Company Quick10K Filing
Lubys
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 30 $36
10-K 2019-11-26 Annual: 2019-08-28
10-Q 2019-07-15 Quarter: 2019-06-05
10-Q 2019-04-22 Quarter: 2019-03-13
10-Q 2019-01-28 Quarter: 2018-12-19
10-K 2018-11-16 Annual: 2018-08-29
10-Q 2018-07-23 Quarter: 2018-06-06
10-Q 2018-04-23 Quarter: 2018-03-14
10-Q 2018-01-29 Quarter: 2017-12-20
10-K 2017-11-13 Annual: 2017-08-30
10-Q 2017-07-13 Quarter: 2017-06-07
10-Q 2017-04-24 Quarter: 2017-03-15
10-Q 2017-02-06 Quarter: 2016-12-21
10-K 2016-11-23 Annual: 2016-08-31
10-Q 2016-07-11 Quarter: 2016-06-01
10-Q 2016-04-18 Quarter: 2016-03-09
10-Q 2016-01-25 Quarter: 2015-12-16
10-K 2015-11-09 Annual: 2015-08-26
10-Q 2015-06-15 Quarter: 2015-05-06
10-Q 2015-03-23 Quarter: 2015-02-11
10-Q 2014-12-19 Quarter: 2014-11-19
10-K 2014-11-12 Annual: 2014-08-27
10-Q 2014-06-16 Quarter: 2014-05-07
10-Q 2014-03-28 Quarter: 2014-02-12
10-K 2013-11-12 Annual: 2013-08-28
10-Q 2013-06-17 Quarter: 2013-05-08
10-Q 2013-03-25 Quarter: 2013-02-13
10-Q 2012-12-26 Quarter: 2012-11-21
10-K 2012-11-13 Annual: 2012-08-29
10-Q 2012-06-15 Quarter: 2012-05-09
10-Q 2012-03-23 Quarter: 2012-02-15
10-Q 2011-12-27 Quarter: 2011-11-23
10-K 2011-11-14 Annual: 2011-08-31
10-Q 2011-06-10 Quarter: 2011-05-04
10-Q 2011-03-11 Quarter: 2011-02-09
10-Q 2010-12-21 Quarter: 2010-11-17
10-K 2010-11-08 Annual: 2010-08-25
10-Q 2010-06-11 Quarter: 2010-05-05
10-Q 2010-03-19 Quarter: 2010-02-10
8-K 2019-11-26 Earnings, Exhibits
8-K 2019-09-10 Other Events, Exhibits
8-K 2019-08-20 Officers, Other Events, Exhibits
8-K 2019-08-01 Enter Agreement, Officers, Amend Bylaw, Other Events, Exhibits
8-K 2019-07-15 Earnings, Exhibits
8-K 2019-06-18 Officers
8-K 2019-04-22 Earnings, Exhibits
8-K 2019-02-11 Enter Agreement, Shareholder Rights, Exhibits
8-K 2019-01-31 Officers
8-K 2019-01-28 Earnings, Exhibits
8-K 2019-01-25 Other Events, Exhibits
8-K 2019-01-25 Shareholder Vote
8-K 2019-01-25 Shareholder Vote
8-K 2019-01-18 Other Events, Exhibits
8-K 2018-12-24 Other Events, Exhibits
8-K 2018-12-13 Enter Agreement, Leave Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-11-29 Enter Agreement, Other Events, Exhibits
8-K 2018-11-12 Earnings, Exhibits
8-K 2018-10-22 Officers, Regulation FD, Exhibits
8-K 2018-08-30 Amend Bylaw, Exhibits
8-K 2018-08-29
8-K 2018-08-24 Enter Agreement, Exhibits
8-K 2018-08-15 Enter Agreement, Exhibits
8-K 2018-08-10 Enter Agreement, Exhibits
8-K 2018-08-06 Officers
8-K 2018-07-16 Earnings, Exhibits
8-K 2018-07-12 Enter Agreement, Other Events, Exhibits
8-K 2018-04-19 Earnings, Exhibits
8-K 2018-02-15 Enter Agreement, Shareholder Rights, Regulation FD, Exhibits
8-K 2018-02-09 Shareholder Vote
8-K 2018-01-29 Earnings, Exhibits
LUB 2019-08-28
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1. Nature of Operations and Significant Accounting Policies
Note 2. Cash, Cash Equivalents and Restricted Cash
Note 3. Revenue Recognition
Note 4. Reportable Segments
Note 5. Derivative Financial Instruments
Note 6. Fair Value Measurement
Note 7. Trade Receivables and Other
Note 8. Income Taxes
Note 9. Property and Equipment, Intangible Assets and Goodwill
Note 10. Current Accrued Expenses and Other Liabilities
Note 11. Other Long-Term Liabilities
Note 12. Debt
Note 14. Commitments and Contingencies
Note 15. Operating Leases
Note 16. Share-Based Compensation
Note 17. Related Parties
Note 18. Common Stock
Note 19. Earnings per Share
Note 20. Shareholder Rights Plan
Note 21. Quarterly Financial Information
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
EX-4.B lub_82819xex4-b.htm
EX-21 lub_82819xex21.htm
EX-23.1 lub_82819xex23-1.htm
EX-31.1 lub_82819xex31-1.htm
EX-31.2 lub_82819xex31-2.htm
EX-32.1 lub_82819xex32-1.htm
EX-32.2 lub_82819xex32-2.htm

Lubys Earnings 2019-08-28

LUB 10K Annual Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
ARKR 71 90 45 161 0 4 11 90 0% 7.8 5%
FAT 52 78 73 22 0 -4 4 71 0% 17.0 -5%
SAUC 47 139 160 156 0 -4 12 140 0% 11.5 -3%
BDL 43 68 31 114 0 5 9 31 0% 3.4 7%
DAVE 41 66 42 63 0 4 6 32 0% 5.7 5%
IPIC 40 157 291 119 0 -26 9 36 0% 3.8 -17%
LUB 36 192 82 336 39 -8 14 68 12% 5.0 -4%
GTIM 24 61 27 109 11 -0 4 32 10% 7.5 -0%
KONA 15 54 74 157 116 -31 -17 46 74% -2.6 -58%
BURG 7 45 38 41 0 -9 -5 13 0% -2.8 -19%

10-K 1 lub_8281910kdocument.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ____________________________________
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended August 28, 2019 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From              to             
 ____________________________________ 
Commission file number 001-08308 
Luby's, Inc.
 (Exact name of registrant as specified in its charter)
Delaware
74-1335253
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification Number)
 
13111 Northwest Freeway, Suite 600
Houston, Texas 77040
(Address of principal executive offices, including zip code)
 
(713) 329-6800
(Registrant’s telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange at which registered
Common Stock ($0.32 par value per share)
LUB
New York Stock Exchange
Common Stock Purchase Rights
N/A
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ☐    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ☐
Accelerated filer  ☐
Non-accelerated filer  x
Smaller reporting company   x
 
Emerging growth company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  x
 
The aggregate market value of the shares of common stock of the registrant held by non-affiliates of the registrant as of March 13, 2019, was approximately $32,205,000 (based upon the assumption that directors and executive officers are the only affiliates).
 
As of November 15, 2019, there were 30,041,422 shares of the registrant’s common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE

 Portions of the following document are incorporated by reference into the designated parts of this Form 10-K:
 Definitive Proxy Statement relating to 2020 annual meeting of shareholders (in Part III)

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Luby’s, Inc.
Form 10-K
Year ended August 28, 2019
Table of Contents
 
Page
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  



2



Additional Information 
 
We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. The SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information that we file electronically. Our website address is www.lubysinc.com. Please note that our website address is provided as an inactive textual reference only. We make available free of charge through our website the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this report.
 
Compliance with New York Stock Exchange Requirements
 
We submitted to the New York Stock Exchange (“NYSE”) the CEO certification required by Section 303A.12(a) of the NYSE’s Listed Company Manual with respect to our fiscal year ended August 29, 2018. We expect to submit the CEO certification with respect to our fiscal year ended August 28, 2019 to the NYSE within 30 days after our annual meeting of shareholders. We are filing as an exhibit to this Form 10-K the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002.


3



FORWARD-LOOKING STATEMENTS
 
This Annual Report on this "Form 10-K” contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Form 10-K, other than statements of historical facts, are “forward-looking statements” for purposes of these provisions, including any statements regarding:

future operating results;
future capital expenditures, and expected sources of funds for capital expenditures;
future debt, including liquidity and the sources and availability of funds related to debt, the expected repayment of debt and the expected sources of funds for working capital requirements;
plans for expansion of our business;
closing existing units;
effectiveness of management’s disposal plans;
future sales of assets and the gains or losses that may be recognized as a result of any such sales; and
continued compliance with the terms of our 2018 Credit Agreement.

