Notes to Consolidated Financial Statements
Fiscal Years
2017
,
2016
, and
2015
Note 1. Nature of Operations and Significant Accounting Policies
Nature of Operations
Luby’s, Inc. is based in Houston, Texas. As of
August 30, 2017
, the Company owned and operated
167
restaurants, with
122
in Texas and the remainder in other states. In addition, the Company received royalties from
113
franchises as of
August 30, 2017
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 three lines of business: healthcare, higher education, and corporate dining.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Luby’s, Inc. and its wholly owned subsidiaries. Luby’s, Inc. was restructured into a holding company on February 1, 1997, at which time all of the operating assets were transferred to Luby’s Restaurants Limited Partnership, a Texas limited partnership consisting of two wholly owned, indirect corporate subsidiaries of the Company. On July 9, 2010, Luby’s Restaurants Limited Partnership was converted into Luby’s Fuddruckers Restaurants, LLC, a Texas limited liability company (“LFR”). Unless the context indicates otherwise, the word “Company” as used herein includes Luby’s, Inc., LFR, and the consolidated subsidiaries of Luby’s, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reportable Segments
Each restaurant is an operating segment because operating results and cash flow can be determined for each restaurant which is regularly reviewed by the chief operating decision maker. The Company has
three
reportable segments: Company-owned restaurants, franchise operations, and Culinary Contract Services (“CCS”). Company-owned restaurants are aggregated into
one
reportable segment because the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, and the nature of the regulatory environment are alike.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments such as money market funds that have a maturity of three months or less. All of the Company’s bank account balances are insured by the Federal Deposit Insurance Corporation. 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 contract service clients, catering customers and restaurant sales to corporations. The Company determines the allowance for CCS receivables and franchise royalty and marketing and advertising receivables based on 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 market.
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 the Term Loan are presented on the Balance Sheet as a direct deduction from long-term debt. The debt issue costs associated with the Revolver are presented on the Balance Sheet as an asset. 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.
Revenue Recognition
Revenue from restaurant sales is recognized when food and beverage products are sold. Unearned revenues are recorded as a liability for gift cards that have been sold but not yet redeemed and are recorded at their expected redemption value. When gift cards are redeemed, revenue is recognized, and unearned revenue is reduced.
Revenue from culinary contract services is recognized when services are provided and reimbursable costs are incurred within contractual terms.
Revenue from franchise royalties is recognized each fiscal period based on contractual royalty rates applied to the franchise’s restaurant sales each fiscal period. Royalties are accrued as earned and are calculated each period based on the franchisee’s reported sales. Area development fees and franchise fees are recognized as revenue when the Company has performed all material obligations and initial services. Area development fees are recognized proportionately with the opening of each new restaurant, which generally occurs upon the opening of the new restaurant. Until earned, these fees are accounted for as an accrued liability.
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
$5.7 million
,
$6.3 million
, and
$4.4 million
in fiscal
2017
,
2016
, and
2015
, 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
$0.6 million
,
$0.7 million
, and
$1.2 million
in fiscal
2017
,
2016
, and
2015
, respectively.
Marketing and advertising expense included in selling, general and administrative expense was
$5.1 million
,
$5.6 million
, and
$3.2 million
in fiscal
2017
,
2016
, and
2015
, 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.
Operating Leases
The Company leases restaurant and administrative facilities 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 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.
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.
Sales Taxes
The Company presents sales taxes on a net basis (excluded from revenue).
Discontinued Operations
Management evaluates unit closures for presentation in discontinued operations following guidance from ASC 205-20-55. To qualify for presentation as a discontinued operation, management determines if the closure or exit of a business location or activity meets the following conditions: (1) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (2) there will not be any significant continuing involvement in the operations of the component after the disposal transaction. To evaluate whether these conditions are met, management considers whether the cash flows lost will not be recovered and generated by the ongoing entity, the level of guest traffic and sales transfer, the significance of the number of locations closed and expectancy of cash flow replacement by sales from new and existing locations, as well as the level of continuing involvement in the disposed operation. Operating and non-operating results of these locations are then classified and reported as discontinued operations of all periods presented. As of fiscal 2016, management evaluates unit closures for presentation in discontinued operations following guidance from ASU 2014-08. Beginning in fiscal 2016, in accordance with ASU No. 2014-08, the Company will only 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.
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 14, “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.
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; fiscal 2016 was such a year. Each of the first three quarters of each fiscal year, prior to fiscal 2016, consisted of three four-week periods, while the fourth quarter normally consists of four four-week periods.
Beginning in fiscal 2016, we changed our fiscal quarter ending dates with the first fiscal quarter end was extended by one accounting period and the fiscal fourth quarter was reduced by one accounting period. The purpose of this change is in part to minimize the Thanksgiving calendar shift by extending the first fiscal quarter until after Thanksgiving. With this change in fiscal quarter ending dates, our first quarter is 16 weeks, and the remaining three quarters will typically be 12 weeks in length. The fourth fiscal quarter will be 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. Fiscal 2016 was such a year where the fourth quarter included 13 weeks, resulting in a 53 week fiscal year. Comparability between quarters may be affected by varying lengths of the quarters, as well as the seasonality associated with the restaurant business.
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
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs be presented in the balance sheet as a direct deduction from the associated debt liability. Debt issuance costs related to the Company's new 2016 Credit Agreement (defined hereafter) amounted to
$0.6 million
. The portion of the debt issuance costs associated with the Term Loan (defined hereafter) are setup as a direct deduction from long-term debt. The adoption of this update did not have a material impact on our consolidated financial statements. See Item 2. Management's Discussion and Analysis in this Form-10K for more discussion on debt issuance costs.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017–04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). This guidance eliminates the requirement to determine the implied fair value of goodwill to measure an impairment of goodwill. Rather, goodwill impairment charges will be calculated as the amount by which a reporting unit's carrying amount exceeds its fair value. Adoption of the provisions in ASU 2017-04 is required for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. The Company adopted ASU 2017-04 in the quarter ended March 15, 2017. The provisions of ASU 2017-04 did not have a material effect on the Company's financial condition, results of operations, or cash flows.
New Accounting Pronouncements - "to be Adopted"
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. Further, in March 2016, the FASB issued ASU No. 2016–08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in ASU No. 2014–09 for evaluating when another party, along with the entity, is involved in providing a good or service to a customer. In April 2016, the FASB issued ASU No. 2016–10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” which clarifies the guidance in ASU No. 2014–09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. The Company plans to adopt the standard in the first quarter of fiscal 2019, which is the first fiscal quarter of the annual reporting period beginning after December 15, 2017. We have not yet decided on a method of transition upon adoption. The Company expects the pronouncement may impact the recognition of the initial franchise fee, which is currently recognized upon the opening of a franchise restaurant. We are further evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU No 2014-15. The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The pronouncement is effective for fiscal years and interim periods within those fiscal years, after December 31, 2016, which requires us to adopt these provisions in the first quarter of fiscal 2018. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). This update requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This update is effective for annual and interim periods beginning after December 15, 2016, which requires us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This update is effective for annual and interim periods beginning after December 15, 2016, which requires us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The update also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020. This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as 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. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2016, which requires us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We are evaluating the impact on the Company’s consolidated financial statements and have not yet selected a transition method.
In March 2016, the FASB issued ASU No. 2016–04, “Liabilities – Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored–Value Products,” which is intended to eliminate current and future diversity in practice related to derecognition of prepaid stored–value product liability in a way that aligns with the new revenue recognition guidance. The update is effective for fiscal years beginning after December 15, 2017; however, early application is permitted. We are are evaluating the impact on the Company's consolidated financial statements and do not expect the adoption to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This update provides clarification regarding how certain cash receipts and cash payment are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019 using a retrospective approach. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
Subsequent Events
Events subsequent to the Company’s fiscal year ended
August 30, 2017
through the date of issuance of the financial statements are evaluated to determine if the nature and significance of the event warrants inclusion in the Company’s annual report.
Note 2. Reportable Segments
The Company has
three
reportable segments: Company-owned restaurants, franchise operations and Culinary Contract Services.
Company-owned restaurants
Company-owned restaurants consists of several brands which are aggregated into
one
reportable segment because of the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, the nature of the regulatory environment, and store level profit margin are similar. The chief operating decision maker analyzes Company-owned restaurant 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. The primary brands are Luby’s Cafeteria, Fuddruckers - World’s Greatest Hamburgers
®
, and Cheeseburger in Paradise. All Company-owned restaurants are casual dining restaurants. Each restaurant is an operating segment because operating results and cash flow can be determined for each restaurant.
The total number of Company-owned restaurants at the end of fiscal
2017
,
2016
, and
2015
were
167
,
175
, and
177
, respectively.
Culinary Contract Services
CCS, branded as Luby’s Culinary Contract 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, behavioral hospitals, a sports stadium, 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 costs of Culinary Contract Services on the 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.
CCS began selling Luby's Famous Fried Fish and Macaroni & Cheese in February 2017 and December 2016, respectively, in the freezer section of H-E-B stores, a Texas-born retailer. H-E-B stores now stock the family-sized versions (approximately
five
servings) of Luby's Classic Macaroni and Cheese and Luby's Jalapeño Macaroni and Cheese varieties and Luby's Fried Fish (
two
regular size fillets that provide
four
LuAnn-sized portions).
The total number of CCS contracts at the end of fiscal
2017
,
2016
, and
2015
were
25
,
24
, and
23
, respectively.
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 have a 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.
