
savings from this transition over time.
We see that both of our core brands are recently
trending in the right direction. We are working diligently
to increase same-store sales and guest traffic, and to
improve operating leverage from a stream-lined cost
CHRISTOPHER J. PAPPAS
President and Chief Executive Officer, Luby’s, Inc.
LUBY’S, INC. INFORMATION
HEADQUARTERS
Luby’s, Inc.
13111 Northwest Freeway
Suite 600
Houston, TX 77040
713.329.6800
lubysinc.com
NOTICE OF ANNUAL MEETING
The 2020 annual meeting of shareholders will be held
Wednesday, February 5, 2020, at 10:00 a.m. local time,
at the Luby’s Corporate Office Building,
13111 Northwest Freeway, Suite 300, Houston, TX 77040.
ANNUAL REPORT
The 2019 Luby’s, Inc. Annual Report on Form 10-K is available
online at lubysinc.com or additional copies may be
obtained by contacting Investor Relations at 713.329.6808,
to receive a hard copy report.
REGISTER AND STOCK TRANSFER AGENT
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
800.937.5449
www.amstock.com
NYSE STOCK SYMBOL
LUB
INDEPENDENT AUDITOR
Grant Thorton LLP
333 Clay Street
2700 Three Allen Center
Houston, TX 77002
COMPANY INFORMATION
Luby’s, Inc. is a multi-branded food service company operating in the retail restaurant and contract service settings. Our primary brands
include Luby’s Cafeteria, Fuddruckers and Luby’s Culinary Contract Services.
As of November 15, 2019 we operated 120 company-owned restaurants located throughout the United States. These establishments
are located in close proximity to retail centers, business developments and residential areas. Of the 120 restaurants, 78 are Luby’s
Cafeterias, 41 are Fuddruckers Restaurants and 1 is a Cheeseburger in Paradise full service restaurant and bar. We also had 98
franchised Fuddruckers restaurants, of which 90 are located in 25 states, 3 in Panama, 2 in each Canada and Mexico and 1 in
Puerto Rico. We operate culinary contract services at 32 locations. Of the 32 locations, 30 are in Texas: 22 are in Houston, 3 are in the
Rio Grande Valley, 2 are in Dallas, 2 are in San Antonio and 1 is in Northwest Texas. The remaining culinary contract service locations are
in Greensboro, NC and Kansas. Luby’s Culinary Contract Services provides food service management to healthcare, corporate dining,
and sports stadiums at their facilities as well as sells packaged food items at retail grocery stores.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 28, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
____________________________________
Commission file number 001-08308
Luby's, Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification Number)
Delaware
74-1335253
13111 Northwest Freeway, Suite 600
Houston, Texas 77040
(Address of principal executive offices, including zip code)
(713) 329-6800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange at which registered
Common Stock ($0.32 par value per share)
Common Stock Purchase Rights
LUB
N/A
New York Stock Exchange
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes x No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
Non-accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the shares of common stock of the registrant held by non-affiliates of the registrant as of March 13, 2019, was approximately
$32,205,000 (based upon the assumption that directors and executive officers are the only affiliates).
As of November 15, 2019, there were 30,041,422 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into the designated parts of this Form 10-K:
Definitive Proxy Statement relating to 2020 annual meeting of shareholders (in Part III)
1
Luby’s, Inc.
Form 10-K
Year ended August 28, 2019
Table of Contents
Part I
Page
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
Item 2
Properties
Item 3
Legal Proceedings
Item 4
Mine Safety Disclosure
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Part II
Item 6
Selected Financial Data
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
Item 8
Item 9
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Item 9B
Other Information
Item 10
Directors, Executive Officers and Corporate Governance
Item 11
Executive Compensation
Part III
Item 12
Item 13
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Item 14
Principal Accountant Fees and Services
Item 15
Exhibits, Financial Statement Schedules
Signatures
Part IV
2
5
10
16
16
18
18
19
20
20
45
46
85
85
85
86
86
86
86
86
87
91
Additional Information
We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports
on Form 10-Q, and current reports on Form 8-K. The SEC maintains an Internet site at http://www.sec.gov that contains the reports,
proxy and information statements, and other information that we file electronically. Our website address is www.lubysinc.com.
Please note that our website address is provided as an inactive textual reference only. We make available free of charge through
our website the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments
to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The
information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information
is specifically referenced elsewhere in this report.
Compliance with New York Stock Exchange Requirements
We submitted to the New York Stock Exchange (“NYSE”) the CEO certification required by Section 303A.12(a) of the NYSE’s
Listed Company Manual with respect to our fiscal year ended August 29, 2018. We expect to submit the CEO certification with
respect to our fiscal year ended August 28, 2019 to the NYSE within 30 days after our annual meeting of shareholders. We are
filing as an exhibit to this Form 10-K the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002.
3
FORWARD-LOOKING STATEMENTS
This Annual Report on this "Form 10-K” contains statements that are “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements contained in this Form 10-K, other than statements of historical facts, are “forward-looking statements” for purposes
of these provisions, including any statements regarding:
•
•
•
•
•
•
•
•
future operating results;
future capital expenditures, and expected sources of funds for capital expenditures;
future debt, including liquidity and the sources and availability of funds related to debt, the expected repayment of debt
and the expected sources of funds for working capital requirements;
plans for expansion of our business;
closing existing units;
effectiveness of management’s disposal plans;
future sales of assets and the gains or losses that may be recognized as a result of any such sales; and
continued compliance with the terms of our 2018 Credit Agreement.
In some cases, investors can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,”
“estimate,” “expect,” “intend,” “outlook,” “may” “should,” “will,” and “would” or similar words. Forward-looking statements
are based on certain assumptions and analyses made by management in light of their experience and perception of historical trends,
current conditions, expected future developments and other factors we believe are relevant. Although management believes that
our assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and
uncertainties, many of which are outside of our control. The following factors, as well as the factors set forth in Item 1A of this
Form 10-K and any other cautionary language in this Form 10-K, provide examples of risks, uncertainties, and events that may
cause our financial and operational results to differ materially from the expectations described in our forward-looking statements:
•
•
•
•
•
our ability to pursue strategic alternatives;
general business and economic conditions;
the impact of competition;
decisions made in the allocation of capital resources;
our operating initiatives, changes in promotional, couponing and advertising strategies, and the success of management’s
business plans;
fluctuations in the costs of commodities, including beef, poultry, seafood, dairy, cheese, oils and produce;
ability to raise menu prices and customers acceptance of changes in menu items;
increases in utility costs, including the costs of natural gas and other energy supplies;
changes in the availability and cost of labor, including the ability to attract qualified managers and team members;
the seasonality of the business;
collectability of accounts receivable;
changes in governmental regulations, including changes in minimum wages and healthcare benefit regulation;
the effects of inflation and changes in our customers’ disposable income, spending trends and habits;
the ability to realize property values;
the availability and cost of credit;
the effectiveness of our credit card controls and Payment Card Industry ("PCI") compliance;
•
•
•
•
•
•
•
•
•
•
•
• weather conditions in the regions in which our restaurants operate;
•
•
•
•
costs relating to legal proceedings;
impact of adoption of new accounting standards;
effects of actual or threatened future terrorist attacks in the United States;
unfavorable publicity relating to operations, including publicity concerning food quality, illness or other health concerns
or labor relations; and
the continued service of key management personnel.
•
Each forward-looking statement speaks only as of the date of this Form 10-K, and we undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should be
aware that the occurrence of the events described above and elsewhere in this Form 10-K could have material adverse effect on
our business, results of operations, cash flows, and financial condition.
4
Item 1. Business
PART I
Overview
Luby’s, Inc. is a multi-branded company operating in the restaurant industry and in the contract food services industry. Our core
brands include Luby’s Cafeteria, Fuddruckers - World’s Greatest Hamburgers® and Luby’s Culinary Contract Services. We also
operate another restaurant brand named Cheeseburger in Paradise.
In this Form 10-K, unless otherwise specified, “Luby’s,” “we,” “our,” “us” and “Company” refer to Luby’s, Inc., Luby's Fuddruckers
Restaurants, LLC, a Texas Limited Liability Company ("LFR") and the consolidated subsidiaries of Luby’s, Inc. References to
“Luby’s Cafeteria” refer specifically to the Luby’s Cafeteria brand restaurant.
Prior to the fourth quarter of fiscal 2019 our internal organization and reporting structure supported three reportable segments;
Company-owned restaurants, Fuddruckers franchise operations and Culinary contract services. The Company-owned restaurants
consisted of the three brands discussed above, which were aggregated into one reportable segment. In the fourth quarter of fiscal
2019 we re-evaluated our reportable segments and disaggregated the Company-owned restaurants into three reportable segments
based on brand name. As such, as of the fourth quarter 2019, our five reportable segments are Luby’s cafeteria restaurants,
Fuddruckers restaurants, Cheeseburger in Paradise restaurants, Fuddruckers franchise operations and Culinary contract services.
Management believes this change better reflects the priorities and decision-making analysis around the allocation of our resources
and better aligns to the economic characteristics within similar restaurant brands. We began reporting on the new structure in the
fourth quarter of fiscal 2019 as reflected in this Annual Report on Form 10-K. The segment data for the comparable periods
presented has been recast to conform to the current period presentation. Recasting this historical information did not have an
impact on the consolidated financial performance of Luby’s Inc. for any of the periods presented.
We are headquartered in Houston, Texas. Our corporate headquarters is located at 13111 Northwest Freeway, Suite 600, Houston,
Texas 77040, and our telephone number at that address is (713) 329-6800. Our website is www.lubysinc.com. The information
on our website is not, and shall not be deemed to be, a part of this annual report on Form 10-K or incorporated into any of our
other filings with the SEC.
As of November 15, 2019, we operated 120 restaurants located throughout the United States, as set forth in the table below. These
establishments are located in close proximity to retail centers, business developments and residential areas. Of the 120 restaurants,
71 are located on property that we own and 49 are located on property that we lease. Five of our owned locations and one of our
leased locations consist of a side-by-side Luby’s Cafeteria and Fuddruckers restaurant, to which we refer herein as a “Combo
location.” The Combo location properties are included in both the Luby's Cafeterias count and the Fuddruckers Restaurants count.
Luby's Cafeterias
Fuddruckers Restaurants
Owned
Leased
Owned
Leased
Other
Leased
Total
Texas:
Houston Metro
San Antonio Metro
Rio Grande Valley
Dallas/Fort Worth Metro
Austin
Other Texas Markets
California
Arizona
Illinois
Mississippi
Other States
Total
8
—
—
1
1
—
—
—
3
1
—
14
9
—
—
—
—
2
6
4
—
—
6
27
—
—
—
—
—
—
—
—
—
—
1
1
45
10
12
13
5
13
6
4
3
2
7
120
16
9
8
10
4
9
—
—
—
1
—
57
12
1
4
2
—
2
—
—
—
—
—
21
5
As of November 15, 2019, we operated 32 locations through our Culinary Contract Services (“CCS”).
Texas:
Houston Metro
San Antonio Metro
Rio Grande Valley
Dallas/Fort Worth Metro
Northwest Texas
Kansas
Greensboro, NC
Total
Total
22
2
3
2
1
1
1
32
6
As of November 15, 2019, we had 38 franchisees operating 98 Fuddruckers restaurants in locations as set forth in the table below.
Our largest six franchisees own 5 to 12 restaurants each. Twelve franchise owners each own two to four restaurants. The 20
remaining franchise owners each own one restaurant.
Fuddruckers
Franchises
Texas:
Houston Metro
Dallas/Fort Worth Metro
Other Texas Markets
California
Connecticut
Florida
Georgia
Louisiana
Maryland
Massachusetts
Michigan
Missouri
Mississippi
Montana
Nebraska
Nevada
New Jersey
New Mexico
North Carolina
North Dakota
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Virginia
International:
Canada
Mexico
Panama
Puerto Rico
Total
7
7
10
5
1
8
3
3
1
4
3
2
1
2
1
3
2
4
1
1
1
1
5
8
1
2
3
2
2
3
1
98
In November 1997, a prior owner of the Fuddruckers - World’s Greatest Hamburgers® brand granted to a licensee the exclusive
right to use the Fuddruckers proprietary marks, trade dress, and system to develop Fuddruckers restaurants in a territory consisting
of certain countries in Africa, the Middle East, and parts of Asia. As of November 15, 2019, this licensee operates 35 restaurants
that are licensed to use the Fuddruckers proprietary marks in Saudi Arabia, Egypt, United Arab Emirates, Qatar, Jordan, Bahrain,
and Kuwait. The Company does not receive revenue or royalties from these restaurants.
For additional information regarding our restaurant locations, please read “Properties” in Item 2 of Part I of this report.
Luby’s, Inc. (formerly, Luby’s Cafeterias, Inc.) was founded in 1947 in San Antonio, Texas. The Company was originally
incorporated in Texas in 1959, with nine cafeterias in various locations, under the name Cafeterias, Inc. It became a publicly held
7
corporation in 1973, and became listed on the NYSE in 1982. The Company's operations continue to be conducted by its wholly-
owned subsidiary, LFR.
Board Special Committee
In September 2019, the Company's Board of Directors formed a new Board Special Committee comprised of independent directors
with the purpose of establishing a strategic review process to identify, examine, and consider a range of strategic alternatives
available to the Company with the objective of maximizing shareholder value. The Board Special Committee consists of the
following members: Gerald Bodzy, Twila Day, Joe McKinney, Gasper Mir, John Morlock, and Randolph Read. The Board Special
Committee is co-chaired by Messrs. Bodzy and Read.
Brookwood and Associates, previously engaged by the Company, is advising the Board Special Committee as a financial advisor
to assist in certain aspects of the strategic alternatives review process. The Special Committee has retained Gibson, Dunn &
Crutcher LLP to advise on various legal matters.
The Board of Directors has not made a decision to enter into any transaction at this time, and there are no assurances that the
consideration of strategic alternatives will result in any transaction. The Company does not intend to comment on or disclose
developments regarding the process unless it deems further disclosure appropriate or required. Please see "Risk factors" in Item
1A.
Operational Focus
Our operational focus is to generate consistent and sustainable same-store sales growth and improved store level profit. From an
operating standpoint, we support this strategic focus through the following:
1. Striving for consistently successful execution: Every day, with every guest, at every restaurant we operate.
2. Developing our human capital: Our team members are the most critical factor in ensuring our Company’s success. Our
relentless focus as a company must be inspiring and developing our team members to delight our guests.
3. Raising awareness of our brand: Our restaurants provide guests in our local communities with memories of family, friends,
childhood, a great date, a memorable birthday, or a significant accomplishment. The most reliable ways to grow and
sustain our business is to perpetuate word of mouth and remain involved in the community. We must share our story with
our guests in our restaurants. This allows new guests to learn our brand story and also reaffirms it with legacy and loyal
guests. Loyal guests spread the word about our brand. Our most loyal guests typically agree to be in our E-club so we
can communicate with them and reward them. Digital media marketing and advertising has become an integral component
of our guest outreach efforts.
4. Maintaining restaurant appearances: We recognize the importance of maintaining our legacy restaurants to remain relevant
and appealing to keep loyal guests coming back and to draw in new guests.
5. Cost management: We evaluate each area of our business to assess that we are spending and investing at appropriate
levels. This includes restaurant operating costs and corporate overhead costs. Within our restaurants, we seek opportunities
with our food and supplies purchasing, menu offerings, labor productivity, and contracts with restaurant service providers
to maintain an appropriate restaurant level cost structure. Within our corporate overhead, we continue to seek opportunities
to stream-line corporate overhead, evaluate outsourcing certain corporate functions, and optimize staffing levels.
We remain focused on the key drivers of our businesses to achieve operational excellence of our brands and to efficiently manage
costs to grow profitability and enhance shareholder value.
Luby’s Cafeteria Operations
At Luby’s Cafeterias, our mission is to serve our guests convenient, great tasting meals in a friendly environment that makes
everyone feel welcome and at home. We do things The Luby’s Way, which means we cook in small batches from scratch using
real food, real ingredients prepared fresh daily, and our employees and our company get involved and support the fabric of our
local communities. We buy local produce as much as possible. We promise to breathe life into the experience of dining out and
make every meal meaningful. We were founded in San Antonio, Texas in 1947.
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Our cafeteria food delivery model allows customers to select freshly-prepared items from our serving line including entrées,
vegetables, salads, desserts, breads and beverages before transporting their selected items on serving trays to a table or booth of
their choice in the dining area. Each restaurant offers 15 to 22 entrées, 12 to 14 vegetable dishes, 8 to 10 salads, and 10 to 12
varieties of desserts daily.
Luby’s Cafeteria’s product offerings are home-style made-from-scratch favorites priced to appeal to a broad range of customers,
including those customers that focus on fast wholesome choices, quality, variety, and affordability. We have had particular success
among families with children, shoppers, travelers, seniors, and business people looking for a quick, freshly prepared meal at a fair
price. All of our restaurants sell food-to-go orders and third party delivery orders which comprised approximately 17% of our
Luby's Cafeteria restaurant sales in fiscal 2019.
Menus are reviewed periodically and new offerings and seasonal food preferences are regularly incorporated. Each restaurant is
operated as a separate unit under the control of a general manager who has responsibility for day-to-day operations, including
food production and personnel employment and supervision. Restaurants generally have a staff led by a general manager, an
associate manager and assistant managers. We grant authority to our restaurant managers to direct the daily operations of their
stores and, in turn, we compensate them on the basis of their performance. Each general manager is supervised by an area leader.
Each area leader is responsible for approximately 7 to 11 restaurants, depending on the area supervised.
In fiscal 2019, we closed five Luby's Cafeterias. The number of Luby’s Cafeterias was 79 at fiscal year-end 2019.
Fuddruckers Restaurants
At Fuddruckers, our mission is to serve the World’s Greatest Hamburgers® using only 100% fresh, never frozen, all American
premium beef, buns baked daily in our kitchens, and the freshest, highest quality ingredients on our “you top it” produce bar. With
a focus on excellent food, attentive guest service and an inviting atmosphere, we are committed to making every guest happy, one
burger at a time! Fuddruckers restaurants feature casual, welcoming dining areas where Americana-themed décor is featured.
Fuddruckers was founded in San Antonio, Texas in 1980.
While Fuddruckers’ signature burgers and fries account for the majority of its restaurant sales, its menu also includes exotic burgers,
such as buffalo and elk, chicken breast sandwiches, hot dogs, a variety of salads, chicken tenders, hand breaded onion rings, soft
drinks, handmade milkshakes, and bakery items. A variety of over 100 carbonated soft drinks including our own unique Sweet
Cherry Cream Soda, which is exclusively offered at Fuddruckers restaurants, along with other varieties such as Powerade®, and
flavored waters are offered through Coke Freestyle® self-service dispensers. Additionally, beer and wine are served and, generally,
account for less than 2% of restaurant sales. Food-to-go sales comprise approximately 8% of Fuddruckers restaurant sales.
Restaurants generally have one general manager with two or three assistant managers and a number of full-time and part-time
associates working in overlapping shifts. Since Fuddruckers generally utilizes a self-service concept, similar to fast casual, it
typically does not employ waiters or waitresses. Fuddruckers restaurant operations are currently divided into a total of four
geographic areas, each supervised by an area leader. Each area leader is responsible for approximately 6 to 15 restaurants, depending
on the area supervised.
In fiscal 2019, we closed 11 Company-owned Fuddruckers restaurants and transitioned 5 Company-owned Fuddruckers
restaurants to a franchisee. The number of Fuddruckers restaurants was 44 at fiscal year-end 2019.
Fuddruckers Franchising
Fuddruckers offers franchises in markets where it deems expansion to be advantageous to the development of the Fuddruckers
concept and system of restaurants. A standard franchise agreement generally has an initial term of 20 years. Franchise agreements
typically grant franchisees an exclusive territorial license to operate a single restaurant within a specified area, usually a four-mile
radius surrounding the franchised restaurant. Luby’s management will continue developing its relationships with our franchisees
over the coming years and beyond.
Franchisees bear all direct costs involved in the development, construction and operation of their restaurants. In exchange for a
franchise fee, we provide franchise assistance in the following areas: site selection, prototypical architectural plans, interior and
exterior design and layout, training, marketing and sales techniques, assistance by a Fuddruckers “opening team” at the time a
franchised restaurant opens, and operations and accounting guidelines set forth in various policies and procedures manuals.
All franchisees are required to operate their restaurants in accordance with Fuddruckers standards and specifications, including
controls over menu items, food quality and preparation. We require the successful completion of our training program by a minimum
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of three managers for each franchised restaurant. In addition, franchised restaurants are evaluated regularly for compliance with
franchise agreements, including standards and specifications through the use of periodic, unannounced on-site inspections, and
standards evaluation reports.
The number of franchised restaurants was 102 at fiscal year-end 2019.
Culinary Contract Services
Our CCS segment consists of a business line servicing long-term acute care hospitals, acute care medical centers, ambulatory
surgical centers, retail grocery stores, behavioral hospitals, sports stadiums, senior living facilities, government, and business and
industry clients, primarily in Texas. The healthcare accounts are full service and typically include in-room delivery, catering,
vending, coffee service, and retail dining. Our mission is to re-define the contract food industry by providing tasty and healthy
menus with customized solutions for healthcare, senior living, business and industry and higher education facilities. We seek to
provide the quality of a restaurant dining experience in an institutional setting. At fiscal year-end 2019, we had contracts with 12
long-term acute care hospitals, 7 acute care hospitals, three business and industry clients, three sport stadiums, one governmental
facility, one medical office building, two senior living facilities, one behavioral facility and one freestanding coffee venue located
inside an office building. We have the unique ability to deliver quality services that include facility design and procurement as
well as nutrition and branded food services to our clients.
For additional information regarding our business segments, please read Notes 1 and 4 to the consolidated financial statements
included in Part II, Item 8 of this Form 10-K.
Intellectual Property
Luby’s, Inc. owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights,
trade secrets and other proprietary information, including the Luby’s and Fuddruckers logos, trade names and trademarks, which
are of material importance to our business. Depending on the jurisdiction, trademarks, and service marks generally are valid as
long as they are used and/or registered. Patents, copyrights, and licenses are of varying durations. The success of our business
depends on the continued ability to use existing trademarks, service marks, and other components of our brands in order to increase
brand awareness and further develop branded products. We take prudent actions to protect our intellectual property.
Employees
As of November 15, 2019, we had an active workforce of 6,133 employees consisting of restaurant management employees, non-
management restaurant employees, CCS management employees, CCS non-management employees, and office and facility service
employees. Employee relations are considered to be good. We have never had a strike or work stoppage, and we are not subject
to collective bargaining agreements.
Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. Investors should consider carefully the risks and uncertainties
described below, and all other information included in this Form 10-K, before deciding whether to invest in our common stock.
Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important
factors that may harm our business, financial condition or results of operations. The occurrence of any of the following risks could
harm our business, financial condition, and results of operations. The trading price of our common stock could decline due to any
of these risks and uncertainties, and investors may lose part or all of their investment.
We are exploring various strategic alternatives to enhance shareholder value, but this strategic review process may not result
in the achievement of the desired goal of enhancing shareholder value.
In September 2019, we announced that our Board formed a new Special Committee with the purpose of establishing a strategic
review process to identify, examine and consider a range of strategic alternatives available to the Company with the objective of
maximizing shareholder value. The process of exploring strategic alternatives may be time consuming and disruptive to our
business operations and may impair our ability to retain and motivate key personnel. We may incur substantial expenses associated
with identifying, evaluating and preparing for any such strategic alternatives. Any potential transaction would be dependent upon
a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, regulatory
limitations and the interest of third parties in us and our assets. There can be no assurance that the exploration of strategic alternatives
will result in any specific action or transaction. Further, any such strategic alternative may not ultimately lead to increased
shareholder value.
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General economic and business conditions as well as those specific to the restaurant industry may adversely affect our business,
financial condition and results of operations.
Our business results depend on a number of industry-specific and general economic factors, many of which are beyond our control.
These factors include consumer income, interest rates, inflation, consumer credit availability, consumer debt levels, tax rates and
policy, unemployment trends, and other matters that influence consumer confidence and spending. The restaurant industry is
affected by changes in national, regional and local economic conditions, seasonal fluctuation of sales volumes, and consumer
spending patterns. Discretionary consumer spending, which is critical to our success, is influenced by general economic conditions
and the availability of discretionary income. A deterioration in the global or local economy or other economic conditions affecting
disposable consumer income, such as unemployment levels, reduced home values, investment losses, inflation, business conditions,
fuel and other energy costs, consumer debt levels, lack of available credit, consumer confidence, interest rates, tax rates and changes
in tax laws, may reduce consumer confidence and affected consumers’ ability or desire to spend disposable income. This may
adversely affect our business by reducing overall consumer spending or by causing customers to reduce the frequency with which
they dine out or to shift their spending to our competitors, any of which could result in lower revenues, increased costs, reduced
traffic, or limits on pricing, any of which could have a material adverse effect on our financial condition and results of operations.
Regional events can adversely affect our financial performance.
Many of our restaurants and franchises are located in Texas. Our results of operations may be adversely affected by economic
conditions in Texas or the occurrence of an event of terrorism or natural disaster in any of the communities in which we operate.
Also, given our geographic concentration, negative publicity relating to our restaurants could have a pronounced adverse effect
on our overall revenues. Although we generally maintain property and casualty insurance to protect against property damage
caused by casualties and natural disasters, inclement weather, flooding, hurricanes, and other acts of God, these events can adversely
impact our sales by discouraging potential customers from going out to eat or by rendering a restaurant or CCS location inoperable
for a significant amount of time.
We face intense competition, and if we are unable to compete effectively or if customer preferences change, our business,
financial condition and results of operations may be adversely affected.
The restaurant industry is intensely competitive and is affected by changes in customer tastes and dietary habits and by national,
regional and local economic conditions and demographic trends. New menu items, concepts, and trends are constantly emerging.
Our Luby’s Cafeteria brand offer a large variety of entrées, side dishes and desserts and our continued success depends, in part,
on the popularity of our cuisine and cafeteria-style dining. A change away from this cuisine or dining style could have a material
adverse effect on our results of operations. Our Fuddruckers brand offers grilled-to-order burgers that feature always fresh and
never frozen, 100% premium-cut beef with no fillers or additives and sesame-topped buns baked from scratch on-site throughout
the day. While burgers are the signature, the engaging menu offers variety for many tastes with an array of sandwiches, and salads.
Changing customer preferences, tastes and dietary habits can adversely affect our business and financial performance. We compete
on quality, variety, value, service, concept, price, and location with well-established national and regional chains, as well as with
locally owned and operated restaurants. We face significant competition from family-style restaurants, fast-casual restaurants, and
buffets as well as fast food restaurants. In addition, we also face growing competition as a result of the trend toward convergence
in grocery, delicatessen, and restaurant services, particularly in the supermarket industry, which offers “convenient meals” in the
form of improved entrées and side dishes from the delicatessen section. Many of our competitors have significantly greater financial
resources than we do. We also compete with other restaurants and retail establishments for restaurant sites and personnel. We
anticipate that intense competition will continue. If we are unable to compete effectively, our business, financial condition, and
results of operations may be adversely affected.
Failure of our efforts designed to effect a turn-around of the business could adversely affect our business, financial condition
and results of operations.
We have directed, and expect to continue to direct our efforts toward effecting a turn-around of the business with the aim of re-
establishing a solid foundation from which profitability can be restored. This includes an asset sales program, menu innovation,
efforts to attract and retain the most talented employees, culinary innovation enhancements, marketing initiatives, and the initiative
to re-franchise company-owned Fuddruckers locations. Some or all of our efforts and initiatives are inherently risky and uncertain
in their application to our business in general, even when tested successfully on a more limited scale. Failure to achieve successful
implementation of any or all of our efforts could adversely affect our business, financial condition, and results of operations.
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Our ability to service our debt obligations is primarily dependent upon our future financial performance.
As of August 28, 2019, we had shareholders’ equity of $101 million compared to:
•
•
$48.7 million of long-term debt comprised of a $43.4 million Term Loan and a $5.3 million Revolver;
$40.2 million of minimum operating and capital lease commitments; and
Our ability to meet our debt service obligations depends on our ability to generate positive cash flows from operations and proceeds
from assets sales.
If we are unable to service our debt obligations, we may have to:
•
•
•
•
delay spending on maintenance projects and other capital projects, including new restaurant development;
sell assets;
restructure or refinance our debt; or
sell equity securities.
Our debt, and the covenants contained in the instruments governing our debt, could:
•
•
•
result in a reduction of our credit rating, which would make it more difficult for us to obtain additional financing on
acceptable terms;
require us to dedicate a substantial portion of our cash flows from operating activities to the repayment of our debt and
the interest associated with our debt;
limit our operating flexibility due to financial and other restrictive covenants, including restrictions on capital investments,
debt levels, incurring additional debt and creating liens on our properties;
place us at a competitive disadvantage compared with our competitors that have relatively less debt;
expose us to interest rate risk because certain of our borrowings are at variable rates of interest; and
•
•
• make us more vulnerable to downturns in our business.
If we are unable to service our debt obligations, we may not be able to sell equity securities, sell additional assets, or restructure
or refinance our debt. Our ability to generate sufficient cash flow from operating activities to pay the principal of and interest on
our indebtedness is subject to market conditions and other factors which are beyond our control.
The impact of inflation may adversely affect our results of operations.
The impact of inflation on food, labor and other aspects of our business can adversely affect our results of operations. Commodity
inflation in food, beverages, and utilities can also impact our financial performance. Although we attempt to offset the effects of
inflation through periodic menu price increases, cost controls, and incremental improvement in operating margins, we may not
be able to completely eliminate such effects, which could adversely affect our results of operations.
We face the risk of adverse publicity and litigation, which could have a material adverse effect on our business and financial
performance.
We may from, time to time, be the subject of complaints or litigation from customers alleging illness, injury or other food quality,
health or operational concerns. Unfavorable publicity relating to one or more of our restaurants or to the restaurant industry in
general may taint public perception of the Luby’s Cafeteria and Fuddruckers brands. Multi-unit restaurant businesses can be
adversely affected by publicity resulting from poor food quality, illness, or other health concerns or operating issues stemming
from one or a limited number of restaurants. Publicity resulting from these allegations may materially adversely affect our business
and financial performance, regardless of whether the allegations are valid or whether we are liable. In addition, we are subject to
employee claims alleging injuries, wage and hour violations, discrimination, harassment or wrongful termination. In recent years,
a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and
state law regarding workplace, employment, and similar matters. A number of these lawsuits have resulted in the payment of
substantial damages by the defendants. Regardless of whether any claims against us are valid or whether we are ultimately
determined to be liable, claims may be expensive to defend, and may divert time and money away from our operations and hurt
our financial performance. A judgment significantly in excess of our insurance coverage, if any, for any claims could materially
adversely affect our financial condition or results of operations.