In some cases, investors can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “outlook,” “may” “should,” “will,” and “would” or similar words. Forward-looking statements are based on certain assumptions and analyses made by management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe are relevant. Although management believes that our assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of our control. The following factors, as well as the factors set forth in Item 1A of this Form 10-K and any other cautionary language in this Form 10-K, provide examples of risks, uncertainties, and events that may cause our financial and operational results to differ materially from the expectations described in our forward-looking statements:
 
our ability to pursue strategic alternatives;
general business and economic conditions;
the impact of competition;
decisions made in the allocation of capital resources;
our operating initiatives, changes in promotional, couponing and advertising strategies, and the success of management’s business plans;
fluctuations in the costs of commodities, including beef, poultry, seafood, dairy, cheese, oils and produce;
ability to raise menu prices and customers acceptance of changes in menu items;
increases in utility costs, including the costs of natural gas and other energy supplies;
changes in the availability and cost of labor, including the ability to attract qualified managers and team members;
the seasonality of the business;
collectability of accounts receivable;
changes in governmental regulations, including changes in minimum wages and healthcare benefit regulation;
the effects of inflation and changes in our customers’ disposable income, spending trends and habits;
the ability to realize property values;
the availability and cost of credit;
the effectiveness of our credit card controls and Payment Card Industry ("PCI") compliance;
weather conditions in the regions in which our restaurants operate;
costs relating to legal proceedings;
impact of adoption of new accounting standards;
effects of actual or threatened future terrorist attacks in the United States;
unfavorable publicity relating to operations, including publicity concerning food quality, illness or other health concerns or labor relations; and
the continued service of key management personnel.

Each forward-looking statement speaks only as of the date of this Form 10-K, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should be aware that the occurrence of the events described above and elsewhere in this Form 10-K could have material adverse effect on our business, results of operations, cash flows, and financial condition.


4



PART I
 
Item 1. Business
 
Overview
Luby’s, Inc. is a multi-branded company operating in the restaurant industry and in the contract food services industry. Our core brands include Luby’s Cafeteria, Fuddruckers - World’s Greatest Hamburgers® and Luby’s Culinary Contract Services. We also operate another restaurant brand named Cheeseburger in Paradise.
 
In this Form 10-K, unless otherwise specified, “Luby’s,” “we,” “our,” “us” and “Company” refer to Luby’s, Inc., Luby's Fuddruckers Restaurants, LLC, a Texas Limited Liability Company ("LFR") and the consolidated subsidiaries of Luby’s, Inc. References to “Luby’s Cafeteria” refer specifically to the Luby’s Cafeteria brand restaurant.
 
Prior to the fourth quarter of fiscal 2019 our internal organization and reporting structure supported three reportable segments; Company-owned restaurants, Fuddruckers franchise operations and Culinary contract services. The Company-owned restaurants consisted of the three brands discussed above, which were aggregated into one reportable segment.  In the fourth quarter of fiscal 2019 we re-evaluated our reportable segments and disaggregated the Company-owned restaurants into three reportable segments based on brand name.  As such, as of the fourth quarter 2019, our five reportable segments are Luby’s cafeteria restaurants, Fuddruckers restaurants, Cheeseburger in Paradise restaurants, Fuddruckers franchise operations and Culinary contract services. Management believes this change better reflects the priorities and decision-making analysis around the allocation of our resources and better aligns to the economic characteristics within similar restaurant brands. We began reporting on the new structure in the fourth quarter of fiscal 2019 as reflected in this Annual Report on Form 10-K. The segment data for the comparable periods presented has been recast to conform to the current period presentation. Recasting this historical information did not have an impact on the consolidated financial performance of Luby’s Inc. for any of the periods presented.

We are headquartered in Houston, Texas. Our corporate headquarters is located at 13111 Northwest Freeway, Suite 600, Houston, Texas 77040, and our telephone number at that address is (713) 329-6800. Our website is www.lubysinc.com. The information on our website is not, and shall not be deemed to be, a part of this annual report on Form 10-K or incorporated into any of our other filings with the SEC.
 
As of November 15, 2019, we operated 120 restaurants located throughout the United States, as set forth in the table below. These establishments are located in close proximity to retail centers, business developments and residential areas. Of the 120 restaurants, 71 are located on property that we own and 49 are located on property that we lease. Five of our owned locations and one of our leased locations consist of a side-by-side Luby’s Cafeteria and Fuddruckers restaurant, to which we refer herein as a “Combo location.” The Combo location properties are included in both the Luby's Cafeterias count and the Fuddruckers Restaurants count.
 
Luby's Cafeterias
Fuddruckers Restaurants
Other
 
 
Owned
Leased
Owned
Leased
Leased
Total
Texas:
 
 
 
 
 
 
Houston Metro
16

12

8

9


45

San Antonio Metro
9

1




10

Rio Grande Valley
8

4




12

Dallas/Fort Worth Metro
10

2

1



13

Austin
4


1



5

Other Texas Markets
9

2


2


13

California



6


6

Arizona



4


4

Illinois


3



3

Mississippi
1


1



2

Other States



6

1

7

Total
57

21

14

27

1

120

  

5



As of November 15, 2019, we operated 32 locations through our Culinary Contract Services (“CCS”).
 
Total
Texas:
 
Houston Metro
22

San Antonio Metro
2

Rio Grande Valley
3

Dallas/Fort Worth Metro
2

   Northwest Texas
1

Kansas
1

Greensboro, NC
1

Total
32



6



As of November 15, 2019, we had 38 franchisees operating 98 Fuddruckers restaurants in locations as set forth in the table below. Our largest six franchisees own 5 to 12 restaurants each. Twelve franchise owners each own two to four restaurants. The 20 remaining franchise owners each own one restaurant.
 
 
Fuddruckers
Franchises
Texas:
 
Houston Metro
7

Dallas/Fort Worth Metro
7

Other Texas Markets
10

California
5

Connecticut
1

Florida
8

Georgia
3

Louisiana
3

Maryland
1

Massachusetts
4

Michigan
3

Missouri
2

Mississippi
1

Montana
2

Nebraska
1

Nevada
3

New Jersey
2

New Mexico
4

North Carolina
1

North Dakota
1

Oklahoma
1

Oregon
1

Pennsylvania
5

South Carolina
8

South Dakota
1

Tennessee
2

Virginia
3

International:
 
Canada
2

Mexico
2

Panama
3

Puerto Rico
1

Total
98

 
In November 1997, a prior owner of the Fuddruckers - World’s Greatest Hamburgers® brand granted to a licensee the exclusive right to use the Fuddruckers proprietary marks, trade dress, and system to develop Fuddruckers restaurants in a territory consisting of certain countries in Africa, the Middle East, and parts of Asia. As of November 15, 2019, this licensee operates 35 restaurants that are licensed to use the Fuddruckers proprietary marks in Saudi Arabia, Egypt, United Arab Emirates, Qatar, Jordan, Bahrain, and Kuwait. The Company does not receive revenue or royalties from these restaurants.

For additional information regarding our restaurant locations, please read “Properties” in Item 2 of Part I of this report.
 
Luby’s, Inc. (formerly, Luby’s Cafeterias, Inc.) was founded in 1947 in San Antonio, Texas. The Company was originally incorporated in Texas in 1959, with nine cafeterias in various locations, under the name Cafeterias, Inc. It became a publicly held

7



corporation in 1973, and became listed on the NYSE in 1982. The Company's operations continue to be conducted by its wholly-owned subsidiary, LFR.

Board Special Committee
 
In September 2019, the Company's Board of Directors formed a new Board Special Committee comprised of independent directors with the purpose of establishing a strategic review process to identify, examine, and consider a range of strategic alternatives available to the Company with the objective of maximizing shareholder value. The Board Special Committee consists of the following members: Gerald Bodzy, Twila Day, Joe McKinney, Gasper Mir, John Morlock, and Randolph Read. The Board Special Committee is co-chaired by Messrs. Bodzy and Read.

Brookwood and Associates, previously engaged by the Company, is advising the Board Special Committee as a financial advisor to assist in certain aspects of the strategic alternatives review process. The Special Committee has retained Gibson, Dunn & Crutcher LLP to advise on various legal matters.

The Board of Directors has not made a decision to enter into any transaction at this time, and there are no assurances that the consideration of strategic alternatives will result in any transaction. The Company does not intend to comment on or disclose developments regarding the process unless it deems further disclosure appropriate or required. Please see "Risk factors" in Item 1A.

Operational Focus

Our operational focus is to generate consistent and sustainable same-store sales growth and improved store level profit. From an operating standpoint, we support this strategic focus through the following:

1.
Striving for consistently successful execution: Every day, with every guest, at every restaurant we operate.

2.
Developing our human capital: Our team members are the most critical factor in ensuring our Company’s success. Our relentless focus as a company must be inspiring and developing our team members to delight our guests.

3.
Raising awareness of our brand: Our restaurants provide guests in our local communities with memories of family, friends, childhood, a great date, a memorable birthday, or a significant accomplishment. The most reliable ways to grow and sustain our business is to perpetuate word of mouth and remain involved in the community. We must share our story with our guests in our restaurants. This allows new guests to learn our brand story and also reaffirms it with legacy and loyal guests. Loyal guests spread the word about our brand. Our most loyal guests typically agree to be in our E-club so we can communicate with them and reward them. Digital media marketing and advertising has become an integral component of our guest outreach efforts.

4.
Maintaining restaurant appearances: We recognize the importance of maintaining our legacy restaurants to remain relevant and appealing to keep loyal guests coming back and to draw in new guests.

5.
Cost management:  We evaluate each area of our business to assess that we are spending and investing at appropriate levels. This includes restaurant operating costs and corporate overhead costs. Within our restaurants, we seek opportunities with our food and supplies purchasing, menu offerings, labor productivity, and contracts with restaurant service providers to maintain an appropriate restaurant level cost structure. Within our corporate overhead, we continue to seek opportunities to stream-line corporate overhead, evaluate outsourcing certain corporate functions, and optimize staffing levels.

We remain focused on the key drivers of our businesses to achieve operational excellence of our brands and to efficiently manage costs to grow profitability and enhance shareholder value.