Franchisees bear all direct costs involved in the development, construction, and operation of their restaurants. In exchange for a franchise fee, the Company provides 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
2017
,
2016
, and
2015
were
113
,
113
, and
106
, 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, tax refunds receivable, property and equipment, assets related to discontinued operations, property held for sale, deferred tax assets, and prepaid expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended
|
|
August 30, 2017
|
|
August 31, 2016
|
|
August 26, 2015
|
|
(In thousands)
|
Sales:
|
|
|
|
|
|
Company-owned restaurants
(1)
|
$
|
351,365
|
|
|
$
|
378,694
|
|
|
$
|
370,723
|
|
Culinary contract services
|
17,943
|
|
|
16,695
|
|
|
16,401
|
|
Franchise operations
|
6,723
|
|
|
7,250
|
|
|
6,961
|
|
Total
|
$
|
376,031
|
|
|
$
|
402,639
|
|
|
$
|
394,085
|
|
Segment level profit:
|
|
|
|
|
|
Company-owned restaurants
|
$
|
42,943
|
|
|
$
|
55,419
|
|
|
$
|
51,763
|
|
Culinary contract services
|
2,169
|
|
|
1,740
|
|
|
1,615
|
|
Franchise operations
|
4,990
|
|
|
5,373
|
|
|
5,293
|
|
Total
|
$
|
50,102
|
|
|
$
|
62,532
|
|
|
$
|
58,671
|
|
Depreciation and amortization:
|
|
|
|
|
|
Company-owned restaurants
|
$
|
16,948
|
|
|
$
|
18,181
|
|
|
$
|
18,120
|
|
Culinary contract services
|
64
|
|
|
103
|
|
|
177
|
|
Franchise operations
|
770
|
|
|
784
|
|
|
767
|
|
Corporate
|
2,656
|
|
|
2,821
|
|
|
2,343
|
|
Total
|
$
|
20,438
|
|
|
$
|
21,889
|
|
|
$
|
21,407
|
|
Total assets:
|
|
|
|
|
|
Company-owned restaurants
(2)
|
$
|
189,990
|
|
|
$
|
211,182
|
|
|
$
|
218,492
|
|
Culinary contract services
|
3,342
|
|
|
3,390
|
|
|
1,644
|
|
Franchise operations
(3)
|
11,325
|
|
|
12,266
|
|
|
13,034
|
|
Corporate
|
21,800
|
|
|
25,387
|
|
|
31,088
|
|
Total
|
$
|
226,457
|
|
|
$
|
252,225
|
|
|
$
|
264,258
|
|
Capital expenditures:
|
|
|
|
|
|
Company-owned restaurants
|
$
|
11,374
|
|
|
$
|
17,258
|
|
|
$
|
19,726
|
|
Culinary contract services
|
3
|
|
|
28
|
|
|
18
|
|
Corporate
|
1,125
|
|
|
967
|
|
|
634
|
|
Total
|
$
|
12,502
|
|
|
$
|
18,253
|
|
|
$
|
20,378
|
|
Loss before income taxes and discontinued operations:
|
|
|
|
|
|
Segment level profit
|
$
|
50,102
|
|
|
$
|
62,532
|
|
|
$
|
58,671
|
|
Opening costs
|
(492
|
)
|
|
(787
|
)
|
|
(2,743
|
)
|
Depreciation and amortization
|
(20,438
|
)
|
|
(21,889
|
)
|
|
(21,407
|
)
|
Selling, general and administrative expenses
|
(37,878
|
)
|
|
(42,422
|
)
|
|
(38,759
|
)
|
Provision for asset impairments and restaurant closings, net
|
(10,567
|
)
|
|
(1,442
|
)
|
|
(636
|
)
|
Net gain on disposition of property and equipment
|
1,804
|
|
|
684
|
|
|
3,994
|
|
Interest income
|
8
|
|
|
4
|
|
|
4
|
|
Interest expense
|
(2,443
|
)
|
|
(2,247
|
)
|
|
(2,337
|
)
|
Other income, net
|
(454
|
)
|
|
186
|
|
|
521
|
|
Total
|
$
|
(20,358
|
)
|
|
$
|
(5,381
|
)
|
|
$
|
(2,692
|
)
|
(1) Includes vending revenue of
$547
,
$583
, and
$531 thousand
for the year ended
August 30, 2017
,
August 31, 2016
, and
August 26, 2015
, respectively.
(2) Company-owned restaurants segment includes
$9.1 million
of Fuddruckers trade name, Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles.
(3) Franchise operations segment includes approximately
$10.7 million
in royalty intangibles.
Note 3. Derivative Financial Instruments
The Company enters into derivative instruments, from time to time, to manage its exposure to changes in interest rates on a percentage of its long-term variable rate debt. On
December 14, 2016
, the Company entered into an interest rate swap, pay fixed - receive floating, with a constant notional amount of
$17.5 million
. The fixed swap rate we pay is
1.965%
, plus an applicable margin. The variable rate we receive is one-month LIBOR, plus an applicable margin. The term of the interest rate swap is
5 years
. The Company does not apply hedge accounting treatment to this derivative, therefore, changes in fair value of the instrument are recognized in Other income (expense), net. In fiscal
2017
, the changes in the interest rate swap fair value resulted in an expense of approximately
$266 thousand
.
The Company does not hold or use derivative instruments for trading purposes.
Note 4. Fair Value Measurement
GAAP establishes a framework for using fair value to measure assets and liabilities, and expands disclosure about fair value measurements. Fair value measurements guidance applies whenever other statements require or permit assets or liabilities to be measured at fair value.
GAAP
establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These include:
|
|
•
|
Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
|
•
|
Level 2: Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.
|
|
|
•
|
Level 3: Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value.
|
Recurring fair value measurements related to liabilities are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
Fiscal Year Ended August 30, 2017
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Valuation Method
|
Recurring Fair Value - Liabilities
|
|
|
(In thousands)
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
TSR Performance Based Incentive Plan
(1)
|
$
|
831
|
|
|
$
|
—
|
|
|
$
|
831
|
|
|
$
|
—
|
|
|
Monte Carlo Approach
|
Derivative - Interest Rate Swap
(2)
|
$
|
266
|
|
|
$
|
—
|
|
|
$
|
266
|
|
|
$
|
—
|
|
|
Discounted Cash Flow
|
Total liabilities at Fair Value
|
$
|
1,097
|
|
|
$
|
—
|
|
|
$
|
1,097
|
|
|
$
|
—
|
|
|
|
(1) The fair value of the Company's 2015, 2016, and 2017 Performance Based Incentive Plan liabilities were approximately
$496 thousand
,
$265 thousand
, and
$70 thousand
, respectively. See Note 14 to the Company's consolidated financial statements in Part II, Item 8 in this Form 10-K for further discussion of Performance Based Incentive Plan.
(2) The fair value of the interest rate swap is recorded in Other liabilities on the Company's Consolidated Balance Sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
Fiscal Year Ended August 31, 2016
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Valuation Method
|
Recurring Fair Value - Liabilities
|
|
|
(In thousands)
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
TSR Performance Based Incentive Plan
(1)
|
$
|
793
|
|
|
$
|
—
|
|
|
$
|
793
|
|
|
$
|
—
|
|
|
Monte Carlo Approach
|
(1) The fair value of the Company's 2015 and 2016 Performance Based Incentive Plan liabilities were approximately
$412 thousand
and
$381 thousand
, respectively. See Note 14 to the Company's consolidated financial statements in Part II, Item 8 in this Form 10-K for further discussion of Performance Based Incentive Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
Fiscal Year Ended August 26, 2015
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Valuation Method
|
Recurring Fair Value - Liabilities
|
|
|
(In thousands)
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
TSR Performance Based Incentive Plan
(1)
|
$
|
108
|
|
|
—
|
|
|
$
|
108
|
|
|
—
|
|
|
Monte Carlo Approach
|
(1) The fair value of the Company's 2015 Performance Based Incentive Plan liabilities was approximately
$108 thousand
.
Non-recurring fair value measurements related to impaired property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
Fiscal Year Ended August 30, 2017
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Impairments
(4)
|
Nonrecurring Fair Value Measurements
|
|
|
(In thousands)
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
Property and equipment related to Company-owned restaurants
(1)
|
$
|
5,519
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,519
|
|
|
$
|
(8,571
|
)
|
Goodwill
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(537
|
)
|
Property held for sale
(3)
|
3,372
|
|
|
—
|
|
|
—
|
|
|
3,372
|
|
|
(977
|
)
|
Total Nonrecurring Fair Value Measurements
|
$
|
8,891
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,891
|
|
|
$
|
(10,085
|
)
|
(1) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of approximately
$14.1 million
were written down to their fair value of approximately
$5.5 million
, resulting in an impairment charge of approximately
$8.6 million
.
(2) In accordance with Subtopic 350-20, goodwill with a carrying amount of approximately
$537 thousand
was written down to its implied fair value of approximately
zero
, resulting in an impairment charge of
$537 thousand
. See Note 7 and Note 11 to the Company's 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 a carrying value of approximately
$5.5 million
were written down to their fair value of approximately
$3.4 million
, less costs to sell, resulting in an impairment charge of approximately
$1.0 million
. Proceeds on the sale of one property previously recorded in Property held for sale amounted to approximately
$1.2 million
.
(4) Total impairments are included in Provision for asset impairments and restaurant closings in the Company's Consolidated Statement of Operations for the fiscal year ended
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
Fiscal Year Ended August 31, 2016
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Impairments
(4)
|
Nonrecurring Fair Value Measurements
|
(In thousands)
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
Property and equipment related to Company-owned restaurants
(1)
|
$
|
959
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
959
|
|
|
$
|
(738
|
)
|
Goodwill
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(38
|
)
|
Property held for sale
(3)
|
1,290
|
|
|
—
|
|
|
—
|
|
|
1,290
|
|
|
(463
|
)
|
Total Nonrecurring Fair Value Measurements
|
$
|
2,249
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,249
|
|
|
$
|
(1,239
|
)
|
(1) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of approximately
$1.7 million
were written down to their fair value of approximately
$1.0 million
, resulting in an impairment charge of approximately
$0.7 million
.