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We are subject to risks related to the provision of employee healthcare benefits, worker’s compensation and employee injury
claims.
Effective January 1, 2018, we maintain a self-insured health benefit plan which provides medical and prescription drug benefits
to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop-loss
limits. We record expenses under the plan based on estimates of the costs of expected claims, administrative costs and stop-loss
insurance premiums. Self-insurance costs are accrued based upon the aggregate of the expected liability for reported claims and
the estimated liability for claims incurred but not reported, based on information on historical claims experience provided by our
third party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical
claims expense may differ from estimated loss provisions based on historical experience. In the event our cost estimates differ
from actual costs, we could incur additional unplanned costs, which could adversely impact our financial condition.
Workers’ compensation coverage is provided through “self-insurance” by LFR. We record expenses under the plan based on
estimates of the costs of expected claims, administrative costs, stop-loss insurance premiums, and expected trends. These estimates
are then adjusted each year to reflect actual costs incurred. Actual costs under these plans are subject to variability that is dependent
upon demographics and the actual costs of claims made. In the event our cost estimates differ from actual costs, we could incur
additional unplanned costs, which could adversely impact our financial condition.
In March 2010, comprehensive healthcare reform legislation under the Patient Protection and Affordable Care Act (the "Affordable
Care Act") and Healthcare Education and Affordability Reconciliation Act was passed and signed into law. Among other things,
the healthcare reform legislation includes mandated coverage requirements, eliminates pre-existing condition exclusions and
annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes
on health insurers and healthcare benefits. Although requirements were phased in over a period of time, the most impactful
provisions began in the third quarter of fiscal 2015.
Due to the breadth and complexity of the healthcare reform legislation, the lack of implementing regulations in some cases, and
interpretive guidance, and the phased-in nature of the implementation, it is difficult to predict the overall impact of the healthcare
reform legislation on our business and the businesses of our franchisees over the coming years. Possible adverse effects of the
healthcare reform legislation include reduced revenues, increased costs and exposure to expanded liability and requirements for
us to revise the ways in which we conduct business or risk of loss of business. It is also possible that healthcare plans offered by
other companies with which we compete for employees will make us less attractive to our current or potential employees. And in
any event, implementing the requirements of the Affordable Care Act has imposed some additional administrative costs on us,
and those costs may increase over time. In addition, our results of operations, financial position and cash flows could be materially
adversely affected. Our franchisees face the potential of similar adverse effects, and many of them are small business owners who
may have significant difficulty absorbing the increased costs.
An increase in the minimum wage and regulatory mandates could adversely affect our financial performance.
From time to time, the U.S. Congress and state legislatures have increased and will consider increases in the minimum wage. The
restaurant industry is intensely competitive, and if the minimum wage is increased, we may not be able to transfer all of the resulting
increases in operating costs to our customers in the form of price increases. In addition, because our business is labor intensive,
shortages in the labor pool or other inflationary pressure could increase labor costs that could adversely affect our results of
operations.
We may be required to recognize additional impairment charges.
We assess our long-lived assets in accordance with generally accepted accounting principles in the United States (“GAAP”) and
determine when they are impaired. Based on market conditions and operating results, we may be required to record additional
impairment charges, which would reduce expected earnings for the periods in which they are recorded.
We may be harmed by security risks we face in connection with our electronic processing and transmission of confidential
customer and employee information.
We accept electronic payment cards for payment in our restaurants. During fiscal 2019, approximately 75% of our restaurant sales
were attributable to credit and debit card transactions, and credit and debit card usage could continue to increase. A number of
retailers have experienced actual or potential security breaches in which credit and debit card information may have been stolen,
including a number of highly publicized incidents with well-known retailers in recent years. In addition, we have previously been
the victim of a cyber attack by hackers who deployed a version of the SamSam ransomware that encrypted electronic files, locking
us out of many of our point-of-sale and other systems. These hackers requested a “ransom” payment in exchange for restoring
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access to these encrypted files. Such attacks, while they did not provide the hackers with access to confidential customer and
employee information, did adversely affect our profits due to our temporary inability to operate our restaurants and increased costs
associated further protecting and restoring our computer systems. While we have taken preventative measures, no assurances can
be provided that we will not be the subject of cyber attacks again in the future.
We may in the future become subject to additional claims for purportedly fraudulent transactions arising out of the actual or alleged
theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings in the future relating to these
types of incidents. Proceedings related to theft of credit or debit card information may be brought by payment card providers,
banks and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit) and federal and state
regulators. Any such proceedings could distract our management from running our business and cause us to incur significant
unplanned losses and expenses. Consumer perception of our brand could also be negatively affected by these events, which could
further adversely affect our results and prospects.
We also are required to collect and maintain personal information about our employees, and we collect information about customers
as part of some of our marketing programs as well. The collection and use of such information is regulated at the federal and state
levels, and the regulatory environment related to information security and privacy is increasingly demanding. At the same time,
we are relying increasingly on cloud computing and other technologies that result in third parties holding significant amounts of
customer or employee information on our behalf. If the security and information systems of ours or of outsourced third party
providers we use to store or process such information are compromised or if we, or such third parties, otherwise fail to comply
with these laws and regulations, we could face litigation and the imposition of penalties that could adversely affect our financial
performance. Our reputation as a brand or as an employer could also be adversely affected from these types of security breaches
or regulatory violations, which could impair our sales or ability to attract and keep qualified employees.
Labor shortages or increases in labor costs could adversely affect our business and results of operations.
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including
regional managers, restaurant general managers and chefs, in a manner consistent with our standards and expectations. Qualified
individuals that we need to fill these positions are in short supply and competition for these employees is intense. If we are unable
to recruit and retain sufficient qualified individuals, our operations and reputation could be adversely affected. Additionally,
competition for qualified employees could require us to pay higher wages, which could result in higher labor costs. Our financial
condition and and announcement of our process of exploring strategic alternatives may result in difficulties in retaining and
attracting qualified employees. Any increase in labor costs could adversely affect our results of operations.
If we are unable to anticipate and react to changes in food, utility and other costs, our results of operations could be
materially adversely affected.
Many of the food and beverage products we purchase are affected by commodity pricing, and as such, are subject to price volatility
caused by production problems, shortages, weather or other factors outside of our control. Our profitability depends, in part, on
our successfully anticipating and reacting to changes in the prices of commodities. Therefore, we enter into purchase commitments
with suppliers when we believe that it is advantageous for us to do so. If commodity prices were to increase, we may be forced
to absorb the additional costs rather than transfer these increases to our customers in the form of menu price increases. Our success
also depends, in part, on our ability to absorb increases in utility costs. Our operating results are affected by fluctuations in the
price of utilities. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a
material adverse effect on our results of operations.
Our business is subject to extensive federal, state and local laws and regulations.
The restaurant industry is subject to extensive federal, state and local laws and regulations. We are also subject to licensing and
regulation by state and local authorities relating to health, healthcare, employee medical plans, sanitation, safety and fire standards,
building codes and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor
Standards Act and applicable minimum wage requirements, overtime, unemployment tax rates, family leave, tip credits, working
conditions, safety standards, healthcare and citizenship requirements), federal and state laws which prohibit discrimination,
potential healthcare benefits legislative mandates, and other laws regulating the design and operation of facilities, such as the
Americans With Disabilities Act of 1990.
As a publicly traded corporation, we are subject to various rules and regulations as mandated by the SEC and the NYSE. Failure
to timely comply with these rules and regulations could result in penalties and negative publicity.
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We are subject to federal regulation and certain state laws which govern the offer and sale of franchises. Many state franchise laws
contain provisions that supersede the terms of franchise agreements, including provisions concerning the termination or non-
renewal of a franchise. Some state franchise laws require that certain materials be registered before franchises can be offered or
sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect us and the franchisees.
Termination of franchise agreements may disrupt restaurant performance.
Our franchise agreements are subject to termination by us in the event of default by the franchisee after applicable cure periods.
Upon the expiration of the initial term of a franchise agreement, the franchisee generally has an option to renew the franchise
agreement for an additional term. There is no assurance that franchisees will meet the criteria for renewal or will desire or be able
to renew their franchise agreements. If not renewed, a franchise agreement, and payments required there under, will terminate.
We may be unable to find a new franchisee to replace a non-renewing franchisee. Furthermore, while we will be entitled to terminate
franchise agreements following a default that is not cured within the applicable grace period, if any, the disruption to the performance
of the restaurants could adversely affect our business and revenues.
Franchisees may breach the terms of their franchise agreements in a manner that adversely affects the reputation of our
brands.
Franchisees are required to conform to specified product quality standards and other requirements pursuant to their franchise
agreements in order to protect our brands and to optimize restaurant performance. However, franchisees may receive through the
supply chain or produce sub-standard food or beverage products, which may adversely impact the reputation of our brands.
Franchisees may also breach the standards set forth in their respective franchise agreements. Any negative actions could have a
corresponding material adverse effect on our business and revenues.
Our strategic initiative to transition the majority of our company-owned Fuddruckers restaurants to franchise operators
may not be fully realizable.
Our success with this initiative requires entering into agreements with new or existing franchise owners on terms that are
economically acceptable to us while presenting an attractive investment opportunity for those franchise owners. Our company-
owned Fuddruckers locations are geographically dispersed with some markets containing only one or two locations. We may not
be able to identify franchise owners willing and able to operate at these locations due to competitors operating in those markets
that are more established or have greater penetration or brand presence.
Expansion of our CCS operations may not be successful.
Successful expansion of our CCS operations depends on our ability to obtain new clients as well as retain and renew our existing
client contracts. Our ability to do so generally depends on a variety of factors, including the quality, price and responsiveness of
our services, as well as our ability to market these services effectively and differentiate ourselves from our competitors. We may
not be able to renew existing client contracts at the same or higher rates or our current clients may turn to competitors, cease
operations, or elect to self-operate or terminate contracts with us. The failure to renew a significant number of our existing contracts
could have a material adverse effect on our business and results of operations.
Failure to collect account receivables could adversely affect our results of operations.
A portion of our accounts receivable is concentrated in our CCS operations among several customers. In addition, our franchises
generate significant accounts receivables. Failure to collect from several of these accounts receivable could adversely affect our
results of operations.
If we lose the services of any of our key management personnel, our business could suffer.
The success of our business is highly dependent upon our key management personnel, particularly Christopher J. Pappas, our
President and Chief Executive Officer, and Benjamin T. Coutee, our Chief Operating Officer. The loss of the services of any key
management personnel could have a material adverse effect upon our business. The process of exploring strategic alternatives
may impair our ability to retain and motivate key management personnel.
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Our business is subject to seasonal fluctuations, and, as a result, our results of operations for any given quarter may not be
indicative of the results that may be achieved for the full fiscal year.
Our business is subject to seasonal fluctuations. Historically, our highest earnings have occurred in the third quarter of the fiscal
year, as our revenues in most of our restaurants have typically been higher during the third quarter of the fiscal year. Similarly,
our results of operations for any single quarter will not necessarily be indicative of the results that may be achieved for a full fiscal
year.
We may not be able to adequately protect our intellectual property, which could harm the value of our brands and adversely
affect our business.
Our ability to successfully implement our business plan depends in part on our ability to further build brand recognition using our
trademarks, service marks, trade dress and other proprietary intellectual property, including our name and logos, and the unique
ambience of our restaurants. If our efforts to protect our intellectual property are inadequate, or if any third party misappropriates
or infringes on our intellectual property, either in print or on the internet, the value of our brands may be harmed, which could
have a material adverse effect on our business and might prevent our brands from achieving or maintaining market acceptance.
We may also encounter claims from prior users of similar intellectual property in areas where we operate or intend to conduct
operations. This could harm our image, brand or competitive position and cause us to incur significant penalties and costs.
The price of our common stock may experience volatility.
The market price of our common stock can be volatile as we undertake the strategic review process, which may continue or become
more severe if and when a transaction or business arrangement is announced or we announce that we are no longer exploring
strategic alternatives.
Appraisals of our properties are estimates of value and may not necessarily correspond to realizable value.
The appraisal methodologies used to appraise our properties involve subjective judgments. As a result, appraisals of our properties
are only estimates of current market value as of the date of the appraisal. Ultimate realization of the value of a property depends
to a great extent on economic and other conditions beyond our control and the control of the independent valuation firm and other
parties involved in the valuation of our properties. Further, these valuations may not necessarily represent the price at which a
property would sell, because market prices of properties can only be determined by negotiation between a willing buyer and seller.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of November 15, 2019, we operated 120 restaurants at 114 property locations. Six of the operating locations are Combo locations
and are considered two restaurants. Luby’s Cafeterias have seating capacity for 250 to 300 customers at each location while
Fuddruckers locations generally seat 125 to 200 customers.
We own the underlying land and buildings on which 57 of our Luby’s Cafeteria and 14 of our Fuddruckers restaurants are located.
Two of these restaurant properties contain excess building space or an extra building on the property which have 7 tenants unaffiliated
with Luby’s, Inc. We also have one owned other-use property which is used as a central bakery supporting our operating restaurants.
16
The following table summarizes our owned properties as of November 15, 2019:
Operating Restaurants:
Luby's cafeterias
Fuddruckers restaurants
Combos
Total Operating Properties
Leased to Fuddruckers franchisees
Non-operating held for sale
Bake Shop
Total
Number of
Properties
Appraised
Value *
(in millions)
52
9
5
66
3
4
1
74
$
$
$
153.7
18.4
21.9
194.0
6.1
10.3
1.1
211.5
* Prior to and in conjunction with entering into the 2018 Credit Agreement in December 2018, we obtained third party appraisals
from a nationally recognized real estate appraisal firm on all property used as collateral.
Included in the non-operating held for sale properties is one property classified as assets related to discontinued operations on our
consolidated balance sheet at August 28, 2019 with a carrying value of $1.8 million and three properties classified as property
held for sale on our consolidated balance sheets at August 28, 2019 with a carrying value of $2.8 million. Included in Luby's
cafeterias and Fuddruckers restaurants operating restaurants are five and three properties, respectively, that are classified as property
held for sale on our consolidated balance sheet at August 28, 2019 with carrying values of $6.3 million and $4.2 million, respectively.
Also, the three properties leased to Fuddruckers franchisees are classified as property held for sale on our consolidated balance
sheet at August 28, 2019 with a carrying value of $3.2 million.
In addition to the owned locations, 21 Luby’s Cafeteria restaurants, 27 Fuddruckers restaurants, and 1 Cheeseburger in Paradise
restaurants are held under 48 leases. One of the 48 leases includes two restaurants at one leased location: one Luby's Cafeteria
and one Fuddruckers restaurant. The majority of the leases are fixed-dollar rentals, which require us to pay additional amounts
related to property taxes, hazard insurance, and maintenance of common areas. Of the 48 restaurant leases, the current terms of
ten expire in less than one year, 22 expire between one and five years, and 16 expire thereafter. Additionally, 41 leases can be
extended beyond their current terms at our option.
At November 15, 2019, we have leases on 10 restaurant properties where we have ceased operations. Although the Company
remains obligated under the terms of the leases for the rent and other costs that may be associated with the leases, the Company
has ceased operations and has no foreseeable plans to occupy the spaces as a company restaurant in the future.
We also have six leased locations that have two third party tenant and four Fuddruckers franchisees.
Our corporate office lease of approximately 26,000 square feet of office space runs through June 2022.
We also lease approximately 60,000 square feet of warehouse space for in-house repair, fabrication and storage in Houston, Texas.
In addition, we lease approximately 630 square feet of office space in Farmers Branch, Texas and an executive suite in North
Andover, MA where we have additional legal personnel.
We maintain general liability insurance and property damage insurance on all properties in amounts which management believes
provide adequate coverage.
17
Item 3. Legal Proceedings
From time to time, we are subject to various private lawsuits, administrative proceedings and claims that arise in the ordinary
course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically
involve claims from guests, employees and others related to issues common to the restaurant industry. We currently believe that
the final disposition of these types of lawsuits, proceedings, and claims will not have a material adverse effect on our financial
position, results of operations, or liquidity. It is possible, however, that our future results of operations for a particular fiscal quarter
or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings, or claims.
Item 4. Mine Safety Disclosures
Not applicable.
18
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Stock Prices
Our common stock is traded on the NYSE under the symbol “LUB.” As of November 15, 2019, there were 1,953 holders of record
of our common stock.
Equity Compensation Plans
Securities authorized under our equity compensation plans as of August 28, 2019, were as follows:
(a)
(b)
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
Weighted-
Average
Exercise Price
of
Outstanding
Options,
Warrants and
Rights
(c)
Number of
Securities
Remaining
Available for
Future
Issuance
Under Equity
Compensation
Plans
Excluding
Securities
Reflected in
Column (a)
1,387,412
$
17,801
1,405,213
$
4.06
—
4.00
1,753,457
—
1,753,457
Plan Category
Equity compensation plans previously approved by security
holders
Equity compensation plans not previously approved by security
holders (1)
Total
(1) Represents the Luby’s, Inc. Nonemployee Director Phantom Stock Plan.
See Note 16, “Share-Based Compensation,” to our Consolidated Financial Statements included in Item 8 of Part II of this report.
Stock Performance Graph
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
19
Item 6. Selected Financial Data
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of the financial condition and results of operations should be read in conjunction with the
consolidated financial statements and footnotes for the fiscal years ended August 28, 2019 (“fiscal 2019”) and August 29, 2018,
(“fiscal 2018”) included in Part II, Item 8 of this Form 10-K.
The table on the following page sets forth selected operating data as a percentage of total revenues (unless otherwise noted) for
the periods indicated. All information is derived from the accompanying Consolidated Statements of Operations. Percentages may
not add due to rounding.
20
Restaurant sales
Culinary contract services
Franchise revenue
Vending revenue
TOTAL SALES
STORE COSTS AND EXPENSES:
(As a percentage of restaurant sales)
Cost of food
Payroll and related costs
Other operating expenses
Occupancy costs
Vending revenue
Store level profit
COMPANY COSTS AND EXPENSES (as a percentage of total sales)
Opening costs
Depreciation and amortization
Selling, general and administrative expenses
Other charges
Provision for asset impairments and restaurant closings
Net gain on disposition of property and equipment
Fiscal Year Ended
August 28,
2019
(52 weeks)
August 29,
2018
(52 weeks)
88.0 %
9.9 %
2.1 %
0.1 %
100.0 %
91.1 %
7.1 %
1.7 %
0.1 %
100.0 %
27.9 %
38.1 %
17.9 %
6.4 %
(0.1)%
9.8 %
0.0 %
4.3 %
10.6 %
1.3 %
1.7 %
(4.0)%
28.3 %
37.4 %
18.7 %
6.1 %
(0.2)%
9.5 %
0.2 %
4.8 %
10.6 %
— %
2.7 %
(1.6)%
Culinary Contract Services Costs (as a percentage of Culinary contract services sales)
Cost of culinary contract services
Culinary income
Franchise Operations Costs (as a percentage of Franchise revenue)
Cost of franchise operations
Franchise income
(As a percentage of total sales)
LOSS FROM OPERATIONS
Interest income
Interest expense
Other income, net
Loss before income taxes and discontinued operations
Provision for income taxes
Loss from continuing operations
Loss from discontinued operations, net of income taxes
NET LOSS
89.5 %
10.5 %
93.7 %
6.3 %
24.4 %
75.6 %
24.0 %
76.0 %
(2.8)%
0.0 %
(1.8)%
0.1 %
(4.6)%
0.1 %
(4.7)%
(0.0)%
(4.7)%
(6.1)%
0.0 %
(0.9)%
0.1 %
(6.9)%
2.1 %
(9.0)%
(0.2)%
(9.2)%
21
Although store level profit, defined as restaurant sales plus vending revenue less cost of food, payroll and related costs, other
operating expenses, and occupancy costs is a non-GAAP measure, we believe its presentation is useful because it explicitly shows
the aggregated results of our restaurant brand reportable segments. The following table reconciles between store level profit, a
non-GAAP measure to loss from continuing operations, a GAAP measure:
Store level profit
Plus:
Sales from culinary contract services
Sales from franchise operations
Less:
Opening costs
Cost of culinary contract services
Cost of franchise operations
Depreciation and amortization
Selling, general and administrative expenses(1)
Other charges
Provision for asset impairments and restaurant closings
Net gain on disposition of property and equipment
Interest income
Interest expense
Other income, net
Provision for income taxes
Loss from continuing operations
Fiscal Year Ended
August 28,
2019
(52 weeks)
August 29,
2018
(52 weeks)
(In thousands)
27,885
$
31,648
$
31,888
6,690
25,782
6,365
56
28,554
1,633
13,998
34,179
4,270
5,603
(12,832)
(30)
5,977
(195)
469
(15,219) $
554
24,161
1,528
17,453
38,725
—
8,917
(5,357)
(12)
3,348
(298)
7,730
(32,954)
$
(1) Marketing and advertising expense included in Selling, general and administrative expenses was $3.9 million in fiscal 2019 and $3.5 million
in fiscal 2018.
The following table shows our restaurant unit count as of August 28, 2019 and August 29, 2018.
Restaurant Counts:
Luby’s Cafeterias(1)
Fuddruckers Restaurants(1)
Cheeseburger in Paradise
Total
Fiscal 2019
Year Begin
84
60
2
146
Fiscal 2019
Openings
Fiscal 2019
Closings
Fiscal 2019
Transfers
to Franchisee
Fiscal 2019
Year End
—
—
—
—
(5)
(11)
(1)
(17)
(5)
(5)
79
44
1
124
(1) Includes 6 restaurants that are part of Combo locations
22
Overview
Description of the business
The Company operates with five reportable operating segments: Luby's Cafeterias, Fuddruckers Restaurants, Cheeseburger in
Paradise, Fuddruckers Franchise Operations, and Culinary Contract Services. We generate revenues primarily by providing quality
food to customers at our 79 Luby’s branded restaurants located mostly in Texas, 44 Fuddruckers restaurants located throughout
the United States, 1 Cheeseburger in Paradise restaurant located in New Jersey, and 102 Fuddruckers franchises located primarily
in the United States. Included in the Luby's Cafeterias segment are six locations where we operate both a Luby's Cafeteria and a
Fuddruckers restaurant. In addition to our restaurant business model, we also provide culinary contract services for organizations
that offer on-site food service, such as healthcare facilities, colleges and universities, sports stadiums, businesses and institutions,
as well as sales through retail grocery outlets.
Prior to the fourth quarter of fiscal 2019 our internal organization and reporting structure supported three reportable segments;
Company-owned restaurants, Fuddruckers franchise operations and Culinary Contract Services. The Company-owned restaurants
consisted of several brands which were aggregated into one reportable segment. The primary brands are Luby’s Cafeteria,
Fuddruckers - World’s Greatest Hamburgers®, and Cheeseburger in Paradise. In the fourth quarter of fiscal 2019 we re-evaluated
our reportable segments and disaggregated the Company-owned restaurants into three reportable segments based on brand name.
As such, as of the fourth quarter 2019, our five reportable segments are Luby’s restaurants, Fuddruckers restaurants, Cheeseburger
in Paradise restaurants, Fuddruckers franchise operations and Culinary Contract Services. Management believes this change better
reflects the priorities and decision-making analysis around the allocation of our resources and better aligns to the economic
characteristics within similar restaurant brands. We began reporting on the new structure in the fourth quarter of fiscal 2019 as
reflected in this Annual Report on Form 10-K. The segment data for the comparable periods presented has been recast to conform
to the current period presentation. Recasting this historical information did not have an impact on the consolidated financial
performance of Luby’s Inc. for any of the periods presented.
Business Strategy
In fiscal 2019, our full efforts were directed toward effecting a turn-around of the business with the aim of re-establishing a solid
foundation from which profitability can be restored. This required a close re-evaluation of each of our business segments and
restaurant brands with consideration of the value of our underlying real estate portfolio. As part of this process, we announced
an asset sales program of up to $45 million. At the end of the first quarter of fiscal 2019, we also re-financed our debt and entered
into a five-year credit agreement with a subsidiary of MSD Capital, MSD PCOF Partners IV, LLC ("MSD") as our new lender.
This new financing arrangement along with the proceeds from the sale of certain owned property locations is intended to provide
the necessary liquidity as we work through our turn-around plan.
Within our operations, we continued our focus on enhancing the guest experience at each of our restaurant brands, executing our
growth plan for our Culinary Contract Services segment, and supporting our Fuddruckers franchise network for future growth.
At our Company-owned restaurants, we focused on menu innovation and variety across the weeks and the seasons. We furthered
our efforts in attracting and retaining the most talented individuals to serve and engage with our guests in both restaurant management
roles and front-line hourly restaurant team member roles. We have an experienced culinary team that vigorously pursues culinary
innovation enhancements. Our marketing initiatives centered around developing a more personal and direct connection with our
guests, deploying technology where it makes most sense. By the end of fiscal 2019, we had transitioned much of our advertising
and messaging toward digital media as we advance to the next phase of our loyalty and recognition programs. We continue to take
these steps as part of our long-term strategy to increase our brand awareness and motivate increased guest visits, with a particular
focus on our existing customer base that already knows us. As we continued to evaluate our portfolio of restaurant locations, we
closed 17 restaurants so that resources could be focused on the locations that exhibit the most promise for enhanced profitability.
We also transitioned 5 Fuddruckers restaurants in fiscal 2019 and an additional two at the beginning of fiscal year 2020 to a
franchisee.
In fiscal 2019, our Fuddruckers franchise business segment continued supporting our loyal franchisees and we continued to pursue
opportunities to re-franchise company-owned Fuddruckers locations as part of our strategy to grow franchise revenues. Our
Culinary Contract Services segment continues its focus on expanding the number of locations that we serve and developing business
partnerships for the long-term, while servicing our existing agreements with our customized and high-level of client service. We
have streamlined our corporate overhead cost, including reduced headcount, corporate travel expense, and associated other overhead
costs. In addition, at the beginning of fiscal 2020, we began organizational and planning efforts with an on-shore outsourcing
firm. We anticipate completing the transition of our accounting, accounts payable, and certain other payroll and back-office
functions to this outsourcing firm during the second fiscal quarter of 2020. We expect to realize additional cost savings and enhanced
23
capabilities with this transition. Concurrent with this effort, we continue to evaluate opportunities to further align and reduce our
corporate overhead costs that support our business operations.
Board Special Committee
In September 2019, the Company's Board of Directors formed a new Board Special Committee comprised of independent directors
with the purpose of establishing a strategic review process to identify, examine, and consider a range of strategic alternatives
available to the Company with the objective of maximizing shareholder value. The Board Special Committee consists of the
following members: Gerald Bodzy, Twila Day, Joe McKinney, Gasper Mir, John Morlock, and Randolph Read. The Board Special
Committee is co-chaired by Messrs. Bodzy and Read.
Brookwood and Associates, previously engaged by the Company, is advising the Board Special Committee as a financial advisor
to assist in certain aspects of the strategic alternatives review process. The Special Committee has retained Gibson, Dunn &
Crutcher LLP to advise on various legal matters.
The Board of Directors has not made a decision to enter into any transaction at this time, and there are no assurances that the
consideration of strategic alternatives will result in any transaction. The Company does not intend to comment on or disclose
developments regarding the process unless it deems further disclosure appropriate or required. Please see "Risk factors" in Item
1A.
24
Financial and Operation Highlights for Fiscal 2019
Financial Results
• Total company sales decreased approximately $41.7 million, or 11.4%, in fiscal 2019 compared to fiscal 2018, consisting
primarily of an approximate $48.0 million decrease in restaurant sales, an approximate $6.1 million increase in Culinary
contract services sales, an approximate $0.3 million increase in franchise revenue, and an approximate $0.1 million
decrease in vending revenue. The decrease in restaurant sales included an approximate $15.8 million decrease in sales
at stand-alone Luby's Cafeterias, an approximate $20.3 million decrease in sales at stand-alone Fuddruckers restaurants,
an approximate $1.4 million decrease in sales at our Combo locations, and an approximate $9.9 million decrease in sales
at Cheeseburger in Paradise restaurants.
• Total segment profit decreased approximately $1.8 million to approximately $36.3 million in fiscal 2019 compared to
approximately $38.1 million in fiscal 2018. The approximate $1.8 million decrease in total segment profit resulted from
a decrease of approximately $3.8 million in Company-owned restaurant segment profit, an approximate $0.2 million
increase in franchise segment profit and an approximate $1.7 million increase in Culinary contract services segment
profit. The approximate $3.8 million decrease in Company-owned restaurant segment profit resulted from restaurant
sales and vending income decreasing approximately $48.2 million with the cost of food, payroll and related costs, other
operating expenses, and occupancy costs decreasing approximately $44.4 million.
• Net loss was approximately $15.2 million in fiscal 2019 compared to a loss of approximately $33.6 million in fiscal 2018.
Net loss included non-cash charges for asset impairments and restaurant closings of approximately $5.6 million and
approximately $8.9 million in fiscal 2019 and fiscal 2018, respectively. Net loss included gains on the disposal of asset
of approximately $12.8 million in fiscal 2019 and $5.4 million in fiscal 2018, respectively. Net loss included other charges
of approximately $4.3 million in fiscal 2019. Net loss for fiscal 2018 included non-tax charges of approximately $8.4
million for valuation allowance on deferred tax assets
Operational Endeavors and Milestones
• Luby's cafeteria segment. In fiscal 2019, we continued to promote our "made–from–scratch" cooking with many locally-
sourced “from the farm” ingredients at our Luby’s Cafeterias with our “Tastes Like Texas, Feels Like Home” slogan.
“Tastes Like Texas, Feels Like Home” signifies that we are dedicated to serving our guests only the best hand-crafted
recipes, prepared fresh each day in our kitchens true to our heritage as a well-regarded and loved Texas tradition. We
support local farmers and use only fresh produce and highest quality ingredients. We rotate seasonal menu offerings
throughout the year that showcase our 70-year history of "made-from-scratch" cooking expertise. Each section of the
cafeteria line is presented to entice our guests to keep coming back for their favorites: fresh colorful hot vegetable
presentations, extensive and creative cold side offerings and salads, varied recipes and presentations for beef, turkey,
chicken, fish, stir-fry, enchiladas, and other delectable entrées. In addition, by the third quarter of fiscal 2019, we had re-
introduced breakfast on the weekend at 33 locations, further expanding our offering. From a marketing perspective, we
enhanced our online presence and much of our advertising is now in a digital format which we find to be a cost-effective
way of reaching our guests and reminding them of who we are and what we offer. In the process, we are gaining more
insights about our loyal guests and we are closely listening to our guests' input. At the same time, we are leveraging our
Texas roots and heritage -- a message that resonates with our many guests that have known us over the decades.