Luby’s Cafeteria Operations
 
At Luby’s Cafeterias, our mission is to serve our guests convenient, great tasting meals in a friendly environment that makes everyone feel welcome and at home. We do things The Luby’s Way, which means we cook in small batches from scratch using real food, real ingredients prepared fresh daily, and our employees and our company get involved and support the fabric of our local communities. We buy local produce as much as possible. We promise to breathe life into the experience of dining out and make every meal meaningful. We were founded in San Antonio, Texas in 1947.
 

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Our cafeteria food delivery model allows customers to select freshly-prepared items from our serving line including entrées, vegetables, salads, desserts, breads and beverages before transporting their selected items on serving trays to a table or booth of their choice in the dining area. Each restaurant offers 15 to 22 entrées, 12 to 14 vegetable dishes, 8 to 10 salads, and 10 to 12 varieties of desserts daily.
 
Luby’s Cafeteria’s product offerings are home-style made-from-scratch favorites priced to appeal to a broad range of customers, including those customers that focus on fast wholesome choices, quality, variety, and affordability. We have had particular success among families with children, shoppers, travelers, seniors, and business people looking for a quick, freshly prepared meal at a fair price. All of our restaurants sell food-to-go orders and third party delivery orders which comprised approximately 17% of our Luby's Cafeteria restaurant sales in fiscal 2019.
 
Menus are reviewed periodically and new offerings and seasonal food preferences are regularly incorporated. Each restaurant is operated as a separate unit under the control of a general manager who has responsibility for day-to-day operations, including food production and personnel employment and supervision. Restaurants generally have a staff led by a general manager, an associate manager and assistant managers. We grant authority to our restaurant managers to direct the daily operations of their stores and, in turn, we compensate them on the basis of their performance. Each general manager is supervised by an area leader. Each area leader is responsible for approximately 7 to 11 restaurants, depending on the area supervised.
  
In fiscal 2019, we closed five Luby's Cafeterias. The number of Luby’s Cafeterias was 79 at fiscal year-end 2019.
 
Fuddruckers Restaurants
 
At Fuddruckers, our mission is to serve the World’s Greatest Hamburgers® using only 100% fresh, never frozen, all American premium beef, buns baked daily in our kitchens, and the freshest, highest quality ingredients on our “you top it” produce bar. With a focus on excellent food, attentive guest service and an inviting atmosphere, we are committed to making every guest happy, one burger at a time! Fuddruckers restaurants feature casual, welcoming dining areas where Americana-themed décor is featured. Fuddruckers was founded in San Antonio, Texas in 1980.
 
While Fuddruckers’ signature burgers and fries account for the majority of its restaurant sales, its menu also includes exotic burgers, such as buffalo and elk, chicken breast sandwiches, hot dogs, a variety of salads, chicken tenders, hand breaded onion rings, soft drinks, handmade milkshakes, and bakery items. A variety of over 100 carbonated soft drinks including our own unique Sweet Cherry Cream Soda, which is exclusively offered at Fuddruckers restaurants, along with other varieties such as Powerade®, and flavored waters are offered through Coke Freestyle® self-service dispensers. Additionally, beer and wine are served and, generally, account for less than 2% of restaurant sales. Food-to-go sales comprise approximately 8% of Fuddruckers restaurant sales.
 
Restaurants generally have one general manager with two or three assistant managers and a number of full-time and part-time associates working in overlapping shifts. Since Fuddruckers generally utilizes a self-service concept, similar to fast casual, it typically does not employ waiters or waitresses. Fuddruckers restaurant operations are currently divided into a total of four geographic areas, each supervised by an area leader. Each area leader is responsible for approximately 6 to 15 restaurants, depending on the area supervised.

In fiscal 2019, we closed 11 Company-owned Fuddruckers restaurants and transitioned 5 Company-owned Fuddruckers restaurants to a franchisee. The number of Fuddruckers restaurants was 44 at fiscal year-end 2019.
  
Fuddruckers Franchising

Fuddruckers offers franchises in markets where it deems expansion to be advantageous to the development of the Fuddruckers concept and system of restaurants. A standard franchise agreement generally has an initial term of 20 years. Franchise agreements typically grant franchisees an exclusive territorial license to operate a single restaurant within a specified area, usually a four-mile radius surrounding the franchised restaurant. Luby’s management will continue developing its relationships with our franchisees over the coming years and beyond.
 
Franchisees bear all direct costs involved in the development, construction and operation of their restaurants. In exchange for a franchise fee, we provide franchise assistance in the following areas: site selection, prototypical architectural plans, interior and exterior design and layout, training, marketing and sales techniques, assistance by a Fuddruckers “opening team” at the time a franchised restaurant opens, and operations and accounting guidelines set forth in various policies and procedures manuals.
 
All franchisees are required to operate their restaurants in accordance with Fuddruckers standards and specifications, including controls over menu items, food quality and preparation. We require the successful completion of our training program by a minimum

9



of three managers for each franchised restaurant. In addition, franchised restaurants are evaluated regularly for compliance with franchise agreements, including standards and specifications through the use of periodic, unannounced on-site inspections, and standards evaluation reports.
 
The number of franchised restaurants was 102 at fiscal year-end 2019.

Culinary Contract Services
 
Our CCS segment consists of a business line servicing long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, retail grocery stores, behavioral hospitals, sports stadiums, senior living facilities, government, and business and industry clients, primarily in Texas. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service, and retail dining. Our mission is to re-define the contract food industry by providing tasty and healthy menus with customized solutions for healthcare, senior living, business and industry and higher education facilities. We seek to provide the quality of a restaurant dining experience in an institutional setting. At fiscal year-end 2019, we had contracts with 12 long-term acute care hospitals, 7 acute care hospitals, three business and industry clients, three sport stadiums, one governmental facility, one medical office building, two senior living facilities, one behavioral facility and one freestanding coffee venue located inside an office building. We have the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food services to our clients.
 
For additional information regarding our business segments, please read Notes 1 and 4 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K.

Intellectual Property
 
Luby’s, Inc. owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information, including the Luby’s and Fuddruckers logos, trade names and trademarks, which are of material importance to our business. Depending on the jurisdiction, trademarks, and service marks generally are valid as long as they are used and/or registered. Patents, copyrights, and licenses are of varying durations. The success of our business depends on the continued ability to use existing trademarks, service marks, and other components of our brands in order to increase brand awareness and further develop branded products. We take prudent actions to protect our intellectual property.
 
Employees
 
As of November 15, 2019, we had an active workforce of 6,133 employees consisting of restaurant management employees, non-management restaurant employees, CCS management employees, CCS non-management employees, and office and facility service employees. Employee relations are considered to be good. We have never had a strike or work stoppage, and we are not subject to collective bargaining agreements.

Item 1A. Risk Factors
 
An investment in our common stock involves a high degree of risk. Investors should consider carefully the risks and uncertainties described below, and all other information included in this Form 10-K, before deciding whether to invest in our common stock. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business, financial condition or results of operations. The occurrence of any of the following risks could harm our business, financial condition, and results of operations. The trading price of our common stock could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment.

We are exploring various strategic alternatives to enhance shareholder value, but this strategic review process may not result in the achievement of the desired goal of enhancing shareholder value.
In September 2019, we announced that our Board formed a new Special Committee with the purpose of establishing a strategic review process to identify, examine and consider a range of strategic alternatives available to the Company with the objective of maximizing shareholder value. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations and may impair our ability to retain and motivate key personnel. We may incur substantial expenses associated with identifying, evaluating and preparing for any such strategic alternatives. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, regulatory limitations and the interest of third parties in us and our assets. There can be no assurance that the exploration of strategic alternatives will result in any specific action or transaction. Further, any such strategic alternative may not ultimately lead to increased shareholder value.