(2) In accordance with Subtopic 350-20, goodwill with a carrying amount of approximately
$38 thousand
was written down to its implied fair value of approximately
zero
, resulting in an impairment charge of
$38 thousand
. See Note 7 and Note 11 to the Company's 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 a carrying value of
$1.8 million
were written down to their fair value of approximately
$1.3 million
, less costs to sell, resulting in an impairment charge of approximately
$0.5 million
.
(4) Total impairments are included in Provision for asset impairments and restaurant closings in the Company's Consolidated Statement of Operations for the fiscal year ended
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
Fiscal Year Ended August 26, 2015
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Impairments
(3)
|
Nonrecurring Fair Value Measurements
|
|
|
(In thousands)
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
Property and equipment related to Company-owned restaurants
(1)
|
$
|
1,350
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,350
|
|
|
$
|
(598
|
)
|
Goodwill
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(38
|
)
|
Total Nonrecurring Fair Value Measurements
|
$
|
1,350
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,350
|
|
|
$
|
(636
|
)
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
Property and equipment related to corporate assets
|
$
|
865
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
865
|
|
|
$
|
(90
|
)
|
(1) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of approximately
$1.9 million
were written down to their fair value of approximately
$1.3 million
, resulting in an impairment charge of approximately
$0.6 million
, which was included in earnings for the period.
(2) In accordance with Subtopic 350-20, goodwill with a carrying amount of approximately
$38 thousand
was written down to its implied fair value of approximately
zero
, resulting in an impairment charge of
$38 thousand
. See Note 7 and Note 11 to the Company's consolidated financial statements in this Form 10-K for further discussion of goodwill.
(3) Total impairments are included in Provision for asset impairments and restaurant closings in the Company's Consolidated Statement of Operations for the fiscal year ended
2015
.
Note 5. Trade Receivables and Other
Trade and other receivables, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
August 30,
2017
|
|
August 31,
2016
|
|
(In thousands)
|
Trade and other receivables
|
$
|
5,966
|
|
|
$
|
5,161
|
|
Franchise royalties and marketing and advertising receivables
|
687
|
|
|
839
|
|
Trade receivables, unbilled
|
1,633
|
|
|
—
|
|
Allowance for doubtful accounts
|
(275
|
)
|
|
(81
|
)
|
Total Trade accounts and other receivables, net
|
$
|
8,011
|
|
|
$
|
5,919
|
|
CCS receivable balance at
August 30, 2017
was
$5.0 million
, primarily the result of
14
contracts with balances of approximately
$0.1 million
to approximately
$2.3 million
per contract entity. These
14
collectively represented approximately
58%
of the Company’s total accounts receivables. Contract payment terms for its CCS customers’ receivables are due within
30
to
45
days. The Company's fiscal
2017
ended one day prior to calendar month end and fiscal
2016
ended at a calendar month end. Trade receivables, unbilled, was approximately
$1.6 million
at
August 30, 2017
and
$0.0 million
at
August 31, 2016
. CCS contracts are billed on a calendar month end basis and represent the total balance of Trade receivables, unbilled.
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 30, 2017
was approximately
$0.7 million
. At
August 30, 2017
, the Company had
113
operating franchise restaurants with no 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended
|
|
August 30,
2017
|
|
August 31,
2016
|
|
August 26,
2015
|
|
(In thousands)
|
Beginning balance
|
$
|
81
|
|
|
$
|
555
|
|
|
$
|
512
|
|
Provisions (reversal) for doubtful accounts
|
200
|
|
|
(18
|
)
|
|
51
|
|
Write-offs
(1)
|
(6
|
)
|
|
(456
|
)
|
|
(8
|
)
|
Ending balance
|
$
|
275
|
|
|
$
|
81
|
|
|
$
|
555
|
|
(1) The approximate
$0.5 million
Balance Sheet write-off in fiscal 2016 resulted from uncollectable receivables at
three
Culinary Contract Services accounts previously reserved for approximately
$0.1 million
,
$0.3 million
, and
$33.0 thousand
in fiscal 2011, 2012, and 2013, respectively.
Note 6. Income Taxes
The following table details the categories of total income tax assets and liabilities for both continuing and discontinued operations resulting from the cumulative tax effects of temporary differences:
|
|
|
|
|
|
|
|
|
|
August 30,
2017
|
|
August 31,
2016
|
|
(In thousands)
|
Deferred income tax assets:
|
|
|
|
Workers’ compensation, employee injury, and general liability claims
|
$
|
486
|
|
|
$
|
466
|
|
Deferred compensation
|
437
|
|
|
552
|
|
Net operating losses
|
2,140
|
|
|
1,258
|
|
General business and foreign tax credits
|
11,599
|
|
|
11,010
|
|
Depreciation, amortization and impairments
|
7,515
|
|
|
1,879
|
|
Straight-line rent, dining cards, accruals, and other
|
4,392
|
|
|
3,812
|
|
Subtotal
|
26,569
|
|
|
18,977
|
|
Valuation allowance
|
(16,871
|
)
|
|
(6,905
|
)
|
Total deferred income tax assets
|
9,698
|
|
|
12,072
|
|
Deferred income tax liabilities:
|
|
|
|
Property taxes and other
|
1,916
|
|
|
1,828
|
|
Total deferred income tax liabilities
|
1,916
|
|
|
1,828
|
|
Net deferred income tax asset
|
$
|
7,782
|
|
|
$
|
10,244
|
|
The Company had deferred tax assets, excluding liabilities, at
August 30, 2017
of approximately
$9.7 million
, the most significant of which include the Company’s general business tax credits carryovers to future years of approximately
$11.1 million
. This item may be carried forward up to
twenty
(
20
) 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
2037
, 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 taxable temporary differences, identified tax-planning strategy, the results of recent operations, and where appropriate, projected future taxable income. We have negative evidence in the form of cumulative losses in recent years, a significant source of which was due to a number of underperforming restaurant locations, principally all of which have, as of this time, been disposed of under the Company's disposal plan. The presence of a cumulative loss in recent years, generally limits our ability to consider projections of future earnings in assessing realization of our deferred tax assets.
Notwithstanding, we have objective positive evidence in the form of (i) identified tax planning strategy and (ii) an excess of appreciated asset value over the tax basis of properties within the Company's portfolio of real estate in an amount sufficient to realize certain of our deferred tax assets. Tax planning strategy includes the acceleration of unrealized gains from our owned property locations through sale or exchange, if and when necessary on a selective basis, to realize deferred tax assets including federal tax credit carryovers. We regularly evaluate our portfolio of owned properties, long-lived assets and their relative values, for many different business purposes, and have estimated the resulting unrealized net gains thereon to be of sufficient amount to realize certain of our deferred tax assets.
Collectively, the available evidence supports an assertion that our deferred tax assets will be realized, but with the exception of a certain portion of the Company's general business and foreign tax credit carryovers that are not likely at this time to be realized, and on which the Company has established a valuation allowance. The general business credits and foreign tax credit carryovers generally expire if unused within
twenty
(
20
) years and
ten
(
10
) years, respectively. We have, as a result of the foregoing assessment, increased the valuation allowance by an additional
$10.0 million
during fiscal 2017 to a
$16.9 million
valuation allowance for deferred tax assets that are not likely to be realized prior to their expiration. The resulting valuation allowance increase is principally attributable to changes for this fiscal year in appreciated asset values of real estate properties considered in the Company's identified tax planning strategy.
An analysis of the provision for income taxes for continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 30,
2017
|
|
August 31,
2016
|
|
August 26,
2015
|
|
(In thousands)
|
Current federal and state income tax expense
|
$
|
329
|
|
|
$
|
128
|
|
|
$
|
523
|
|
Current foreign income tax expense
|
84
|
|
|
82
|
|
|
63
|
|
Deferred income tax expense (benefit)
|
2,025
|
|
|
4,665
|
|
|
(1,662
|
)
|
Total income tax expense (benefit)
|
$
|
2,438
|
|
|
$
|
4,875
|
|
|
$
|
(1,076
|
)
|
Relative only to continuing operations, the reconciliation of the expense (benefit) for income taxes to the expected income tax expense (benefit), computed using the statutory tax rate, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended
|
|
August 30,
2017
|
|
August 31,
2016
|
|
August 26,
2015
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
(In thousands and as a percent of pretax loss from continuing operations)
|
Income tax benefit from continuing operations at the federal rate
|
$
|
(6,922
|
)
|
|
34.0
|
%
|
|
$
|
(1,830
|
)
|
|
34.0
|
%
|
|
$
|
(832
|
)
|
|
34.0
|
%
|
Permanent and other differences:
|
|
|
|
|
|
|
|
|
|
|
|
Federal jobs tax credits (wage deductions)
|
200
|
|
|
(1.0
|
)
|
|
226
|
|
|
(4.2
|
)
|
|
302
|
|
|
(12.3
|
)
|
Stock options and restricted stock
|
129
|
|
|
(0.6
|
)
|
|
165
|
|
|
(3.1
|
)
|
|
74
|
|
|
(3.0
|
)
|
Other permanent differences
|
62
|
|
|
(0.3
|
)
|
|
74
|
|
|
(1.4
|
)
|
|
60
|
|
|
(2.5
|
)
|
State income tax, net of federal benefit
|
(45
|
)
|
|
0.2
|
|
|
94
|
|
|
(1.7
|
)
|
|
200
|
|
|
(8.2
|
)
|
General Business Tax Credits
|
(589
|
)
|
|
2.9
|
|
|
(665
|
)
|
|
12.4
|
|
|
(888
|
)
|
|
36.3
|
|
Other
|
84
|
|
|
(0.4
|
)
|
|
(94
|
)
|
|
1.7
|
|
|
8
|
|
|
(0.3
|
)
|
Change in valuation allowance
|
9,519
|
|
|
(46.8
|
)
|
|
6,905
|
|
|
(128.3
|
)
|
|
—
|
|
|
—
|
|
Income tax expense (benefit) from continuing operations
|
$
|
2,438
|
|
|
(12.0
|
)%
|
|
$
|
4,875
|
|
|
(90.6
|
)%
|
|
$
|
(1,076
|
)
|
|
44.0
|
%
|
For the fiscal year ended
August 30, 2017
, including both continuing and discontinued operations, the Company is estimated to report a federal taxable loss of approximately
$3.0 million
.