Additionally, we are addressing the conveniences expected by today's busy lifestyles through our partnership with third-
party delivery platforms as well as the expected launch in early fiscal 2020 of the new Luby's app for mobile devices.
Fuddrucker restaurants segment. At Fuddruckers, we continue to evolve the World’s Greatest Hamburgers®, with new
specialty burger combinations and toppings. In fiscal 2019, we continued to focus on speed of service and the ordering
experience. We furthered our use of technology to reach our guests utilizing new digital media campaigns and targeted
advertising to guests' mobile devices. We continued to measure guest satisfaction through surveys and other guest
interactions that helped us identify areas of excellence and areas for improvement. We are confident the focus on great
food and enhanced service will in the long run lead to increased guest frequency and loyalty.
At both of our core brands, we returned to everyday value pricing in efforts to grow guest visits over time. We see this
as a rational approach and one that our guests expect and appreciate. By the third quarter of fiscal 2019, we removed
substantially all discounts as we focused on delivering this everyday value to our guests with consistent pricing. We also
offer select premium items at higher price points at both of our core brands for the guest that is seeking that experience.
As anticipated, our overall average spend per guest declined as we moved to this lower pricing structure. However, we
credit this approach with the improving guest traffic trends we experienced as we moved through fiscal 2019.
25
Key to our operational strategy at both of our core brands in fiscal 2019 was aligning the people within our organization
into the right roles and providing team members with coaching to aid them in being successful. This alignment was
aimed at encouraging everyone within our organization to further commit to a service mindset so that our guests have a
welcoming and comfortable experience when visiting any of our restaurants. This initiative, combined with our everyday
value pricing, is delivering tangible benefits in terms of guest frequency and overall guest visits.
• Fuddruckers franchise network. Key to our strategy is to become a more franchise-centric brand as we transition
company-owned Fuddruckers to new and existing franchise-owned business owners in our franchise network. Five
locations in the San Antonio, TX metro area transferred in fiscal 2019 and two locations near Austin, TX transferred in
early fiscal 2020 to a new franchise business owner as part of this effort. We continue to pursue opportunities to transition
company-owned Fuddruckers for each of our existing markets and stores outside of our core Houston, TX market. As
of August 28, 2019, we supported a franchise network of 102 Fuddruckers franchise locations. In addition to five locations
that transferred from company-operated stores to franchise-owned stores, three other franchise locations opened in fiscal
2019 (one in the country of Panama, one in Georgia, and one in Mississippi). 11 locations closed in fiscal 2019 (three
international locations, and eight in the United States). Our franchise network generated approximately $6.7 million in
revenue in fiscal 2019.
• Culinary Contract Services. Our Culinary Contract Services segment generated approximately $31.9 million in revenue
during fiscal 2019 compared to approximately $25.8 million in revenue during fiscal 2018. The approximate $6.1 million
increase in revenue was primarily due to a net increase in the number of locations in operation and higher sales volume
locations replacing lower sales volume locations. We view this area as a long-term growth business that generally requires
less capital investment and produces favorable returns on invested capital.
• Cheeseburger in Paradise segment. Despite previous efforts to revitalize the Cheeseburger in Paradise brand and improve
financial results, we have ceased operations at all but one location.
• Capital Spending. Purchases of property and equipment were approximately $4.0 million in fiscal 2019, down from
approximately $13.2 million in fiscal 2018. Capital investments was constrained to a level necessary to maintain our base
of continually operated restaurants and the information technology infrastructure needed to support these restaurants.
No remodel projects were undertaken in fiscal 2019. We remain committed to maintaining the attractiveness of all of our
restaurant locations where we anticipate operating over the long term. In fiscal 2020, we anticipate making capital
investments of up to $4.0 million for recurring maintenance of our restaurant buildings and equipment, and technology
infrastructure.
Accounting Periods
Our fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods,
or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that
consists of 53 weeks, accounting for 371 days in the aggregate. Our first quarter consists of four four-week periods, while our last
three quarters normally consist of three four-week periods. Comparability between quarters may be affected by the varying lengths
of the quarters, as well as the seasonality associated with the restaurant business.
Same-Store Sales
The restaurant business is highly competitive with respect to food quality, concept, location, price, and service, all of which may
have an effect on same-store sales. Our same-store sales calculation measures the relative performance of a certain group of
restaurants. A store is included in this group of restaurants after it has been open for six complete consecutive quarters. Stores that
close on a permanent basis (or on a temporary basis for remodeling) are removed from the group in the fiscal quarter when
operations cease at the restaurant, but remain in the same-store group for previously reported fiscal quarters. Although management
believes this approach leads to more effective year-over-year comparisons, neither the time frame nor the exact practice may be
similar to those used by other restaurant companies. Same-store sales at our restaurant units decreased 4.2% for fiscal 2019 and
decreased 0.5% for fiscal 2018.
26
The following table shows the year-over-year same-store sales change for comparative historical quarters for the restaurant
segments:
Increase (Decrease)
Q4
Fiscal 2019
Q2
Q3
Q1
Q4
Fiscal 2018
Q2
Q3
Luby's Cafeterias
Combo Locations
(3.2 )% (3.1 )% (2.2 )% (3.0 )%
3.9 %
2.4 % (1.8 )%
(2.5 )% (4.8 )% (7.1 )% (11.1 )%
(1.5)% (3.3 )% (5.4 )%
Luby's cafeteria segment
(3.2 )% (3.3 )% (2.6 )% (3.7 )%
3.3 %
1.9 % (2.1 )%
Q1
1.5 %
1.3 %
1.5 %
Fuddruckers restaurants segment
(5.5 )% (6.1 )% (5.3 )% (11.2 )%
(3.9)% (5.8 )% (6.4 )%
0.6 %
Cheeseburger in Paradise Segment
(3.6 )% (4.4 )% (3.1 )% (0.6 )%
(4.4)% (11.7 )% (13.9 )% (10.5)%
Same-store sales
(3.7)% (4.0)% (3.3)% (5.5)%
1.2 % (0.9)% (3.7)%
0.8 %
At the end of fiscal 2019, there were 73 Luby’s Cafeterias, 6 Combo locations, 38 Fuddruckers Restaurants, and 1 Cheeseburger
in Paradise locations that met the definition of same-stores.
27
RESULTS OF OPERATIONS
Fiscal 2019 (52 weeks) compared to Fiscal 2018 (52 weeks)
Sales
($000s)
Fiscal Year 2019
Ended
August 28, 2019
(52 weeks)
Fiscal Year 2018
Ended
August 29, 2018
(52 weeks)
Fiscal 2019 vs
Fiscal 2018
Higher/(Lower)
(52 vs 52 weeks)
Restaurant sales
Culinary contract services
Franchise revenue
Vending revenue
TOTAL SALES
$
$
284,513
31,888
6,690
379
323,470
$
$
332,518
25,782
6,365
531
365,196
(14.4)%
23.7 %
5.1 %
(28.6)%
(11.4)%
Total company sales decreased approximately $41.7 million, or 11.4%, in fiscal 2019 compared to fiscal 2018, consisting primarily
of an approximate $48.0 million decrease in restaurant sales and an approximate $0.2 million decrease in vending revenue, partially
offset by an approximate $6.1 million increase in Culinary contract services sales, an approximate $0.3 million increase in Franchise
revenue.
The Company operates with five reportable operating segments: Luby's Cafeterias, Fuddruckers Restaurants, Cheeseburger in
Paradise, Fuddruckers Franchise Operations, and Culinary Contract Services.
Company-Owned Restaurants
Restaurant Sales
Restaurant Brands
Fiscal Year
2019 Ended
August 28,
2019
(52 weeks)
Fiscal Year
2018 Ended
August 29,
2018
(52 weeks)
Fiscal 2019 vs
Fiscal 2018
Higher/(Lower)
(52 vs 52 weeks)
Luby’s cafeterias
Combo locations
Luby's cafeteria segment
Fuddruckers restaurants segment
Cheeseburger in Paradise segment
Total Restaurant Sales
$
$
$
$
195,151
19,459
214,610
67,331
3,108
284,513
$
$
$
$
210,972
20,886
231,858
87,618
13,042
332,518
(7.5)%
(6.8)%
(7.4)%
(23.2)%
(76.2)%
(14.4)%
Total restaurant sales decreased approximately $48.0 million in fiscal 2019 compared to fiscal 2018. The decrease in restaurant
sales included an approximate $15.8 million decrease in sales at stand-alone Luby’s Cafeterias, an approximate $20.3 million
decrease in sales at stand-alone Fuddruckers restaurants, an approximate $1.4 million decrease in sales from Combo locations,
and an approximate $9.9 million decrease at sales from our Cheeseburger in Paradise restaurants.
• The approximate $15.8 million decrease in sales at stand-alone Luby’s reflects the reduction of nine operating restaurants,
and a 2.9% decrease in same-store stand-alone Luby's Cafeteria sales. The 2.9% decrease in same-store sales includes a
4.9% decrease in guest traffic, partially offset by a 2.1% increase in average spend per guest.
• The approximate $20.3 million decrease in sales at stand-alone Fuddruckers restaurants reflects the reduction of 27
operating restaurants and a 7.5% decrease in same-store stand-alone Fuddruckers sales. The 7.5% decrease in same-store
sales includes a 10.7% decrease in guest traffic partially offset by a 3.6% increase in average spend per guest.
• The approximate $1.4 million decrease in sales from Combo locations reflects a 6.8% decrease in sales at the six locations
in operation throughout fiscal 2019 and fiscal 2018.
28
• The approximate $9.9 million decrease in sales from our Cheeseburger in Paradise reflects the reduction of seven operating
restaurants and a 2.9% decrease at the one remaining Cheeseburger in Paradise location.
Cost of Food
($000s)
Cost of food:
Luby's cafeteria segment
Fuddruckers restaurants segment
Cheeseburger in Paradise segment
Total Restaurants
As a percentage of restaurant sales
Luby's cafeteria segment
Fuddruckers restaurants segment
Cheeseburger in Paradise segment
Total Restaurants
Fiscal Year
2019 Ended
Fiscal Year
2018 Ended
Fiscal 2019 vs
Fiscal 2018
August 28,
2019
(52 weeks)
August 29,
2018
(52 weeks)
Higher/(Lower)
(52 vs 52 weeks)
$
$
60,801
17,712
966
79,479
$
$
65,956
23,956
4,326
94,238
$
$
(5,155)
(6,244)
(3,360)
(14,759)
28.4%
26.3%
31.1%
27.9%
28.4%
27.3%
33.2%
28.3%
0.0 %
(1.0)%
(2.1)%
(0.4)%
Cost of food, which is comprised of the cost associated with the sale of food and beverage products that are consumed while dining
in our restaurants, as take-out, and as catering. Cost of food decreased approximately $14.8 million, or 15.7%, in fiscal 2019
compared to fiscal 2018. Cost of food is variable and generally fluctuates with sales and guest traffic volume. As a percentage of
restaurant sales, food costs decreased 0.4% to 27.9% in fiscal 2019 compared to 28.3% in fiscal 2018. The Cost of food as percentage
of sales was impacted by higher average pricing in the first half of the fiscal year, menu rationalization leading to a favorable
change in the mix of menu items purchased by guests, and continued careful cost management, partially offset by higher prices
for certain food commodities.
The cost of food as a percentage of restaurant sales in the Luby's cafeteria segment was level at 28.4% in fiscal 2019 compared
to fiscal 2018 due in large part to higher average menu pricing in the first half of fiscal 2019 offset by higher prices for certain
food commodities. The cost of food as a percentage of restaurant sales for the Fuddruckers restaurants segment decreased 1.0%
in fiscal 2019 compared to fiscal 2018 due to higher average menu pricing and a favorable change in the mix of menu items
purchased by guests, partially offset by higher input prices of beef and other food commodities. The cost of food as a percentage
of restaurant sales for the Cheeseburger in Paradise segment decreased 2.1% in fiscal 2019 compared to fiscal 2018 due primarily
to reducing operations to a single location with better food cost economics.
29
Payroll and Related Costs
($000s)
Payroll and related Costs:
Luby's cafeteria segment
Fuddruckers restaurants segment
Cheeseburger in Paradise segment
Total Restaurants
As a percentage of restaurant sales
Luby's cafeteria segment
Fuddruckers restaurants segment
Cheeseburger in Paradise segment
Total Restaurants
Fiscal Year
2019 Ended
Fiscal Year
2018 Ended
Fiscal 2019 vs
Fiscal 2018
August 28,
2019
(52 weeks)
August 29,
2018
(52 weeks)
Higher/(Lower)
(52 vs 52 weeks)
$
$
81,342
25,938
1,229
108,509
$
$
86,264
32,585
5,629
124,478
$
$
(4,922)
(6,647)
(4,400)
(15,969)
38.0%
38.5%
39.5%
38.1%
37.2%
37.2%
43.2%
37.4%
0.8 %
1.3 %
(3.6)%
0.7 %
Payroll and related costs includes restaurant-level hourly wages, including overtime pay, and pay while training, as well as
management salaries and incentive payments. Payroll and related costs also include the payroll taxes, workers’ compensation
expense, group health insurance costs, and 401(k) matching expense for all restaurant-level hourly and management employees.
Payroll and related costs decreased approximately $16.0 million, or 12.8%, in fiscal 2019 compared to fiscal 2018 due in part to
(1) operating 43 fewer restaurants (closure of 21 restaurants in fiscal 2018 closure of of 17 restaurants in fiscal 2019, and transfer
of five Fuddruckers restaurants to a franchisee in fiscal 2019); for stores that continue to operate, payroll and related expense
increased less than $0.1 million. The modest increase in payroll and related expenses for stores that continue to operate reflected
(1) an increase in average salaries among our restaurant management teams and increased wage rates among our hourly team
members; and (2) higher health insurance expense; partially offset by (3) a reduction in scheduled hours as a result of a decline
in guest traffic. As a percentage of restaurant sales, payroll and related costs increased 0.7% to 38.1% in fiscal 2019 compared to
37.4% in fiscal 2018, due primarily to (1) the fixed cost component of labor costs (mainly management labor) with lower same-
store sales levels and (2) higher health insurance expense.
Payroll and related costs a percentage of restaurant sales in the Luby's cafeteria segment increased 0.8% to 38.0% in fiscal 2019
compared to fiscal 2018 due to (1) increased wage rates among our hourly team members; (2) the fixed component of management
labor costs with lower same-store sales levels; (3) increased usage of hourly overtime hours; and (4) higher health insurance
expense; partially offset by (5) reduction in scheduled hours as a result of a decline in guest traffic. Payroll and related costs a
percentage of restaurant sales in the Fuddruckers restaurants segment increased 1.3% to 38.5% in fiscal 2019 compared to fiscal
2018 due to (1) an increase in staffing and average salary cost for restaurant-level management; (2) higher health insurance
expenses; and (3) an increase in average wage rates amount our hourly team members; partially offset by (4) a reduction in
scheduled hours as a result of a decline in guest traffic. Payroll and related costs a percentage of restaurant sales in the Cheeseburger
in Paradise segment decreased 3.6% to 39.5% in fiscal 2019 compared to fiscal 2018 due primarily to reducing operations to a
single location with better labor cost economics and higher average sales volumes.
30
Other Operating Expenses
($000s)
Other operating expenses:
Luby's cafeteria segment
Fuddruckers restaurants segment
Cheeseburger in Paradise segment
Total Restaurants
As a percentage of restaurant sales
Luby's cafeteria segment
Fuddruckers restaurants segment
Cheeseburger in Paradise segment
Total Restaurants
Fiscal Year
2019 Ended
Fiscal Year
2018 Ended
Fiscal 2019 vs
Fiscal 2018
August 28,
2019
(52 weeks)
August 29,
2018
(52 weeks)
Higher/(Lower)
(52 vs 52 weeks)
$
$
37,192
12,829
865
50,886
$
$
41,653
17,305
3,328
62,286
$
$
(4,461)
(4,476)
(2,463)
(11,400)
17.4%
19.1%
27.8%
17.9%
18.0%
19.8%
25.5%
18.7%
(0.6)%
(0.7)%
2.3 %
(0.8)%
Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising,
insurance, and services. Other operating expenses decreased approximately $11.4 million, or 18.3%, in fiscal 2019 compared to
fiscal 2018. Of the approximate $11.4 million million decrease in total other operating expenses, approximately $8.9 million is
attributed to store closures and approximately $2.5 million is attributed to stores that continue to operate. The $2.5 million reduction
in other operating expenses at stores that continue to operate is attributable to (1) an approximate $1.7 million reduction in restaurant
supplies expense; (2) an approximate $0.7 million reduction in repairs and maintenance expense; and (3) an approximate $0.4
million reduction in other expenses, including the benefit from the absence of approximately $0.2 million in post-hurricane related
repair and other expenses incurred in fiscal 2018; partially offset by (4) an approximate $0.3 million increase in uninsured losses,
net of insurance recoveries. As a percentage of restaurant sales, Other operating expenses decreased 0.8% to 17.9% in fiscal 2019
compared to 18.7% in fiscal 2018. The 0.8% decrease in Other operating expenses as a percentage of restaurant sales was due to
the net expense items enumerated above and the beneficial impact of store closures where operating expenses were generally
higher as percentage of sales than stores that continue to operate.
Other operating expense a percentage of restaurant sales in the Luby's cafeteria segment decreased 0.6% to 17.4% in fiscal 2019
compared to fiscal 2018 due to (1) an approximate $0.7 million insurance recovery recorded in fiscal 2019; (2) a reduction in
restaurant supplies expense; (3) the absence of approximately $0.2 million in post-hurricane related repair and other expenses
incurred in fiscal 2018; partially offset by (4) increased cost for certain services provided to the cafeteria restaurants, including
an increase in delivery fees related to increased usage of third-party delivery platforms. Other operating expense a percentage of
restaurant sales in the Fuddruckers restaurants segment decreased 0.7% to 19.1% in fiscal 2019 compared to fiscal 2018 due to
(1) the absence of approximately $0.3 million in post-hurricane related repair and other expenses incurred in fiscal 2018; (2) a
reduction in restaurant supplies expense; and (3) the beneficial impact of store closures where operating expenses were generally
higher as percentage of sales than stores that continue to operate; partially offset by (4) comparison to fiscal 2018 when an
approximate $0.7 million insurance recovery was recorded. Other operating expense a percentage of restaurant sales in the
Cheeseburger in Paradise segment increased 2.3% to 27.8% in fiscal 2019 compared to fiscal 2018 due to primarily to wind-down
operational costs in fiscal 2019 for locations that closed at the end of fiscal 2018, including utilities expense and certain restaurant
service costs.
31
Occupancy Costs
($000s)
Occupancy costs:
Luby's cafeteria segment
Fuddruckers restaurants segment
Cheeseburger in Paradise segment
Total Restaurants
As a percentage of restaurant sales
Luby's cafeteria segment
Fuddruckers restaurants segment
Cheeseburger in Paradise segment
Total Restaurants
Fiscal Year
2019 Ended
Fiscal Year
2018 Ended
Fiscal 2019 vs
Fiscal 2018
August 28,
2019
(52 weeks)
August 29,
2018
(52 weeks)
Higher/(Lower)
(52 vs 52 weeks)
$
$
9,315
8,529
289
18,133
$
$
8,935
10,420
1,044
20,399
$
$
380
(1,891)
(755)
(2,266)
4.4%
12.7%
9.3%
6.4%
3.9%
11.9%
8.0%
6.1%
0.5%
0.8%
1.3%
0.3%
Occupancy costs include property lease expense, property taxes, and common area maintenance charges, property insurance, and
permits and licenses. Occupancy costs decreased $2.3 million in fiscal 2019 compared to fiscal 2018. The decrease was primarily
due to a decrease in rent and property taxes associated with operating 43 fewer restaurants in fiscal 2019 compared to fiscal 2018
(closure of 21 restaurants in fiscal 2018 closure of of 17 restaurants in fiscal 2019, and transfer of five Fuddruckers restaurants to
a franchisee), partially offset by the additional lease expense at three properties that were sold and leased back. As a percentage
of restaurant sales, occupancy costs increased 0.3%, to 6.4%, in fiscal 2019 compared to 6.1% in fiscal 2018 primarily as a result
of the change in the mix of the portfolio of owned versus leased stores after the closure of 43 locations and sale of certain owned
property locations as well as adjustments to property tax estimates. A significantly higher percentage of our Fuddruckers restaurants
are leased properties as compared to our Luby's cafeterias. As a result, our Fuddruckers restaurant segment's occupancy costs as
a percentage of sales is higher than our Luby's cafeterias.
Fuddruckers Franchise Segment Profit
($000s)
Franchise revenue
Cost of franchise operations
Franchise operations segment
profit
Franchise profit as percent of
Franchise revenue
$
$
Fiscal Year
2019 Ended
August 28,
2019
(52 weeks)
Fiscal Year
2018 Ended
Fiscal 2019 vs
Fiscal 2018
August 29,
2018
(52 weeks)
Higher/(Lower)
(52 vs 52 weeks)
6,690
1,633
5,057
$
$
6,365
1,528
4,837
5.1 %
6.9 %
4.5 %
75.6%
76.0%
(0.4)%
We offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the
development of the Fuddruckers concept and system of restaurants. Franchise revenue includes (1) royalties paid to us as the
franchisor for the Fuddruckers brand; (2) funds paid to us as the franchisor for pooled advertising expenditures; and (3) franchise
fees paid to us when franchise units are opened for business or transferred to new owners and when franchise agreements are
renewed or certain milestones in franchise agreements are reached. Cost of franchise operations includes the direct costs associated
with supporting franchisees with opening new Fuddruckers franchised restaurants and the corporate overhead expenses associated
with generating franchise revenue. These corporate expenses primarily include the salaries and benefits, travel and related expenses,
and other expenses for employees whose primary job function involves supporting our franchise owners and the development of
new franchise locations
32
Beginning with the first quarter fiscal 2019, as a result of our adoption of the new revenue accounting standards more fully described
in Note 1 to our consolidated financial statements:
• We recognize as revenue the amounts due to us from franchisees for pooled advertising expenditures.
• We recognize initial and renewal franchise fees evenly over the term of franchise area development agreements and
we recognize revenue when a franchise agreement is terminated early.
• Additionally, we record an expense and liability in an amount equal to the unspent funds paid to us from franchisees for
pooled advertising expenditures that will be incurred in a future period.
Franchise revenue increased approximately $0.3 million, or 5.1%, in fiscal 2019 compared to fiscal 2018. The $0.3 million increase
in franchise revenue reflects (1) an approximate $0.3 million increase in franchise fees earned; and (2) recognition of approximately
$0.4 million of revenue related to funds owed to us as the franchisor for pooled advertising expenditures; partially offset by (3)
an approximate $0.4 million decline in franchise royalties on fewer franchise locations in operation in fiscal 2019.
Cost of franchise operations increased approximately $0.1 million, or 6.9%, in fiscal 2019 compared to fiscal 2018. The increase
was due primarily to (1) recording an expense in fiscal 2019 related to pooled advertising expenditures, partially offset by lower
salary and benefits expense as well as lower travel expense required to support the franchise system.
Franchise operations segment profit, defined as Franchise revenue less Cost of franchise operations, increased approximately $0.2
million in in fiscal 2019 compared to fiscal 2018, due primarily to the $0.3 million increase in franchise revenue partially offset
by the $0.1 million increase in franchise costs, both discussed above.
During fiscal 2019, three new Fuddruckers franchise locations opened, 11 locations closed, and five locations in the San Antonio,
Texas area transferred from company operated locations to franchise operated locations. We ended fiscal 2019 with 102 Fuddruckers
franchise restaurants.
Culinary Contract Services Segment Profit
Culinary Contract Services is a business line servicing healthcare, sport stadiums, corporate dining clients, and sales through retail
grocery stores. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service,
and retail dining. Culinary Contract Services has contracts with long-term acute care hospitals, acute care medical centers,
ambulatory surgical centers, behavioral hospitals, sports stadiums, and business and industry clients. Culinary Contract Services
has the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food
services to our clients. We operated 31 Culinary Contract Services locations at the end of fiscal 2019 and 28 at the end of fiscal
2018. We focus on clients who are able to enter into agreements in which all operating costs are reimbursed to us and we generally
charge a fixed fee as opposed to agreements where we retain all revenues and operating costs and we are exposed to the variability
of the operating results of the location. The fixed fee agreements typically present lower financial risk to the company.
($000s)
Fiscal Year
2019 Ended
August 28,
2019
(52 weeks)
Fiscal Year
2018 Ended
Fiscal 2019 vs
Fiscal 2018
August 29,
2018
(52 weeks)
Higher/(Lower)
(52 vs 52 weeks)
Culinary contract services
Cost of culinary contract services
CCS segment profit
Culinary contract profit as percent of
Culinary contract services sales
$
$
31,888
28,554
3,334
$
$
25,782
24,161
1,621
10.5%
6.3%
23.7%
18.2%
105.7%
4.2%
Culinary contract services revenue increased $6.1 million, or 23.7%, in fiscal 2019 compared to fiscal 2018. The $6.1 million
increase in revenue was primarily due to (1) an increase in sales of approximately $4.5 million from newer accounts that were not
in operation for the entirety of fiscal 2019 and fiscal 2018; (2) approximately $0.6 million from a location that was transferred
from our restaurant business segment to our culinary contract services business segment; and (3) approximately $1.1 million
increase in sales from locations continually operated over the prior full year; partially offset by loss of sales of approximately $0.1
million for locations that ceased operations.
Cost of culinary contract services includes the food, payroll and related costs, other direct operating expenses, and corporate
overhead expenses associated with generating Culinary contract services sales. Cost of culinary contract services increased
33
approximately $4.4 million, or 18.2%, in fiscal 2019 compared to fiscal 2018 due primarily to a net increase in culinary contract
sales volume, partially offset by reductions of corporate overhead expenses required to support this business segment. CCS
segment profit (defined as Culinary contract cervices revenue less Cost of culinary contract services) increased in dollar terms by
approximately $1.7 million and increased as a percent of Culinary contract services revenue to 10.5% in fiscal 2019 from 6.3%
in fiscal 2018, due primarily to the change in the mix of culinary contract service agreements with clients.
Opening Costs
Opening costs includes labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period.
Opening costs were less than $0.1 million in fiscal 2019 compared to approximately $0.6 million in fiscal 2018. Opening costs
of $0.6 million in fiscal 2018 included the re-opening costs associated with one Fuddruckers location that was damaged during
Hurricane Harvey and subsequently restored and re-opened for business just prior to the quarter ended June 6, 2018 as well as the
carrying costs for one location where we previously operated a Cheeseburger in Paradise restaurant and one location that we lease
where we previously intended to open a Fuddruckers restaurant.
Depreciation and Amortization
($000s)
Fiscal Year
2019 Ended
August 28,
2019
(52 weeks)
Fiscal Year
2018 Ended
Fiscal 2019 vs
Fiscal 2018
August 29,
2018
(52 weeks)
Higher/(Lower)
(52 vs 52 weeks)
Depreciation and amortization
$
13,998
$
17,453
As a percentage of total sales
4.3%
4.8%
(19.8)%
(0.5)%
Depreciation and amortization expense decreased $3.5 million in fiscal 2019 compared to fiscal 2018 due primarily to certain
assets reaching the end of their depreciable lives and the removal of certain assets upon sale. As a percentage of total revenue,
depreciation and amortization expense decreased to 4.3% in fiscal 2019, compared to 4.8% in fiscal 2018.
Selling, General and Administrative Expenses
($000s)
Fiscal Year
2019 Ended
August 28,
2019
(52 weeks)
Fiscal Year
2018 Ended
Fiscal 2019 vs
Fiscal 2018
August 29,
2018
(52 weeks)
Higher/(Lower)
(52 vs 52 weeks)
General and administrative expenses
Marketing and advertising expenses
Selling, general and administrative expenses
As percent of total sales
$
$
30,257
3,922
34,179
$
$
35,201
3,524
38,725
10.6%
10.6%
(14.0)%
11.3 %
(11.7)%
0.0 %
Selling, general and administrative expenses include marketing and advertising expenses, corporate salaries and benefits-related
costs, including restaurant area leaders and regional directors, share-based compensation, professional fees, travel and recruiting
expenses and other office expenses. Selling, general and administrative expenses decreased by approximately $4.5 million, or
11.7%, in fiscal 2019 compared to fiscal 2018. The approximate $4.5 million decrease in Selling, general and administrative
expenses include (1) an approximate $4.6 million decrease in salaries, benefits, and other compensation expenses; (2) an
approximate $0.5 million reduction in corporate travel expense; (3) an approximate $0.4 million decrease related to lower general
liability insurance expense; partially offset by (4) an approximate $0.4 million increase in marketing and advertising expense; (5)
an approximate $0.5 million increase in outside professional services and telecommunications network costs; and (6) an
approximate net $0.1 million increase in other corporate overhead costs. As a percentage of total sales, Selling, general and
administrative expenses were 10.6% in fiscal 2019 and in fiscal 2018.
34
Other Charges
Other charges includes those expenses that we consider related to our restructuring efforts are not part of our recurring operations.
We have identified these expenses amounting to approximately $4.3 million in fiscal 2019 and recorded in Other charges. These
expenses were included in our Selling, general, and administrative cost expense line in previously reported quarters of fiscal 2019.
($000s)
Proxy communication related
Employee severances
Restructuring related
Total Other Charges
Fiscal Year
2019 Ended
August 28,
2019
(52 weeks)
$
$
1,740
1,325
1,205
4,270
In the first half of fiscal 2019, a shareholder of the company proposed alternative nominees to the Board of Directors and other
possible changes to the corporate strategy resulting in a contested proxy at the company's annual meeting. We incurred
approximately $1.7 million in proxy communication expense which was primarily for outside professional services and related
costs in order to communicate with shareholders about management's strategy and the experience of the Company's members on
the Board of Directors.
In fiscal 2019, we separated with a number of employees as part of our efforts to streamline our corporate overhead costs and to
support a reduced number of restaurants in operation. Employees who were separated from the company were paid severance
based on the number of years of service and earnings with the organization, resulting in an approximate $1.3 million charge.