10



General economic and business conditions as well as those specific to the restaurant industry may adversely affect our business, financial condition and results of operations.
Our business results depend on a number of industry-specific and general economic factors, many of which are beyond our control. These factors include consumer income, interest rates, inflation, consumer credit availability, consumer debt levels, tax rates and policy, unemployment trends, and other matters that influence consumer confidence and spending. The restaurant industry is affected by changes in national, regional and local economic conditions, seasonal fluctuation of sales volumes, and consumer spending patterns. Discretionary consumer spending, which is critical to our success, is influenced by general economic conditions and the availability of discretionary income. A deterioration in the global or local economy or other economic conditions affecting disposable consumer income, such as unemployment levels, reduced home values, investment losses, inflation, business conditions, fuel and other energy costs, consumer debt levels, lack of available credit, consumer confidence, interest rates, tax rates and changes in tax laws, may reduce consumer confidence and affected consumers’ ability or desire to spend disposable income. This may adversely affect our business by reducing overall consumer spending or by causing customers to reduce the frequency with which they dine out or to shift their spending to our competitors, any of which could result in lower revenues, increased costs, reduced traffic, or limits on pricing, any of which could have a material adverse effect on our financial condition and results of operations.
Regional events can adversely affect our financial performance. 
Many of our restaurants and franchises are located in Texas. Our results of operations may be adversely affected by economic conditions in Texas or the occurrence of an event of terrorism or natural disaster in any of the communities in which we operate. Also, given our geographic concentration, negative publicity relating to our restaurants could have a pronounced adverse effect on our overall revenues. Although we generally maintain property and casualty insurance to protect against property damage caused by casualties and natural disasters, inclement weather, flooding, hurricanes, and other acts of God, these events can adversely impact our sales by discouraging potential customers from going out to eat or by rendering a restaurant or CCS location inoperable for a significant amount of time.
We face intense competition, and if we are unable to compete effectively or if customer preferences change, our business, financial condition and results of operations may be adversely affected.
The restaurant industry is intensely competitive and is affected by changes in customer tastes and dietary habits and by national, regional and local economic conditions and demographic trends. New menu items, concepts, and trends are constantly emerging. Our Luby’s Cafeteria brand offer a large variety of entrées, side dishes and desserts and our continued success depends, in part, on the popularity of our cuisine and cafeteria-style dining. A change away from this cuisine or dining style could have a material adverse effect on our results of operations. Our Fuddruckers brand offers grilled-to-order burgers that feature always fresh and never frozen, 100% premium-cut beef with no fillers or additives and sesame-topped buns baked from scratch on-site throughout the day. While burgers are the signature, the engaging menu offers variety for many tastes with an array of sandwiches, and salads. Changing customer preferences, tastes and dietary habits can adversely affect our business and financial performance. We compete on quality, variety, value, service, concept, price, and location with well-established national and regional chains, as well as with locally owned and operated restaurants. We face significant competition from family-style restaurants, fast-casual restaurants, and buffets as well as fast food restaurants. In addition, we also face growing competition as a result of the trend toward convergence in grocery, delicatessen, and restaurant services, particularly in the supermarket industry, which offers “convenient meals” in the form of improved entrées and side dishes from the delicatessen section. Many of our competitors have significantly greater financial resources than we do. We also compete with other restaurants and retail establishments for restaurant sites and personnel. We anticipate that intense competition will continue. If we are unable to compete effectively, our business, financial condition, and results of operations may be adversely affected.
Failure of our efforts designed to effect a turn-around of the business could adversely affect our business, financial condition and results of operations.
We have directed, and expect to continue to direct our efforts toward effecting a turn-around of the business with the aim of re-establishing a solid foundation from which profitability can be restored. This includes an asset sales program, menu innovation, efforts to attract and retain the most talented employees, culinary innovation enhancements, marketing initiatives, and the initiative to re-franchise company-owned Fuddruckers locations. Some or all of our efforts and initiatives are inherently risky and uncertain in their application to our business in general, even when tested successfully on a more limited scale. Failure to achieve successful implementation of any or all of our efforts could adversely affect our business, financial condition, and results of operations.

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Our ability to service our debt obligations is primarily dependent upon our future financial performance.
 
As of August 28, 2019, we had shareholders’ equity of $101 million compared to:

$48.7 million of long-term debt comprised of a $43.4 million Term Loan and a $5.3 million Revolver;
$40.2 million of minimum operating and capital lease commitments; and
 
Our ability to meet our debt service obligations depends on our ability to generate positive cash flows from operations and proceeds from assets sales.

If we are unable to service our debt obligations, we may have to:

delay spending on maintenance projects and other capital projects, including new restaurant development;
sell assets;
restructure or refinance our debt; or
sell equity securities.
 
 Our debt, and the covenants contained in the instruments governing our debt, could:

result in a reduction of our credit rating, which would make it more difficult for us to obtain additional financing on acceptable terms;
require us to dedicate a substantial portion of our cash flows from operating activities to the repayment of our debt and the interest associated with our debt;
limit our operating flexibility due to financial and other restrictive covenants, including restrictions on capital investments, debt levels, incurring additional debt and creating liens on our properties;
place us at a competitive disadvantage compared with our competitors that have relatively less debt;
expose us to interest rate risk because certain of our borrowings are at variable rates of interest; and
make us more vulnerable to downturns in our business.
 
If we are unable to service our debt obligations, we may not be able to sell equity securities, sell additional assets, or restructure or refinance our debt. Our ability to generate sufficient cash flow from operating activities to pay the principal of and interest on our indebtedness is subject to market conditions and other factors which are beyond our control.
 
The impact of inflation may adversely affect our results of operations.

The impact of inflation on food, labor and other aspects of our business can adversely affect our results of operations. Commodity inflation in food, beverages, and utilities can also impact our financial performance. Although we attempt to offset the effects of inflation through periodic menu price increases, cost controls, and incremental improvement in operating margins, we may not be able to completely eliminate such effects, which could adversely affect our results of operations.

We face the risk of adverse publicity and litigation, which could have a material adverse effect on our business and financial performance.
 
We may from, time to time, be the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Unfavorable publicity relating to one or more of our restaurants or to the restaurant industry in general may taint public perception of the Luby’s Cafeteria and Fuddruckers brands. Multi-unit restaurant businesses can be adversely affected by publicity resulting from poor food quality, illness, or other health concerns or operating issues stemming from one or a limited number of restaurants. Publicity resulting from these allegations may materially adversely affect our business and financial performance, regardless of whether the allegations are valid or whether we are liable. In addition, we are subject to employee claims alleging injuries, wage and hour violations, discrimination, harassment or wrongful termination. In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace, employment, and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend, and may divert time and money away from our operations and hurt our financial performance. A judgment significantly in excess of our insurance coverage, if any, for any claims could materially adversely affect our financial condition or results of operations.


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We are subject to risks related to the provision of employee healthcare benefits, worker’s compensation and employee injury claims.
 
Effective January 1, 2018, we maintain a self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop-loss limits. We record expenses under the plan based on estimates of the costs of expected claims, administrative costs and stop-loss insurance premiums. Self-insurance costs are accrued based upon the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on information on historical claims experience provided by our third party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims expense may differ from estimated loss provisions based on historical experience. In the event our cost estimates differ from actual costs, we could incur additional unplanned costs, which could adversely impact our financial condition.
 
Workers’ compensation coverage is provided through “self-insurance” by LFR. We record expenses under the plan based on estimates of the costs of expected claims, administrative costs, stop-loss insurance premiums, and expected trends. These estimates are then adjusted each year to reflect actual costs incurred. Actual costs under these plans are subject to variability that is dependent upon demographics and the actual costs of claims made. In the event our cost estimates differ from actual costs, we could incur additional unplanned costs, which could adversely impact our financial condition.
 
In March 2010, comprehensive healthcare reform legislation under the Patient Protection and Affordable Care Act (the "Affordable Care Act") and Healthcare Education and Affordability Reconciliation Act was passed and signed into law. Among other things, the healthcare reform legislation includes mandated coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and healthcare benefits. Although requirements were phased in over a period of time, the most impactful provisions began in the third quarter of fiscal 2015.

Due to the breadth and complexity of the healthcare reform legislation, the lack of implementing regulations in some cases, and interpretive guidance, and the phased-in nature of the implementation, it is difficult to predict the overall impact of the healthcare reform legislation on our business and the businesses of our franchisees over the coming years. Possible adverse effects of the healthcare reform legislation include reduced revenues, increased costs and exposure to expanded liability and requirements for us to revise the ways in which we conduct business or risk of loss of business. It is also possible that healthcare plans offered by other companies with which we compete for employees will make us less attractive to our current or potential employees. And in any event, implementing the requirements of the Affordable Care Act has imposed some additional administrative costs on us, and those costs may increase over time. In addition, our results of operations, financial position and cash flows could be materially adversely affected. Our franchisees face the potential of similar adverse effects, and many of them are small business owners who may have significant difficulty absorbing the increased costs.  
 
An increase in the minimum wage and regulatory mandates could adversely affect our financial performance.
 
From time to time, the U.S. Congress and state legislatures have increased and will consider increases in the minimum wage. The restaurant industry is intensely competitive, and if the minimum wage is increased, we may not be able to transfer all of the resulting increases in operating costs to our customers in the form of price increases. In addition, because our business is labor intensive, shortages in the labor pool or other inflationary pressure could increase labor costs that could adversely affect our results of operations.
 
We may be required to recognize additional impairment charges.
 
We assess our long-lived assets in accordance with generally accepted accounting principles in the United States (“GAAP”) and determine when they are impaired. Based on market conditions and operating results, we may be required to record additional impairment charges, which would reduce expected earnings for the periods in which they are recorded.
 
We may be harmed by security risks we face in connection with our electronic processing and transmission of confidential customer and employee information.

We accept electronic payment cards for payment in our restaurants. During fiscal 2019, approximately 75% of our restaurant sales were attributable to credit and debit card transactions, and credit and debit card usage could continue to increase. A number of retailers have experienced actual or potential security breaches in which credit and debit card information may have been stolen, including a number of highly publicized incidents with well-known retailers in recent years. In addition, we have previously been the victim of a cyber attack by hackers who deployed a version of the SamSam ransomware that encrypted electronic files, locking us out of many of our point-of-sale and other systems. These hackers requested a “ransom” payment in exchange for restoring

13



access to these encrypted files. Such attacks, while they did not provide the hackers with access to confidential customer and employee information, did adversely affect our profits due to our temporary inability to operate our restaurants and increased costs associated further protecting and restoring our computer systems. While we have taken preventative measures, no assurances can be provided that we will not be the subject of cyber attacks again in the future.
 
We may in the future become subject to additional claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Proceedings related to theft of credit or debit card information may be brought by payment card providers, banks and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit) and federal and state regulators. Any such proceedings could distract our management from running our business and cause us to incur significant unplanned losses and expenses. Consumer perception of our brand could also be negatively affected by these events, which could further adversely affect our results and prospects.

We also are required to collect and maintain personal information about our employees, and we collect information about customers as part of some of our marketing programs as well. The collection and use of such information is regulated at the federal and state levels, and the regulatory environment related to information security and privacy is increasingly demanding. At the same time, we are relying increasingly on cloud computing and other technologies that result in third parties holding significant amounts of customer or employee information on our behalf. If the security and information systems of ours or of outsourced third party providers we use to store or process such information are compromised or if we, or such third parties, otherwise fail to comply with these laws and regulations, we could face litigation and the imposition of penalties that could adversely affect our financial performance. Our reputation as a brand or as an employer could also be adversely affected from these types of security breaches or regulatory violations, which could impair our sales or ability to attract and keep qualified employees.
 