For the fiscal year ended
August 31, 2016
, including both continuing and discontinued operations, the Company generated federal taxable income of approximately
$3.1 million
.
For the fiscal year ended
August 26, 2015
, including both continuing and discontinued operations, the Company generated federal taxable income of approximately
$0.4 million
.
Our income tax filings are periodically examined by various federal and state jurisdictions. The State of Louisiana is currently examining tax returns for fiscal 2014 and 2015.
There were
no
payments of federal income taxes in fiscal
2015
,
2016
or
2017
. The Company has income tax filing requirements in over
30
states. State income tax payments were approximately
$0.4 million
,
$0.4 million
, and
$0.7 million
in fiscal
2017
,
2016
, and
2015
, respectively.
The following table is a reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of fiscal
2015
,
2016
and
2017
(in thousands):
|
|
|
|
|
Balance as of August 27, 2014
|
$
|
62
|
|
Decrease based on prior year tax positions
|
—
|
|
Interest Expense
|
1
|
|
Balance as of August 26, 2015
|
$
|
63
|
|
Decrease based on prior year tax positions
|
(18
|
)
|
Interest Expense
|
—
|
|
Balance as of August 31, 2016
|
$
|
45
|
|
Decrease based on prior year tax positions
|
(20
|
)
|
Interest Expense
|
—
|
|
Balance as of August 30, 2017
|
$
|
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 30, 2017
. The Company has included interest or penalties related to income tax matters as part of income tax expense (or benefit).
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 30, 2017
.
Management believes that adequate provisions for income taxes have been reflected in the financial statements and is not aware of any significant exposure items that have not been reflected in the financial statements. Amounts considered probable of settlement within one year have been included in the accrued expenses and other liabilities in the accompanying consolidated balance sheet.
Note 7. Property and Equipment, Intangible Assets and Goodwill
The cost, net of impairment, and accumulated depreciation of property and equipment at
August 30, 2017
and
August 31, 2016
, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 30, 2017
|
|
August 31, 2016
|
|
Estimated
Useful Lives (years)
|
|
(In thousands)
|
|
|
|
|
|
|
Land
|
$
|
60,414
|
|
|
$
|
61,940
|
|
|
|
|
—
|
|
|
Restaurant equipment and furnishings
|
73,411
|
|
|
75,764
|
|
|
3
|
|
to
|
|
15
|
Buildings
|
153,041
|
|
|
157,006
|
|
|
20
|
|
to
|
|
33
|
Leasehold and leasehold improvements
|
26,953
|
|
|
25,973
|
|
|
|
|
Lesser of lease term or
estimated useful life
|
|
|
Office furniture and equipment
|
3,684
|
|
|
3,277
|
|
|
3
|
|
to
|
|
10
|
Construction in progress
|
35
|
|
|
145
|
|
|
|
|
—
|
|
|
|
317,538
|
|
|
324,105
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
(144,724
|
)
|
|
(130,887
|
)
|
|
|
|
|
|
|
Property and equipment, net
|
$
|
172,814
|
|
|
$
|
193,218
|
|
|
|
|
|
|
|
Intangible assets, net
|
$
|
19,640
|
|
|
$
|
21,074
|
|
|
15
|
|
to
|
|
21
|
Goodwill
|
$
|
1,068
|
|
|
$
|
1,605
|
|
|
|
|
|
|
|
Intangible assets, net, consist 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 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 6, 2012.
The aggregate amortization expense related to intangible assets subject to amortization for fiscal
2017
,
2016
, and
2015
was approximately
$1.4 million
,
$1.4 million
, and
$1.4 million
, respectively. The aggregate amortization expense related to intangible assets subject to amortization is expected to be approximately
$1.4 million
in each of the next five successive years.
The following table presents intangible assets as of
August 30, 2017
and
August 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 30, 2017
|
|
August 31, 2016
|
|
(In thousands)
|
|
(In thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated Amortization
|
|
Net
Carrying
Amount
|
Intangible Assets Subject to Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Fuddruckers trade name and franchise agreements
|
$
|
29,486
|
|
|
$
|
(9,943
|
)
|
|
$
|
19,543
|
|
|
$
|
29,486
|
|
|
$
|
(8,535
|
)
|
|
$
|
20,951
|
|
Cheeseburger in Paradise trade name and license agreements
|
$
|
421
|
|
|
$
|
(324
|
)
|
|
$
|
97
|
|
|
$
|
421
|
|
|
$
|
(298
|
)
|
|
$
|
123
|
|
Intangible assets, net
|
$
|
29,907
|
|
|
$
|
(10,267
|
)
|
|
$
|
19,640
|
|
|
$
|
29,907
|
|
|
$
|
(8,833
|
)
|
|
$
|
21,074
|
|
In fiscal 2010, the Company recorded an intangible asset for goodwill in the amount of approximately
$0.2 million
related to the acquisition of substantially all of the assets of Fuddruckers. The Company also recorded, in fiscal 2013, an intangible asset for goodwill in the amount of approximately
$2.0 million
related to the acquisition of Cheeseburger in Paradise. Goodwill is considered to have an indefinite useful life and is not amortized.
The Company performs a goodwill impairment test annually and more frequently when negative conditions or a triggering event arise. After an assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative test(s) become optional. For the annual analysis in fiscal
2017
,
2016
and
2015
, the Company elected to bypass the qualitative assessment and proceeded directly to performing the first step of the goodwill impairment test. In future periods, the Company may determine that facts and circumstances indicate use of the qualitative assessment may be the most reasonable approach. Management performed its formal annual assessment as of the second quarter of each fiscal year. The individual restaurant level is the level at which goodwill is assessed for impairment under ASC 350. In accordance with our understanding of ASC 350, we have allocated the goodwill value to each reporting unit in proportion to each location’s fair value at the date of acquisition. The result of these assessments were impairment of goodwill of approximately
$537 thousand
,
$38 thousand
, and
$38 thousand
in fiscal
2017
,
2016
, and
2015
, respectively. The Company will formally perform additional assessments on an interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists. As of
November 7, 2017
, of the
23
Cheeseburger in Paradise locations that were acquired,
seven
locations remain operating as Cheeseburger in Paradise restaurants and of the restaurants closed for conversion to Fuddruckers
five
locations remain operating as a Fuddruckers restaurant.
Three
locations were removed due to their lease term expiring,
three
locations were subleased to franchisees, and the remaining
five
locations were closed and held for future use. As we are not moving any of the former Cheeseburger in Paradise restaurants out of their respective market, the goodwill associated with the acquired location and market area is expected to be realized through operating these former Cheeseburger in Paradise branded restaurants as Fuddruckers branded restaurants. The Company has experience converting and opening new restaurant locations and the Fuddruckers brand units have positive cash flow history. This historical data was considered when completing our fair value estimates for recovery of the remaining net book value including goodwill. In addition, we included the incremental conversion costs in our cash flow projections when completing our routine impairment of long-lived assets testing. Management has therefore performed valuations using a discounted cash flow analysis for each of its restaurants to determine the fair value of each reporting unit for comparison with the reporting unit’s carrying value.
Goodwill, net of accumulated impairments of approximately
$1.1 million
and
$0.6 million
in fiscal
2017
and
2016
, respectively, was approximately
$1.1 million
as of
August 30, 2017
and
$1.6 million
as of
August 31, 2016
and relates to our Company-owned restaurants reportable segment.
Note 8. Current Accrued Expenses and Other Liabilities
The following table sets forth current accrued expenses and other liabilities as of
August 30, 2017
and
August 31, 2016
:
|
|
|
|
|
|
|
|
|
|
August 30,
2017
|
|
August 31,
2016
|
|
(In thousands)
|
Salaries, compensated absences, incentives, and bonuses
(1)
|
$
|
5,339
|
|
|
$
|
4,184
|
|
Operating expenses
|
1,041
|
|
|
1,118
|
|
Unredeemed gift cards and certificates
|
7,298
|
|
|
6,269
|
|
Taxes, other than income
|
9,423
|
|
|
7,882
|
|
Accrued claims and insurance
|
1,505
|
|
|
1,577
|
|
Income taxes, legal and other
|
3,470
|
|
|
2,722
|
|
Total
|
$
|
28,076
|
|
|
$
|
23,752
|
|
(1) Salaries, compensated absences, incentives, and bonuses include the award value of the 2015 Performance Based Incentive Plan liability in the amount of
$496 thousand
at
August 30, 2017
.