Also, in fiscal 2019, we engaged a professional consulting firm to evaluate initiatives to right-size corporate overhead costs and
revenue enhancing measures. In addition, we engaged other outside consultants to evaluate various other components of our
strategy. We also incurred cost of other outside professionals as we began efforts to transition portions of our accounting, payroll,
operational reporting, and other back-office functions to a leading multi-unit restaurant outsourcing firm.We anticipate completing
the transition in the first calendar quarter of 2020 and expect to realize additional cost savings and enhanced capabilities from this
transition. Lastly, we incurred expenses related to certain information technology systems that will be replaced by the capabilities
of the outsourcing firm. We incurred an expense of $1.2 million for these restructuring efforts.
Other charges, as defined above, were not significant in fiscal 2018.
Provision for Asset Impairments and Restaurant Closings
The provision for asset impairment and restaurant closings of approximately $5.6 million in fiscal 2019 is primarily related to
assets at nine property locations held for use, seven properties held for sale, one international joint venture investment, and spare
inventory of restaurant equipment and parts at our maintenance facility, each written down to their estimated fair value. The
provision for asset impairment and restaurant closings of approximately $8.9 million in fiscal 2018 is primarily related to assets
impaired at 21 property locations, goodwill at three property locations, ten properties held for sale written down to their fair value,
and a reserve for 15 restaurant closings of approximately $1.3 million.
Net Gain on Disposition of Property and Equipment
The approximate $12.8 million net gain on disposition of property and equipment in fiscal 2019 primarily reflects (1) the sale and
leaseback of two property locations where we operate a total of three restaurants, including a portion related to amortization of
deferred gains; (2) sale of one undeveloped property that was previously held for sale; (3) partially offset by net lease termination
costs at other locations as well as routine asset retirement activity.
The approximate $5.4 million net gain on disposition of property and equipment in fiscal 2018 is primarily related to the gain on
the sale of 10 properties of approximately $4.9 million and approximately $1.3 million of insurance proceeds received for property
and equipment damaged by Hurricane Harvey, partially offset by lease termination costs at eight restaurant location closures and
routine asset retirements.
35
Interest Income
Interest income was $30 thousand in fiscal 2019 compared to $12 thousand in fiscal 2018 due to higher net cash balances, including
required restricted cash balances.
Interest Expense
Interest expense was approximately $6.0 million in fiscal 2019 compared to $3.3 million in fiscal 2018. The increase in interest
expense reflects higher average debt balances, higher interest rates in the credit agreement entered into on December 13, 2018,
and higher amortization expense related to pre-paid interest and fees association with the credit agreement into on December 13,
2018, as well as acceleration of the expensing of deferred financing fees associated with our previous debt agreement. Interest
paid in cash was $4.5 million in fiscal 2019 and $2.5 million in fiscal 2018.
Other Income (Expense), Net
Other income, net, consisted primarily of the following components: net rental property income and expenses relating to property
for which we are the landlord; prepaid sales tax discounts earned through our participation in state tax prepayment programs; oil
and gas royalty income; and changes in the fair value of our interest rate swap agreement prior to its termination in December
2018.
Other income was approximately $0.2 million in fiscal 2019 compared to approximately $0.3 million in fiscal 2018. The
approximate $0.2 million of income in fiscal 2019 is primarily net rental income, partially offset by sales tax discount expense
and a reduction in the fair value of our interest rate swap in the first quarter. The approximate $0.3 million of income in fiscal
2018 primarily reflects net rental income and an increase in the fair value of our interest rate swap, partially offset by gift card
expenses (specifically the expense of discounting gift card sales).
Taxes
The income tax provision related to continuing operations for fiscal 2019 was approximately $0.5 million compared to an income
tax provision of approximately $7.7 million for fiscal 2018. The income tax provision in fiscal 2019 reflects $0.4 million of current
state income tax and $0.1 million of international withholding taxes. The income tax provision in fiscal 2018 reflects the impact
of the U.S. tax reform, that is commonly referred to as Tax Cuts and Jobs Act (the "Tax Act"), of $3.2 million in deferred income
taxes, an additional $4.1 million of deferred income tax provision, including an incremental valuation allowance, and $0.4 million
of current state income taxes.
The effective tax rate ("ETR) for continuing operations was a negative 3.2% for fiscal 2019 and a negative 30.6% for fiscal 2018.
The ETR for fiscal 2019 differs from the federal statutory rate of 21% due to the change in the valuation allowance, the federal
jobs credits, state income taxes, and other discrete items. The Tax Act lowered the federal statutory tax rate from 35% to 21%
effective January 1, 2018. In accordance with the application of Internal Revenue Code, Section 15, the Company's federal statutory
tax rate for fiscal 2018 was 25%, representing a blended tax rate for the fiscal year. The ETR for fiscal 2018 differs from the
blended federal statutory rate due to the change in the valuation allowance, the federal jobs credits, state income taxes and other
discrete items.
Discontinued Operations
($000s)
Discontinued operating losses
Impairments
Gains
Pretax loss
Income tax benefit (expense) from discontinued operations
Loss from discontinued operations, net of income taxes
Fiscal Year Ended
August 28,
2019
(52 weeks)
August 29,
2018
(52 weeks)
$
$
$
(7) $
—
—
(7) $
—
(7) $
(21)
(59)
—
(80)
(534)
(614)
36
The loss from discontinued operations, net of income taxes was $7 thousand in fiscal 2019 compared to a loss of approximately
$0.6 million in fiscal 2018. The loss of $7 thousand in fiscal 2019 primarily reflected net occupancy cost associated with assets
that were related to discontinued operations. The loss of $0.6 million in fiscal 2018 included (1) less than $0.1 million in “carrying
costs” (typically rent, property taxes, utilities, and maintenance) associated with assets that were related to discontinued operations;
(2) less than $0.1 million impairment charges for certain assets related to discontinued operations; and (3) an approximate $0.5
million income tax provision related to increasing the deferred tax asset valuation allowance associated with discontinued
operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
In fiscal 2019 and 2018 our primary sources of short-term and long-term liquidity were proceeds from asset sales and our 2018
and 2016 Credit Facilities (as defined below). Cash and cash equivalents and restricted cash increased approximately $9.0 million
from $3.7 million at the end of fiscal 2018 to $12.8 million at the end of fiscal 2019. We expect to continue to invest our available
liquidity to reduce our debt, maintain our existing restaurants and infrastructure and provide working capital requirements as
necessary. We plan to continue a level of capital and repair and maintenance expenditures to keep our restaurants attractive and
operating efficiently. Based upon our level of past and projected capital requirements, we expect that proceeds from the sale of
assets, funding available under our 2018 Credit Facility and cash flows from operations, will be sufficient to meet our capital
expenditures and working capital requirements during the next twelve months.
As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories and our vendors
grant trade credit for purchases such as food and supplies. However, higher levels of accounts receivable are typical in our CCS
business segment and Fuddruckers franchise business segment. We also strategically invest in our business through the addition
of new restaurant units and refurbishment of existing restaurant units, which are reflected as long-term assets.
The following table summarizes our cash flows from operating, investing and financing activities:
Total cash provided by (used in):
Operating activities
Investing activities
Financing activities
Increase (Decrease) in cash and cash equivalents
Fiscal Year Ended
August 28,
2019
(52 weeks)
August 29,
2018
(52 weeks)
(In thousands)
$
$
(13,130) $
17,849
4,315
9,034
$
(8,453)
3,014
8,065
2,626
Operating Activities. Cash flow from operating activities decreased from a use of cash of $8.5 million in fiscal 2018 to a use of
cash of $13.1 million in fiscal 2019. The $4.7 million decrease in operating cash flow was primarily due to a $4.4 million decrease
in cash used in operations before changes in operating assets and liabilities and a $0.3 million increase in cash used in changes in
operating assets and liabilities.
The $4.4 million decrease in cash used in operating activities before changes in operating assets and liabilities was primarily due
to uses of cash from a $1.8 million decrease total in total segment level profit and a $2.6 million increase in interest expense.
The $0.3 million increase in cash used in changes in operating assets and liabilities was primarily due to a $2.0 million higher
decrease in accounts payable, accrued expenses and other liabilities, partially offset by a $0.7 million decrease in the change in
trade accounts receivable and other receivables, a $0.2 million decrease in the change of food and supply inventories, and a $0.8
million decrease in the change of prepaid expenses and other assets, in fiscal 2019 compared to fiscal 2018.
Investing Activities. Cash provided by investing activities was $17.8 million in fiscal 2019, an increase of $14.8 million compared
to cash used in investing activities of $3.0 million in fiscal 2018, primarily due to the proceeds from disposal of assets and property
held for sale and proceeds from property and equipment insurance claims. We used cash to invest $4.0 million in the purchase of
property and equipment in fiscal 2019, a decrease of $9.3 million from our investment of $13.2 million in fiscal 2018. Proceeds
from disposal of assets and property held for sale was $21.8 million in fiscal 2019, an increase of $7.6 million from proceeds of
$14.2 million in fiscal 2018. Proceeds on property and equipment insurance claims of $2.1 million was a source of cash in fiscal
37
2018. The purchases of property and equipment of $4.0 million in fiscal 2019 included $3.7 million for our Company-owned
restaurants and $0.3 million in corporate related capital expenditures,. The purchases of property and equipment of $13.2 million
in fiscal 2018 included $11.1 million for our Company-owned restaurants, $1.9 million in corporate related capital expenditures
and $0.2 million for our CCS business segment.
Financing Activities. Cash provided by financing activities was $4.3 million in fiscal 2019, a decrease of $3.8 million from cash
provided by financing activities of $8.1 million in fiscal 2018. Cash flows from financing activities was primarily the result of
our 2016 Credit facility, as amended through December 13, 2018 and our 2018 Credit Facility thereafter. During fiscal 2019, net
cash provided by our 2018 term loan was $58.4 million and by Revolver borrowings was $42.3 million. Cash used for Revolver
repayments was $57.0 million, for repayments of our 2016 term loan was $36.1 million and for debt issuance costs was $3.3
million.
Net cash provided by financing activities of fiscal 2018 of $8.1 million consisted of net borrowings from our Revolver of $15.6
million, partially offset by payments on our 2015 term loan of $7.1 million and debt issuance costs paid of $0.4 million.
STATUS OF LONG-TERM INVESTMENTS AND LIQUIDITY
At August 28, 2019, we did not hold any long-term investments.
STATUS OF TRADE ACCOUNTS AND OTHER RECEIVABLES, NET
We monitor the aging of our receivables, including Fuddruckers franchising related receivables, and record provisions for
uncollectability, as appropriate. Credit terms of accounts receivable associated with our CCS business vary from 30 to 45 days
based on contract terms.
WORKING CAPITAL
At fiscal year-end 2019, current assets increased $7.6 million including an decrease of $0.1 million in cash and an increase in
restricted cash of $9.1 million. Trade accounts and other receivables increased $0.1 million while food and supply inventory and
prepaid expenses decreased $0.6 million and $0.9 million, respectively. The $0.6 million decrease in food and supply inventory
was primarily due to lower spending for restaurant supplies and food supplies on lower sales volumes and the $0.9 million decrease
in prepaid expenses was primarily due to reduction in prepayments of expenses.
At fiscal year-end 2019, current liabilities decreased $48.6 million due primarily to a $39.3 million decrease in Credit facility debt,
a $7.3 million decrease in accrued expenses and other liabilities and a $2.0 million decrease in accounts payable. The decrease of
$39.3 million in Credit facility debt due to the retirement of the 2016 Credit Facility debt with the proceeds from the long-term
2018 Credit Facility. The $7.3 million decrease in accrued expenses and other liabilities is primarily a result of lower payroll
related liabilities of $1.8 million, lower insurance claim and premium liabilities of $1.2 million, lower lease termination costs
reserves of $0.6 million, and lower unredeemed gift and dining card liability of $3.4 million, partially offset by higher accrued
interest payable of $0.3 million. The lower unredeemed gift and dining card liability includes $3.1 million related to the cumulative
effect of adopting the new revenue recognition accounting standard as more fully described at Note 1 to the consolidated financial
statements included in Item 8. of this Form 10-K. The $2.0 million decrease in accounts payable was due to a $1.6 million decrease
in checks in transit, a $0.8 million decrease in trade payables, and a $0.4 million increase in accrued purchases.
CAPITAL EXPENDITURES
Capital expenditures generally consist of purchases of real estate for future restaurant sites, culinary contract services investments,
new unit construction, purchases of new and replacement restaurant furniture and equipment, and ongoing remodeling programs.
Capital expenditures for fiscal 2019 were approximately $4.0 million primarily related to recurring maintenance of our restaurant
properties and information technology infrastructure. In fiscal 2020, we expect to invest up to $4.0 million for recurring maintenance
for our restaurant properties and information technology investments. We expect to be able to fund all planned capital expenditures
in fiscal 2020 using cash flows from operations, proceeds from the sale of assets, and our available credit.
38
DEBT
2018 Credit Agreement
On December 13, 2018, the Company entered into a credit agreement (as amended by the First Amendment (as defined below),
the “2018 Credit Agreement”) among the Company, the lenders from time to time party thereto, and MSD as Administrative Agent,
pursuant to which the lenders party thereto agreed to make loans to the Company from time to time up to an aggregate principal
amount of $80 million consisting of a $10 million revolving credit facility (the “2018 Revolver”), a $10 million delayed draw
term loan (“2018 Delayed Draw Term Loan”), and a $60 million term loan (the “2018 Term Loan”, and together with the 2018
Revolver and the 2018 Delayed Draw Term Loan, the “2018 Credit Facility”). The 2018 Credit Facility terminates on, and all
amounts owing thereunder must be repaid on, December 13, 2023.
On July 31, 2019, the Company entered into the First Amendment to the 2018 Credit Agreement (the “First Amendment”) to
extend the 2018 Delayed Draw Term Loan expiration date for up to one year to the earlier to occur of (a) the date on which the
commitments under the 2018 Delayed Draw Term Loan have been terminated or reduced to zero in accordance with the terms of
the 2018 Credit Agreement and (b) September 13, 2020.
Borrowings under the 2018 Revolver, 2018 Delayed Draw Term Loan, and 2018 Term Loan will bear interest at the London
InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest is payable quarterly and accrues daily. Under the terms of the
2018 Credit Agreement, the maximum amount of interest payable, based on the aggregate principal amount of $80 million and
interest rates in effect at December 13, 2018, in the next 12 months was required to be pre-funded at the closing date of the 2018
Credit Agreement. The pre-funded amount at August 28, 2019 of approximately $6.4 million is recorded in restricted cash and
cash equivalents on our consolidated balance sheet and is not available for other purposes. The interest rate for the 2018 Term
Loan and the 2018 Revolver was approximately 10.1% as of November 15, 2019.
The 2018 Credit Facility is subject to the following minimum amortization payments: 1st anniversary: $10 million; 2nd anniversary:
$10 million; 3rd anniversary: $15 million; and 4th anniversary: $15 million.
The Company also pays a quarterly commitment fee based on the unused portion of the 2018 Revolver and the 2018 Delayed
Draw Term Loan at 0.5% per annum. Voluntary prepayments, refinancing and asset dispositions constituting a sale of all or
substantially all assets, under the 2018 Delayed Draw Term Loan and the 2018 Term Loan are subject to a make whole premium
during years one and two equal to the present value of all interest otherwise owed on the prepaid amount from the date of the pre-
payment through the end of year two, a 2.0% fee during year three, and a 1.0% fee during year four. Finally, the Company paid
to the lenders a one-time fee of $1.6 million in connection with the closing of the 2018 Credit Facility.
Indebtedness under the 2018 Credit Facility is secured by a security interest in, among other things, all of the Company’s present
and future personal property (other than certain excluded assets) and all Mortgaged Property (as defined in the 2018 Credit
Agreement) of the Company and its subsidiaries.
The 2018 Credit Facility contains customary covenants and restrictions on the Company’s ability to engage in certain activities,
including financial performance covenants, asset sales and acquisitions, and contains customary events of default. Specifically,
among other things, the Company is required to maintain minimum Liquidity (as defined in the 2018 Credit Agreement) of $3.0
million as of the last day of each fiscal quarter and a minimum Asset Coverage Ratio (as defined in the 2018 Credit Agreement)
of 2.50 to 1.00.
In conjunction with entering into the 2018 Credit Agreement in December 2018, we obtained third party appraisals on all property
used as collateral to maintain the debt covenant requirement of a minimum of 2.50 to 1.00 asset coverage ratio . The asset coverage
ratio is defined as the aggregate value of all mortgaged property divided by the outstanding principle amount of term loans plus
the average aggregate outstanding principle amount of revolving credit loans during the last full month prior to such date of
determination. At August 28, 2019, our asset coverage ratio was 4.23 to 1.00.
All amounts owing by the Company under the 2018 Credit Facility are guaranteed by the subsidiaries of the Company.
As of August 28, 2019, we had no amounts due within the next 12 months under the 2018 Credit Facility due to principal repayments
in excess of the required minimum. As of August 28, 2019 we had approximately $1.3 million committed under letters of credit,
which is used as security for the payment of insurance obligations and are fully cash collateralized, and approximately $0.1 million
in other indebtedness.
At August 28, 2019, the Company had $4.7 million available to borrow under the 2018 Revolver and $10.0 million available to
borrow under the 2018 Delayed Draw Term Loan.
As of November 26, 2019, the Company was in compliance with all covenants under the terms of the 2018 Credit Agreement.
39
2016 Credit Agreement (paid in full and terminated in December 2018)
On November 8, 2016, the Company entered into a $65.0 million Senior Secured Credit Facility with Wells Fargo Bank, National
Association, as Administrative Agent and Cadence Bank, NA and Texas Capital Bank, NA, as lenders (“2016 Credit Agreement”).
The 2016 Credit Agreement, prior to the amendments discussed below, was comprised of a $30.0 million 5-year Revolver (the
“Revolver”) and a $35.0 million 5-year Term Loan (the “Term Loan”), and it also included sub-facilities for swingline loans and
letters of credits. The original maturity date of the 2016 Credit Agreement was November 8, 2021.
Borrowings under the Revolver and Term Loan bore interest at (1) a base rate equal to the greater of (a) the federal funds effective
rate plus one-half of 1% (the “Base Rate”), (b) prime and (c) LIBOR for an interest period of 1 month, plus, in any case, an
applicable spread that ranges from 1.50% to 2.50% per annum the (“Applicable Margin”), or (2) the LIBOR, as adjusted for any
Eurodollar reserve requirements, plus an applicable spread that ranges from 2.50% to 3.50% per annum. Borrowings under the
swingline loan bore interest at the Base Rate plus the Applicable Margin. The applicable spread under each option was dependent
upon certain measures of the Company’s financial performance at the time of election. Interest was payable quarterly, or in more
frequent intervals if LIBOR applies.
The Company was obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based
on the average daily unused amount of the commitment of such lender, ranged from 0.30% to 0.35% per annum depending upon
the Company's financial performance.
The proceeds of the 2016 Credit Agreement were available for the Company to (i) pay in full all indebtedness outstanding under
the 2013 Credit Agreement as of November 8, 2016, (ii) pay fees, commissions, and expenses in connection with our repayment
of the 2013 Credit Agreement, initial extensions of credit under the 2016 Credit Agreement, and (iii) for working capital and
general corporate purposes of the Company.
The 2016 Credit Agreement, as amended, contained the customary covenants and was secured by an all asset lien on all of the
Company's real property and also included customary events of default. On December 13, 2018, the 2016 Credit Agreement was
terminated with all outstanding amounts paid in full.
COMMITMENTS AND CONTINGENCIES
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements except for operating leases for our corporate office, facility service warehouse and
certain restaurant properties.
Claims
From time to time, we are subject to various other private lawsuits, administrative proceedings and claims that arise in the
ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters
typically involve claims from guests, employees and others related to issues common to the restaurant industry. We currently
believe that the final disposition of these types of lawsuits, proceedings and claims will not have a material adverse effect on
our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a
particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims.
Construction Activity
From time to time, we enter into non-cancelable contracts for the construction of our new restaurants and restaurant remodels.
This construction activity exposes us to the risks inherent in this industry including but not limited to rising material prices,
labor shortages, delays in getting required permits and inspections, adverse weather conditions, and injuries sustained by
workers.
Contractual Obligations
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide the contractual
obligations table.
40
AFFILIATIONS AND RELATED PARTIES
Affiliate Services
The Company’s Chief Executive Officer, Christopher J. Pappas, and Harris J. Pappas, a former Director of the Company, own
restaurant entities (the “Pappas entities”) that may, from time to time, provide services to the Company and its subsidiaries, as
detailed in the Amended and Restated Master Sales Agreement dated August 2, 2017 among the Company and the Pappas entities.
Collectively, Messrs. Pappas and the Pappas entities own greater than 5% of the Company's common stock.
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities continue to provide specialized
(customized) equipment fabrication, primarily for new construction, and basic equipment maintenance, including stainless steel
stoves, shelving, rolling carts, and chef tables. The total costs under the Master Sales Agreement of custom-fabricated and
refurbished equipment in fiscal 2019 and 2018 were approximately $19 thousand and $31 thousand, 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 partner interest and a 50% general partner interest in the limited
partnership. A third party company manages the center. One of the Company’s restaurants has rented approximately 7% of the
space in that center since July 1969. No changes were made to the Company’s lease terms as a result of the transfer of ownership
of the center to the new partnership.
On November 22, 2006, the Company executed a new lease agreement with respect to this property. Effective upon the Company’s
relocation and occupancy into the new space in July 2008, the new lease agreement provides for a primary term of approximately
12 years with two subsequent five-year options. The new lease also gave the landlord an option to buy out the tenant on or after
the calendar year 2015 by paying the then unamortized cost of improvements to the tenant. The Company is paying rent of $22.00
per square foot plus maintenance, taxes, and insurance for the remaining primary term of the lease. Thereafter, the lease provides
for increases in rent at set intervals. The new lease agreement was approved by the Finance and Audit Committee of our Board
of Directors in 2006.
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement for one of the Company’s
Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of approximately six years
with two subsequent five-year options. Pursuant to the new ground lease agreement, the Company is paying $28.53 per square
foot plus maintenance, taxes, and insurance from March 12, 2014 until May 31, 2020. Thereafter, the new ground lease agreement
provides for increases in rent at set intervals.
Affiliated rents paid for the Houston property lease represented 2.9% and 3.1% of total rents for continuing operations for fiscal
2019 and 2018, respectively. Rent payments under the two lease agreements described above were $593 thousand and $628
thousand in fiscal 2019 and 2018, respectively.
41
The following table compares current and prior two fiscal years charges incurred under the Amended and Restated Master Sales
Agreement, affiliated property leases, and other related party agreements to our total capital expenditures, as well as relative
Selling, general and administrative expenses, and other operating expenses included in continuing operations:
AFFILIATED COSTS INCURRED:
Selling, general and administrative expenses—professional and other costs
Capital expenditures—custom-fabricated and refurbished equipment
Other operating expenses, occupancy costs and opening costs, including
property leases
Total
RELATIVE TOTAL COMPANY COSTS:
Selling, general and administrative expenses
Capital expenditures
Other operating expenses, occupancy costs and opening costs
Total
AFFILIATED COSTS INCURRED AS A PERCENTAGE OF RELATIVE
TOTAL COMPANY COSTS
Fiscal Year Ended
August 28,
2019
(364 days)
August 29,
2018
(364 days)
(In thousands, except percentages)
$
$
$
$
— $
19
593
612
34,179
3,987
69,075
107,241
$
$
$
—
31
628
659
38,725
13,247
83,239
135,211
0.57%
0.49%
The Company entered into a new employment agreement with Christopher Pappas on December 11, 2017. Under the employment
agreement, the initial term of Mr. Pappas' employment ended on August 28, 2019 and automatically renews for additional one
year periods, unless terminated in accordance with its terms. Mr. Pappas continues to devote his primary time and business efforts
to the Company while maintaining his role at Pappas Restaurants, Inc. The Employment Agreement was unanimously approved
by the Executive Compensation Committee (the “Committee”) of the Board as well as by the full Board. Effective August 1, 2018,
the Company and Christopher J. Pappas agreed to reduce his fixed annual base salary to one dollar.
Peter Tropoli, a former director and officer of the Company, is an attorney and stepson of Frank Markantonis, who is a director
of the Company. Mr. Tropoli resigned from the Company and is no longer our General Counsel and Corporate Secretary.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
42
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are described in Note 1, “Nature of Operations and Significant Accounting Policies,” to our Consolidated
Financial Statements included in Item 8 of Part II of this report. The Consolidated Financial Statements are prepared in conformity
with accounting principles generally accepted in the United States. Preparation of the financial statements requires us to make
judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and
expenses during the reporting periods. Management believes the following are critical accounting policies due to the significant,
subjective and complex judgments and estimates used when preparing our consolidated financial statements. Management regularly
reviews these assumptions and estimates with the Finance and Audit Committee of our Board of Directors.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best
estimate of current and future taxes to be paid. We are subject to income taxes in the United States and a limited number of foreign
jurisdictions, involving franchised locations in Panama, Mexico, and Canada. Significant judgments and estimates are required
in the determination of the consolidated income tax expense.
On December 22, 2017, U.S. tax reform legislation that is commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was
signed into law. The enactment date occurred during the second quarter of fiscal 2018 and the impact on our income tax accounts
of the Tax Act were accounted for in the period of enactment, in accordance with ASC 740. The Tax Act makes broad and complex
changes to the U.S. tax code and most notably to the Company, the Tax Act lowered the federal statutory tax rate from 35% to
21% effective January 1, 2018. The Company's federal statutory tax rate for fiscal 2019 was 21%.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts
in the financial statements, which will result in taxable or deductible amounts in the future, as well as from tax Net Operating
Losses ("NOL") and tax credit carryovers. We establish a valuation allowance when we no longer consider it more likely than not
that a deferred tax asset will be realized. In evaluating our ability to recover our deferred tax assets, we consider available positive
and negative evidence, including scheduled reversals of deferred tax liabilities, tax-planning strategies and existing business
conditions, including the results of recent operations. In the third quarter of fiscal 2018, management concluded that a full valuation
allowance on the Company's net deferred tax assets was necessary. As of August 28, 2019, the Company considers the deferred
tax assets not to be realizable and maintains a full valuation allowance against the Company's net deferred tax asset balance.
The composition of the Company’s deferred tax assets, excluding the offsetting impact of the valuation allowance, includes income
tax NOL’s and tax credits of approximately $18.1 million, approximately $5.5 million relating to income tax NOL’s and $12.5
million relating to tax credit carryover, which expire in varying amounts between fiscal 2022 through 2039, except for the portion
of the tax NOL's that have an indefinite carryforward period. At this time, the management is uncertain as to the realization of
these deferred tax assets, which is otherwise dependent on numerous factors, including our ability to generate sufficient taxable
income prospectively and, if necessary, gains on sale of owned property locations, prior to expiration of the tax NOL’s and tax
credit carryovers.
Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes
to previous estimates of tax liability. We operate within multiple taxing jurisdictions and are subject to examination in these tax
jurisdictions, as well as by the Internal Revenue Service (“IRS”). In management’s opinion, adequate provisions for income taxes
have been made for all open income tax periods. The potential outcomes of examinations are regularly assessed in determining
the adequacy of the provision for income taxes and income tax liabilities. Management believes that adequate provisions have
been made for reasonable and foreseeable outcomes related to uncertain tax matters.
Impairment of Long-Lived Assets
We periodically evaluate long-lived assets held for use and held for sale, whenever events or changes in circumstances indicate
that the carrying amount of those assets may not be recoverable. We analyze historical cash flows of operating locations and
compare results of poorer performing locations to more profitable locations. We also analyze lease terms, condition of the assets
and related need for capital expenditures or repairs, construction activity in the surrounding area as well as the economic and
market conditions in the surrounding area.
For assets held for use, we estimate future cash flows using assumptions based on possible outcomes of the areas analyzed. If the
undiscounted future cash flows are less than the carrying value of our location’s assets, we record an impairment based on an
estimate of discounted cash flows. The estimates of future cash flows, based on reasonable and supportable assumptions and
projections, require management’s subjective judgments. Assumptions and estimates used include operating results, changes in
working capital, discount rate, growth rate, anticipated net proceeds from disposition of the property and if applicable, lease terms.
43
The span of time for which future cash flows are estimated is often lengthy, increasing the sensitivity to assumptions made. The
time span is longer and could be 20 to 25 years for newer properties, but only 5 to 10 years for older properties. Depending on
the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within
a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future cash flows.
The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows.
We operated 120 restaurants as of November 15, 2019 and periodically experience unanticipated changes in our assumptions and
estimates. Those changes could have a significant impact on discounted cash flow models with a corresponding significant impact
on the measurement of an impairment. Gains are not recognized until the assets are disposed.
We evaluate the useful lives of our other intangible assets, primarily the Fuddruckers trademarks and franchise agreements to
determine if they are definite or indefinite-lived. Reaching a determination of useful life requires significant judgments and
assumptions regarding the future effects of obsolescence, contract term, demand, competition, other economic factors (such as
the stability of the industry, legislative action that results in an uncertain or changing regulatory environment, and expected changes
in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets.
We periodically evaluate our intangible assets, primarily the Fuddruckers trademarks and franchise agreements, to determine if
events or changes in circumstances such as economic or market conditions indicate that the carrying amount of the assets may
not be recoverable. We analyze historical cash flows of operating locations to determine trends that would indicate a need for
impairment. We also analyze royalties and collectability from our franchisees to determine if there are trends that would indicate
a need for impairment.
Property Held for Sale
We periodically review long-lived assets against our plans to retain or ultimately dispose of properties. If we decide to dispose of
a property, it will be moved to property held for sale and actively marketed. Property held for sale is recorded at amounts not in
excess of what management currently expects to receive upon sale, less costs of disposal. We analyze market conditions each
reporting period and record additional impairments due to declines in market values of like assets. The fair value of the property
is determined by observable inputs such as appraisals and prices of comparable properties in active markets for assets like ours.
Gains are not recognized until the properties are sold.
Insurance and Claims
We self-insure a significant portion of risks and associated liabilities under our employee injury, workers’ compensation and general
liability programs. We maintain insurance coverage with third party carriers to limit our per-occurrence claim exposure. We have
recorded accrued liabilities for self-insurance based upon analysis of historical data and actuarial estimates, and we review these
amounts on a quarterly basis to ensure that the liability is appropriate.