Labor shortages or increases in labor costs could adversely affect our business and results of operations.
 
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including regional managers, restaurant general managers and chefs, in a manner consistent with our standards and expectations. Qualified individuals that we need to fill these positions are in short supply and competition for these employees is intense. If we are unable to recruit and retain sufficient qualified individuals, our operations and reputation could be adversely affected. Additionally, competition for qualified employees could require us to pay higher wages, which could result in higher labor costs. Our financial condition and and announcement of our process of exploring strategic alternatives may result in difficulties in retaining and attracting qualified employees. Any increase in labor costs could adversely affect our results of operations.
  
If we are unable to anticipate and react to changes in food, utility and other costs, our results of operations could be materially adversely affected.
 
Many of the food and beverage products we purchase are affected by commodity pricing, and as such, are subject to price volatility caused by production problems, shortages, weather or other factors outside of our control. Our profitability depends, in part, on our successfully anticipating and reacting to changes in the prices of commodities. Therefore, we enter into purchase commitments with suppliers when we believe that it is advantageous for us to do so. If commodity prices were to increase, we may be forced to absorb the additional costs rather than transfer these increases to our customers in the form of menu price increases. Our success also depends, in part, on our ability to absorb increases in utility costs. Our operating results are affected by fluctuations in the price of utilities. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a material adverse effect on our results of operations.
 
Our business is subject to extensive federal, state and local laws and regulations.
 
The restaurant industry is subject to extensive federal, state and local laws and regulations. We are also subject to licensing and regulation by state and local authorities relating to health, healthcare, employee medical plans, sanitation, safety and fire standards, building codes and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act and applicable minimum wage requirements, overtime, unemployment tax rates, family leave, tip credits, working conditions, safety standards, healthcare and citizenship requirements), federal and state laws which prohibit discrimination, potential healthcare benefits legislative mandates, and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990.
  
As a publicly traded corporation, we are subject to various rules and regulations as mandated by the SEC and the NYSE. Failure to timely comply with these rules and regulations could result in penalties and negative publicity.
 

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We are subject to federal regulation and certain state laws which govern the offer and sale of franchises. Many state franchise laws contain provisions that supersede the terms of franchise agreements, including provisions concerning the termination or non-renewal of a franchise. Some state franchise laws require that certain materials be registered before franchises can be offered or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect us and the franchisees.
 
Termination of franchise agreements may disrupt restaurant performance.
 
Our franchise agreements are subject to termination by us in the event of default by the franchisee after applicable cure periods. Upon the expiration of the initial term of a franchise agreement, the franchisee generally has an option to renew the franchise agreement for an additional term. There is no assurance that franchisees will meet the criteria for renewal or will desire or be able to renew their franchise agreements. If not renewed, a franchise agreement, and payments required there under, will terminate. We may be unable to find a new franchisee to replace a non-renewing franchisee. Furthermore, while we will be entitled to terminate franchise agreements following a default that is not cured within the applicable grace period, if any, the disruption to the performance of the restaurants could adversely affect our business and revenues.

Franchisees may breach the terms of their franchise agreements in a manner that adversely affects the reputation of our brands.
 
Franchisees are required to conform to specified product quality standards and other requirements pursuant to their franchise agreements in order to protect our brands and to optimize restaurant performance. However, franchisees may receive through the supply chain or produce sub-standard food or beverage products, which may adversely impact the reputation of our brands. Franchisees may also breach the standards set forth in their respective franchise agreements. Any negative actions could have a corresponding material adverse effect on our business and revenues.

Our strategic initiative to transition the majority of our company-owned Fuddruckers restaurants to franchise operators may not be fully realizable.
 
Our success with this initiative requires entering into agreements with new or existing franchise owners on terms that are economically acceptable to us while presenting an attractive investment opportunity for those franchise owners.  Our company-owned Fuddruckers locations are geographically dispersed with some markets containing only one or two locations.  We may not be able to identify franchise owners willing and able to operate at these locations due to competitors operating in those markets that are more established or have greater penetration or brand presence. 

Expansion of our CCS operations may not be successful.
 
Successful expansion of our CCS operations depends on our ability to obtain new clients as well as retain and renew our existing client contracts. Our ability to do so generally depends on a variety of factors, including the quality, price and responsiveness of our services, as well as our ability to market these services effectively and differentiate ourselves from our competitors. We may not be able to renew existing client contracts at the same or higher rates or our current clients may turn to competitors, cease operations, or elect to self-operate or terminate contracts with us. The failure to renew a significant number of our existing contracts could have a material adverse effect on our business and results of operations.
 
Failure to collect account receivables could adversely affect our results of operations.
 
A portion of our accounts receivable is concentrated in our CCS operations among several customers. In addition, our franchises generate significant accounts receivables. Failure to collect from several of these accounts receivable could adversely affect our results of operations.
  
If we lose the services of any of our key management personnel, our business could suffer.
 
The success of our business is highly dependent upon our key management personnel, particularly Christopher J. Pappas, our President and Chief Executive Officer, and Benjamin T. Coutee, our Chief Operating Officer. The loss of the services of any key management personnel could have a material adverse effect upon our business. The process of exploring strategic alternatives may impair our ability to retain and motivate key management personnel.
 

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Our business is subject to seasonal fluctuations, and, as a result, our results of operations for any given quarter may not be indicative of the results that may be achieved for the full fiscal year.
 
Our business is subject to seasonal fluctuations. Historically, our highest earnings have occurred in the third quarter of the fiscal year, as our revenues in most of our restaurants have typically been higher during the third quarter of the fiscal year. Similarly, our results of operations for any single quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year.

We may not be able to adequately protect our intellectual property, which could harm the value of our brands and adversely affect our business.
 
Our ability to successfully implement our business plan depends in part on our ability to further build brand recognition using our trademarks, service marks, trade dress and other proprietary intellectual property, including our name and logos, and the unique ambience of our restaurants. If our efforts to protect our intellectual property are inadequate, or if any third party misappropriates or infringes on our intellectual property, either in print or on the internet, the value of our brands may be harmed, which could have a material adverse effect on our business and might prevent our brands from achieving or maintaining market acceptance. We may also encounter claims from prior users of similar intellectual property in areas where we operate or intend to conduct operations. This could harm our image, brand or competitive position and cause us to incur significant penalties and costs. 

The price of our common stock may experience volatility.
The market price of our common stock can be volatile as we undertake the strategic review process, which may continue or become more severe if and when a transaction or business arrangement is announced or we announce that we are no longer exploring strategic alternatives.

Appraisals of our properties are estimates of value and may not necessarily correspond to realizable value.
The appraisal methodologies used to appraise our properties involve subjective judgments. As a result, appraisals of our properties are only estimates of current market value as of the date of the appraisal. Ultimate realization of the value of a property depends to a great extent on economic and other conditions beyond our control and the control of the independent valuation firm and other parties involved in the valuation of our properties. Further, these valuations may not necessarily represent the price at which a property would sell, because market prices of properties can only be determined by negotiation between a willing buyer and seller.
Item 1B. Unresolved Staff Comments
 
None.
 
Item 2. Properties

As of November 15, 2019, we operated 120 restaurants at 114 property locations. Six of the operating locations are Combo locations and are considered two restaurants. Luby’s Cafeterias have seating capacity for 250 to 300 customers at each location while Fuddruckers locations generally seat 125 to 200 customers.
 
We own the underlying land and buildings on which 57 of our Luby’s Cafeteria and 14 of our Fuddruckers restaurants are located. Two of these restaurant properties contain excess building space or an extra building on the property which have 7 tenants unaffiliated with Luby’s, Inc. We also have one owned other-use property which is used as a central bakery supporting our operating restaurants.


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The following table summarizes our owned properties as of November 15, 2019:
 
 
Number of Properties
 
Appraised Value *
 
 
 
 
(in millions)
Operating Restaurants:
 
 
 
 
Luby's cafeterias
 
52

 
$
153.7

Fuddruckers restaurants
 
9

 
18.4

Combos
 
5

 
21.9

   Total Operating Properties
 
66

 
$
194.0

Leased to Fuddruckers franchisees
 
3

 
6.1

Non-operating held for sale
 
4

 
10.3

Bake Shop
 
1

 
1.1

   Total
 
74

 
$
211.5


 * Prior to and in conjunction with entering into the 2018 Credit Agreement in December 2018, we obtained third party appraisals from a nationally recognized real estate appraisal firm on all property used as collateral.

Included in the non-operating held for sale properties is one property classified as assets related to discontinued operations on our consolidated balance sheet at August 28, 2019 with a carrying value of $1.8 million and three properties classified as property held for sale on our consolidated balance sheets at August 28, 2019 with a carrying value of $2.8 million. Included in Luby's cafeterias and Fuddruckers restaurants operating restaurants are five and three properties, respectively, that are classified as property held for sale on our consolidated balance sheet at August 28, 2019 with carrying values of $6.3 million and $4.2 million, respectively. Also, the three properties leased to Fuddruckers franchisees are classified as property held for sale on our consolidated balance sheet at August 28, 2019 with a carrying value of $3.2 million.