Note 9. Other Long-Term Liabilities
The following table sets forth other long-term liabilities as of
August 30, 2017
and
August 31, 2016
:
|
|
|
|
|
|
|
|
|
|
August 30,
2017
|
|
August 31,
2016
|
|
(In thousands)
|
Workers’ compensation and general liability insurance reserve
|
$
|
923
|
|
|
$
|
986
|
|
Capital leases
|
109
|
|
|
44
|
|
Deferred rent and unfavorable leases
|
5,297
|
|
|
5,565
|
|
Deferred compensation
(1)
|
426
|
|
|
895
|
|
Fair value derivative - Interest Rate Swap
|
266
|
|
|
—
|
|
Other
|
290
|
|
|
262
|
|
Total
|
$
|
7,311
|
|
|
$
|
7,752
|
|
(1) Deferred compensation includes 2016 and 2017 Performance Based Incentive Plan liabilities in the amount of approximately
$266 thousand
and approximately
$70 thousand
, respectively, at
August 30, 2017
and 2015 and 2016 Performance Based Incentive Plan liabilities in the amount of approximately
$412 thousand
and
$380 thousand
, respectively, at
August 31, 2016
.
Note 10. Debt
The following table summarizes credit facility debt, less current portion at
August 30, 2017
and
August 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 30,
2017
|
|
August 31, 2016
|
|
(In thousands)
|
2013 Credit Agreement - Revolver
|
$
|
—
|
|
|
$
|
37,000
|
|
2016 Credit Agreement - Revolver
|
4,400
|
|
|
—
|
|
2016 Credit Agreement - Term Loan
|
26,585
|
|
|
—
|
|
Total credit facility debt
|
30,985
|
|
|
37,000
|
|
Less unamortized debt issue costs
|
(287
|
)
|
|
—
|
|
Total credit facility debt, less unamortized debt issuance costs
|
30,698
|
|
|
37,000
|
|
Current portion of credit facility debt
|
—
|
|
|
—
|
|
Total
|
30,698
|
|
|
37,000
|
|
On November 8, 2016, we refinanced the Company's 2013 Credit Facility with a new
$65.0 million
Senior Secured Credit Agreement. The debt issue costs the Company incurred on the new 2016 Credit Agreement financing amounted to approximately
$0.6 million
of which approximately
$0.3 million
was applicable to the Term Loan and was setup on a pro-rata basis as a liability, which is included in credit facility debt, less current portion.
Senior Secured Credit Agreement
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, as amended, is comprised of a
$30.0 million
5
-year Revolver (the “Revolver”) and a
$35.0 million
5
-year Term Loan (the “Term Loan”). The maturity date of the 2016 Credit Agreement is
November 8, 2021
. For this section of the form 10-K, capitalized terms that are used but not otherwise defined shall have the meanings give to such terms in the 2016 Credit Agreement.
The Term Loan and/or Revolver commitments may be increased by up to an additional
$10.0 million
in the aggregate.
The 2016 Credit Agreement also provides for the issuance of letters of credit in an aggregate amount equal to the lesser of
$5.0 million
and the Revolving Credit Commitment, which was
$30.0 million
as of
November 8, 2016
. The 2016 Credit Agreement is guaranteed by all of the Company’s present subsidiaries and will be guaranteed by the Company's future subsidiaries.
At any time throughout the term of the 2016 Credit Agreement, the Company has the option to elect one of two bases of interest rates. One interest rate option is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus
0.50%
and (c) 30-day LIBOR plus
1.00%
, plus, in each case, the Applicable Margin, which ranges from
1.50%
to
2.50%
per annum. The other interest rate option is LIBOR plus the Applicable Margin, which ranges from
2.50%
to
3.50%
per annum. The Applicable margin under each option is dependent upon the Company's Consolidated Total Lease Adjusted Leverage Ratio ("CTLAL") at the most recent quarterly determination date.
The Term Loan amortizes
7.00%
per year (
35%
in
5
years) which includes the quarterly payment of principal. On December 14, 2016, The Company entered into an interest rate swap with a notional amount of
$17.5 million
, representing
50%
of the initial outstanding Term Loan.
The Company is 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, ranging from
0.30%
to
0.35%
per annum depending on the CTLAL at the most recent quarterly determination date.
The proceeds of the 2016 Credit Agreement are 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 the Company's 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, contains the following covenants among others:
|
|
•
|
CTLAL of not more than (i)
5.00
to 1.00 at all times through and including the third fiscal quarter of the Borrower’s fiscal 2018, and (ii)
4.75
to 1.00 at all times thereafter,
|
|
|
•
|
Consolidated Fixed Charge Coverage Ratio of not less than
1.25
to 1.00, at the end of each fiscal quarter,
|
|
|
•
|
Limit on Growth Capital Expenditures so long as the CTLAL is at least
0.25
x less than the then-applicable permitted maximum CTLAL,
|
|
|
•
|
restrictions on mergers, acquisitions, consolidations and asset sales,
|
|
|
•
|
restrictions on the payment of dividends, redemption of stock and other distributions,
|
|
|
•
|
restrictions on incurring indebtedness, including certain guarantees and capital lease obligations,
|
|
|
•
|
restrictions on incurring liens on certain of our property and the property of our subsidiaries,
|
|
|
•
|
restrictions on transactions with affiliates and materially changing our business,
|
|
|
•
|
restrictions on making certain investments, loans, advances and guarantees,
|
|
|
•
|
restrictions on selling assets outside the ordinary course of business,
|
|
|
•
|
prohibitions on entering into sale and leaseback transactions, and
|
|
|
•
|
restrictions on certain acquisitions of all or a substantial portion of the assets, property and/or equity interests of any person, including share repurchases and dividends.
|
The 2016 Credit Agreement is secured by substantially all of the Company’s personal property, including without limitation the equity interest in each subsidiary of the Company. The 2016 Credit Agreement also includes customary events of default. If a default occurs and is continuing, the lenders’ commitments under the 2016 Credit Agreement may be immediately terminated and/or the Company may be required to repay all amounts outstanding under the 2016 Credit Agreement.
As of
August 30, 2017
, the Company had
$31.0 million
in total outstanding loans and approximately
$1.3 million
committed under letters of credit, which is used as security for the payment of insurance obligations, and approximately
$0.1 million
in other indebtedness.
The Company was in compliance with the covenants contained in the 2016 Credit Agreement as of
August 30, 2017
. At any determination date, if certain leverage and fixed charge coverage ratios exceed the maximum permitted under the Company's 2016 Credit Agreement, the Company would be considered in default under the terms of the agreement. Due to negative results in fiscal
2017
, continued under performance could cause the Company's financial ratios to exceed the permitted limits under the terms of the 2016 Credit Agreement.
2013 Credit Agreement
In August 2013, the Company entered into a
$70.0 million
revolving credit facility with Wells Fargo Bank, National Association, as Administrative Agent, and ZB, N.A. dba Amegy Bank (formerly Amegy Bank, N.A.), as Syndication Agent. Pursuant to the October 2, 2015 amendment, the total aggregate amount of the lenders' commitments was lowered to
$60 million
from
$70.0 million
. The following description summarizes the material terms of the revolving credit facility, as subsequently amended on March 21, 2014, November 7, 2014 and October 2, 2015, (the revolving credit facility is referred to as the “2013 Credit Facility”). The 2013 Credit Facility was governed by the credit agreement dated as of August 14, 2013 (the “2013 Credit Agreement”) among the Company, the lenders from time to time party thereto, Wells Fargo Bank, National Association, as Administrative Agent, and ZB, N.A. dba Amegy Bank (formerly Amegy Bank, N.A.), as Syndication Agent. The maturity date of the 2013 Credit Facility was September 1, 2017.
The 2013 Credit Facility also provided for the issuance of letters of credit in a maximum aggregate amount of
$5.0 million
outstanding as of
August 14, 2013
and
$15.0 million
outstanding at any one time with prior written consent of the Administrative Agent and the Issuing Bank.
At any time throughout the term of the 2013 Credit Facility, the Company had the option to elect one of two bases of interest rates. One interest rate option was the greater of (a) the Federal Funds Effective Rate plus
0.50%
, or (b) prime, plus, in either case, an applicable spread that ranges from
0.75%
to
2.25%
per annum. The other interest rate option was the London InterBank Offered Rate plus a spread that ranges from
2.50%
to
4.0%
per annum. The applicable spread under each option was dependent upon the ratio of the Company's debt to EBITDA at the most recent determination date.
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, ranging from
0.30%
to
0.40%
per annum depending on the Total Leverage Ratio at the most recent determination date.
The proceeds of the 2013 Credit Facility was available for the Company’s general corporate purposes and general working capital purposes and capital expenditures.
The 2013 Credit Agreement, as amended, contained the following covenants among others:
|
|
•
|
Debt Service Coverage Ratio of not less than (i)
1.10
to 1.00 at all times during the first, second and third fiscal quarters of the Borrower’s fiscal
2015
, (ii)
1.25
to 1.00 at all times during the fourth fiscal quarter of the Borrower’s fiscal
2015
, and (iii)
1.50
to 1.00 at all times thereafter,
|
|
|
•
|
Lease Adjusted Leverage Ratio of not more than (i)
5.75
to 1.00 at all times during the first, second and third fiscal quarters of the Borrower’s fiscal
2015
, (ii)
5.50
to 1.00 at all times during the fourth fiscal quarter of the Borrower’s fiscal
2015
, (iii)
5.25
to 1.00 at all times during the first fiscal quarter of the Borrower’s fiscal
2016
, (iv)
5.00
to 1.00 at all times during the second fiscal quarter of the Borrower’s fiscal
2016
, and (v)
4.75
to 1.00 at all times thereafter,
|
|
|
•
|
capital expenditures limited to
$25.0 million
per year,
|
|
|
•
|
restrictions on incurring indebtedness, including certain guarantees and capital lease obligations,
|
|
|
•
|
restrictions on incurring liens on certain of our property and the property of our subsidiaries,
|
|
|
•
|
restrictions on transactions with affiliates and materially changing our business,
|
|
|
•
|
restrictions on making certain investments, loans, advances and guarantees,
|
|
|
•
|
restrictions on selling assets outside the ordinary course of business,
|
|
|
•
|
prohibitions on entering into sale and leaseback transactions, and
|
|
|
•
|
restrictions on certain acquisitions of all or a substantial portion of the assets, property and/or equity interests of any person, including share repurchases and dividends.
|
The 2013 Credit Agreement also included customary events of default. If a default occured and continued, the lenders’ commitments under the 2013 Credit Facility may have be immediately terminated and, or the Company could have been required to repay all amounts outstanding under the 2013 Credit Facility.