The significant assumptions made by the actuary to estimate self-insurance reserves, including incurred but not reported claims,
are as follows: (1) historical patterns of loss development will continue in the future as they have in the past (Loss Development
Method), (2) historical trend patterns and loss cost levels will continue in the future as they have in the past (Bornhuetter-Ferguson
Method), and (3) historical claim counts and exposures are used to calculate historical frequency rates and average claim costs
are analyzed to get a projected severity (Frequency and Severity Method). The results of these methods are blended by the actuary
to provide the reserves estimates.
Actual workers’ compensation, employee injury and general liability claims expense may differ from estimated loss provisions.
The ultimate level of claims under the in-house safety program are not known, and declines in incidence of claims as well as
claims costs experiences or reductions in reserve requirements under the program may not continue in future periods.
Prior to January 1, 2018, employee health insurance coverage was offered through fully-insured contracts with insurance carriers
and the liability for covered health claims was borne by the insurance carriers per the terms of each policy contract. Effective
January 1, 2018, we maintain a self-insured health benefit plan which provides medical and prescription drug benefits to certain
of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits per 3rd
party insurance carriers. Our self-insurance expense is accrued based upon the aggregate of the expected liability for reported
claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided by our 3rd
party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims
expense may differ from estimated loss provisions based on historical experience. The liabilities for these claims are included as
a component of accrued expenses and other liabilities on our consolidated balance sheets.
44
SHARE-BASED COMPENSATION
Share-based compensation is recognized as compensation expense in the income statement utilizing the fair value on the date of
the grant. The fair value of performance share based award liabilities are estimated based on a Monte Carlo simulation model.
The fair value of restricted stock units is valued at the closing market price of our common stock at the date of grant. The fair
value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Assumptions for
volatility, forfeitures, expected option life, risk free interest rate, and dividend yield are used in the model.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 to the accompanying Consolidated Financial Statements for a discussion of recent accounting guidance adopted and
not yet adopted. Except as disclosed in Note 1, the adopted accounting guidance discussed in Note 1 did not have a significant
impact on our consolidated financial position or results of operations. Except as disclosed in Note 1, Company either expects that
the accounting guidance not yet adopted will not have a significant impact on the Company’s consolidated financial position or
results of operations or is currently evaluating the impact of adopting the accounting guidance.
INFLATION
It is generally our policy to maintain stable menu prices without regard to seasonal variations in food costs. Certain increases in
costs of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the
extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
45
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Luby’s, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Luby’s, Inc. (a Delaware corporation) and subsidiaries (the
“Company”) as of August 28, 2019 and August 29, 2018, the related consolidated statements of operations, shareholders’ equity,
and cash flows for each of the two years in the period ended August 28, 2019, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of August 28, 2019 and August 29, 2018, and the results of its operations and its cash flows for each of the two years
in the period ended August 28, 2019, in conformity with accounting principles generally accepted in the United States of America.
Adoption of new accounting standard
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue
recognition on August 30, 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts
with Customers. The Company adopted the new revenue standard using the modified retrospective method.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for
the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2007.
Houston, Texas
November 26, 2019
46
Luby’s, Inc.
Consolidated Balance Sheets
August 28,
2019
August 29,
2018
(In thousands, except share data)
ASSETS
Current Assets:
Cash and cash equivalents
Restricted cash and cash equivalents
Trade accounts and other receivables, net
Food and supply inventories
Prepaid expenses
Total current assets
Property held for sale
Assets related to discontinued operations
Property and equipment, net
Intangible assets, net
Goodwill
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Liabilities related to discontinued operations
Current portion of credit facility debt
Accrued expenses and other liabilities
Total current liabilities
Credit facility debt, less current portion
Liabilities related to discontinued operations
Other liabilities
Total liabilities
Commitments and Contingencies
SHAREHOLDERS’ EQUITY
Common stock, $0.32 par value; 100,000,000 shares authorized; Shares issued were
30,478,972 and 30,003,642 at August 28, 2019 and August 29, 2018, respectively;
Shares outstanding were 29,978,972 and 29,503,642 at August 28, 2019 and August
29, 2018, respectively
Paid-in capital
Retained earnings
Less cost of treasury stock, 500,000 shares
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
$
3,640 $
9,116
8,852
3,432
2,355
27,395
16,488
1,813
121,743
16,781
514
1,266
186,000 $
8,465 $
14
—
24,475
32,954
45,439
—
6,577
84,970
9,753
34,870
61,182
(4,775)
101,030
186,000 $
3,722
—
8,787
4,022
3,219
19,750
19,469
1,813
138,287
18,179
555
1,936
199,989
10,457
14
39,338
31,755
81,564
—
16
5,781
87,361
9,602
33,872
73,929
(4,775)
112,628
199,989
The accompanying notes are an integral part of these Consolidated Financial Statements.
47
Luby’s, Inc.
Consolidated Statements of Operations
SALES:
Restaurant sales
Culinary contract services
Franchise revenue
Vending revenue
TOTAL SALES
COSTS AND EXPENSES:
Cost of food
Payroll and related costs
Other operating expenses
Occupancy costs
Opening costs
Cost of culinary contract services
Cost of franchise operations
Depreciation and amortization
Selling, general and administrative expenses
Other charges
Provision for asset impairments and restaurant closings
Net gain on disposition of property and equipment
Total costs and expenses
LOSS FROM OPERATIONS
Interest income
Interest expense
Other income, net
Loss before income taxes and discontinued operations
Provision for income taxes
Loss from continuing operations
Loss from discontinued operations, net of income taxes
NET LOSS
Loss per share from continuing operations:
Basic
Assuming dilution
Loss per share from discontinued operations:
Basic
Assuming dilution
Net loss per share:
Basic
Assuming dilution
Weighted-average shares outstanding:
Basic
Assuming dilution
Year Ended
August 28,
2019
August 29,
2018
(In thousands, except per share
data)
$
$
$
$
$
$
$
$
$
284,513
31,888
6,690
379
323,470
79,479
108,509
50,886
18,133
56
28,554
1,633
13,998
34,179
4,270
5,603
(12,832)
332,468
(8,998)
30
(5,977)
195
(14,750)
469
(15,219)
(7)
(15,226) $
(0.51) $
(0.51) $
0.00
0.00
$
$
(0.51) $
(0.51) $
332,518
25,782
6,365
531
365,196
94,238
124,478
62,286
20,399
554
24,161
1,528
17,453
38,725
—
8,917
(5,357)
387,382
(22,186)
12
(3,348)
298
(25,224)
7,730
(32,954)
(614)
(33,568)
(1.10)
(1.10)
(0.02)
(0.02)
(1.12)
(1.12)
29,786
29,786
29,901
29,901
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
Luby’s, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands)
Common Stock
Issued
Treasury
Balance at August 30, 2017
Net loss for the year
Common stock issued under nonemployee
director benefit plans
Common stock issued under employee
benefit plans
Share-based compensation expense
Balance at August 29, 2018
Net loss for the year
Cumulative effect of accounting changes
from the adoption of ASC Topic 606
Common stock issued under nonemployee
director benefit plans
Common stock issued under employee
benefit plans
Share-based compensation expense
Balance at August 28, 2019
Shares Amount
29,624
—
$ 9,480
—
87
28
183
109
30,003
—
59
35
$ 9,602
—
—
53
—
17
93
329
30,478
30
104
$ 9,753
Retained
Earnings
Total
Shareholders’
Equity
Shares Amount
Paid-In
Capital
(500) $ (4,775) $31,850
—
—
—
—
$ 107,497
— (33,568)
(28)
—
—
—
(59)
2,109
(500) $ (4,775) $33,872
—
—
—
—
$ 73,929
— (15,226)
—
—
—
—
—
—
—
2,479
(17)
—
—
—
(30)
1,045
(500) $ (4,775) $34,870
—
—
—
—
$ 61,182
$
$
$
144,052
(33,568)
—
—
2,144
112,628
(15,226)
2,479
—
—
1,149
101,030
The accompanying notes are an integral part of these Consolidated Financial Statements.
49
Luby’s, Inc.
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for asset impairments and net loss (gain) on property dispositions
Depreciation and amortization
Amortization of debt issuance cost
Share-based compensation expense
Deferred tax provision
Cash used in operating activities before changes in operating assets and liabilities
Changes in operating assets and liabilities:
Increase in trade accounts and other receivables
Decrease in food and supply inventories
Decrease in prepaid expenses and other assets
Decrease in accounts payable, accrued expenses and other liabilities
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets and property held for sale
Insurance proceeds
Purchases of property and equipment
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolver borrowings
Revolver repayments
Debt issuance costs
Proceeds on term loan
Term loan repayments
Tax paid on equity withheld
Net cash provided by financing activities
Net increase in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents and restricted cash at end of period
Cash paid for:
Income taxes
Interest
Year Ended
August 28,
2019
August 29,
2018
(In thousands)
$
(15,226) $
(33,568)
(7,229)
13,998
1,317
1,140
—
(6,000)
(65)
590
1,657
(9,312)
(13,130)
21,836
—
(3,987)
17,849
42,300
(57,000)
(3,266)
58,400
(36,107)
(12)
4,315
9,034
3,722
12,756
470
4,452
$
$
$
3,619
17,453
534
2,144
8,192
(1,626)
(775)
432
808
(7,292)
(8,453)
14,191
2,070
(13,247)
3,014
147,600
(132,000)
(386)
—
(7,079)
(70)
8,065
2,626
1,096
3,722
426
2,499
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
50
Luby’s, Inc.
Notes to Consolidated Financial Statements
Fiscal Years 2019 and 2018
Note 1. Nature of Operations and Significant Accounting Policies
Nature of Operations
Luby’s, Inc. is based in Houston, Texas. As of August 28, 2019, the Company owned and operated 124 restaurants, with 101 in
Texas and the remainder in other states. In addition, the Company received royalties from 102 Fuddruckers franchises as of
August 28, 2019 located primarily throughout the United States. The Company’s owned and franchised restaurant locations are
convenient to shopping and business developments, as well as, to residential areas. Accordingly, the restaurants appeal to a variety
of customers at breakfast, lunch, and dinner. Culinary Contract Services consists of contract arrangements to manage food services
for clients operating in primarily four lines of business: healthcare; senior living; business; and venues.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Luby’s, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in consolidation.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. We
have assessed our ability to continue as a going concern as of the balance sheet date and for at least one year beyond the issuance
date of the consolidated financial statements. Based on an evaluation of both quantitative and qualitative information, including
available liquidity under our 2018 Credit Facility, related to known conditions and events in the aggregate, it is probable that we
will be able to meet our obligations as they become due within one year after the date the consolidated financial statements are
issued.
Accounting Periods
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week
periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year
that consists of 53 weeks, accounting for 371 days in the aggregate. The first fiscal quarter consists of four four-week periods, or
16 weeks, and the remaining three quarters typically include three four-week periods, or 12 weeks, in length. The fourth fiscal
quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365
day calendar year.
Reportable Segments
Each restaurant is an operating segment because operating results and cash flow can be determined for each restaurant. We aggregate
our operating segments into reportable segments by restaurant brand due to the nature of the products and services, the production
processes, the customers, the methods used to distribute the products and services, similarity of store level profit margins and the
nature of the regulatory environment are alike. The Company has five reportable segments: Luby’s cafeterias, Fuddruckers
restaurants, Cheeseburger in Paradise restaurant, Fuddruckers franchise operations, and Culinary Contract Services (“CCS”).
Prior to the fourth quarter of fiscal 2019 our internal organization and reporting structure supported three reportable segments;
Company-owned restaurants, Franchise operations and Culinary Contract Services. The Company-owned restaurants consists of
the three brands discussed above, which were aggregated into one reportable segment. In the fourth quarter of fiscal 2019 we re-
evaluated and disaggregated the Company-owned restaurants into three reportable segments based on brand name. As such, as
of the fourth quarter 2019, our five reportable segments are Luby’s cafeterias, Fuddruckers restaurants, Cheeseburger in Paradise
restaurants, Fuddruckers franchise operations and Culinary Contract Services. Management believes this change better reflects
the priorities and decision-making analysis around the allocation of our resources and better aligns to the economic characteristics
within similar restaurant brands. We began reporting on the new structure in the fourth quarter of fiscal 2019 as reflected in this
Annual Report on Form 10-K. The segment data for the comparable periods presented has been recast to conform to the current
period presentation. Recasting this historical information did not have an impact on the consolidated financial performance of
Luby’s Inc. for any of the periods presented.
51
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
Cash and cash equivalents and restricted cash and cash equivalents include highly liquid investments such as money market funds
that have a maturity of three months or less. The Company’s bank account balances are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to $250,000 at each institution. However, balances in money market fund accounts are not insured.
Amounts in transit from credit card companies are also considered cash equivalents because they are both short-term and highly
liquid in nature and are typically converted to cash within three days of the sales transaction.
Trade Accounts and Other Receivables, net
Receivables consist principally of amounts due from franchises, culinary contract service clients, catering customers and restaurant
food sales to corporations. Receivables are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s
best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines
the allowance based on historical loss experience for CCS clients, catering customers and restaurant sales to corporations and, for
CCS receivables and franchise royalty and marketing and advertising receivables, the Company also considers the franchisees’
and CCS clients’ unsecured default status. The Company periodically reviews its allowance for doubtful accounts. Account balances
are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered
remote.
Inventories
Food and supply inventories are stated at the lower of cost (first-in, first-out) or net realizable value.
Property Held for Sale
The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of properties. If the Company
decides to dispose of a property, it will be moved to property held for sale and actively marketed. Property held for sale is recorded
at amounts not in excess of what management currently expects to receive upon sale, less costs of disposal. Depreciation on assets
moved to property held for sale is discontinued and gains are not recognized until the properties are sold.
Impairment of Long-Lived Assets
Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company evaluates
impairments on a restaurant-by-restaurant basis and uses cash flow results and other market conditions as indicators of impairment.
Debt Issuance Costs
Debt issuance costs include costs incurred in connection with the arrangement of long-term financing agreements. The debt issuance
costs associated with our term loans are presented on the our consolidated balance sheet as a direct deduction from long-term debt.
The debt issue costs associated with the our revolving credit facility are included in other assets on our consolidated balance sheet.
These costs are amortized using the effective interest method over the respective term of the debt to which they specifically relate.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, trade accounts and other receivables, accounts payable and accrued expenses
approximates fair value based on the short-term nature of these accounts. The carrying value of credit facility debt also approximates
fair value based on its recent renewal.
Self-Insurance Accrued Expenses
The Company self-insures a significant portion of expected losses under its workers’ compensation, employee injury and general
liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred claims, both
reported and not yet reported. These recorded estimated liabilities are based on judgments and independent actuarial estimates,
which include the use of claim development factors based on loss history; economic conditions; the frequency or severity of claims
and claim development patterns; and claim reserve management settlement practices.
52
Effective January 1, 2018, we maintain a self-insured health benefit plan which provides medical and prescription drug benefits
to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits
per 3rd party insurance carriers. We record expenses under the plan based on estimates of the costs of expected claims, administrative
costs and stop-loss insurance premiums. Our self-insurance expense is accrued based upon the aggregate of the expected liability
for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided
by our 3rd party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical
claims expense may differ from estimated loss provisions based on historical experience.
Revenue Recognition
See Note 3. Revenue Recognition.
Cost of CCS
The cost of CCS includes all food, payroll and related expenses, other operating expenses, and selling, general and administrative
expenses related to culinary contract service sales. All depreciation and amortization, property disposal, and asset impairment
expenses associated with CCS are reported within those respective lines as applicable.
Cost of Franchise Operations
The cost of franchise operations includes all food, payroll and related expenses, other operating expenses, and selling, general and
administrative expenses related to franchise operations sales. All depreciation and amortization, property disposal, and asset
impairment expenses associated with franchise operations are reported within those respective lines as applicable.
Marketing and Advertising Expenses
Marketing and advertising costs are expensed as incurred. Total advertising expense included in other operating expenses and
selling, general and administrative expense was $4.0 million and $4.1 million in fiscal 2019 and 2018, respectively. We record
advertising attributable to local store marketing and local community involvement efforts in other operating expenses; we record
advertising attributable to our brand identity, our promotional offers, and our other marketing messages intended to drive guest
awareness of our brands, in selling, general, and administrative expenses. We believe this separation of our marketing and
advertising costs assists with measurement of the profitability of individual restaurant locations by associating only the local store
marketing efforts with the operations of each restaurant.
Marketing and advertising expense included in other operating expenses attributable to local store marketing was $0.1 million
and $0.6 million in fiscal 2019 and 2018, respectively.
Marketing and advertising expense included in selling, general and administrative expense was $3.9 million and $3.5 million in
fiscal 2019 and 2018, respectively.
Depreciation and Amortization
Property and equipment are recorded at cost. The Company depreciates the cost of equipment over its estimated useful life using
the straight-line method. Leasehold improvements are amortized over the lesser of their estimated useful lives or the related lease
terms. Depreciation of buildings is provided on a straight-line basis over the estimated useful lives.
Opening Costs
Opening costs are expenditures related to the opening of new restaurants through its opening periods, other than those for capital
assets. Such costs are charged to expense when incurred.
53
Other Charges
Other charges includes those expenses that we consider related to our restructuring efforts or not part of our recurring operations.
In the first half of fiscal 2019, a shareholder of the company proposed alternative nominees to the Board of Directors and other
possible changes to the corporate strategy resulting in a contested proxy at the Company's 2019 annual meeting. We incurred $1.7
million in proxy communication expense which was primarily for outside professional services and related costs in order to
communicate with shareholders about management's strategy and the experience of the Company's members on the Board of
Directors.
Also, in fiscal 2019, we engaged a professional consulting firm to evaluate initiatives to right-size corporate overhead costs and
revenue enhancing measures. In addition, we engaged other outside consultants to evaluate various other components of our
strategy. We also incurred cost of other outside professionals as we began efforts to transition portions of our accounting, payroll,
operational reporting, and other back-office functions to a leading multi-unit restaurant outsourcing firm. We anticipate completing
the transition in the first calendar quarter of 2020 and expect to realize additional cost savings and enhanced capabilities from this
transition. Lastly, we incurred expenses related to certain information technology systems that will be replaced by the capabilities
of the outsourcing firm. We incurred an expense of $1.3 million for these restructuring efforts.
In fiscal 2019, we separated with a number of employees as part of our efforts to streamline our corporate overhead costs and to
support a reduced number of restaurants in operation. Employees who were separated from the company were paid severance
based on the number of years of service and earnings with the organization, resulting in a $1.2 million charge.
Other charges, as defined above, were not significant in fiscal 2018.
Operating Leases
The Company leases restaurant and administrative facilities, vehicles and administrative equipment under operating leases.
Building lease agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for a percentage
of sales in excess of specified levels. Contingent rental expenses are recognized prior to the achievement of a specified target,
provided that the achievement of the target is considered probable. Most of the Company’s lease agreements include renewal
periods at the Company’s option. The Company recognizes rent holiday periods and scheduled rent increases on a straight-line
basis over the lease term beginning with the date the Company takes possession of the leased space.
Income Taxes
The estimated future income tax effects of temporary differences between the tax bases of assets and liabilities and amounts
reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carrybacks and carryforwards
are recorded. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of
assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. A valuation allowance is recognized if, based on the weight of available evidence, it is more
likely than not a portion or all of the deferred tax asset will not be recognized. During fiscal 2018, management concluded to
increase their valuation allowance to reduce fully the Company’s net deferred tax asset balances, net of deferred tax liabilities,
including through the fiscal year ended August 28, 2019.
Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes
to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit
in these jurisdictions as well as by the Internal Revenue Service (“IRS”). In management’s opinion, adequate provisions for income
taxes have been made for all open tax years. The potential outcomes of examinations are regularly assessed in determining the
adequacy of the provision for income taxes and income tax liabilities. Management believes that adequate provisions have been
made for reasonably possible outcomes related to uncertain tax matters.
Discontinued Operations
We will report the disposal of a component or a group of components of the Company in discontinued operations if the disposal
of the components or group of components represents a strategic shift that has or will have a major effect on the Company’s
operations and financial results. Adoption of this standard did not have a material impact on our consolidated financial statements.
54
Share-Based Compensation
Share-based compensation expense is estimated for equity awards at fair value at the grant date. The Company determines fair
value of restricted stock awards based on the average of the high and low price of its common stock on the date awarded by the
Board of Directors. The Company determines the fair value of stock option awards using a Black-Scholes option pricing model.
The Black-Scholes option pricing model requires various judgmental assumptions including the expected dividend yield, stock
price volatility, and the expected life of the award. If any of the assumptions used in the model change significantly, share-based
compensation expense may differ materially in the future, from that recorded in the current period. The fair value of performance
share based award liabilities are estimated based on a Monte Carlo simulation model. For further discussion, see Note 16, “Share-
Based Compensation,” below.
Earnings Per Share
Basic income per share is computed by dividing net income by the weighted-average number of shares outstanding, including
restricted stock units, during each period presented. For the calculation of diluted net income per share, the basic weighted average
number of shares is increased by the dilutive effect of stock options, determined using the treasury stock method.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Recently Adopted Accounting Pronouncements
We transitioned to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers (“ASC 606”) from ASC Topic 605, Revenue Recognition and ASC Topic 953-605,
Franchisors - Revenue Recognition (together, the “Previous Standards”) on August 30, 2018. Our transition to ASC 606 represents
a change in accounting principle. ASC 606 eliminates industry-specific guidance and provides a single model for recognizing
revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depict
the transfer of promised goods and services to customers in an amount that reflects the consideration to which the reporting entity
expects to be entitled for the exchange of those goods or services.
We adopted ASC 606 using the modified retrospective method applied to contracts that were not completed at August 29, 2018.
Due to the short term nature of a significant portion of our contracts with customers, we have elected to apply the practical
expedients under ASC 606 to: (1) not adjust the consideration for the effects of a significant financing component, (2) recognize
incremental costs of obtaining a contract as expense when incurred and (3) not disclose the value of our unsatisfied performance
obligations for contracts with an original expected duration of one year or less.
The adoption of ASC 606 did not have an impact on the recognition of revenues from our primary source of revenue from our
Company owned restaurants (except for recognition of breakage and discounts on gift cards, as discussed below), revenues from
our culinary contract services, vending revenue or ongoing franchise royalty fees, which are based on a percentage of franchisee
sales. The adoption did impact the recognition of initial franchise fees and area development fees and gift card breakage.
The adoption of ASC 606 requires us to recognize initial and renewal franchise and development fees on a straight-line basis over
the term of the franchise agreement, which is usually 20 years. Historically, we have recognized revenue from initial franchise
and development fees upon the opening of a franchised restaurant when we have completed all our material obligations and initial
services.
Additionally, ASC 606 requires gift card breakage to be recognized as revenue in proportion to the pattern of gift card redemptions
exercised by our customers. Historically, we recorded breakage income within other (expense) income (and not within revenue)
when it was deemed remote that the unused gift card balance will be redeemed.
Upon adoption of ASC 606 we changed our reporting of marketing and advertising fund (“MAF”) contributions from franchisees
and the related marketing and advertising expenditures. Under the Previous Standards, we did not reflect MAF contributions from
franchisees and MAF expenditures in our statements of operations. Although the gross amounts of our revenues and expenses are
impacted by the recognition of franchisee MAF fund contributions and related expenditures of MAF funds we manage, increases
to gross revenues and expenses did not result in a material net impact to our statement of operations.
55
Our consolidated financial statements reflect the application of ASC 606 beginning in fiscal year 2019, while our consolidated
financial statements for prior periods were prepared under the guidance of the Previous Standards. The $2.5 million cumulative
effect of our adoption of ASC 606 is reflected as an increase to our August 30, 2018 shareholders’ equity with a corresponding
decrease to accrued expenses and other liabilities and was comprised of (1) a reduction to accrued expense and other liabilities of
$3.1 million to adjust the unused gift card liability balance as if the gift card breakage guidance had been applied prior to August 30,
2018 and (2) an increase to accrued expense and other liabilities of $0.6 million to adjust the unearned franchise fees for the fees
received through the end of fiscal year 2018 that would have been deferred and recognized over the term of the franchise agreement
if the new guidance had been applied prior to August 30, 2018.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts
and Cash Payments. This update provides clarification regarding how certain cash receipts and disbursements are presented and
classified in the statement of cash flows. The update addresses eight specific cash flow issues with the objective of reducing the
existing diversity in practice. We adopted ASU 2016-15 on August 30, 2018 using the retrospective method of adoption. The
adoption of this standard did not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. This update addresses
the diversity in practice on how to classify and present changes in restricted cash or restricted cash equivalents in the statement
of cash flows. The update requires that a statement of cash flows explain the change during the period in restricted cash or restricted
cash equivalents in addition to changes in cash and cash equivalents. Entities are also required to disclose information about the
nature of the restrictions and amounts described as restricted cash and restricted cash equivalents. Also, when cash, cash equivalents,
restricted cash and restricted cash equivalents are presented in more than one line on the balance sheet, an entity must reconcile
these amounts to the total shown on the statement of cash flows. We adopted ASU 2016-18 effective August 30, 2018 using the
retrospective method of adoption. Our adoption of ASU 2016-18 represents a change in accounting principle. Our adoption had
no effect on our consolidated statement of cash flows for the fiscal year ended August, 29, 2018. See Note 2 for the reconciliation
and disclosures regarding the restrictions required by this update. The adoption of this standard did not have a material impact on
our consolidated financial statements.
New Accounting Pronouncements - "to be Adopted"
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Subsequently, the FASB issued ASU 2018-01, 2018-10,
2018-11, 2018-20 and 2019-01, which were targeted improvements to ASU 2016-02 (collectively, with ASU 2016-02, “ASC 842”)
and provided entities with an additional (and optional) transition method to adopt the new lease standard. ASC 842 requires a
lessee to recognize a liability to make lease payments and a corresponding right-of-use asset on the balance sheet, as well as
provide additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. ASC 842 is effective
for annual and interim periods beginning after December 15, 2018. ASC 842 may be adopted using the modified retrospective
method, which requires application to all comparative periods presented (the “comparative method”) or alternatively, as of the
effective date of initial application without restating comparative period financial statements (the “effective date method”). We
will adopt ASC 842 in the first quarter of fiscal year 2020 using the effective date method. The ASC 842 also provides several
practical expedients and policies that companies may elect under either transition method.
We are implementing a new lease tracking and accounting system in connection with the adoption of ASC 842. Based on a
preliminary assessment, we expect that most of our operating lease commitments will be subject to the new standard and we will
record operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities
on our consolidated balance sheet. We do not expect the adoption of ASC 42 to have a significant impact on our consolidated
statements of operations or our consolidated statements of cash flows.We expect to elect the package of practical expedients which
will allow us not to reassess previous accounting conclusions regarding lease identification and classification for existing or expired
leases as of the date of adoption. We also expect to elect the short-term lease recognition exemption, which provides the option
to not recognize right-of-use assets and related liabilities for leases with terms of 12 months or less.
Upon adoption, our lease liability will generally be based on the present value of the operating lease payments and the related
right-of-use asset will generally be based on the lease liability, adjusted for amounts reclassified from other lease-related assets
and liabilities, in accordance with the new guidance, and impairment of certain right-of-use assets recognized as a charge to retained
earnings. We expect to recognize operating lease liabilities of approximately $32.0 million and corresponding right-of-use assets
of approximately $27.0 million.
In addition, we expect to record an initial adjustment to retained earnings to derecognize the deferred gain from the sale / leaseback
transactions using the cumulative effect transition method, and we will no longer recognize the amortization of this gain to net
gain on disposition of properties in our consolidated statements of operations starting in fiscal 2020. For any future sale / leaseback
transactions, the gain (adjusted for any off-market items) will be recognized immediately in most cases. As of August 28, 2019,
we had $2.0 million of deferred gain on sale / leaseback transactions recorded in other long-term liabilities in our consolidated
balance sheet.
56
The amounts of right-of-use-assets, lease liabilities and cumulative effect adjustment to retained earnings we ultimately recognized
may differ from these estimates as we finalize the calculations upon adoption.
Subsequent Events
Events subsequent to the Company’s fiscal year ended August 28, 2019 through the date of issuance of the financial statements
are evaluated to determine if the nature and significance of the events warrant inclusion in the Company’s consolidated
financial statements.
57
Note 2. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our consolidated balance
sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
Cash and cash equivalents
Restricted cash and cash equivalents
Total cash and cash equivalents shown in the statement of cash flows
August 28,
2019
August 29,
2018
(in thousands)
3,640
9,116
12,756
$
$
3,722
—
3,722
$
$
Amounts included in restricted cash represent amounts required to be set aside for (1) maximum amount of interest payable in the
next 12 months under the 2018 Credit Agreement (see Note 12. Debt), (2) collateral for letters of credit issued for potential insurance
obligations, which letters of credit expire in less than 12 months and (3) pre-funding of the credit limit under our corporate
purchasing card program.
Note 3. Revenue Recognition
Restaurant Sales
Restaurant sales consist of sales of food and beverage products to restaurant guests at our Luby’s Cafeteria, Fuddruckers and
Cheeseburger in Paradise restaurants. Revenue from restaurant sales is recognized at the point of sale and is presented net of
discounts, coupons, employee meals and complimentary meals. Sales taxes that we collect and remit to the appropriate taxing
authority related to these sales are excluded from revenue.
We sell gift cards to our customers in our venues and through certain third-party distributors. These gift cards do not expire and
do not incur a service fee on unused balances. Sales of gift cards to our restaurant customers are initially recorded as a contract
liability, included in accrued expenses and other liabilities, at their expected redemption value. When gift cards are redeemed, we
recognize revenue and reduce the contract liability. Discounts on gift cards sold by third parties are recorded as a reduction to
accrued expenses and other liabilities and are recognized, as a reduction to revenue, over a period that approximates redemption
patterns. The portion of gift cards sold to customers that are never redeemed is commonly referred to as gift card breakage. Under
ASC 606 we recognize gift card breakage revenue in proportion to the pattern of gift card redemptions exercised by our customers,
using an estimated breakage rate based on our historical experience. Under the Previous Standards, we recognized gift card breakage
income within other (expense) income (and not within revenue) when it was deemed remote that the unused gift card balance
would be redeemed.
Culinary contract services revenue
Our Culinary Contract Services segment provides food, beverage and catering services to our clients at their locations. Depending
on the type of client and service, we are either paid directly by our client and/or directly by the customer to whom we have been
provided access by our client.