In addition to the owned locations, 21 Luby’s Cafeteria restaurants, 27 Fuddruckers restaurants, and 1 Cheeseburger in Paradise restaurants are held under 48 leases. One of the 48 leases includes two restaurants at one leased location: one Luby's Cafeteria and one Fuddruckers restaurant. The majority of the leases are fixed-dollar rentals, which require us to pay additional amounts related to property taxes, hazard insurance, and maintenance of common areas. Of the 48 restaurant leases, the current terms of ten expire in less than one year, 22 expire between one and five years, and 16 expire thereafter. Additionally, 41 leases can be extended beyond their current terms at our option.
 
At November 15, 2019, we have leases on 10 restaurant properties where we have ceased operations. Although the Company remains obligated under the terms of the leases for the rent and other costs that may be associated with the leases, the Company has ceased operations and has no foreseeable plans to occupy the spaces as a company restaurant in the future.

We also have six leased locations that have two third party tenant and four Fuddruckers franchisees.
 
Our corporate office lease of approximately 26,000 square feet of office space runs through June 2022.
 
We also lease approximately 60,000 square feet of warehouse space for in-house repair, fabrication and storage in Houston, Texas. In addition, we lease approximately 630 square feet of office space in Farmers Branch, Texas and an executive suite in North Andover, MA where we have additional legal personnel.
 
We maintain general liability insurance and property damage insurance on all properties in amounts which management believes provide adequate coverage.


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Item 3. Legal Proceedings
 
From time to time, we are subject to various private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to issues common to the restaurant industry. We currently believe that the final disposition of these types of lawsuits, proceedings, and claims will not have a material adverse effect on our financial position, results of operations, or liquidity. It is possible, however, that our future results of operations for a particular fiscal quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings, or claims.
 
Item 4. Mine Safety Disclosures
 
Not applicable.



18



PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Stock Prices
 
Our common stock is traded on the NYSE under the symbol “LUB.” As of November 15, 2019, there were 1,953 holders of record of our common stock.

Equity Compensation Plans
 
Securities authorized under our equity compensation plans as of August 28, 2019, were as follows:
 
 
 
(a)
 
(b)
 
(c)
Plan Category
 
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
 
Weighted-
Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights
 
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans Excluding
Securities
Reflected in
Column (a)
Equity compensation plans previously approved by security holders
 
1,387,412

 
$
4.06

 
1,753,457

Equity compensation plans not previously approved by security holders (1)
 
17,801

 

 

Total
 
1,405,213

 
$
4.00

 
1,753,457

(1)  Represents the Luby’s, Inc. Nonemployee Director Phantom Stock Plan.
 
See Note 16, “Share-Based Compensation,” to our Consolidated Financial Statements included in Item 8 of Part II of this report.
 
Stock Performance Graph

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.




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Item  6. Selected Financial Data
 
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Management’s discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and footnotes for the fiscal years ended August 28, 2019 (“fiscal 2019”) and August 29, 2018, (“fiscal 2018”) included in Part II, Item 8 of this Form 10-K.

The table on the following page sets forth selected operating data as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying Consolidated Statements of Operations. Percentages may not add due to rounding.

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Fiscal Year Ended
 
 
August 28,
2019
 
August 29,
2018
 
 
(52 weeks)
 
(52 weeks)
Restaurant sales
 
88.0
 %
 
91.1
 %
Culinary contract services
 
9.9
 %
 
7.1
 %
Franchise revenue
 
2.1
 %
 
1.7
 %
Vending revenue
 
0.1
 %
 
0.1
 %
TOTAL SALES
 
100.0
 %
 
100.0
 %
 
 
 
 
 
STORE COSTS AND EXPENSES:
 
 
 
 
(As a percentage of restaurant sales)
 
 
 
 
 
 
 
 
 
Cost of food
 
27.9
 %
 
28.3
 %
Payroll and related costs
 
38.1
 %
 
37.4
 %
Other operating expenses
 
17.9
 %
 
18.7
 %
Occupancy costs
 
6.4
 %
 
6.1
 %
Vending revenue
 
(0.1
)%
 
(0.2
)%
Store level profit
 
9.8
 %
 
9.5
 %
 
 
 
 
 
COMPANY COSTS AND EXPENSES (as a percentage of total sales)
 
 
 
 
 
 
 
 
 
Opening costs
 
0.0
 %
 
0.2
 %
Depreciation and amortization
 
4.3
 %
 
4.8
 %
Selling, general and administrative expenses
 
10.6
 %
 
10.6
 %
Other charges
 
1.3
 %
 
 %
Provision for asset impairments and restaurant closings
 
1.7
 %
 
2.7
 %
Net gain on disposition of property and equipment
 
(4.0
)%
 
(1.6
)%
 
 
 
 
 
Culinary Contract Services Costs (as a percentage of Culinary contract services sales)
 
 
 
 
 
 
 
Cost of culinary contract services
 
89.5
 %
 
93.7
 %
Culinary income
 
10.5
 %
 
6.3
 %
 
 
 
 
 
Franchise Operations Costs (as a percentage of Franchise revenue)
 
 
 
 
 
 
 
 
 
Cost of franchise operations
 
24.4
 %
 
24.0
 %
Franchise income
 
75.6
 %
 
76.0
 %
 
 
 
 
 
(As a percentage of total sales)
 
 
 
 
LOSS FROM OPERATIONS
 
(2.8
)%
 
(6.1
)%
Interest income
 
0.0
 %
 
0.0
 %
Interest expense
 
(1.8
)%
 
(0.9
)%
Other income, net
 
0.1
 %
 
0.1
 %
Loss before income taxes and discontinued operations
 
(4.6
)%
 
(6.9
)%
Provision for income taxes
 
0.1
 %
 
2.1
 %
Loss from continuing operations
 
(4.7
)%
 
(9.0
)%
Loss from discontinued operations, net of income taxes
 
(0.0
)%
 
(0.2
)%
NET LOSS
 
(4.7
)%
 
(9.2
)%


21



Although store level profit, defined as restaurant sales plus vending revenue less cost of food, payroll and related costs, other operating expenses, and occupancy costs is a non-GAAP measure, we believe its presentation is useful because it explicitly shows the aggregated results of our restaurant brand reportable segments. The following table reconciles between store level profit, a non-GAAP measure to loss from continuing operations, a GAAP measure:
 
 
 
Fiscal Year Ended
 
 
August 28, 2019
 
August 29, 2018
 
 
(52 weeks)
 
(52 weeks)
 
 
(In thousands)
Store level profit
 
$
27,885

 
$
31,648

 
 
 
 
 
Plus:
 
 
 
 
Sales from culinary contract services
 
31,888

 
25,782

Sales from franchise operations
 
6,690

 
6,365

 
 
 
 
 
Less:
 
 
 
 
Opening costs
 
56

 
554

Cost of culinary contract services
 
28,554

 
24,161

Cost of franchise operations
 
1,633

 
1,528

Depreciation and amortization
 
13,998

 
17,453

Selling, general and administrative expenses(1)
 
34,179

 
38,725

Other charges
 
4,270

 

Provision for asset impairments and restaurant closings
 
5,603

 
8,917

Net gain on disposition of property and equipment
 
(12,832
)
 
(5,357
)
Interest income
 
(30
)
 
(12
)
Interest expense
 
5,977

 
3,348

Other income, net
 
(195
)
 
(298
)
Provision for income taxes
 
469

 
7,730

Loss from continuing operations
 
$
(15,219
)
 
$
(32,954
)

(1) Marketing and advertising expense included in Selling, general and administrative expenses was $3.9 million in fiscal 2019 and $3.5 million in fiscal 2018.

The following table shows our restaurant unit count as of August 28, 2019 and August 29, 2018.
 
Restaurant Counts: 
 
 
Fiscal 2019 Year Begin
 
Fiscal 2019 Openings
 
Fiscal 2019 Closings
 
Fiscal 2019
Transfers
to Franchisee
 
Fiscal 2019 Year End
Luby’s Cafeterias(1)
 
84

 

 
(5
)
 
 
 
79

Fuddruckers Restaurants(1)
 
60

 

 
(11
)
 
(5
)
 
44

Cheeseburger in Paradise
 
2

 

 
(1
)
 
 
 
1

Total
 
146

 

 
(17
)
 
(5
)
 
124

  
 (1) Includes 6 restaurants that are part of Combo locations



22



Overview
 
Description of the business
 
The Company operates with five reportable operating segments: Luby's Cafeterias, Fuddruckers Restaurants, Cheeseburger in Paradise, Fuddruckers Franchise Operations, and Culinary Contract Services. We generate revenues primarily by providing quality food to customers at our 79 Luby’s branded restaurants located mostly in Texas, 44 Fuddruckers restaurants located throughout the United States, 1 Cheeseburger in Paradise restaurant located in New Jersey, and 102 Fuddruckers franchises located primarily in the United States. Included in the Luby's Cafeterias segment are six locations where we operate both a Luby's Cafeteria and a Fuddruckers restaurant. In addition to our restaurant business model, we also provide culinary contract services for organizations that offer on-site food service, such as healthcare facilities, colleges and universities, sports stadiums, businesses and institutions, as well as sales through retail grocery outlets.

Prior to the fourth quarter of fiscal 2019 our internal organization and reporting structure supported three reportable segments; Company-owned restaurants, Fuddruckers franchise operations and Culinary Contract Services. The Company-owned restaurants consisted of several brands which were aggregated into one reportable segment.  The primary brands are Luby’s Cafeteria, Fuddruckers - World’s Greatest Hamburgers®, and Cheeseburger in Paradise. In the fourth quarter of fiscal 2019 we re-evaluated our reportable segments and disaggregated the Company-owned restaurants into three reportable segments based on brand name.  As such, as of the fourth quarter 2019, our five reportable segments are Luby’s restaurants, Fuddruckers restaurants, Cheeseburger in Paradise restaurants, Fuddruckers franchise operations and Culinary Contract Services. Management believes this change better reflects the priorities and decision-making analysis around the allocation of our resources and better aligns to the economic characteristics within similar restaurant brands. We began reporting on the new structure in the fourth quarter of fiscal 2019 as reflected in this Annual Report on Form 10-K. The segment data for the comparable periods presented has been recast to conform to the current period presentation. Recasting this historical information did not have an impact on the consolidated financial performance of Luby’s Inc. for any of the periods presented.
 