The 2013 Credit Facility was secured by a perfected first priority lien on certain of the Company's real property and all of the material personal property owned by the Company or any of its subsidiaries, other than certain excluded assets (as defined in the Credit Agreement).
Interest Expense
Total interest expense incurred for fiscal
2017
,
2016
, and
2015
was approximately
$2.2 million
,
$2.2 million
, and
$2.3 million
, respectively. Interest paid was approximately
$1.8 million
,
$1.9 million
, and
$2.1 million
in fiscal
2017
,
2016
, and
2015
, respectively.
No
interest expense was allocated to discontinued operations in fiscal
2017
,
2016
, or
2015
. Interest was capitalized on properties in fiscal
2017
,
2016
, and
2015
, in the amounts of
zero
,
zero
, and
$80 thousand
, respectively.
Note 11. 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 (credits) to income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended
|
|
August 30, 2017
|
|
August 31, 2016
|
|
August 26, 2015
|
|
(In thousands, except per share data)
|
Provision for asset impairments and restaurant closings
|
$
|
10,567
|
|
|
$
|
1,442
|
|
|
$
|
636
|
|
Net gain on disposition of property and equipment
|
(1,804
|
)
|
|
(684
|
)
|
|
(3,994
|
)
|
|
|
|
|
|
|
Total
|
$
|
8,763
|
|
|
$
|
758
|
|
|
$
|
(3,358
|
)
|
Effect on EPS:
|
|
|
|
|
|
Basic
|
$
|
(0.29
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.12
|
|
Assuming dilution
|
$
|
(0.29
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.12
|
|
The approximate
$10.6 million
impairment charge in fiscal
2017
is primarily related to assets impaired at
17
property locations, goodwill at
six
property locations,
five
properties held for sale written down to their fair value, and a reserve for
10
restaurant closings of approximately
$482 thousand
.
The approximate
$1.8 million
net gain on disposition of property and equipment in fiscal
2017
is primarily related to the gain on the sale of
six
properties of approximately
$2.4 million
partially offset by routine asset retirements.
The approximate
$1.4 million
impairment charge in fiscal
2016
is primarily related to assets impaired at
4
property locations, goodwill at
one
property location, and a reserve for
four
restaurant closings of approximately
$202 thousand
.
The approximate
$0.7 million
net gain on disposition of property and equipment in fiscal
2016
is primarily related to the gain on the sale of
two
properties of approximately
1.0 million
partially offset by routine asset retirements.
The approximate
$0.6 million
impairment charge in fiscal
2015
is primarily related to
three
property locations.
The approximate
$4.0 million
net gain on disposition of property and equipment in fiscal
2015
is primarily related to the gain on the sale of
five
properties of approximately
$4.5 million
partially offset by routine asset retirements.
Discontinued Operations
On March 21, 2014, the Board of Directors of the Company approved a plan focused on improving cash flow from the acquired Cheeseburger in Paradise leasehold locations. This underperforming Cheeseburger in Paradise leasehold disposal plan called for five or more units to be closed or converted to Fuddruckers restaurants. As of
August 30, 2017
,
no
locations remain classified as discontinued operations in this plan.
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 30, 2017
,
one
location remains held for sale.
The following table sets forth the assets and liabilities for all discontinued operations:
|
|
|
|
|
|
|
|
|
|
August 30,
2017
|
|
August 31,
2016
|
|
(In thousands)
|
Prepaid expenses
|
$
|
—
|
|
|
$
|
1
|
|
Assets related to discontinued operations—current
|
$
|
—
|
|
|
$
|
1
|
|
Property and equipment
|
$
|
1,872
|
|
|
$
|
1,872
|
|
Deferred tax assets
|
883
|
|
|
1,320
|
|
Assets related to discontinued operations—non-current
|
$
|
2,755
|
|
|
$
|
3,192
|
|
Deferred income taxes
|
$
|
354
|
|
|
$
|
361
|
|
Accrued expenses and other liabilities
|
13
|
|
|
51
|
|
Liabilities related to discontinued operations—current
|
$
|
367
|
|
|
$
|
412
|
|
Other liabilities
|
$
|
16
|
|
|
$
|
17
|
|
Liabilities related to discontinued operations—non-current
|
$
|
16
|
|
|
$
|
17
|
|
As of
August 30, 2017
, under both closure plans, the Company had
one
property classified as discontinued operations. The asset carrying value of the owned property was approximately
$1.9 million
and is included in assets related to discontinued operations. The Company is actively marketing this property for sale and has
one
property with a ground lease previously impaired to
zero
.
The following table sets forth the sales and pretax losses reported for all discontinued locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended
|
|
August 30,
2017
|
|
August 31,
2016
|
|
August 26,
2015
|
|
(In thousands, except locations)
|
Sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Pretax loss
|
$
|
(28
|
)
|
|
$
|
(136
|
)
|
|
$
|
(864
|
)
|
Income tax benefit on discontinued operations
|
$
|
(438
|
)
|
|
$
|
46
|
|
|
$
|
406
|
|
Loss on discontinued operations
|
$
|
(466
|
)
|
|
$
|
(90
|
)
|
|
$
|
(458
|
)
|
Discontinued locations closed during the period
|
0
|
|
|
0
|
|
|
0
|
|
The following table summarizes discontinued operations for fiscal
2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended
|
|
August 30,
2017
|
|
August 31,
2016
|
|
August 26,
2015
|
|
(In thousands, except per share data)
|
Discontinued operating losses
|
$
|
(28
|
)
|
|
$
|
(161
|
)
|
|
$
|
(890
|
)
|
Impairments
|
—
|
|
|
—
|
|
|
(90
|
)
|
Gains
|
—
|
|
|
25
|
|
|
116
|
|
Net loss
|
$
|
(28
|
)
|
|
$
|
(136
|
)
|
|
$
|
(864
|
)
|
Income tax benefit (expense) from discontinued operations
|
(438
|
)
|
|
46
|
|
|
406
|
|
Loss from discontinued operations, net of income taxes
|
$
|
(466
|
)
|
|
$
|
(90
|
)
|
|
$
|
(458
|
)
|
Effect on EPS from discontinued operations—decrease—basic
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
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 30, 2017
, the Company had
four
owned properties recorded at approximately
$3.4 million
in property held for sale.
At
August 31, 2016
, the Company had
five
owned properties recorded at approximately
$5.5 million
in property held for sale.
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
2017
,
2016
, and
2015
is provided below
(in thousands)
:
|
|
|
|
|
Balance as of August 27, 2014
|
$
|
991
|
|
Disposals
|
(3,203
|
)
|
Net transfers to property held for sale
|
6,748
|
|
Balance as of August 26, 2015
|
$
|
4,536
|
|
Disposals
|
(1,488
|
)
|
Net transfers to property held for sale
|
2,937
|
|
Adjustment to fair value
|
(463
|
)
|
Balance as of August 31, 2016
|
$
|
5,522
|
|
Disposals
|
(1,173
|
)
|
Adjustment to fair value
|
(977
|
)
|
Balance as of August 30, 2017
|
$
|
3,372
|
|
Abandoned Leased Facilities - Reserve for Store Closing
As of
August 30, 2017
, the Company classified
seven
leased locations in Arkansas, Illinois, Indiana, New York, Texas, Virginia and Wisconsin 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 decided to cease operations and has no foreseeable plans to occupy the spaces as a company restaurant in the future. Therefore, the Company recorded a charge to earnings, in provision for asset impairments and restaurant closings for fiscal years 2017 and 2016 of approximately
$482 thousand
and
$203 thousand
, respectively. The liability is equal to the total amount of rent and other direct costs for the remaining period of time the properties will be unoccupied plus the present value of the 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. Accrued lease termination expense was approximately
$540 thousand
and
$151 thousand
as of
August 30, 2017
and
August 31, 2016
, respectively.
Note 12. 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 contracts as of
August 30, 2017
.
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 13. 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 30, 2017
, the Company has lease agreements for
91
properties which include the Company’s corporate office, facility service warehouse,
two
remote office spaces, and restaurant properties. The leasing terms of the
91
properties consist of
13
properties expiring in less than one year,
56
properties expiring between one and five years and the remaining
22
properties having current terms that are greater than five years. Of the
91
leased properties,
66
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 30, 2017
, the Company has entered into noncancelable operating lease agreements for certain office equipment with terms ranging from
36
to
60 months
.
Annual future minimum lease payments under noncancelable operating leases with terms in excess of one year as of
August 30, 2017
are as follows:
|
|
|
|
|
Fiscal Year Ending:
|
(In thousands)
|
August 29, 2018
|
$
|
11,747
|
|
August 28, 2019
|
10,088
|
|
August 26, 2020
|
7,777
|
|
August 25, 2021
|
6,287
|
|
August 31, 2022
|
5,122
|
|
Thereafter
|
25,078
|
|
Total minimum lease payments
|
$
|
66,099
|
|
Most of the leases are for periods of
5
to
thirty years
and some leases provide for contingent rentals based on sales in excess of a base amount.