We typically use one of the following types of client contracts:
Fee-Based Contracts. Revenue from fee-based contracts is based on our costs incurred and invoiced to the client along with the
agreed management fee, which may be calculated as a fixed dollar amount or a percentage of sales or other variable measure.
Some fee-based contracts entitle us to receive incentive fees based upon our performance under the contract, as measured by
factors such as sales, operating costs and client satisfaction surveys. This potential incentive revenue is allocated entirely to the
management services performance obligation. We recognize revenue from our management fee and payroll cost reimbursement
over time as the services are performed. We recognize revenue from our food and 3rd party purchases reimbursement at the point
in time when the vendor delivers the goods or performs the services.
Profit and Loss Contracts. Revenue from profit and loss contracts consist primarily of sales made to consumers, typically with
little or no subsidy charged to clients. Revenue is recognized at the point of sale to the consumer. Sales taxes that we collect and
remit to the appropriate taxing authority related to these sales are excluded from revenue.
As part of client contracts, we sometimes make payments to clients, such as concession rentals, vending commissions and profit
share. These payments are accounted for as operating costs when incurred.
58
Revenue from the sale of frozen foods includes royalty fees based on a percentage of frozen food sales and is recognized at the
point in time when product is delivered by our contracted manufacturers to the retail outlet.
Franchise revenues
Franchise revenues consist primarily of royalties, marketing and advertising fund (“MAF”) contributions, initial and renewal
franchise fees, and upfront fees from area development agreements related to our Fuddruckers restaurant brand. Our performance
obligations under franchise agreements consist of: (1) a franchise license, including a license to use our brand and MAF management,
(2) pre-opening services, such as training and inspections and (3) ongoing services, such as development of training materials and
menu items as well as restaurant monitoring and inspections. These performance obligations are highly interrelated, so we do not
consider them to be individually distinct. We account for them under ASC 606 as a single performance obligation, which is satisfied
over time by providing a right to use our intellectual property over the term of each franchise agreement.
Royalties, including franchisee MAF contributions, are calculated as a percentage of franchise restaurant sales. MAF contributions
paid by franchisees are used for the creation and development of brand advertising, marketing and public relations, merchandising
research and related programs, activities and materials. The initial franchisee fee is payable upon execution of the franchise
agreement and the renewal fee is due and payable at the expiration of the initial term of the franchise agreement. Our franchise
agreement royalties, including advertising fund contributions, represent sales-based royalties that are related entirely to our
performance obligation under the franchise agreement and are recognized as franchise sales occur.
Initial and renewal franchise fees and area development fees are recognized as revenue over the term of the respective agreement
unless the franchise agreement is terminated early, in which case the remaining initial or renewal franchise fee is fully recognized
in the period of termination. Area development fees are not distinct from franchise fees, so upfront fees paid by franchisees for
exclusive development rights are deferred and apportioned to each franchise restaurant opened by the franchisee. The pro rata
amount apportioned to each restaurant is accounted for as an initial franchise fee.
Under the Previous Standards, initial franchise fees and area development fees were recognized as revenue when the related
restaurant commenced operations and we completed all material pre-opening services and conditions. Renewal franchise fees
were recognized as revenue upon execution of a new franchise agreement. MAF contributions from franchisees and the related
MAF expenditures were accounted for on a net basis in our consolidated balance sheets.
Revenue from vending machine sales is recorded at the point in time when the sale occurs.
Contract Liabilities
Contract liabilities consist of (1) deferred revenue resulting from initial and renewal franchise fees and upfront area development
fees paid by franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement, (2)
liability for unused gift cards and (3) unamortized discount on gift cards sold to 3rd party retailers. These contract liabilities are
included in accrued expenses and other liabilities in our consolidated balance sheets. The following table reflects the change in
contract liabilities between the date of adoption (August 30, 2018) and August 28, 2019:
Balance at August 30, 2018
Revenue recognized that was included in the contract liability balance at the beginning
of the year
Increase (decrease), net of amounts recognized as revenue during the period
Balance at August 28, 2019
Gift Cards, net
of discounts
Franchise Fees
(In thousands)
2,707
$
1,891
(1,308)
1,481
2,880
$
(564)
(40)
1,287
$
$
59
The following table illustrates the estimated revenues expected to be recognized in the future related to our deferred franchise fees
that are unsatisfied (or partially unsatisfied) as of August 28, 2019 (in thousands):
Fiscal 2020
Fiscal 2021
Fiscal 2022
Fiscal 2023
Fiscal 2024
Thereafter
Total operating franchise restaurants
Franchise restaurants not yet opened(1)
Total
Franchise Fees
(In thousands)
$
$
$
37
37
37
37
37
347
495
755
1,250
(1) Amortization of the deferred franchise fees will begin when the restaurant commences operations and revenue will be recognized straight-
line over the franchise term (which is typically 20 years). If the franchise agreement is terminated, the deferred franchise fee will be recognized
in full in the period of termination.
Disaggregation of Total Revenues
For the fiscal year ended August 28, 2019, total sales of $323.5 million was comprised of revenue from performance obligations
satisfied over time of $23.0 million and revenue from performance obligations satisfied at a point in time of $300.5 million. See
Note 4. Reportable Segments for disaggregation of revenue by reportable segment.
With the exception of the cumulative effect adjustment described in Note 1, the adoption of ASC 606 did not have a material
effect on our consolidated financial statements for the fiscal year ended August 28, 2019.
Note 4. Reportable Segments
As more fully discussed at Note 1. Nature of Operations and Significant Accounting Policies, in the fourth quarter of fiscal 2019,
the Company has reevaluated its reportable segments and has disaggregated its Company-owned restaurants into three reportable
segments; Luby’s cafeterias, Fuddruckers restaurants and Cheeseburger in Paradise restaurants. We began reporting on the new
structure in the fourth quarter of fiscal 2019. The segment data for the comparable periods presented has been recast to conform
to the current period presentation. We have five reportable segments: Luby’s cafeterias, Fuddruckers restaurants, Cheeseburger
in Paradise restaurants, Fuddruckers franchise operations, and Culinary contract services.
Company-owned restaurants
Company-owned restaurants consists of Luby’s Cafeterias, Fuddruckers and Cheeseburger in Paradise reportable segments. We
consider each restaurant to be an operating segment because operating results and cash flow can be determined for each restaurant.
We aggregate our operating segments into reportable segments by restaurant brand because the nature of the products and services,
the production processes, the customers, the methods used to distribute the products and services, long-term store level profit
margins, and the nature of the regulatory environment are similar. The chief operating decision maker analyzes store level profit
which is defined as restaurant sales and vending revenue, less cost of food, payroll and related costs, other operating expenses and
occupancy costs. All Company-owned Luby’s Cafeterias, Fuddruckers and Cheeseburger in Paradise restaurants are casual dining
restaurants.
The Luby’s segment includes the results of our company-owned Luby’s Cafeterias restaurants. The total number of Luby’s
restaurants at the end of fiscal 2019 and 2018 were 79 and 84, respectively.
The Fuddruckers segment includes the results of our company-owned Fuddruckers restaurants. The total number of Fuddruckers
restaurants at the end of fiscal 2019 and 2018 were 44 and 60, respectively.
The Cheeseburger and Paradise segment includes the results of our Cheeseburger in Paradise restaurants. The total number of
Cheeseburger in Paradise restaurants at the end of fiscal 2019 and 2018 were one and two, respectively.
60
Culinary Contract Services
CCS, branded as Luby’s Culinary Services, consists of a business line servicing healthcare, sport stadiums, corporate dining clients,
and sales through retail grocery stores. The healthcare accounts are full service and typically include in-room delivery, catering,
vending, coffee service, and retail dining. CCS had contracts with long-term acute care hospitals, acute care medical centers,
ambulatory surgical centers, retail grocery stores, behavioral hospitals, a senior living facility, sports stadiums, government, and
business and industry clients. CCS has the unique ability to deliver quality services that include facility design and procurement
as well as nutrition and branded food services to our clients. The cost of culinary contract services on our consolidated statements
of operations includes all food, payroll and related costs, other operating expenses, and other direct general and administrative
expenses related to CCS sales. The total number of CCS contracts at the end of fiscal 2019 and 2018 were 31 and 28, respectively.
CCS began selling Luby's Famous Fried Fish, Macaroni & Cheese and Chicken Tetrazzini in February 2017, December 2016, and
May, 2019, respectively, in the freezer section of H-E-B stores, a Texas-born retailer. H-E-B stores now stock the family-sized
versions of Luby's Classic Macaroni and Cheese , Chicken Tetrazzini, and Luby's Fried Fish. HEB also stocks single serve versions
of these three items as well as Jalapeno Macaroni and Cheese.
Fuddruckers Franchise Operations
We only offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to
the development of the Fuddruckers concept and system of restaurants. Initial franchise agreements generally have a term of 20
years. Franchise agreements typically grant franchisees an exclusive territorial license to operate a single restaurant within a
specified area.
Franchisees bear all direct costs involved in the development, construction, and operation of their restaurants. In exchange for a
franchise fee, we provide franchise assistance in the following areas: site selection, prototypical architectural plans, interior and
exterior design and layout, training, marketing and sales techniques, assistance by a Fuddruckers “opening team” at the time a
franchised restaurant opens, and operations and accounting guidelines set forth in various policies and procedures manuals.
All franchisees are required to operate their restaurants in accordance with Fuddruckers standards and specifications, including
controls over menu items, food quality, and preparation. The Company requires the successful completion of its training program
by a minimum of three managers for each franchised restaurant. In addition, franchised restaurants are evaluated regularly by the
Company for compliance with franchise agreements, including standards and specifications through the use of periodic,
unannounced, on-site inspections and standards evaluation reports.
The number of franchised restaurants at the end of fiscal 2019 and 2018 were 102 and 105, respectively.
Segment Table
The table on the following page shows financial information as required by ASC 280 for segment reporting. ASC 280 requires
depreciation and amortization be disclosed for each reportable segment, even if not used by the chief operating decision maker.
The table also lists total assets for each reportable segment. Corporate assets include cash and cash equivalents, restricted cash,
property and equipment, assets related to discontinued operations, property held for sale, deferred tax assets, and prepaid expenses.
61
Sales:
Luby's cafeterias
Fuddruckers restaurants(1)
Cheeseburger in Paradise restaurants
Culinary contract services
Fuddruckers franchise operations
Total
Segment level profit:
Luby's cafeterias
Fuddruckers restaurants
Cheeseburger in Paradise restaurants
Culinary contract services
Fuddruckers franchise operations
Total
Depreciation and amortization:
Luby's cafeterias
Fuddruckers restaurants
Cheeseburger in Paradise restaurants
Culinary contract services
Fuddruckers franchise operations
Corporate
Total
Total assets:
Luby's cafeterias
Fuddruckers restaurants (2)
Cheeseburger in Paradise restaurants (3)
Culinary contract services
Fuddrucker franchise operations (4)
Corporate
Total
Fiscal Year Ended
August 28,
2019
August 29,
2018
(In thousands)
$
214,074
$
67,710
3,108
31,888
6,690
323,470
25,423
2,702
(240)
3,334
5,057
36,276
8,886
2,844
117
82
767
1,302
13,998
107,287
25,725
829
6,703
10,034
35,422
186,000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
231,859
88,139
13,051
25,782
6,365
365,196
29,050
3,873
(1,275)
1,621
4,837
38,106
10,455
3,900
386
71
769
1,872
17,453
113,259
36,345
1,907
4,569
10,982
32,927
199,989
(1) Includes vending revenue of $379 thousand and $531 thousand for the years ended August 28, 2019 and August 29, 2018, respectively.
(2) Includes Fuddruckers trade name intangible of $7.5 million and $8.3 million at August 28, 2019 and August 29, 2018, respectively.
(3) Includes Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles of $46 thousand and $131 thousand at August 28, 2019
and August 29, 2018, respectively.
(4) Fuddruckers franchise operations segment includes royalty intangibles of $9.2 million and $9.9 million at August 28, 2019 and August 29,
2018, respectively.
62
Capital expenditures:
Luby's cafeterias
Fuddruckers restaurants
Cheeseburger in Paradise restaurants
Culinary contract services
Corporate
Total
Loss before income taxes and discontinued operations:
Segment level profit
Opening costs
Depreciation and amortization
Selling, general and administrative expenses
Other charges
Provision for asset impairments and restaurant closings
Net gain on disposition of property and equipment
Interest income
Interest expense
Other income, net
Total
Note 5. Derivative Financial Instruments
Fiscal Year Ended
August 28,
2019
August 29,
2018
(In thousands)
3,195
513
16
—
263
3,987
$
$
7,474
3,258
377
235
1,903
13,247
Fiscal Year Ended
August 28,
2019
August 29,
2018
(In thousands)
$
36,276
(56)
(13,998)
(34,179)
(4,270)
(5,603)
12,832
30
(5,977)
195
(14,750) $
38,106
(554)
(17,453)
(38,725)
—
(8,917)
5,357
12
(3,348)
298
(25,224)
$
$
$
$
The Company enters into derivative instruments, from time to time, to manage its exposure to changes in interest rates on a
percentage of its long-term variable rate debt. On December 14, 2016, the Company entered into an interest rate swap, pay fixed-
receive floating, with a constant notional amount of $17.5 million. The fixed rate we paid was 1.965% and the variable rate we
receive is one-month LIBOR. The term of the interest rate swap was 5 years. The Company did not apply hedge accounting
treatment to this derivative; therefore, changes in fair value of the instrument were recognized in other income (expense), net in
our consolidated statements of operations. The changes in the interest rate swap fair value resulted in expense of $0.1 million and
income of $0.7 million in fiscal 2019 and 2018, respectively. The Company terminated its interest rate swap in the quarter ended
December 19, 2018 and received $0.3 million million in cash proceeds
The Company does not hold or use derivative instruments for trading purposes.
Note 6. Fair Value Measurement
GAAP establishes a framework for using fair value to measure assets and liabilities, and expands disclosure about fair value
measurements. Fair value measurements guidance applies whenever other statements require or permit assets or liabilities to be
measured at fair value.
GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These include:
• Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the
reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and
volume to provide pricing information on an ongoing basis.
63
• Level 2: Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly
or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models
or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions,
including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices
for the underlying instruments, as well as other relevant economic measures.
• Level 3: Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally
developed methodologies that result in management's best estimate of fair value.
Recurring fair value measurements related to assets are presented below:
Fair Value Measurement Using
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Fiscal Year
Ended August 29,
2018
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Valuation
Method
Recurring Fair Value - Assets
Continuing Operations:
(In thousands)
Derivative - Interest Rate Swap(1)
435
$
(1) The fair value of the interest rate swap is recorded in other assets on our consolidated balance sheet.
— $
435
$
$
Discounted
Cash Flow
—
We terminated the interest rate swap in the first quarter of fiscal 2019 and received proceeds of $0.3 million.
Recurring fair value measurements related to liabilities are presented below:
Fair Value Measurement Using
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Fiscal Year
Ended August 29,
2018
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Valuation
Method
Recurring Fair Value - Liabilities
Continuing Operations:
TSR Performance Based Incentive Plan(1)
(In thousands)
21
(1) The fair value of the Company's 2017 Performance Based Incentive Plan liabilities was $21 thousand. See Note 16 to the our consolidated
financial statements in this Form 10-K for further discussion of Performance Based Incentive Plan.
— $
21
—
$
$
$
Monte Carlo
Approach
64
Non-recurring fair value measurements related to impaired property and equipment consist of the following:
Fair Value Measurement Using
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Fiscal Year
Ended August 28,
2019
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Impairments (4)
Nonrecurring Fair Value Measurements
Continuing Operations:
Property and equipment related to
Company-owned restaurants(1)
Goodwill(2)
Property held for sale(3)
Total Nonrecurring Fair Value
Measurements
$
$
(In thousands)
1,220
$
— $
514
8,030
—
—
— $
— $
—
$
$
1,220
514
8,030
(5,627)
(41)
(124)
9,764
$
— $
— $
9,764
$
(5,792)
(1) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of $7.2 million were written down to their fair
value of $1.2 million, resulting in an impairment charge of $5.6 million.
(2) In accordance with Subtopic 350-20, goodwill with a carrying amount of $0.6 million was written down to its implied fair value of $0.5
million resulting in an impairment charge of $41 thousand See Note 9 and Note 13 to the our consolidated financial statements in this Form 10-
K for further discussion of goodwill.
(3) In accordance with Subtopic 360-10, long-lived assets held for sale with carrying values of $8.2 million were written down to their fair value,
less cost to sell, of $8.0 million, resulting in an impairment charge of $0.1 million. Proceeds on the sale of two property previously recorded in
Property held for sale amounted to $19.6 million. See Note 13. Impairment of Long-Lived Assets, Discontinued Operations, Property Held for
Sale and Store Closings.
(4) Total impairments are included in provision for asset impairments and restaurant closings in the our consolidated statement of operations.
Fair Value
Measurement Using
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Fiscal Year
Ended August 29,
2018
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Impairments(4)
Nonrecurring Fair Value Measurements
Continuing Operations:
Property and equipment related to
Company-owned restaurants(1)
Goodwill(2)
Property held for sale(3)
Total Nonrecurring Fair Value
Measurements
$
$
(In thousands)
$
1,519
—
5,132
— $
—
—
— $
—
—
$
1,519
—
5,132
(4,052)
(513)
(3,062)
6,651
$
— $
— $
6,651
$
(7,627)
(1) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of $5.6 million were written down to their fair
value of $1.5 million, resulting in an impairment charge of $4.1 million.
(2) In accordance with Subtopic 350-20, goodwill with a carrying amount of $513 thousand was written down to its implied fair value of zero,
resulting in an impairment charge of $513 thousand. See Note 9 and Note 13 to the our consolidated financial statements in this Form 10-K for
further discussion of goodwill.
(3) In accordance with Subtopic 360-10, long-lived assets held for sale with carrying values of $12.9 million were written down to their fair
value, less costs to sell, of $5.1 million, resulting in an impairment charge of $3.1 million. Proceeds on the sale of six properties previously
recorded in Property held for sale amounted to $4.7 million.
(4) Total impairments are included in Provision for asset impairments and restaurant closings in the or consolidated statement of operations.
65
Note 7. Trade Receivables and Other
Trade and other receivables, net, consist of the following:
Trade and other receivables
Franchise royalties and marketing and advertising receivables
Unbilled revenue
Allowance for doubtful accounts
Total Trade accounts and other receivables, net
$
$
August 28,
2019
August 29,
2018
$
(In thousands)
6,326
1,040
1,913
(427)
8,852
$
6,697
764
1,557
(231)
8,787
CCS receivable balance at August 28, 2019 was $4.7 million, primarily the result of 24 contracts with balances of $0.1 million to
$1.5 million per contract entity. These 24 contracts collectively represented 49% of the Company’s total accounts receivables.
Contract payment terms for its CCS customers’ receivables are due within 30 to 45 days. Unbilled revenue, was $1.9 million at
August 28, 2019 and $1.6 million at August 29, 2018. CCS contracts are billed on a calendar month end basis and represent the
total balance of unbilled revenue.
The Company recorded receivables related to Fuddruckers franchise operations royalty and marketing and advertising payments
from the franchisees, as required by their franchise agreements. Franchise royalty and marketing and advertising fund receivables
balance at August 28, 2019 was $1.0 million. At August 28, 2019, the Company had 102 operating franchise restaurants with no
significant concentration of accounts receivable.
The change in allowances for doubtful accounts for each of the years in the three-year periods ended as of the dates below is as
follows:
Beginning balance
Provisions for doubtful accounts, net of reversals
Write-offs(1)
Ending balance
Fiscal Year Ended
August 28,
2019
August 29,
2018
(In thousands)
$
$
231
196
—
427
$
$
275
464
(508)
231
(1) The $0.5 million Balance Sheet write-off in fiscal 2018 primarily resulted from uncollectable receivables at seven Culinary Contract
Services accounts reserved in fiscal years 2015 through and including 2018.
66
Note 8. Income Taxes
The following table details the categories of total income tax assets and liabilities for both continuing and discontinued operations
resulting from the cumulative tax effects of temporary differences:
Deferred income tax assets:
Workers’ compensation, employee injury, and general liability claims
Deferred compensation
Net operating losses
General business and foreign tax credits
Depreciation, amortization and impairments
Straight-line rent, dining cards, accruals, and other
Subtotal
Valuation allowance
Total deferred income tax assets
Deferred income tax liabilities:
Property taxes and other
Total deferred income tax liabilities
Net deferred income tax asset
August 28,
2019
August 29,
2018
(In thousands)
$
$
$
395
193
5,541
12,529
8,561
2,594
29,813
(28,865)
948
948
948
— $
507
280
4,401
12,105
6,796
2,917
27,006
(25,873)
1,133
1,133
1,133
—
At August 28, 2019, the Company considered the deferred tax assets not to be realizable and maintains a full valuation allowance
against the Company’s net deferred tax asset balance. The most significant deferred tax asset prior to valuation allowance is the
Company’s general business tax credits carryovers to future years of $12.5 million. This item may be carried forward up to twenty
years for possible utilization in the future. The carryover of general business tax credits, beginning in fiscal 2002, will begin to
expire at the end of fiscal 2022 through 2039, if not utilized by then.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts
in the financial statements, which will result in taxable or deductible amounts in the future, as well as from tax net operating losses
and tax credit carryovers. We establish a valuation allowance when we no longer consider it more likely than not that a deferred
tax asset will be realized. In evaluating our ability to recover our deferred tax assets, we consider available positive and negative
evidence, including scheduled reversals of deferred tax liabilities, tax-planning strategies and existing business conditions,
including amendment to our credit agreement(s) to avoid default and results of recent operations. In the third quarter of fiscal
2018, management concluded that a full valuation allowance on the Company's net deferred tax assets was necessary. As of
August 28, 2019, the Company continues to maintain a full valuation allowance against the net deferred tax asset balance.
An analysis of the provision for income taxes for continuing operations is as follows:
Current federal and state income tax expense
Current foreign income tax expense
Deferred income tax expense
Provision for income taxes
August 28,
2019
August 29,
2018
(In thousands)
$
$
418
51
—
469
$
$
405
71
7,254
7,730
67
Relative only to continuing operations, the reconciliation of the expense for income taxes to the expected income tax expense,
computed using the statutory tax rate, was as follows:
Fiscal Year Ended
August 28,
2019
August 29,
2018
Income tax benefit from continuing operations at the federal rate
$
Amount
(In thousands and as a percent of pretax loss from
continuing operations)
Amount
%
%
21.0 % $
(6,405)
(3,098)
25.4 %
Permanent and other differences:
Federal jobs tax credits (wage deductions)
Stock options and restricted stock
Other permanent differences
State income tax, net of federal benefit
General Business Tax Credits
Impact of U.S. Tax Reform
Other
Change in valuation allowance
Provision for income taxes from continuing operations
89
19
31
273
(422)
—
117
3,460
469
$
(0.6)
(0.1)
(0.2)
(1.9)
2.9
—
(0.8)
(23.5)
129
67
41
145
(506)
3,167
487
10,605
(0.5)
(0.3)
(0.2)
(0.6)
2.0
(12.6)
(1.8)
(42.0)
(3.2)% $
7,730
(30.6)%
For the fiscal year ended August 28, 2019, including both continuing and discontinued operations, the Company is estimated to
report a federal taxable loss of $5.1 million. For the fiscal year ended August 29, 2018, including both continuing and discontinued
operations, the Company generated federal taxable loss of $14.2 million.
Our income tax filings are periodically examined by various federal and state jurisdictions. There are no open examinations by
federal and state income tax jurisdiction. The Company's U.S. federal income tax return remains open to examination for fiscal
2016 through fiscal 2018.
There were no payments of federal income taxes in fiscal 2019 or fiscal 2018. The Company has income tax filing requirements
in over 30 states. State income tax payments were $0.5 million and $0.4 million in fiscal 2019 and 2018, respectively.
The following table is a reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of fiscal 2018
and 2019 (in thousands):
Balance as of August 30, 2017
Decrease based on prior year tax positions
Interest Expense
Balance as of August 29, 2018
Decrease based on prior year tax positions
Interest Expense
Balance as of August 28, 2019
$
$
$
25
—
—
25
—
—
25
The unrecognized tax benefits would favorably affect the Company’s effective tax rate in future periods if they are recognized.
There is no interest associated with unrecognized benefits as of August 28, 2019. The Company has included interest or penalties
related to income tax matters as part of income tax expense.
It is reasonably possible that the amount of unrecognized tax benefits with respect to our uncertain tax positions could significantly
increase or decrease within 12 months. However, based on the current status of examinations, it is not possible to estimate the
future impact, if any, to recorded uncertain tax positions as of August 28, 2019.
Management believes that adequate provisions for income taxes have been reflected in the financial statements and is not aware
of any significant exposure items that have not been reflected in the financial statements. Amounts considered probable of settlement
within one year have been included in the accrued expenses and other liabilities in the accompanying consolidated balance sheet.
68
3
20
3
—
to
to
Lesser of lease
term or
estimated useful
life
to
to
15
33
10
21
Note 9. Property and Equipment, Intangible Assets and Goodwill
The cost, net of impairment, and accumulated depreciation of property and equipment at August 28, 2019 and August 29, 2018,
together with the related estimated useful lives used in computing depreciation and amortization, were as follows:
August 28,
2019
August 29,
2018
Estimated
Useful Lives (years)
Land
Restaurant equipment and furnishings
Buildings
(In thousands)
$
45,845
$
67,015
126,957
46,817
69,678
131,557
Leasehold and leasehold improvements
Office furniture and equipment
Less accumulated depreciation and amortization
Property and equipment, net
Intangible assets, net
Goodwill
22,098
3,364
265,279
(143,536)
121,743
16,781
514
$
$
$
$
$
$
27,172
3,596
278,820
(140,533)
138,287
18,179
15
555
Depreciation expense for the fiscal years 2019 and 2018, was $12.6 million and $16.1 million, respectively.
Intangible assets, net, consist primarily of the Fuddruckers trade name and franchise agreements and will be amortized. The
Company believes the Fuddruckers brand name has an expected accounting life of 21 years from the date of acquisition based on
the expected use of its assets and the restaurant environment in which it is being used. The trade name represents a respected brand
with customer loyalty and the Company intends to cultivate and protect the use of the trade name. The franchise agreements, after
considering renewal periods, have an estimated accounting life of 21 years from the date of acquisition, July 2010, and will be
amortized over this period of time.
Intangible assets, net, also includes the license agreement and trade name related to Cheeseburger in Paradise and the value of the
acquired licenses and permits allowing the sales of beverages with alcohol. These assets have an expected accounting life of 15
years from the date of acquisition December 2012.
The aggregate amortization expense related to intangible assets subject to amortization for fiscal 2019 and 2018 was $1.4 million
and $1.4 million, respectively. The aggregate amortization expense related to intangible assets subject to amortization is expected
to be $1.4 million in each of the next five successive years.
The following table presents intangible assets as of August 28, 2019 and August 29, 2018:
August 28, 2019
(In thousands)
August 29, 2018
(In thousands)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Intangible Assets Subject to
Amortization:
Fuddruckers trade name and
franchise agreements
Cheeseburger in Paradise
trade name and license
agreements
Intangible assets, net
$
$
$
29,486
$
(12,752) $
16,734
$
29,701
$
(11,653) $
18,048
146
29,632
$
$
(99) $
47
(12,851) $
16,781
$
$
206
29,907
$
$
(75) $
(11,728) $
131
18,179
69
Goodwill, net of accumulated impairments of $0.5 million and $1.6 million in fiscal 2019 and 2018, respectively, was $0.5 million
as of August 28, 2019 and $0.6 million as of August 29, 2018. Goodwill has been allocated to and impairment is assessed at the
reporting unit level, which is the individual restaurants within our Fuddruckers and Cheeseburger in Paradise restaurant segments
that were acquired in fiscal 2010 and fiscal 2013, respectively. The net Goodwill balance at the end of fiscal 2019 is comprised
of amounts assigned to the one Cheeseburger in Paradise restaurant that is still operated by us, two Cheeseburger in Paradise
restaurants that were converted to Fuddruckers restaurants, and the goodwill from the Fuddruckers acquisition in 2010. The
Company performs a goodwill impairment test annually as of the end of the second quarter of each year and more frequently when
negative conditions or a triggering event arise. Management prepares valuations for each of its restaurants using a discounted cash
flow analysis (Level 3 inputs) to determine the fair value of each reporting unit for comparison with the reporting unit’s carrying
value in determining if there has been an impairment of goodwill at the reporting unit level.
The Company recorded goodwill impairment charges of $41 thousand and $513 thousand in fiscal 2019 and 2018, respectively.
Note 10. Current Accrued Expenses and Other Liabilities
The following table sets forth current accrued expenses and other liabilities as of August 28, 2019 and August 29, 2018:
August 28,
2019
August 29,
2018
Salaries, compensated absences, incentives, and bonuses
Operating expenses
Unredeemed gift and dining cards
Taxes, other than income
Accrued claims and insurance
Income taxes, legal and other(1)
Total
$
$
$
(In thousands)
4,318
925
3,862
9,056
1,796
4,518
24,475
$
6,073
1,068
7,213
9,247
2,958
5,195
31,754
(1) Income taxes, legal and other includes accrued lease termination costs. See Note 13 to our consolidated financial statements in this Form
10-K for further discussion of lease termination costs.
Note 11. Other Long-Term Liabilities
The following table sets forth other long-term liabilities as of August 28, 2019 and August 29, 2018:
Workers’ compensation and general liability insurance reserve
Capital leases
Deferred rent and unfavorable leases
Deferred compensation
Deferred gain on sale / leaseback transactions
Other
Total
August 28,
2019
August 29,
2018
(In thousands)
$
$
736
73
3,710
80
1,969
9
6,577
$
$
1,002
137
4,380
106
—
156
5,781
70
Note 12. Debt
The following table summarizes credit facility debt, less current portion at August 28, 2019 and August 29, 2018:
Long-Term Debt
2016 Credit Agreement - Term Loan
2016 Credit Agreement - Revolver
2018 Credit Agreement - Revolver
2018 Credit Agreement - Term Loan
Total credit facility debt
Less:
Unamortized debt issue costs
Unamortized debt discount
Total credit facility debt, less unamortized discount and issuance costs
Current portion of credit facility debt
Total Credit facility debt, less current portion
$
2018 Credit Agreement
August 28,
2019
August 29,
2018
(In thousands)
— $
—
5,300
43,399
48,699
(1,887)
(1,373)
45,439
—
45,439
$
19,506
20,000
—
—
39,506
(168)
—
39,338
39,338
—
On December 13, 2018, the Company entered into a credit agreement (as amended by the First Amendment (as defined below),
the “2018 Credit Agreement”) among the Company, the lenders from time to time party thereto, and a subsidiary of MSD Capital,
MSD PCOF Partners VI, LLC (“MSD”), as Administrative Agent, pursuant to which the lenders party thereto agreed to make
loans to the Company from time to time up to an aggregate principal amount of $80 million consisting of a $10 million revolving
credit facility (the “2018 Revolver”), a $10 million delayed draw term loan (“2018 Delayed Draw Term Loan”), and a $60 million
term loan (the “2018 Term Loan”, and together with the 2018 Revolver and the 2018 Delayed Draw Term Loan, the “2018 Credit
Facility”). The 2018 Credit Facility terminates on, and all amounts owing thereunder must be repaid on, December 13, 2023.