Business Strategy
 
In fiscal 2019, our full efforts were directed toward effecting a turn-around of the business with the aim of re-establishing a solid foundation from which profitability can be restored. This required a close re-evaluation of each of our business segments and restaurant brands with consideration of the value of our underlying real estate portfolio. As part of this process, we announced an asset sales program of up to $45 million. At the end of the first quarter of fiscal 2019, we also re-financed our debt and entered into a five-year credit agreement with a subsidiary of MSD Capital, MSD PCOF Partners IV, LLC ("MSD") as our new lender. This new financing arrangement along with the proceeds from the sale of certain owned property locations is intended to provide the necessary liquidity as we work through our turn-around plan.

Within our operations, we continued our focus on enhancing the guest experience at each of our restaurant brands, executing our growth plan for our Culinary Contract Services segment, and supporting our Fuddruckers franchise network for future growth. At our Company-owned restaurants, we focused on menu innovation and variety across the weeks and the seasons. We furthered our efforts in attracting and retaining the most talented individuals to serve and engage with our guests in both restaurant management roles and front-line hourly restaurant team member roles. We have an experienced culinary team that vigorously pursues culinary innovation enhancements. Our marketing initiatives centered around developing a more personal and direct connection with our guests, deploying technology where it makes most sense. By the end of fiscal 2019, we had transitioned much of our advertising and messaging toward digital media as we advance to the next phase of our loyalty and recognition programs. We continue to take these steps as part of our long-term strategy to increase our brand awareness and motivate increased guest visits, with a particular focus on our existing customer base that already knows us. As we continued to evaluate our portfolio of restaurant locations, we closed 17 restaurants so that resources could be focused on the locations that exhibit the most promise for enhanced profitability. We also transitioned 5 Fuddruckers restaurants in fiscal 2019 and an additional two at the beginning of fiscal year 2020 to a franchisee.

In fiscal 2019, our Fuddruckers franchise business segment continued supporting our loyal franchisees and we continued to pursue opportunities to re-franchise company-owned Fuddruckers locations as part of our strategy to grow franchise revenues. Our Culinary Contract Services segment continues its focus on expanding the number of locations that we serve and developing business partnerships for the long-term, while servicing our existing agreements with our customized and high-level of client service. We have streamlined our corporate overhead cost, including reduced headcount, corporate travel expense, and associated other overhead costs. In addition, at the beginning of fiscal 2020, we began organizational and planning efforts with an on-shore outsourcing firm. We anticipate completing the transition of our accounting, accounts payable, and certain other payroll and back-office functions to this outsourcing firm during the second fiscal quarter of 2020. We expect to realize additional cost savings and enhanced

23



capabilities with this transition. Concurrent with this effort, we continue to evaluate opportunities to further align and reduce our corporate overhead costs that support our business operations.

Board Special Committee

In September 2019, the Company's Board of Directors formed a new Board Special Committee comprised of independent directors with the purpose of establishing a strategic review process to identify, examine, and consider a range of strategic alternatives available to the Company with the objective of maximizing shareholder value. The Board Special Committee consists of the following members: Gerald Bodzy, Twila Day, Joe McKinney, Gasper Mir, John Morlock, and Randolph Read. The Board Special Committee is co-chaired by Messrs. Bodzy and Read.

Brookwood and Associates, previously engaged by the Company, is advising the Board Special Committee as a financial advisor to assist in certain aspects of the strategic alternatives review process. The Special Committee has retained Gibson, Dunn & Crutcher LLP to advise on various legal matters.

The Board of Directors has not made a decision to enter into any transaction at this time, and there are no assurances that the consideration of strategic alternatives will result in any transaction. The Company does not intend to comment on or disclose developments regarding the process unless it deems further disclosure appropriate or required. Please see "Risk factors" in Item 1A.




24



Financial and Operation Highlights for Fiscal 2019
 
Financial Results

Total company sales decreased approximately $41.7 million, or 11.4%, in fiscal 2019 compared to fiscal 2018, consisting primarily of an approximate $48.0 million decrease in restaurant sales, an approximate $6.1 million increase in Culinary contract services sales, an approximate $0.3 million increase in franchise revenue, and an approximate $0.1 million decrease in vending revenue. The decrease in restaurant sales included an approximate $15.8 million decrease in sales at stand-alone Luby's Cafeterias, an approximate $20.3 million decrease in sales at stand-alone Fuddruckers restaurants, an approximate $1.4 million decrease in sales at our Combo locations, and an approximate $9.9 million decrease in sales at Cheeseburger in Paradise restaurants.

Total segment profit decreased approximately $1.8 million to approximately $36.3 million in fiscal 2019 compared to approximately $38.1 million in fiscal 2018. The approximate $1.8 million decrease in total segment profit resulted from a decrease of approximately $3.8 million in Company-owned restaurant segment profit, an approximate $0.2 million increase in franchise segment profit and an approximate $1.7 million increase in Culinary contract services segment profit. The approximate $3.8 million decrease in Company-owned restaurant segment profit resulted from restaurant sales and vending income decreasing approximately $48.2 million with the cost of food, payroll and related costs, other operating expenses, and occupancy costs decreasing approximately $44.4 million.

Net loss was approximately $15.2 million in fiscal 2019 compared to a loss of approximately $33.6 million in fiscal 2018. Net loss included non-cash charges for asset impairments and restaurant closings of approximately $5.6 million and approximately $8.9 million in fiscal 2019 and fiscal 2018, respectively. Net loss included gains on the disposal of asset of approximately $12.8 million in fiscal 2019 and $5.4 million in fiscal 2018, respectively. Net loss included other charges of approximately $4.3 million in fiscal 2019. Net loss for fiscal 2018 included non-tax charges of approximately $8.4 million for valuation allowance on deferred tax assets
 
 Operational Endeavors and Milestones

Luby's cafeteria segment. In fiscal 2019, we continued to promote our "made–from–scratch" cooking with many locally-sourced “from the farm” ingredients at our Luby’s Cafeterias with our “Tastes Like Texas, Feels Like Home” slogan. “Tastes Like Texas, Feels Like Home” signifies that we are dedicated to serving our guests only the best hand-crafted recipes, prepared fresh each day in our kitchens true to our heritage as a well-regarded and loved Texas tradition. We support local farmers and use only fresh produce and highest quality ingredients. We rotate seasonal menu offerings throughout the year that showcase our 70-year history of "made-from-scratch" cooking expertise. Each section of the cafeteria line is presented to entice our guests to keep coming back for their favorites: fresh colorful hot vegetable presentations, extensive and creative cold side offerings and salads, varied recipes and presentations for beef, turkey, chicken, fish, stir-fry, enchiladas, and other delectable entrées. In addition, by the third quarter of fiscal 2019, we had re-introduced breakfast on the weekend at 33 locations, further expanding our offering. From a marketing perspective, we enhanced our online presence and much of our advertising is now in a digital format which we find to be a cost-effective way of reaching our guests and reminding them of who we are and what we offer. In the process, we are gaining more insights about our loyal guests and we are closely listening to our guests' input. At the same time, we are leveraging our Texas roots and heritage -- a message that resonates with our many guests that have known us over the decades. Additionally, we are addressing the conveniences expected by today's busy lifestyles through our partnership with third-party delivery platforms as well as the expected launch in early fiscal 2020 of the new Luby's app for mobile devices.

Fuddrucker restaurants segment. At Fuddruckers, we continue to evolve the World’s Greatest Hamburgers®, with new specialty burger combinations and toppings. In fiscal 2019, we continued to focus on speed of service and the ordering experience. We furthered our use of technology to reach our guests utilizing new digital media campaigns and targeted advertising to guests' mobile devices. We continued to measure guest satisfaction through surveys and other guest interactions that helped us identify areas of excellence and areas for improvement. We are confident the focus on great food and enhanced service will in the long run lead to increased guest frequency and loyalty.

At both of our core brands, we returned to everyday value pricing in efforts to grow guest visits over time. We see this as a rational approach and one that our guests expect and appreciate. By the third quarter of fiscal 2019, we removed substantially all discounts as we focused on delivering this everyday value to our guests with consistent pricing. We also offer select premium items at higher price points at both of our core brands for the guest that is seeking that experience. As anticipated, our overall average spend per guest declined as we moved to this lower pricing structure. However, we credit this approach with the improving guest traffic trends we experienced as we moved through fiscal 2019.

25




Key to our operational strategy at both of our core brands in fiscal 2019 was aligning the people within our organization into the right roles and providing team members with coaching to aid them in being successful. This alignment was aimed at encouraging everyone within our organization to further commit to a service mindset so that our guests have a welcoming and comfortable experience when visiting any of our restaurants. This initiative, combined with our everyday value pricing, is delivering tangible benefits in terms of guest frequency and overall guest visits.