Total rent expense for operating leases for fiscal
2017
,
2016
, and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
August 30,
2017
|
|
August 31,
2016
|
|
August 26,
2015
|
|
(In thousands, except percentages)
|
Minimum rent-facilities
|
$
|
11,849
|
|
|
$
|
12,341
|
|
|
$
|
12,547
|
|
Contingent rentals
|
86
|
|
|
164
|
|
|
129
|
|
Minimum rent-equipment
|
758
|
|
|
712
|
|
|
805
|
|
Total rent expense (including amounts in discontinued operations)
|
$
|
12,693
|
|
|
$
|
13,217
|
|
|
$
|
13,481
|
|
Percent of sales
|
3.4
|
%
|
|
3.3
|
%
|
|
3.4
|
%
|
See Note 15, “Related Parties,” for lease payments associated with related parties.
Note 14. 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
1.1 million
shares approved for issuance under the Nonemployee Director Stock Plan,
1.1 million
options, restricted stock units and restricted stock awards were granted,
0.1 million
options were cancelled or expired and added back into the plan, since the plans inception. Approximately
0.1 million
shares remain available for future issuance as of
August 30, 2017
. Compensation cost for share-based payment arrangements under the Nonemployee Director Stock Plan, recognized in selling, general and administrative expenses for fiscal
2017
,
2016
, and
2015
was approximately
$0.7 million
,
$0.7 million
, and
$0.7 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),
6.1 million
options and restricted stock units were granted,
3.7 million
options and restricted stock units were cancelled or expired and added back into the plan, since the plans inception in 2005. Approximately
1.7 million
shares remain available for future issuance as of
August 30, 2017
. Compensation cost for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses for fiscal
2017
,
2016
, and
2015
was approximately
$0.9 million
,
$1.0 million
, and
$0.9 million
, respectively. Included in these costs for fiscal 2016 was approximately
$252 thousand
, which represented accelerated share-based compensation expense as a result of the rescission of
312,663
stock options.
In fiscal 2015, 2016, and 2017, the Company approved a Total Shareholder Return, (“TSR”), Performance Based Incentive Plan which provides 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 a
three
-year cycle, for each plan year. The 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 measurement period. The number of shares at the end of the
three
-year measurement period will be 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. As of
August 30, 2017
, the valuation estimate which represents the fair value of the performance awards liability for all plan years resulted in an aggregate liability of approximately
$0.8 million
. Non-cash compensation expense related to the Company's TSR Performance Based Incentive Plans was an expense of approximately
$38 thousand
,
$684 thousand
and
$108 thousand
in fiscal 2017, 2016, and 2015, respectively, and are recorded in Selling, general and administrative expenses. 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 number of shares at the end of each plans' three-year periods will be determined as the award value divided by the Company's closing stock price on the last day of the plans fiscal year.
Stock Options
Stock options granted under either the Employee Stock Plan or the Nonemployee Director Stock Plan have exercise prices equal to the market price of the Company’s common stock at the date of the grant. The market price under the Employee Stock Plan is the closing price at the date of the grant. The market price under the Nonemployee Director Plan is the average of the high and the low price on the date of the grant.
Option awards under the Nonemployee Director Stock Plan generally vest
100%
on the first anniversary of the grant date and expire
ten
years from the grant date.
No
options were granted under the Nonemployee Director Stock Plan in fiscal
2017
,
2016
, or
2015
.
No
options to purchase shares remain outstanding under this plan, as of
August 30, 2017
.
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
2017
,
2016
, and
2015
were granted under the Employee Stock Plan. Options to purchase
1,345,916
shares at options prices from
$3.44
to
$11.10
per share remain outstanding as of
August 30, 2017
.
The Company has segregated option awards into two homogenous 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:
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended
|
|
August 30,
2017
|
|
August 31,
2016
|
|
August 26,
2015
|
|
(In thousands, except percentages)
|
Dividend yield
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Volatility
|
37.65
|
%
|
|
39.64
|
%
|
|
42.30
|
%
|
Risk-free interest rate
|
1.99
|
%
|
|
1.82
|
%
|
|
1.41
|
%
|
Expected life (in years)
|
5.87
|
|
|
5.58
|
|
|
5.61
|
|
A summary of the Company’s stock option activity for fiscal
2017
,
2016
, and
2015
is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Under
Fixed
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
(Years)
|
|
(In thousands)
|
Outstanding at August 27, 2014
|
800,754
|
|
|
$
|
4.95
|
|
|
4.1
|
|
|
$
|
583
|
|
Granted
|
628,060
|
|
|
4.49
|
|
|
—
|
|
|
—
|
|
Exercised
|
(57,007
|
)
|
|
3.45
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(1,523
|
)
|
|
5.59
|
|
|
—
|
|
|
—
|
|
Expired
|
(82,185
|
)
|
|
5.47
|
|
|
—
|
|
|
—
|
|
Outstanding at August 26, 2015
|
1,288,099
|
|
|
$
|
4.76
|
|
|
6.5
|
|
|
$
|
350
|
|
Granted
|
279,944
|
|
|
4.89
|
|
|
—
|
|
|
—
|
|
Exercised
|
(21,249
|
)
|
|
3.51
|
|
|
—
|
|
|
—
|
|
Cancelled
|
(312,663
|
)
|
|
4.98
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(55,893
|
)
|
|
4.80
|
|
|
—
|
|
|
—
|
|
Expired
|
(9,000
|
)
|
|
3.44
|
|
|
—
|
|
|
—
|
|
Outstanding at August 31, 2016
|
1,169,238
|
|
|
$
|
4.76
|
|
|
6.6
|
|
|
$
|
178
|
|
Granted
|
295,869
|
|
|
4.26
|
|
|
—
|
|
|
—
|
|
Exercised
|
0
|
|
|
0.00
|
|
|
—
|
|
|
—
|
|
Cancelled
|
(9,290
|
)
|
|
4.49
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(72,212
|
)
|
|
4.57
|
|
|
—
|
|
|
|
Expired
|
(37,689
|
)
|
|
5.39
|
|
|
—
|
|
|
—
|
|
Outstanding at August 30, 2017
|
1,345,916
|
|
|
$
|
4.64
|
|
|
6.4
|
|
|
$
|
0
|
|
Exercisable at August 30, 2017
|
872,216
|
|
|
$
|
4.74
|
|
|
5.2
|
|
|
$
|
0
|
|
The intrinsic value for stock options is defined as the difference between the current market value and the grant price.
At
August 30, 2017
, there was approximately
$0.4 million
of total unrecognized compensation cost related to unvested options that are expected to be recognized over a weighted-average period of
1.4
years.
The weighted-average grant-date fair value of options granted during fiscal
2017
,
2016
, and
2015
was
$1.66
,
$1.92
, and
$1.83
per share, respectively.
During fiscal
2017
,
no
options were exercised. During fiscal
2016
and
2015
cash received from options exercised was approximately
$82 thousand
and
$190 thousand
, respectively.
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 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Units
|
|
Weighted
Average
Fair Value
|
|
Weighted-
Average
Remaining
Contractual Term
|
|
|
|
(Per share)
|
|
(In years)
|
Unvested at August 27, 2014
|
397,837
|
|
|
$
|
6.03
|
|
|
1.6
|
|
Granted
|
84,495
|
|
|
4.54
|
|
|
—
|
|
Vested
|
(72,915
|
)
|
|
4.55
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
Unvested at August 26, 2015
|
409,417
|
|
|
$
|
5.98
|
|
|
1.6
|
|
Granted
|
172,212
|
|
|
4.87
|
|
|
—
|
|
Vested
|
(257,482
|
)
|
|
6.19
|
|
|
—
|
|
Forfeited
|
(9,314
|
)
|
|
5.37
|
|
|
—
|
|
Unvested at August 31, 2016
|
314,833
|
|
|
$
|
5.23
|
|
|
1.9
|
|
Granted
|
200,549
|
|
|
4.26
|
|
|
—
|
|
Vested
|
(92,058
|
)
|
|
6.30
|
|
|
—
|
|
Forfeited
|
(18,960
|
)
|
|
4.55
|
|
|
—
|
|
Unvested at August 30, 2017
|
404,364
|
|
|
$
|
4.54
|
|
|
1.8
|
|
At
August 30, 2017
, there was approximately
$0.9 million
of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of
1.8
years.
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 a Supplemental Executive Retirement Plan (“SERP”) designed to provide benefits for selected officers at normal retirement age with
25
years of service equal to
50%
of their final average compensation offset by Social Security, profit sharing benefits, and deferred compensation. None of the Company’s executive officers participates in the Supplemental Executive Retirement Plan. Some of the officers designated to participate in the plan have retired and are receiving benefits under the plan. Accrued benefits of all actively employed participants become fully vested upon termination of the plan or a change in control (as defined in the plan). The plan is unfunded and the Company is obligated to make benefit payments solely on a current disbursement basis. On December 6, 2005, the Board of Directors voted to amend the SERP and suspend the further accrual of benefits and participation. As a result, a curtailment gain of approximately
$88,000
was recognized. The net benefit recognized for the SERP for the years ended
August 30, 2017
,
August 31, 2016
, and
August 26, 2015
, was
zero
, and the unfunded accrued liability included in “Other Liabilities” on the Company’s consolidated Balance Sheets as of
August 30, 2017
and
August 31, 2016
was approximately
$45 thousand
and
$58 thousand
, respectively.
Nonemployee Director Phantom Stock Plan
Under the Company’s Nonemployee Director Phantom Stock Plan (“Phantom Stock Plan”), nonemployee directors deferred portions of their retainer and meeting fees which, along with certain matching incentives, were credited to phantom stock accounts in the form of phantom shares priced at the market value of the Company’s common stock on the date of grant. Additionally, the phantom stock accounts were credited with dividends, if any, paid on the common stock represented by phantom shares. Authorized shares (
100,000
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 30, 2017
,
29,627
phantom shares remained unissued 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 years ended
August 30, 2017
,
August 31, 2016
, and
August 26, 2015
, was approximately
$359 thousand
,
$350 thousand
, and
$255 thousand
, respectively.