On July 31, 2019, the Company entered into the First Amendment to the 2018 Credit Agreement (the “First Amendment”) to
extend the 2018 Delayed Draw Term Loan expiration date for up to one year to the earlier to occur of (a) the date on which the
commitments under the 2018 Delayed Draw Term Loan have been terminated or reduced to zero in accordance with the terms of
the 2018 Credit Agreement and (b) September 13, 2020.
Borrowings under the 2018 Revolver, 2018 Delayed Draw Term Loan, and 2018 Term Loan will bear interest at the three-month
LIBOR plus 7.75% per annum. Interest is payable quarterly and accrues daily. Under the terms of the 2018 Credit Agreement, the
maximum amount of interest payable, based on the aggregate principal amount of $80 million and interest rates in effect at
December 13, 2018, in the next 12 months was required to be pre-funded at the closing date of the 2018 Credit Agreement. The
pre-funded amount at August 28, 2019 of $6.4 million is recorded in restricted cash and cash equivalents on our consolidated
balance sheet and is not available for other purposes. LIBOR is set to terminate in December 2021. We expect that to agree to a
replacement rate with MSD prior to the LIBOR termination.
The 2018 Credit Facility is subject to the following minimum amortization payments: 1st anniversary: $10 million; 2nd anniversary:
$10 million; 3rd anniversary: $15 million; and 4th anniversary: $15 million.
The Company also pays a quarterly commitment fee based on the unused portion of the 2018 Revolver and the 2018 Delayed
Draw Term Loan at 0.5% per annum. Voluntary prepayments, refinancing and asset dispositions constituting a sale of all or
substantially all assets, under the 2018 Delayed Draw Term Loan and the 2018 Term Loan are subject to a make whole premium
during years one and two equal to the present value of all interest otherwise owed from the date of the pre-payment through the
end of year two, a 2.0% fee during year three, and a 1.0% fee during year four. Finally, the Company paid to the lenders a one-
time fee of $1.6 million in connection with the closing of the 2018 Credit Facility.
Indebtedness under the 2018 Credit Facility is secured by a security interest in, among other things, all of the Company’s present
and future personal property (other than certain excluded assets) and all Mortgaged Property (as defined in the 2018 Credit
Agreement) of the Company and its subsidiaries. All amounts owing by the Company under the 2018 Credit Facility are guaranteed
by the subsidiaries of the Company.
71
The 2018 Credit Facility contains customary covenants and restrictions on the Company’s ability to engage in certain activities,
including financial performance covenants, asset sales and acquisitions, and contains customary events of default. Specifically,
among other things, the Company is required to maintain minimum Liquidity (as defined in the 2018 Credit Agreement) of $3.0
million as of the last day of each fiscal quarter and a minimum Asset Coverage Ratio (as defined in the 2018 Credit Agreement)
of 2.50 to 1.00. As of August 28, 2019, the Company was in full compliance with all covenants with respect to the 2018 Credit
Facility.
As of August 28, 2019, we had no amounts due within the next 12 months under the 2018 Credit Facility due to principal repayments
in excess of the required minimum. As of August 28, 2019 we had $1.3 million committed under letters of credit, which is used
as security for the payment of insurance obligations and are fully cash collateralized, and $0.1 million in other indebtedness.
At August 28, 2019, the Company had $4.7 million available to borrow under the 2018 Revolver and $10.0 million available to
borrow under the 2018 Delayed Draw Term Loan.
As of November 26, 2019, the Company was in compliance with all covenants under the terms of the 2018 Credit Agreement.
2016 Credit Agreement (paid in full and terminated in December 2018)
On November 8, 2016, the Company entered into a $65.0 million Senior Secured Credit Facility with Wells Fargo Bank, National
Association, as Administrative Agent and Cadence Bank, NA and Texas Capital Bank, NA, as lenders (“2016 Credit Agreement”).
The 2016 Credit Agreement, prior to the amendments discussed below, was comprised of a $30.0 million 5 year Revolver (the
“Revolver”) and a $35.0 million 5 year Term Loan (the “Term Loan”), and it also included sub-facilities for swingline loans and
letters of credits. The original maturity date of the 2016 Credit Agreement was November 8, 2021.
Borrowings under the Revolver and Term Loan bore interest at (1) a base rate equal to the greater of (a) the federal funds effective
rate plus one-half of 1% (the “Base Rate”), (b) prime and (c) LIBOR for an interest period of 1 month, plus, in any case, an
applicable spread that ranges from 1.50% to 2.50% per annum the (“Applicable Margin”), or (2) the LIBOR, as adjusted for any
Eurodollar reserve requirements, plus an applicable spread that ranges from 2.50% to 3.50% per annum. Borrowings under the
swingline loan bore interest at the Base Rate plus the Applicable Margin. The applicable spread under each option was dependent
upon certain measures of the Company’s financial performance at the time of election. Interest was payable quarterly, or in more
frequent intervals if LIBOR applies.
The Company was obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based
on the average daily unused amount of the commitment of such lender, ranged from 0.30% to 0.35% per annum depending upon
the Company's financial performance.
The proceeds of the 2016 Credit Agreement were available for the Company to (i) pay in full all indebtedness outstanding under
the 2013 Credit Agreement as of November 8, 2016, (ii) pay fees, commissions, and expenses in connection with our repayment
of the 2013 Credit Agreement, initial extensions of credit under the 2016 Credit Agreement, and (iii) for working capital and
general corporate purposes of the Company.
The 2016 Credit Agreement, as amended, contained the customary covenants and was secured by an all asset lien on all of the
Company's real property and also included customary events of default. On December 13, 2018, the 2016 Credit Agreement
was terminated with all outstanding amounts paid in full.
Interest Expense
Total interest expense incurred for fiscal 2019 and 2018 was $6.0 million and $3.3 million, respectively. No interest expense
was allocated to discontinued operations in fiscal 2019 or 2018. No interest was capitalized on properties in fiscal 2019 or
2018.
72
Note 13. Impairment of Long-Lived Assets, Store Closings, Discontinued Operations and Property Held for Sale
Impairment of Long-Lived Assets and Store Closings
The Company periodically evaluates long-lived assets held for use and held for sale whenever events or changes in circumstances
indicate that the carrying amount of those assets may not be recoverable. The Company analyzes historical cash flows of operating
locations and compares results of poorer performing locations to more profitable locations. The Company also analyzes lease
terms, condition of the assets and related need for capital expenditures or repairs, as well as construction activity and the economic
and market conditions in the surrounding area.
For assets held for use, the Company estimates future cash flows using assumptions based on possible outcomes of the areas
analyzed. If the undiscounted future cash flows are less than the carrying value of the location’s assets, the Company records an
impairment loss based on an estimate of discounted cash flows. The estimates of future cash flows, based on reasonable and
supportable assumptions and projections, require management’s subjective judgments. Assumptions and estimates used include
operating results, changes in working capital, discount rate, growth rate, anticipated net proceeds from disposition of the property
and if applicable, lease terms. The span of time for which future cash flows are estimated is often lengthy, increasing the sensitivity
to assumptions made. The time span is longer and could be 20 to 25 years for newer properties, but only 5 to 10 years for older
properties. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-
lived assets can vary within a wide range of outcomes. The Company considers the likelihood of possible outcomes in determining
the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset
as determined by discounted cash flows.
The Company recognized the following impairment charges and gains on asset disposals to income from operations:
Fiscal Year Ended
Provision for asset impairments and restaurant closings
Net gain on disposition of property and equipment
Total
Effect on EPS:
Basic
Assuming dilution
August 28, 2019 August 29, 2018
(In thousands, except per share data)
8,917
$
(5,357)
5,603
(12,832)
$
$
$
$
(7,229) $
3,560
0.24
0.24
$
$
(0.12)
(0.12)
The approximate $5.6 million impairment charge in fiscal 2019 is primarily related to assets impaired at nine property locations,
goodwill at one property locations, seven properties held for sale written down to their fair value, certain surplus equipment written
down to fair value, and an impairment to a joint venture investment, partially offset by a net decrease in the reserve for restaurant
closings of $0.2 million.
The $12.8 million net gain on disposition of property and equipment in fiscal 2019 is primarily related to the $13.2 million gain
on the sale of two properties discussed below, partially offset by asset retirements at three locations.
During fiscal 2019, the Company sold and leased back two properties. The net sales price was $19.6 million. The properties sold
had been included in the previously announced asset sales program. The sales included lease back periods of 36 and 60 months
and average annual lease payments of $450 thousand and $295 thousand respectively. The Company recorded a total net gain on
the two sales of $15.3 million of which $12.9 million was recognized at the time of the sale and the remainder will be recognized
over the respective lease back periods. The deferred gain on the sale of the two properties is included in other liabilities on our
consolidated balance sheet at August 28, 2019. Net proceeds from the sales were used in accordance with the 2018 Credit Agreement,
to reduce the balance on its outstanding 2018 Term Loan (as defined above) and for general business purposes.
The $8.9 million impairment charge in fiscal 2018 is primarily related to assets impaired at twenty-one property locations, goodwill
at three property location, ten properties held for sale written down to their fair value, and a reserve for fifteen restaurant closings
of $1.3 million.
73
The $5.4 million net gain on disposition of property and equipment in fiscal 2018 is primarily related to the gain on the sale of
ten properties of $4.9 million, $1.3 million of insurance proceeds received for property and equipment damaged by Hurricane
Harvey, partially partially offset by asset retirements at eight locations.
Discontinued Operations
As a result of the first quarter fiscal 2010 adoption of the Company’s Cash Flow Improvement and Capital Redeployment Plan,
the Company reclassified 24 Luby’s Cafeterias to discontinued operations. As of August 28, 2019, one location remains held for
sale.
The following table sets forth the assets and liabilities for all discontinued operations:
August 28,
2019
August 29,
2018
Property and equipment
Deferred tax assets
Assets related to discontinued operations—non-current
Deferred income taxes
Accrued expenses and other liabilities
Liabilities related to discontinued operations—current
Other liabilities
Liabilities related to discontinued operations—non-current
$
$
$
$
$
$
$
(In thousands)
1,813
—
1,813
$
— $
14
14
$
— $
— $
1,813
—
1,813
—
14
14
16
16
As of August 28, 2019, under both closure plans, the Company had one property classified as discontinued operations. The asset
carrying value of the owned property was $1.8 million and is included in assets related to discontinued operations. The Company
is actively marketing this property for sale.
The following table sets forth the sales and pretax losses reported for all discontinued locations in fiscal 2019 and fiscal 2018:
Sales
Pretax loss
Income tax benefit on discontinued operations
Loss on discontinued operations
Discontinued locations closed during the period
The following table summarizes discontinued operations for fiscal 2019 and 2018:
Discontinued operating losses
Impairments
Gains
Net loss
Income tax benefit (expense) from discontinued operations
Loss from discontinued operations, net of income taxes
Effect on EPS from discontinued operations—decrease—basic
Fiscal Year Ended
August 28,
2019
August 29,
2018
(In thousands, except locations)
$
$
$
$
— $
(7) $
— $
(7) $
—
—
(80)
(534)
(614)
—
Fiscal Year Ended
August 28,
2019
August 29,
2018
(In thousands, except per share data)
(21)
(7) $
$
(59)
—
—
—
(80)
(7) $
(534)
—
(614)
(7) $
$
$
$
0.00
$
(0.02)
74
Within discontinued operations, the Company offsets gains from applicable property disposals against total impairments. The
amounts in the table described as “Other” include employment termination and shut-down costs, as well as operating losses through
each restaurant’s closing date and carrying costs until the locations are finally disposed.
The impairment charges included above relate to properties closed and designated for immediate disposal. The assets of these
individual operating units have been written down to their net realizable values. In turn, the related properties have either been
sold or are being actively marketed for sale. All dispositions are expected to be completed within one to two years. Within
discontinued operations, the Company also recorded the related fiscal year-to-date net operating results, employee terminations
and basic carrying costs of the closed units.
Property Held for Sale
The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of properties. If the Company
decides to dispose of a property, it will be reclassified to property held for sale and actively marketed. The Company analyzes
market conditions each reporting period and records additional impairments due to declines in market values of like assets. The
fair value of the property is determined by observable inputs such as appraisals and prices of comparable properties in active
markets for assets like the Company’s. Gains are not recognized until the properties are sold.
Property held for sale includes unimproved land, closed restaurant properties and related equipment for locations not classified
as discontinued operations. The specific assets are valued at the lower of net depreciable value or net realizable value. The Company
actively markets all locations classified as property held for sale.
At August 28, 2019, the Company had 14 owned properties recorded at $16.5 million in property held for sale.
At August 29, 2018, the Company had 15 owned properties recorded at $19.5 million in property held for sale.
The pretax profit (loss) for the 14 held for sale locations was $0.3 million and $(1.0) million in fiscal 2019 and 2018, respectively.
The Company’s results of continuing operations will be affected to the extent proceeds from sales exceed or are less than net book
value.
A roll forward of property held for sale for fiscal 2019, and 2018 is provided below (in thousands):
Balance as of August 30, 2017
Disposals
Net transfers to property held for sale
Adjustment to fair value
Balance as of August 29, 2018
Disposals
Net transfers to property held for sale
Adjustment to fair value
Balance as of August 28, 2019
$
$
$
3,372
(7,916)
27,075
(3,062)
19,469
(6,036)
3,055
—
16,488
Abandoned Leased Facilities - Reserve for Store Closing
As of August 28, 2019, the Company classified eleven leased locations in Arizona, Florida, Illinois, Maryland, Texas, and Virginia
as abandoned. Although the Company remains obligated under the terms of the leases for the rent and other costs that may be
associated with the leases, the Company has ceased operations and has no foreseeable plans to occupy the spaces as a company
restaurant in the future. Therefore, the Company recorded a liability and a corresponding charge to earnings, in provision for asset
impairments and restaurant closings, equal to the estimated total amount of rent and other direct costs for the remaining period of
time the properties will be unoccupied plus the present value, calculated using a credit-adjusted risk free rate, of the estimated
amount by which the rent paid by the Company to the landlord exceeds any rent paid to the Company by a tenant under a sublease
over the remaining period of the lease terms. The liability is adjusted for changes in estimates and when a final settlement is
reached with and paid to the lessor. For fiscal years 2019 and 2018 net charges (credits) to provision for assets impairments and
store closings related to the abandoned lease facilities were $(0.2) million and $1.3 million, respectively. The accrued lease
termination liability was $1.4 million and $2.0 million as of August 28, 2019 and August 29, 2018, respectively.
75
Note 14. Commitments and Contingencies
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements, except for operating leases for the Company’s corporate office, facility
service warehouse, and certain restaurant properties.
Claims
From time to time, the Company is subject to various other private lawsuits, administrative proceedings and claims that arise in
the ordinary course of its business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters
typically involve claims from guests, employees and others related to issues common to the restaurant industry. The Company
currently believes that the final disposition of these types of lawsuits, proceedings, and claims will not have a material adverse
effect on the Company’s financial position, results of operations, or liquidity. It is possible, however, that the Company’s future
results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits,
proceedings, or claims.
Construction Activity
From time to time, the Company enters into non-cancelable contracts for the construction of its new restaurants or restaurant
remodels. This construction activity exposes the Company to the risks inherent in this industry including but not limited to rising
material prices, labor shortages, delays in getting required permits and inspections, adverse weather conditions, and injuries
sustained by workers. The Company had no non-cancelable construction contracts as of August 28, 2019.
Cheeseburger in Paradise, Royalty Commitment
The license agreement and trade name relates to a perpetual license to use intangible assets including trademarks, service marks
and publicity rights related to Cheeseburger in Paradise owned by Jimmy Buffett and affiliated entities. In return, the Company
will pay a royalty fee of 2.5% of gross sales, less discounts, at the Company's operating Cheeseburger in Paradise locations to an
entity owned or controlled by Jimmy Buffett. The trade name represents a respected brand with positive customer loyalty, and the
Company intends to cultivate and protect the use of the trade name.
Note 15. Operating Leases
The Company conducts part of its operations from facilities that are leased under non-cancelable lease agreements. Lease
agreements generally contain a primary term of five to 30 years with options to renew or extend the lease from one to 25 years.
As of August 28, 2019, the Company has lease agreements for 71 properties which include the Company’s corporate office, facility
service warehouse, two remote office spaces, and restaurant properties. The leasing terms of the 71 properties consist of 18
properties expiring in less than one year, 33 properties expiring between one and five years and the remaining 20 properties having
current terms that are greater than five years. Of the 71 leased properties, 46 properties have options remaining to renew or extend
the lease.
A majority of the leases include periodic escalation clauses. Accordingly, the Company follows the straight-line rent method of
recognizing lease rental expense.
As of August 28, 2019, the Company has entered into noncancelable operating lease agreements for certain office equipment with
terms ranging from 36 to 60 months.
76
Annual future minimum lease payments under noncancelable operating leases with terms in excess of one year as of August 28,
2019 are as follows:
Fiscal Year Ending:
(In thousands)
August 26, 2020
August 25, 2021
August 31, 2022
August 30, 2023
August 28, 2024
Thereafter
Total minimum lease payments
$
$
8,841
7,155
5,643
4,410
3,768
10,312
40,129
Most of the leases are for periods of five to 30 years and some leases provide for contingent rentals based on sales in excess of a
base amount. As of August 28, 2019, aggregate future minimum rentals to be received under noncancelable subleases is $1.9
million.
Total rent expense for operating leases for fiscal 2019 and 2018 was as follows:
Minimum rent-facilities
Contingent rentals
Minimum rent-equipment
Total rent expense (including amounts in discontinued operations)
Year Ended
August 28,
2019
August 29,
2018
(In thousands, except percentages)
$
$
9,218
75
761
10,054
$
$
10,584
77
801
11,462
The future minimum lease payment table and the total rent expense table above include amounts related to two leases with related
parties, which are further described at Note 17. Related Parties.
Note 16. Share-Based Compensation
We have two active share-based stock plans, the Luby's Incentive Stock Plan, as amended and restated effective December 5, 2015
(the "Employee Stock Plan") and the Nonemployee Director Stock Plan. Both plans authorize the granting of stock options,
restricted stock, and other types of awards consistent with the purpose of the plans.
Of the aggregate 2.1 million shares approved for issuance under the Nonemployee Director Stock Plan, (which amount includes
shares authorized under the original plan and shares authorized pursuant to the amended and restated plan effective as of February 9,
2018), 1.6 million options, restricted stock units and restricted stock awards were granted, 0.1 million options expired or were
canceled and added back into the plan, since the plans inception. Approximately 0.6 million shares remain available for future
issuance as of August 28, 2019. Compensation cost for share-based payment arrangements under the Nonemployee Director Stock
Plan, recognized in selling, general and administrative expenses for fiscal 2019 and 2018 was $0.6 million and $0.5 million,
respectively.
Of the 4.1 million shares approved for issuance under the Employee Stock Plan (which amount includes shares authorized under
the original plan and shares authorized pursuant to the amended and restated plan effective as of December 5, 2015), 7.3 million
options and restricted stock units were granted, 4.3 million options and restricted stock units were canceled or expired and added
back into the plan, since the plans inception in 2005. Approximately 1.1 million shares remain available for future issuance as of
August 28, 2019. Compensation cost for share-based payment arrangements under the Employee Stock Plan, recognized in selling,
general and administrative expenses for fiscal 2019 and 2018 was $0.3 million and $0.9 million, respectively.
Stock Options
Stock options granted under either the Employee Stock Plan or the Nonemployee Director Stock Plan have exercise prices equal
to the market price of the Company’s common stock at the date of the grant. The market price under the Employee Stock Plan is
the closing price at the date of the grant. The market price under the Nonemployee Director Plan is the average of the high and
the low price on the date of the grant.
77
Option awards under the Nonemployee Director Stock Plan generally vest 100% on the first anniversary of the grant date and
expire ten years from the grant date. No options were granted under the Nonemployee Director Stock Plan in fiscal 2019 or 2018,
No options to purchase shares remain outstanding under this plan, as of August 28, 2019.
Options granted under the Employee Stock Plan generally vest 50% on the first anniversary of grant date, 25% on the second
anniversary of the grant date and 25% on the third anniversary of the grant date, with all options expiring ten years from the grant
date. All options granted in fiscal 2018, and 2017 were granted under the Employee Stock Plan. No options were granted in fiscal
2019. Options to purchase 1,387,412 shares at options prices from $2.82 to $5.95 per share remain outstanding as of August 28,
2019.
The Company has segregated option awards into two homogeneous groups for the purpose of determining fair values for its options
because of differences in option terms and historical exercise patterns among the plans. Valuation assumptions are determined
separately for the two groups which represent, respectively, the Employee Stock Plan and the Nonemployee Director Stock Option
Plan. The assumptions are as follows:
• The Company estimated volatility using its historical share price performance over the expected life of the option.
Management believes the historical estimated volatility is materially indicative of expectations about expected future
volatility.
• The Company uses an estimate of expected lives for options granted during the period based on historical data.
• The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of
the option.
• The expected dividend yield is based on the Company’s current dividend yield and the best estimate of projected dividend
yield for future periods within the expected life of the option.
The fair value of each option award is estimated on the date of the grant using the Black-Scholes option pricing model which
determine inputs as shown in the following table for options granted under the Employee Stock Plan:
Dividend yield
Volatility
Risk-free interest rate
Expected life (in years)
Fiscal Year Ended
August 28,
2019
August 29,
2018
(In thousands, except percentages)
N/A
N/A
N/A
N/A
0%
34.80%
2.19%
5.87
A summary of the Company’s stock option activity for fiscal 2019 and 2018 is presented in the following table:
Outstanding at August 30, 2017
Granted
Cancelled
Forfeited
Expired
Outstanding at August 29, 2018
Granted
Forfeited
Expired
Outstanding at August 28, 2019
Exercisable at August 28, 2019
Shares
Under
Fixed
Options
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
(Years)
1,345,916
449,410
—
(97,111)
(44,801)
1,653,414
—
(178,700)
(87,302)
1,387,412
1,217,957
$
$
$
$
78
4.76
2.82
0.00
4.80
7.89
4.10
0.00
3.68
5.54
4.06
4.19
6.6
—
—
—
—
6.4
—
—
—
5.7
5.4
Aggregate
Intrinsic
Value
(In thousands)
178
$
—
—
—
—
—
—
—
—
—
—
$
$
$
The intrinsic value for stock options is defined as the difference between the market value at August 28, 2019 and the grant price.
At August 28, 2019, there was $0.1 million of total unrecognized compensation cost related to unvested options that are expected
to be recognized over a weighted-average period of 1.1 years.
The weighted-average grant-date fair value of options granted during fiscal 2018 at $1.05 per share. No options were granted in
fiscal 2019. During fiscal 2018 and 2019, no options were exercised.
Restricted Stock Units
Grants of restricted stock units consist of the Company’s common stock and generally vest after three years. All restricted stock
units are cliff-vested. Restricted stock units are valued at market price of the Company’s common stock at the date of grant. The
market price under the Employee Stock Plan is the closing price at the date of the grant. The market price under the Nonemployee
Director Plan is the average of the high and the low price on the date of the grant.
A summary of the Company’s restricted stock unit activity during fiscal years 2018 and 2019 and is presented in the following
table:
Unvested at August 30, 2017
Granted
Vested
Forfeited
Unvested at August 29, 2018
Granted
Vested
Forfeited
Unvested at August 28, 2019
Restricted Stock
Units
Weighted
Average
Fair Value
(Per share)
Weighted-
Average
Remaining
Contractual
Term
(In years)
404,364
244,748
(99,495)
(32,326)
517,291
4,410
(153,757)
(93,935)
274,009
$
$
$
5.23
2.83
4.42
3.87
3.79
1.15
4.66
3.41
3.39
1.9
—
—
—
1.8
—
—
—
1.2
At August 28, 2019, there was $0.2 million of total unrecognized compensation cost related to unvested restricted stock units that
is expected to be recognized over a weighted-average period of 1.2 years.
Performance Based Incentive Plan
For fiscal years 2015 - 2018, the Company approved a Total Shareholder Return ("TSR") Performance Based Incentive Plan
(“Plan”). Each Plan’s award value varies from 0% to 200% of a base amount, as a result of the Company’s TSR performance in
comparison to its peers over the respective measurement period. Each Plan’s vesting period is three years.
The Plans for fiscal years 2015 - 2017 provided for a right to receive an unspecified number of shares of common stock under the
Employee Stock Plan based on the total shareholder return ranking compared to a selection of peer companies over the three-year
vesting period, for each plan year. The number of shares at the end of the three-year period is determined as the award value
divided by the closing stock price on the last day of each fiscal year, accordingly. Each three-year measurement period is designated
a plan year name based on year one of the measurement period. Since the plans provide for an undeterminable number of awards,
the plans are accounted for as liability based plans. The liability valuation estimate for each plan year has been determined based
on a Monte Carlo simulation model. Based on this estimate, management accrues expense ratably over the three-year service
periods. A valuation estimate of the future liability associated with each fiscal year's performance award plan is performed
periodically with adjustments made to the outstanding liability at each reporting period to properly state the outstanding liability
for all plan years in the aggregate as of the respective balance sheet date.
79
The 2015 TSR Performance Based Incentive Plan vested for each active participant on August 30, 2017 and a total of 187,883
shares were awarded under the Plan at 50% of the original target. The fair value of the 2015 plan's liability in the amount of $496
thousand was converted to equity and the number of shares awarded for the 2015 TSR Performance Based Incentive Plan was
based on the Company's stock price at closing on the last day of fiscal 2017.
The fair value of the 2016 TSR Performance Based Incentive Plan was zero at the end of the three-year measurement period and
at August 29, 2018 no shares vested due to the relative ranking of the Company's stock performance.
The fair value of the 2017 TSR Performance Based Incentive Plan was zero at the end of the three-year measurement period and
at August 28, 2019 no shares vested due to the relative ranking of the Company's stock performance.
The 2018 TSR Performance Based Incentive Plan provides for a specified number of shares of common stock under the Employee
Stock Plan based on the total shareholder return ranking compared to a selection of peer companies over a three-year cycle. The
Fair Value of the 2018 Plan has been determined based on a Monte Carlo simulation model for the three-year period. The target
number of shares for distribution at 100% of the plan is 373,294. The 2018 TSR Performance Based Incentive Plan is accounted
for as an equity award since the Plan provides for a specified number of shares. The expense for this Plan year is amortized over
the three-year period based on 100% target award.
Non-cash compensation expense related to the Company's TSR Performance Based Incentive Plans in fiscal 2019 and 2018 was
a credit to expense of $0.3 million, and $15 thousand, respectively, and is recorded in selling, general and administrative expenses
on our consolidated statement of operations.
A summary of the Company’s restricted stock Performance Based Incentive Plan activity during fiscal 2019 is presented in the
following table:
Unvested at August 30, 2017
Granted
Vested
Forfeited
Unvested at August 29, 2018
Granted
Vested
Forfeited
Unvested at August 28, 2019
Units
Weighted Average
Fair Value
(Per share)
—
561,177
(187,883)
—
373,294
—
—
(106,851)
266,443
$
—
3.33
2.64
—
3.68
—
—
3.68
3.68
At August 28, 2019, there was $0.4 million of total unrecognized compensation cost related to 2018 TSR Performance Based
Incentive Plan that is expected to be recognized over a weighted-average period of 1.0 year.
Restricted Stock Awards
Under the Nonemployee Director Stock Plan, directors are granted restricted stock in lieu of cash payments, for all or a portion
of their compensation as directors. Directors may receive a 20% premium of additional restricted stock by opting to receive stock
over a minimum required amount of stock, in lieu of cash. The number of shares granted is valued at the average of the high and
low price of the Company’s stock at the date of the grant. Restricted stock awards vest when granted because they are granted in
lieu of a cash payment. However, directors are restricted from selling their shares until after the third anniversary of the date of
the grant.
Supplemental Executive Retirement Plan
The Company has an unfunded Supplemental Executive Retirement Plan (“SERP”). In 2005, the Board of Directors voted to
amend the SERP and suspend the further accrual of benefits and participation. The net benefit recognized for the SERP for the
years ended August 28, 2019 and August 29, 2018 was zero, and the unfunded accrued liability included in “Other Liabilities” on
the Company’s consolidated Balance Sheets as of August 28, 2019 and August 29, 2018 was $32 thousand and $39 thousand,
respectively.
80
Nonemployee Director Phantom Stock Plan
The Company has a Nonemployee Director Phantom Stock Plan (“Phantom Stock Plan”). Authorized shares ( shares) under the
Phantom Stock Plan were fully depleted in early fiscal 2003; since that time, no deferrals, incentives or dividends have been
credited to phantom stock accounts. As participants cease to be directors, their phantom shares are converted into an equal number
of shares of common stock and issued from the Company’s treasury stock. As of August 28, 2019, 17,801 phantom shares remained
outstanding and unconverted under the Phantom Stock Plan.
401(k) Plan
The Company has a voluntary 401(k) employee savings plan to provide substantially all employees of the Company an opportunity
to accumulate personal funds for their retirement. The Company matches 25% of participants’ contributions made to the plan up
to 6% of their salary. The net expense recognized in connection with the employer match feature of the voluntary 401(k) employee
savings plan for the fiscal years ended August 28, 2019 and August 29, 2018 was $279 thousand and $243 thousand, respectively.