Note 15. Related Parties
Affiliate Services
The Company’s Chief Executive Officer, Christopher J. Pappas, and Harris J. Pappas, a 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 May 28, 2015 among the Company and the Pappas entities.
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
2017
,
2016
, and
2015
were approximately
$4 thousand
,
$2 thousand
, and
zero
, respectively. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Company’s Board of Directors.
Operating Leases
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a
50%
limited partnership interest and a
50%
general partnership interest in the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented approximately
7%
of the space in that center since July 1969. No changes were made to the Company’s lease terms as a result of the transfer of ownership of the center to the new partnership.
On November 22, 2006, the Company executed a new lease agreement with respect to this shopping center. Effective upon the Company’s relocation and occupancy into the new space in July 2008, the new lease agreement provides for a primary term of approximately
12
years with
two
subsequent
five
-year options and gives the landlord an option to buy out the tenant on or after the calendar year 2015 by paying the then unamortized cost of improvements to the tenant. The Company paid 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 Company made payments of approximately
$419 thousand
,
$417 thousand
, and
$416 thousand
in fiscal
2017
,
2016
, and
2015
, respectively, under the lease agreement. The new lease agreement was approved by the Finance and Audit Committee.
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 paid rent of
$28.06
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. The Company made payments of
$162 thousand
,
$160 thousand
, and
$160 thousand
during fiscal
2017
,
2016
, and
2015
, respectively.
Affiliated rents paid for the Houston property lease represented
2.7%
,
2.6%
, and
2.7%
of total rents for continuing operations for fiscal
2017
,
2016
, and
2015
, respectively.
Board of Directors
Pursuant to the terms of a separate Purchase Agreement dated March 9, 2001, entered into by and among the Company, Christopher J. Pappas and Harris J. Pappas, the Company agreed to submit three persons designated by Christopher J. Pappas and Harris J. Pappas as nominees for election at the 2002 Annual Meeting of Shareholders. Messrs. Pappas designated themselves and Frank Markantonis as their nominees for directors, all of whom were subsequently elected. Christopher J. Pappas and Harris J. Pappas are brothers and Frank Markantonis is an attorney whose principal client is Pappas Restaurants, Inc., an entity owned by Harris J. Pappas and Christopher J. Pappas.
Christopher J. Pappas is a member of the Advisory Board of Amegy Bank, a Division of ZB, N.A. (formerly, Amegy Bank, N.A.), which was a lender and syndication agent under the Company’s 2013 Revolving Credit Facility.
Key Management Personnel
The Company entered into a new employment agreement with Christopher Pappas on January 24, 2014. The employment agreement was amended on August 2, 2017, to extend the termination date thereof to August 29, 2018. Mr. Pappas continues to devote his primary time and business efforts to the Company while maintaining his role at Pappas Restaurants, Inc.
Peter Tropoli, a director of the Company and the Company’s Chief Operating Officer, and formerly the Company’s Senior Vice President, Administration, General Counsel and Secretary, is an attorney and stepson of Frank Markantonis, who is a director of the Company.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas, who is a director of the Company.
Note 16. Common Stock
At
August 30, 2017
, the Company had
500,000
shares of common stock reserved for issuance upon the exercise of outstanding stock options.
Treasury Shares
In February 2008, the Company acquired
500,000
treasury shares for
$4.8 million
.
Note 17. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended
|
|
August 30,
2017
|
|
August 31,
2016
|
|
August 26,
2015
|
|
(In thousands, except per share data)
|
Numerator:
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(22,796
|
)
|
|
$
|
(10,256
|
)
|
|
$
|
(1,616
|
)
|
NET LOSS
|
$
|
(23,262
|
)
|
|
$
|
(10,346
|
)
|
|
$
|
(2,074
|
)
|
Denominator:
|
|
|
|
|
|
Denominator for basic earnings per share—weighted-average shares
|
29,476
|
|
|
29,226
|
|
|
28,974
|
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
Employee and non-employee stock options
|
—
|
|
|
—
|
|
|
—
|
|
Denominator for earnings per share assuming dilution
|
29,476
|
|
|
29,226
|
|
|
28,974
|
|
Loss from continuing operations:
|
|
|
|
|
|
Basic
|
$
|
(0.77
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.06
|
)
|
Assuming dilution
(a)
|
$
|
(0.77
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.06
|
)
|
Net loss per share:
|
|
|
|
|
|
Basic
|
$
|
(0.79
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.07
|
)
|
Assuming dilution
(a)
|
$
|
(0.79
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.07
|
)
|
(a) Potentially dilutive shares, not included in the computation of net income per share because to do so would have been antidilutive, totaled
3,000
shares in fiscal
2017
,
55,000
shares in fiscal
2016
, and
77,000
shares in fiscal
2015
. Additionally, stock options with exercise prices exceeding market close prices that were excluded from the computation of net income per share amounted to
1,346,000
shares in fiscal
2017
,
494,000
shares in fiscal
2016
, and
415,000
shares in fiscal
2015
.
Note 18. Quarterly Financial Information
The following tables summarize quarterly unaudited financial information for fiscal
2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
(a)
|
|
August 30,
2017
|
|
June 7,
2017
|
|
March 15,
2017
|
|
December 21,
2016
|
|
(84 days)
|
|
(84 days)
|
|
(84 days)
|
|
(112 days)
|
|
(In thousands, except per share data)
|
Restaurant sales
|
$
|
79,078
|
|
|
$
|
82,594
|
|
|
$
|
81,064
|
|
|
$
|
108,082
|
|
Franchise revenue
|
1,556
|
|
|
1,477
|
|
|
1,819
|
|
|
1,871
|
|
Culinary contract services
|
5,825
|
|
|
4,515
|
|
|
3,306
|
|
|
4,297
|
|
Vending revenue
|
130
|
|
|
133
|
|
|
125
|
|
|
159
|
|
Total sales
|
$
|
86,589
|
|
|
$
|
88,719
|
|
|
$
|
86,314
|
|
|
$
|
114,409
|
|
Loss from continuing operations
|
(4,069
|
)
|
|
(377
|
)
|
|
(12,836
|
)
|
|
(5,514
|
)
|
Income (loss) from discontinued operations
|
(32
|
)
|
|
(19
|
)
|
|
(343
|
)
|
|
(72
|
)
|
Net loss
|
$
|
(4,101
|
)
|
|
$
|
(396
|
)
|
|
$
|
(13,179
|
)
|
|
$
|
(5,586
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.14
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.19
|
)
|
Assuming dilution
|
$
|
(0.14
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.19
|
)
|
Costs and Expenses (
as a percentage of restaurant sales
)
|
|
|
|
|
|
|
Cost of food
|
28.3
|
%
|
|
27.8
|
%
|
|
27.9
|
%
|
|
28.5
|
%
|
Payroll and related costs
|
36.1
|
%
|
|
35.7
|
%
|
|
36.1
|
%
|
|
35.8
|
%
|
Other operating expenses
|
18.6
|
%
|
|
16.7
|
%
|
|
17.0
|
%
|
|
18.2
|
%
|
Occupancy costs
|
6.4
|
%
|
|
6.0
|
%
|
|
6.6
|
%
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
(a)
|
|
August 31, 2016
|
|
June 1,
2016
|
|
March 9,
2016
|
|
December 16,
2015
|
|
(91 days)
|
|
(84 days)
|
|
(84 days)
|
|
(112 days)
|
|
(In thousands, except per share data)
|
Restaurant sales
|
$
|
91,775
|
|
|
$
|
86,476
|
|
|
$
|
86,314
|
|
|
$
|
113,546
|
|
Franchise revenue
|
1,839
|
|
|
1,586
|
|
|
1,700
|
|
|
2,125
|
|
Culinary contract services
|
3,970
|
|
|
3,892
|
|
|
3,918
|
|
|
4,915
|
|
Vending revenue
|
145
|
|
|
143
|
|
|
137
|
|
|
158
|
|
Total sales
|
$
|
97,729
|
|
|
$
|
92,097
|
|
|
92,069
|
|
|
$
|
120,744
|
|
Loss from continuing operations
|
(7,789
|
)
|
|
(147
|
)
|
|
(582
|
)
|
|
(1,738
|
)
|
Income (loss) from discontinued operations
|
(13
|
)
|
|
13
|
|
|
(17
|
)
|
|
(73
|
)
|
Net loss
|
$
|
(7,802
|
)
|
|
$
|
(134
|
)
|
|
$
|
(599
|
)
|
|
$
|
(1,811
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.27
|
)
|
|
$
|
—
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
Assuming dilution
|
$
|
(0.27
|
)
|
|
$
|
—
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
Costs and Expenses (
as a percentage of restaurant sales
)
|
|
|
|
|
|
|
Cost of food
|
28.0
|
%
|
|
28.0
|
%
|
|
28.5
|
%
|
|
28.6
|
%
|
Payroll and related costs
|
35.9
|
%
|
|
35.6
|
%
|
|
34.6
|
%
|
|
34.7
|
%
|
Other operating expenses
|
16.6
|
%
|
|
15.7
|
%
|
|
15.9
|
%
|
|
16.2
|
%
|
Occupancy costs
|
5.6
|
%
|
|
5.9
|
%
|
|
6.4
|
%
|
|
5.8
|
%
|
(a)
The fiscal quarters ended,
December 21, 2016 and December 16, 2015, consist of fou
r
four-week periods and the fiscal quarter ended
August 31, 2016
, consists of two four-week periods and one five week period.