Note 17. Related Parties
Affiliate Services
The Company’s Chief Executive Officer, Christopher J. Pappas, and Harris J. Pappas, a former Director of the Company, own
two restaurant entities (the “Pappas entities”) that may, from time to time, provide services to the Company and its subsidiaries,
as detailed in the Amended and Restated Master Sales Agreement dated August 2, 2017 among the Company and the Pappas
entities. Collectively, Messrs. Pappas and the Pappas entities own greater than 5% of the Company's common stock.
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities may provide specialized (customized)
equipment fabrication and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables.
The Company incurred $19 thousand and $31 thousand under the Amended and Restated Master Sales Agreement for custom-
fabricated and refurbished equipment in fiscal 2019 and 2018, respectively and incurred $2 thousand in other operating costs in
fiscal 2018. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of
the Company’s Board of Directors.
Operating Leases
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center
in Houston, Texas. Messrs. Pappas collectively own a 50% limited partnership interest and a 50% general partnership interest in
the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented 7% of the space
in that center since July 1969. No changes were made to the Company’s lease terms as a result of the transfer of ownership of the
center to the new partnership.
On November 22, 2006, the Company executed a new lease agreement with respect to this shopping center. Effective upon the
Company’s relocation and occupancy into the new space in July 2008, the new lease agreement provides for a primary term of 12
years with two subsequent five-year options and gives the landlord an option to buy out the tenant on or after the calendar year
2015 by paying the then unamortized cost of improvements to the tenant. The Company pays rent of $22.00 per square foot plus
maintenance, taxes, and insurance during the remaining primary term of the lease. Thereafter, the lease provides for increases in
rent at set intervals. The new lease agreement was approved by the Finance and Audit Committee in 2006.
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement for one of the Company’s
Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of six years with two subsequent
five-year options. Pursuant to the new ground lease agreement, the Company pays rent of $28.53 per square foot plus maintenance,
taxes, and insurance from March 12, 2014 until May 31, 2020. Thereafter, the new ground lease agreement provides for increases
in rent at set intervals.
Affiliated rents paid for the Houston property leases represented 2.9% and 3.1% of total rents for continuing operations for fiscal
2019 and 2018, respectively. Rent payments under the two lease agreements described above were $593 thousand and $628
thousand in fiscal 2019 and 2018, respectively.
81
Board of Directors
Christopher Pappas and Frank Markantonis, an attorney whose former principal client is Pappas Restaurants, Inc., are current
members of our Board of Directors.
Key Management Personnel
The Company entered into a new employment agreement with Christopher Pappas on December 11, 2017. Under the employment
agreement, the initial term of Mr. Pappas' employment ended on August 28, 2019 and automatically renews for additional one
year periods, unless terminated in accordance with its terms. Mr. Pappas continues to devote his primary time and business efforts
to the Company while maintaining his role at Pappas Restaurants, Inc. The Employment Agreement was unanimously approved
by the Executive Compensation Committee (the “Committee”) of the Board as well as by the full Board. Effective August 1, 2018,
the Company and Christopher J. Pappas agreed to reduce his fixed annual base salary to one dollar.
Peter Tropoli, a former director and officer of the Company, is an attorney and stepson of Frank Markantonis, who is a director
of the Company. Mr. Tropoli resigned from the Company and is no longer our General Counsel and Corporate Secretary.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
Note 18. Common Stock
At August 28, 2019, the Company had 500,000 shares of common stock reserved for issuance upon the exercise of outstanding
stock options.
Treasury Shares
In February 2008, the Company acquired 500,000 treasury shares for $4.8 million.
82
Note 19. Earnings Per Share
A reconciliation of the numerators and denominators of basic earnings per share and earnings per share assuming dilution is shown
in the table below:
Numerator:
Loss from continuing operations
Net Loss
Denominator:
Denominator for basic earnings per share—weighted-average shares
Effect of potentially dilutive securities:
Employee and non-employee stock options
Denominator for earnings per share assuming dilution
Loss from continuing operations:
Basic
Assuming dilution (a)
Net loss per share:
Basic
Assuming dilution (a)
Fiscal Year Ended
August 28,
2019
August 29,
2018
(In thousands, except per share data)
$
$
$
$
$
$
(15,219) $
(15,226) $
(32,954)
(33,568)
29,786
—
29,786
(0.51) $
(0.51) $
(0.51) $
(0.51) $
29,901
—
29,901
(1.10)
(1.10)
(1.12)
(1.12)
(a) Potentially dilutive shares, not included in the computation of net income per share because to do so would have been anti-
dilutive, totaled 63,000 shares in fiscal 2019 and no shares in fiscal 2018. Additionally, stock options with exercise prices exceeding
market close prices that were excluded from the computation of net income per share amounted to 1,387,000 shares in fiscal 2019
and 1,653,000 shares in fiscal 2018.
Note 20. Shareholder Rights Plan
On February 15, 2018, the Board of Directors adopted a rights plan with a 10% triggering threshold and declared a dividend
distribution of one right initially representing the right to purchase one half of a share of Luby’s common stock, upon specified
terms and conditions. The rights plan was effective immediately.
The Board adopted the rights plan in view of the concentrated ownership of Luby’s common stock as a means to ensure that all
of Luby’s stockholders are treated equally. The rights plan is designed to limit the ability of any person or group to gain control
of Luby’s without paying all of Luby’s stockholders a premium for that control. The rights plan was not adopted in response to
any specific takeover bid or other plan or proposal to acquire control of Luby’s.
If a person or group acquires 10% or more of the outstanding shares of Luby’s common stock (including in the form of
synthetic ownership through derivative positions), each right will entitle its holder (other than such person or members of such
group) to purchase, for $12.00, a number of shares of Luby’s common stock having a then-current market value of twice such
price. The rights plan exempts any person or group owning 10% or more (35.5% or more in the case of Harris J. Pappas,
Christopher J. Pappas and their respective affiliates and associates) of Luby’s common stock immediately prior to the adoption
of the rights plan. However, the rights will be exercisable if any such person or group acquires any additional shares of Luby’s
common stock (including through derivative positions) other than as a result of equity grants made by Luby’s to its directors,
officers or employees in their capacities as such.
Prior to the acquisition by a person or group of beneficial ownership of 10% or more of the outstanding shares of Luby’s
common stock, the rights are redeemable for 1 cent per right at the option of Luby’s Board of Directors.
The dividend distribution was made on February 28, 2018 to stockholders of record on that date. Unless and until a triggering
event occurs and the rights become exercisable, the rights will trade with shares of Luby’s common stock.
Luby’s financial condition, operations, and earnings per share was not affected by the adoption of the rights plan.
83
On February 11, 2019, the Board of Directors approved the first amendment to the shareholder rights plan extending the term
of the plan to February 15, 2020.
Note 21. Quarterly Financial Information
The following tables summarize quarterly unaudited financial information for fiscal 2019 and 2018.
Quarter Ended
August 28,
2019
(84 days)
June 6,
2019
(84 days)
March 14,
2019
(84 days)
December 20,
2018
(112 days)
(In thousands, except per share data)
$
$
Restaurant sales
Franchise revenue
Culinary contract services
Vending revenue
Total sales
Loss from continuing operations
Loss from discontinued operations
Net loss
Net loss per share:
Basic
Assuming dilution
$
$
$
$
$
62,434
1,563
7,278
88
71,363
(9,081)
12
(9,069)
(0.30)
(0.30)
Costs and Expenses (as a percentage of restaurant sales)
Cost of food
Payroll and related costs
Other operating expenses
Occupancy costs
28.5%
38.8%
18.4%
6.5%
$
$
$
$
65,611
1,482
7,571
102
74,766
(5,295)
(6)
(5,301)
(0.18)
(0.18)
28.2%
38.1%
17.5%
6.1%
$
$
$
$
65,370
1,421
7,543
90
74,424
6,640
(8)
6,632
0.22
0.22
27.8%
37.8%
17.5%
6.4%
$
$
$
$
$
91,098
2,224
9,496
99
102,917
(7,483)
(5)
(7,488)
(0.25)
(0.25)
27.5%
37.9%
18.1%
6.4%
Quarter Ended
August 29,
2018
(91 days)
June 6,
2018
(84 days)
March 14,
2018
(84 days)
December 20,
2017
(112 days)
(In thousands, except per share data)
Restaurant sales
Franchise revenue
Culinary contract services
Vending revenue
Total sales
Loss from continuing operations
Loss from discontinued operations
Net loss
Net loss per share:
Basic
Assuming dilution
$
$
$
$
$
Costs and Expenses (as a percentage of restaurant sales)
Cost of food
Payroll and related costs
Other operating expenses
Occupancy costs
75,782
1,633
6,369
119
83,903
(1,858)
(6)
(1,864)
(0.06)
(0.06)
$
$
$
$
$
27.8%
37.5%
17.7%
6.4%
84
$
$
$
$
77,803
1,444
6,639
118
86,004
(14,133)
(463)
(14,596)
(0.48)
(0.48)
28.6%
37.8%
19.3%
5.9%
$
$
$
$
$
74,351
1,401
5,889
151
81,792
(11,461)
(110)
(11,571)
(0.39)
(0.39)
28.5%
38.3%
19.3%
6.3%
104,582
1,887
6,885
143
113,497
(5,502)
(35)
(5,537)
(0.19)
(0.19)
28.5%
36.5%
18.6%
6.0%
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
We have had no disagreements with our accountants on any accounting or financial disclosures.
Item 9A. Controls and Procedures
Evaluation of Disclosure Control and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of August 28, 2019. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of August 28, 2019, our disclosure controls and procedures
were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules
and forms and (ii) accumulated and communicated to the issuer’s management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting
may not prevent or detect material misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting based on
the framework in Internal Control – Integrated Framework-2013 issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation, we concluded that our internal control over financial reporting was effective as
of August 28, 2019.
Changes in Internal Control over Financial Reporting
Except as noted above, there were no changes in our internal control over financial reporting during the quarter ended August 28,
2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
85
Item 10. Directors, Executive Officers and Corporate Governance
PART III
There is incorporated in this Item 10 by reference that portion of our definitive proxy statement for the 2020 annual meeting of
shareholders appearing therein under the captions “Election of Directors,” “Corporate Governance,” “Section 16(a) Beneficial
Ownership Reporting Compliance,” “Executive Officers,” and “Certain Relationships and Related Transactions.”
We have in place a Policy Guide on Standards of Conduct and Ethics applicable to all employees, as well as the Board of Directors,
and Supplemental Standards of Conduct and Ethics for the Chief Executive Officer, Chief Financial Officer, Vice President of
Accounting, and all senior financial officers. This Policy Guide and the Supplemental Standards were filed as exhibits to the
Annual Report on Form 10-K for the fiscal year ended August 26, 2003 and can be found on our website at www.lubys.com. We
intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendments to or waivers from the code of
ethics or supplementary code of ethics by posting such information on our website at www.lubys.com.
Item 11. Executive Compensation
There is incorporated in this Item 11 by reference that portion of our definitive proxy statement for the 2020 annual meeting of
shareholders appearing therein under the captions “Compensation Discussion and Analysis—Executive Compensation,” “—
Executive Compensation Committee Report,” “—Compensation Tables and Information,” “—Director Compensation,” and
“Corporate Governance—Executive Compensation Committee—Compensation Committee Interlocks.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
There is incorporated in this Item 12 by reference that portion of our definitive proxy statement for the 2020 annual meeting of
shareholders appearing therein under the captions “Ownership of Equity Securities in the Company” and “Principal Shareholders.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
There is incorporated in this Item 13 by reference that portion of our definitive proxy statement for the 2020 annual meeting of
shareholders appearing therein under the captions, “Corporate Governance Guidelines—Director Independence” and “Certain
Relationships and Related Transactions.”
Item 14. Principal Accountant Fees and Services
There is incorporated in this Item 14 by reference that portion of our definitive proxy statement for the 2020 annual meeting of
shareholders appearing therein under the caption “Fees Paid To The Independent Registered Public Accounting Firm.”
86
Item 15. Exhibits, Financial Statement Schedules
1.
Financial Statements
PART IV
The following financial statements are filed as part of this Report:
Consolidated balance sheets at August 28, 2019 and August 29, 2018.
Consolidated statements of operations for each of the two years in the period ended August 28, 2019.
Consolidated statements of shareholders’ equity for each of the two years in the period ended August 28, 2019.
Consolidated statements of cash flows for each of the two years in the period ended August 28, 2019.
Notes to consolidated financial statements
Report of Independent Registered Public Accounting Firm Grant Thornton LLP
2.
Financial Statement Schedules
All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission
of the schedule or because the information required is included in the financial statements and notes thereto.
3.
Exhibits
The following exhibits are filed as a part of this Report:
3(a)
3(b)
3(c)
3(d)
3(e)
Amended and Restated Certificate of Incorporation of Luby’s, Inc. (incorporated by reference to Exhibit 3.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended February 11, 2009, filed on March 20, 2009 (File
No. 001-08308)).
Bylaws of Luby’s, Inc., as amended through July 9, 2008 (incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed on July 14, 2008 (File No. 001-08308)).
Amendment to Bylaws of Luby’s, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report
on Form 8-K filed on October 22, 2015 (File No. 001-08308)).
Amendment No. 2 to Bylaws of Luby’s Inc., effective as of August 31, 2018 (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on August 31, 2018 (File No. 001-08308)).
Amendment No. 3 to Bylaws of Luby’s Inc., effective as of July 30, 2019 (incorporated by reference to Exhibit 3.1
to the Company’s Current Report on Form 8-K filed on August 1, 2019 (File No. 001-08308)).
87
4
4(a)
Rights Agreement, dated as of February 15, 2018, by and between the Company and American Stock Transfer &
Trust Company, LLC, as rights agent (which includes the Form of Rights Certificate as Exhibit A thereto)
(incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A, filed on February
16, 2018 (File No. 001-08308)).
First Amendment to Rights Agreement, dated as of February 11, 2019, by and between the Company and American
Stock Transfer & Trust Company, LLC, as rights agent (incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K, filed on February 12, 2019 (File No. 001-08308)).
4(b)
Description of registered securities.
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)
10(k)
Second Amended and Restated Nonemployee Director Stock Plan of Luby’s, Inc. adopted January 25, 2013
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
February 13, 2013, filed March 25, 2013 (File No. 001-08308)).*
Registration Rights Agreement dated March 9, 2001, by and among Luby’s, Inc., Christopher J. Pappas, and Harris
J. Pappas (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March
15, 2001 (File No. 001-08308)).
Luby’s, Inc. Amended and Restated Nonemployee Director Phantom Stock Plan effective September 28, 2001
(incorporated by reference to Exhibit 10(dd) to the Company’s Quarterly Report on Form 10-Q for the quarter
ended February 13, 2002, filed on March 29, 2002 (File No. 001-08308)).*
Form of Indemnification Agreement entered into between Luby’s, Inc. and each member of its Board of Directors
initially dated July 23, 2002 (incorporated by reference to Exhibit 10(gg) to the Company’s Annual Report on
Form 10-K for the fiscal year ended August 28, 2002, filed on November 27, 2002 (File No. 001-08308)).*
Amended and Restated Master Sales Agreement effective November 16, 2011, by and among Luby’s, Inc.,
Pappas Restaurants, L.P., and Pappas Restaurants, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended May 9, 2012, filed on June 15, 2012 (File No. 001-08308)).
Amended and Restated Master Sales Agreement effective August 2, 2017, by and among Luby’s, Inc.,
Pappas Restaurants, L.P., and Pappas Restaurants, Inc. (incorporated by reference to Exhibit 10(j) to the
Company's Annual Report on Form 10-K for the fiscal year ended August 30, 2017, filed on November 13, 2017
(File No. 001-08308)).
Restated Employment Agreement dated December 11, 2017, between Luby's, Inc. and Christopher J. Pappas
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 12,
2017 (File No. 001-08308)).*
Form of Restricted Stock Award Agreement pursuant to the Luby’s Incentive Stock Plan (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 16, 2007 (File No.
001-08308)).*
Form of Incentive Stock Option Award Agreement pursuant to the Luby’s Incentive Stock Plan (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 16, 2007 (File No.
001-08308)).*
Luby's Incentive Stock Plan, effective as of December 5, 2015 (incorporated by reference to Annex A to the
Company's Definitive Proxy Statement on Schedule 14A filed on December 16, 2016 (File No. 001-083038)).*
Form of Restricted Stock Award Agreement pursuant to the Luby’s Incentive Stock Plan (incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 16, 2015 (File No.
001-08308)).*
88
10(l)
10(m)
10(n)
10(o)
10(p)
14(a)
14(b)
Form of Incentive Stock Option Award Agreement pursuant to the Luby’s Incentive Stock Plan (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 16, 2015 (File No.
001-08308)).*
Form of Incentive Stock Option Award Agreement to Luby’s 2015 Incentive Stock Plan (incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 12, 2017 (File No.
001-08308)).*
Form of Restricted Stock Unit Agreement to Luby’s 2015 Incentive Stock Plan (incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 12, 2017 (File No. 001-08308)).*
Credit Agreement, dated as of December 13, 2018, among the Company, the lenders from time to time party
thereto, and MSD PCOF Partners VI, LLC, as Administrative Agent (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed on December 14, 2018 (File No. 001-08308)).
First Amendment to Credit Agreement, dated as of December 13, 2018, among the Company, the lenders from time
to time party thereto, and MSD PCOF Partners VI, LLC, as Administrative Agent (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 1, 2019 (File No. 001-08308)).
Policy Guide on Standards of Conduct and Ethics applicable to all employees, as well as the board of directors
(incorporated by reference to Exhibit 14(a) to the Company’s Annual Report on Form 10-K for the fiscal year
ended August 26, 2003, filed on November 25, 2003 (File No. 001-08308)).
Supplemental Standards of Conduct and Ethics for the Chief Executive Officer, Chief Financial Officer, Controller,
and all senior financial officers (incorporated by reference to Exhibit 14(b) to the Company’s Annual Report on
Form 10-K for the fiscal year ended August 26, 2003, filed on November 25, 2003 (File No. 001-08308)).
21
Subsidiaries of the Company.
23.1
Consent of Grant Thornton LLP.
31.1
31.2
32.1
32.2
99(a)
Rule 13a-14(a)/15d-14(a) certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Rule 13a-14(a)/15d-14(a) certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Section 1350 certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Section 1350 certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Corporate Governance Guidelines of Luby’s, Inc., as amended October 28, 2004 (incorporated by reference to
Exhibit 99(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended August 29, 2007, filed on
November 9, 2007 (File No. 001-08308)).
101.INS XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
89
101.DEF XBRL Definition Linkbase Document
101.LAB XBRL Label Linkbase Document
101.PRE XBRL Presentation Linkbase Document
__________________________
*
Denotes management contract or compensatory plan or arrangement.
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 26, 2019
Date
LUBY’S, INC.
(Registrant)
By:
/s/ CHRISTOPHER J. PAPPAS
Christopher J. Pappas
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature and Title
Date
/S/ GERALD W. BODZY
November 26, 2019
Gerald W. Bodzy, Director and Chairman of the Board
/S/ CHRISTOPHER J. PAPPAS
November 26, 2019
Christopher J. Pappas, Director, President and Chief
Executive Officer
(Principal Executive Officer)
/S/ K. SCOTT GRAY
November 26, 2019
K. Scott Gray, Senior Vice President and Chief Financial
Officer, and Principal Accounting Officer
(Principal Financial and Accounting Officer)
/S/ TWILA DAY
Twila Day, Director
/S/ JILL GRIFFIN
Jill Griffin, Vice Chair and Director
/S/ FRANK MARKANTONIS
Frank Markantonis, Director
/S/ JOE C. MCKINNEY
Joe C. McKinney, Director
/S/ GASPER MIR, III
Gasper Mir, III, Director
/S/ JOHN B. MORLOCK
John B. Morlock, Director
/S/ RANDOLPH C. READ
Randolph C. Read, Director
November 26, 2019
November 26, 2019
November 26, 2019
November 26, 2019
November 26, 2019
November 26, 2019
November 26, 2019
91
DESCRIPTION OF COMMON STOCK
Exhibit 4.1(b)
The following summary of the common stock (the "common stock"), of Luby's, Inc. (the "Company") is based on and
qualified by reference to, the Company’s Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation")
and Bylaws of Luby's Inc. (the "Bylaws"). The summary is not complete and is qualified by reference to our Certificate of
Incorporation and our Bylaws, which are filed as exhibits to this Annual Report on Form 10-K and are incorporated by reference
herein. We encourage you to read our Certificate of Incorporation, our Bylaws and the applicable provisions of the Delaware
General Corporation Law (the "DGCL") for additional information.
General
Our authorized capital stock consists of one hundred million (100,000,000) shares of common stock, par value of thirty-
two cents ($0.32) per share. Our issued and outstanding shares of common stock are fully paid and nonassessable. There are no
redemption or sinking fund provisions applicable to the shares of our common stock, and such shares are not entitled to any
preemptive rights.
Listing
Our common stock is listed and principally traded on The New York Stock Exchange ("NYSE") under the symbol "LUB."
Transfer Agent
American Stock Transfer & Trust Company is the registrar and transfer agent for our common stock.
Voting Rights
The holders of common stock are entitled to one vote per share on all matters voted on by the stockholders, including
the election of directors. Our stockholders do not have cumulative voting rights. Except as otherwise provided by law, our
Certificate of Incorporation or our Bylaws, matters will generally be decided by a majority of the votes cast.
Board of Directors
Our Certificate of Incorporation provides that the Board of Directors shall consist of not less than nine nor more than
fifteen persons. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence
shall be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of
Directors.
Our Certificate of Incorporation provides that directors are elected for one-year terms expiring at the next Annual Meeting
of Stockholders and may be removed with or without cause upon the approval of at least 80% of the voting power of all of the
shares of the Company.
Our Certificate of Incorporation and Bylaws provide that a vacancy on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes shall be filled by a majority of the directors then in office. A vacancy created
by an increase in the number of authorized directors may be filled by election at an Annual or Special Meeting of Stockholders
called for that purpose or by the Board of Directors for a term of office continuing only until the next election of one or more
directors by the stockholders.
Dividend Rights
Holders of our common stock are entitled to receive dividends as may be declared from time to time by our Board of
Directors and paid in cash, in property, or in shares of the Company.
Rights upon Liquidation
Upon any liquidation or dissolution of the Company, holders of our common stock are entitled to share pro rata in all
remaining assets legally available for distribution to stockholders.
Certain Anti-Takeover Effects
Certain provisions of our Certificate of Incorporation and Bylaws may be deemed to have an anti-takeover effect.
Business Combinations. The Certificate of Incorporation provides that certain conditions must be met before the
consummation of certain business combinations ("Business Combinations") by the Company or any of its subsidiaries with any
stockholder who is directly or indirectly the beneficial owner of more than 10% of the voting power of the outstanding common
stock or is an affiliate of the Company and at any time within the two-year period immediately prior to the date in question was
directly or indirectly the beneficial owner of 10% or more of the voting power of the then outstanding common stock (an "Interested
Stockholder"). The affirmative vote of the holders of at least 80% of the voting power of the then outstanding common stock
entitled to vote generally in the election of directors, voting together as a single class, shall be required for Business Combinations.
A Business Combination will require only the affirmative vote as required by law or any other provision of the Certificate
of Incorporation if all of the conditions specified in either of the following paragraphs (i) and (ii) below are met:
(i)
The Business Combination is approved by a majority of the directors who are unaffiliated with the Interested
Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became
an Interested Stockholder.
(ii)
The Business Combination complies with certain "fair price" provisions and procedures.
DGCL Section 203. As a Delaware corporation, the Company is subject to Section 203, or the business combination
statute, of the General Corporation Law of the State of Delaware ("DGCL"). Under the business combination statute of the DGCL,
a corporation is generally restricted from engaging in a business combination (as defined in Section 203 of the DGCL) with an
interested stockholder (defined generally as a person owning 15% or more of the corporation’s outstanding voting stock) for a
three-year period following the time the stockholder became an interested stockholder. This restriction applies unless:
•
•
•
prior to the time the stockholder became an interested stockholder, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
the interested stockholder owned at least 85% of the voting stock of the corporation upon completion of the transaction
which resulted in the stockholder becoming an interested stockholder (excluding stock held by the corporation’s directors
who are also officers and by the corporation’s employee stock plans, if any, that do not provide employees with the right
to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or
at or subsequent to the time the stockholder became an interested stockholder, the business combination was approved
by the board of directors of the corporation and authorized by the affirmative vote, at an annual or special meeting, and
not by written consent, of at least 66 2/3% of the outstanding voting shares of the corporation, excluding shares held by
that interested stockholder.
The provisions of the business combination statute of the DGCL do not apply to a corporation if, subject to certain
requirements specified in Section 203(b) of the DGCL, the certificate of incorporation or bylaws of the corporation contain a
provision expressly electing not to be governed by the provisions of the statute or the corporation does not have voting stock listed
on a national securities exchange or held of record by more than 2,000 stockholders. The Company has not adopted any provision
in the Certificate of Incorporation or Bylaws electing not to be governed by the business combination statute of the DGCL. As a
result, the statute is applicable to business combinations involving the Company.
Advance Notice and Proxy Access Provisions. Our Bylaws require timely advance notice for stockholders seeking to
bring business before our annual meeting of stockholders or to nominate candidates for election as directors at our annual meeting
of stockholders and specify certain requirements regarding the form and content of a stockholder’s notice. The chair of the annual
meeting has the power and duty to determine whether a nomination or any business proposed to be brought before the meeting
was made or proposed, as the case may be, in accordance with the applicable procedures and, if any proposed nomination or
business is not in compliance with the applicable procedures, to declare that such nomination shall be disregarded or that such
proposed business shall not be transacted.
Rights Agreement
On February 15, 2018, the Board of Directors adopted a rights agreement, dated February 15, 2018, which was subsequently
amended on February 11, 2019, (as amended, the "Rights Agreement") and declared a dividend distribution of one right (each, a
"Right") for each outstanding share of common stock to stockholders of record at the close of business on February 28, 2018. The
purchase price for each whole share of common stock pursuant to the exercise of a Right is initially $12.00 (equivalent to $6.00
for each half of a share of common stock), subject to adjustment. If a person or group acquires 10% or more of the outstanding
shares of 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 common stock having
a then-current market value of twice such price. The Rights Agreement 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 common stock
immediately prior to the adoption of the Rights Agreement. However, the Rights will be exercisable if any such person or group
acquires any additional shares of common stock (including through derivative positions) other than as a result of equity grants
made by the Company to its directors, officers or employees in their capacities as such. The Rights Agreement will expire on
February 15, 2020.
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
NAME
Luby’s Fuddruckers Restaurants, LLC
Luby’s Bevco, Inc.
Luby’s Bev I, LLC
Luby’s Bev II, LLC
Fuddruckers of Annapolis, LLC
Fuddruckers of Brandywine, LLC
Paradise Cheeseburgers, LLC
Paradise Restaurant Group, LLC
Cheeseburger of Algonquin, LLC
Cheeseburger of California, LLC
Cheeseburger of Downers Grove, LLC
Cheeseburger of Evansville, LLC
Cheeseburger of Fishers, LLC
Cheeseburger of Fredericksburg, LLC
Cheeseburger of Ft. Meyers, LLC
Cheeseburger of Kansas City, LLC
Cheeseburger of Middleton, LLC
Cheeseburger of Myrtle Beach, LLC
Cheeseburger of Newark, LLC
Cheeseburger of Newport News, LLC
High Tides of Omaha, LLC
Cheeseburger of Pasadena, LLC
Cheeseburger of Sandestin, LLC
Cheeseburger of Secaucus, LLC
Cheeseburger of Southport, LLC
Cheeseburger of Sterling Heights, LLC
Cheeseburger of Terre Haute, LLC
Cheeseburger of Virgina Beach, LLC
Cheeseburger of Wallkill, LLC
Cheeseburger of Woodbridge, LLC
Cheeseburger in Paradise of St. Mary’s County, LLC
Luby's Fuddruckers Foundation
STATE OR COUNTRY OF ORGANIZATION
OR INCORPORATION
Texas
Texas
Texas
Texas
Maryland
Maryland
Texas
Delaware
Illinois
Maryland
Illinois
Indiana
Indiana
Virginia
Florida
Kansas
Wisconsin
South Carolina
Delaware
Virginia
Nebraska
Maryland
Florida
New Jersey
Indiana
Michigan
Indiana
Virginia
New York
Virginia
Maryland
Texas
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated November 26, 2019, with respect to the consolidated financial statements of Luby’s, Inc.
included in the Annual Report on Form 10-K for the year ended August 28, 2019. We consent to the incorporation by reference
of said reports in the following Registration Statements of Luby’s, Inc. on Forms S-8 (File No. 333-210790, effective April 15,
2016; File No. 333-186326 effective January 30, 2013; File No. 333-135058, effective June 16, 2006; File No. 333-81606,
effective January 29, 2002; File No. 333-81608, effective January 29, 2002; File No. 333-55140, effective February 7, 2001;
and File No. 333-70315, effective January 8, 1999).
Exhibit 23.1
/s/ GRANT THORNTON LLP
Houston, Texas
November 26, 2019
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Christopher J. Pappas, certify that:
Exhibit 31.1
1.
2.
I have reviewed this Annual Report on Form 10-K of Luby’s, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: November 26, 2019
By:
/s/ CHRISTOPHER J. PAPPAS
Christopher J. Pappas
President and Chief Executive Officer
A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to
Luby’s, Inc. and will be retained by Luby’s, Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, K. Scott Gray, certify that:
Exhibit 31.2
1.
2.
I have reviewed this Annual Report on Form 10-K of Luby’s, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: November 26, 2019
By:
/s/ K. SCOTT GRAY
K. Scott Gray
Senior Vice President and Chief Financial Officer,
and Principal Accounting Officer
A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to
Luby’s, Inc. and will be retained by Luby’s, Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the Annual Report of Luby’s, Inc. on Form 10-K for the fiscal year ended August 28, 2019, as filed with the
Securities and Exchange Commission on the date hereof, I, Christopher J. Pappas, President and Chief Executive Officer of the
Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: November 26, 2019
By:
/s/ CHRISTOPHER J. PAPPAS
Christopher J. Pappas
President and Chief Executive Officer
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
In connection with the Annual Report of Luby’s, Inc. on Form 10-K for the fiscal year ended August 28, 2019, as filed with the
Securities and Exchange Commission on the date hereof, I, K. Scott Gray, Senior Vice President and Chief Financial Officer of
the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: November 26, 2019
By:
/s/ K. SCOTT GRAY
K. Scott Gray
Senior Vice President and Chief Financial Officer,
and Principal Accounting Officer