Fuddruckers franchise network. Key to our strategy is to become a more franchise-centric brand as we transition company-owned Fuddruckers to new and existing franchise-owned business owners in our franchise network. Five locations in the San Antonio, TX metro area transferred in fiscal 2019 and two locations near Austin, TX transferred in early fiscal 2020 to a new franchise business owner as part of this effort. We continue to pursue opportunities to transition company-owned Fuddruckers for each of our existing markets and stores outside of our core Houston, TX market. As of August 28, 2019, we supported a franchise network of 102 Fuddruckers franchise locations.  In addition to five locations that transferred from company-operated stores to franchise-owned stores, three other franchise locations opened in fiscal 2019 (one in the country of Panama, one in Georgia, and one in Mississippi). 11 locations closed in fiscal 2019 (three international locations, and eight in the United States). Our franchise network generated approximately $6.7 million in revenue in fiscal 2019.

Culinary Contract Services. Our Culinary Contract Services segment generated approximately $31.9 million in revenue during fiscal 2019 compared to approximately $25.8 million in revenue during fiscal 2018. The approximate $6.1 million increase in revenue was primarily due to a net increase in the number of locations in operation and higher sales volume locations replacing lower sales volume locations. We view this area as a long-term growth business that generally requires less capital investment and produces favorable returns on invested capital.

Cheeseburger in Paradise segment. Despite previous efforts to revitalize the Cheeseburger in Paradise brand and improve financial results, we have ceased operations at all but one location.

Capital Spending. Purchases of property and equipment were approximately $4.0 million in fiscal 2019, down from approximately $13.2 million in fiscal 2018. Capital investments was constrained to a level necessary to maintain our base of continually operated restaurants and the information technology infrastructure needed to support these restaurants. No remodel projects were undertaken in fiscal 2019. We remain committed to maintaining the attractiveness of all of our restaurant locations where we anticipate operating over the long term. In fiscal 2020, we anticipate making capital investments of up to $4.0 million for recurring maintenance of our restaurant buildings and equipment, and technology infrastructure.

Accounting Periods
 
Our fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. Our first quarter consists of four four-week periods, while our last three quarters normally consist of three four-week periods. Comparability between quarters may be affected by the varying lengths of the quarters, as well as the seasonality associated with the restaurant business.
 
Same-Store Sales
 
The restaurant business is highly competitive with respect to food quality, concept, location, price, and service, all of which may have an effect on same-store sales. Our same-store sales calculation measures the relative performance of a certain group of restaurants. A store is included in this group of restaurants after it has been open for six complete consecutive quarters. Stores that close on a permanent basis (or on a temporary basis for remodeling) are removed from the group in the fiscal quarter when operations cease at the restaurant, but remain in the same-store group for previously reported fiscal quarters. Although management believes this approach leads to more effective year-over-year comparisons, neither the time frame nor the exact practice may be similar to those used by other restaurant companies. Same-store sales at our restaurant units decreased 4.2% for fiscal 2019 and decreased 0.5% for fiscal 2018.


26



The following table shows the year-over-year same-store sales change for comparative historical quarters for the restaurant segments:
 
 
 
Fiscal 2019
 
Fiscal 2018
Increase (Decrease)
 
Q4
 
Q3
 
Q2
 
Q1
 
Q4
 
Q3
 
Q2
 
Q1
Luby's Cafeterias
 
(3.2
)%
 
(3.1
)%
 
(2.2
)%
 
(3.0
)%
 
3.9
 %
 
2.4
 %
 
(1.8
)%
 
1.5
 %
Combo Locations
 
(2.5
)%
 
(4.8
)%
 
(7.1
)%
 
(11.1
)%
 
(1.5
)%
 
(3.3
)%
 
(5.4
)%
 
1.3
 %
Luby's cafeteria segment
 
(3.2
)%
 
(3.3
)%
 
(2.6
)%
 
(3.7
)%
 
3.3
 %
 
1.9
 %
 
(2.1
)%
 
1.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuddruckers restaurants segment
 
(5.5
)%
 
(6.1
)%
 
(5.3
)%
 
(11.2
)%
 
(3.9
)%
 
(5.8
)%
 
(6.4
)%
 
0.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cheeseburger in Paradise Segment
 
(3.6
)%
 
(4.4
)%
 
(3.1
)%
 
(0.6
)%
 
(4.4
)%
 
(11.7
)%
 
(13.9
)%
 
(10.5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same-store sales
 
(3.7
)%
 
(4.0
)%
 
(3.3
)%
 
(5.5
)%
 
1.2
 %
 
(0.9
)%
 
(3.7
)%
 
0.8
 %

At the end of fiscal 2019, there were 73 Luby’s Cafeterias, 6 Combo locations, 38 Fuddruckers Restaurants, and 1 Cheeseburger in Paradise locations that met the definition of same-stores.



27



RESULTS OF OPERATIONS 
 
Fiscal 2019 (52 weeks) compared to Fiscal 2018 (52 weeks)
 
Sales 
 
Fiscal Year 2019 Ended
 
Fiscal Year 2018 Ended
 
Fiscal 2019 vs Fiscal 2018
($000s)
August 28, 2019
 
August 29, 2018
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
Restaurant sales
$
284,513

 
$
332,518

 
(14.4
)%
Culinary contract services
31,888

 
25,782

 
23.7
 %
Franchise revenue
6,690

 
6,365

 
5.1
 %
Vending revenue
379

 
531

 
(28.6
)%
TOTAL SALES
$
323,470

 
$
365,196

 
(11.4
)%
 
Total company sales decreased approximately $41.7 million, or 11.4%, in fiscal 2019 compared to fiscal 2018, consisting primarily of an approximate $48.0 million decrease in restaurant sales and an approximate $0.2 million decrease in vending revenue, partially offset by an approximate $6.1 million increase in Culinary contract services sales, an approximate $0.3 million increase in Franchise revenue.

The Company operates with five reportable operating segments: Luby's Cafeterias, Fuddruckers Restaurants, Cheeseburger in Paradise, Fuddruckers Franchise Operations, and Culinary Contract Services.
 
Company-Owned Restaurants
 
Restaurant Sales
Restaurant Brands
Fiscal Year 2019 Ended
 
Fiscal Year 2018 Ended
 
Fiscal 2019 vs Fiscal 2018
 
August 28, 2019
 
August 29, 2018
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
   Luby’s cafeterias
$
195,151

 
$
210,972

 
(7.5
)%
   Combo locations
19,459

 
20,886

 
(6.8
)%
Luby's cafeteria segment
$
214,610

 
$
231,858

 
(7.4
)%
Fuddruckers restaurants segment
67,331

 
87,618

 
(23.2
)%
Cheeseburger in Paradise segment
$
3,108

 
$
13,042

 
(76.2
)%
Total Restaurant Sales
$
284,513

 
$
332,518

 
(14.4
)%
 
Total restaurant sales decreased approximately $48.0 million in fiscal 2019 compared to fiscal 2018. The decrease in restaurant sales included an approximate $15.8 million decrease in sales at stand-alone Luby’s Cafeterias, an approximate $20.3 million decrease in sales at stand-alone Fuddruckers restaurants, an approximate $1.4 million decrease in sales from Combo locations, and an approximate $9.9 million decrease at sales from our Cheeseburger in Paradise restaurants.

The approximate $15.8 million decrease in sales at stand-alone Luby’s reflects the reduction of nine operating restaurants, and a 2.9% decrease in same-store stand-alone Luby's Cafeteria sales. The 2.9% decrease in same-store sales includes a 4.9% decrease in guest traffic, partially offset by a 2.1% increase in average spend per guest.

The approximate $20.3 million decrease in sales at stand-alone Fuddruckers restaurants reflects the reduction of 27 operating restaurants and a 7.5% decrease in same-store stand-alone Fuddruckers sales. The 7.5% decrease in same-store sales includes a 10.7% decrease in guest traffic partially offset by a 3.6% increase in average spend per guest.

The approximate $1.4 million decrease in sales from Combo locations reflects a 6.8% decrease in sales at the six locations in operation throughout fiscal 2019 and fiscal 2018.


28



The approximate $9.9 million decrease in sales from our Cheeseburger in Paradise reflects the reduction of seven operating restaurants and a 2.9% decrease at the one remaining Cheeseburger in Paradise location.

Cost of Food 
 
Fiscal Year 2019 Ended
 
Fiscal Year 2018 Ended
 
Fiscal 2019 vs Fiscal 2018
($000s)
August 28, 2019
 
August 29, 2018
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
Cost of food:
 
 
 
 
 
Luby's cafeteria segment
$
60,801

 
$
65,956

 
$
(5,155
)
Fuddruckers restaurants segment
17,712

 
23,956

 
(6,244
)
Cheeseburger in Paradise segment
966

 
4,326

 
(3,360
)
Total Restaurants
$
79,479

 
$
94,238

 
$
(14,759
)
 
 
 
 
 
 
As a percentage of restaurant sales
 
 
 
 
 
Luby's cafeteria segment
28.4
%
 
28.4
%
 
0.0
 %
Fuddruckers restaurants segment
26.3
%
 
27.3
%
 
(1.0
)%
Cheeseburger in Paradise segment
31.1
%
 
33.2
%
 
(2.1
)%
Total Restaurants
27.9
%
 
28.3
%
 
(0.4
)%
 
Cost of food, which is comprised of the cost associated with the sale of food and beverage products that are consumed while dining in our restaurants, as take-out, and as catering. Cost of food decreased approximately $14.8 million, or 15.7%, in fiscal 2019 compared to fiscal 2018. Cost of food is variable and generally fluctuates with sales and guest traffic volume. As a percentage of restaurant sales, food costs decreased 0.4% to 27.9% in fiscal 2019 compared to 28.3% in fiscal 2018. The Cost of food as percentage of sales was impacted by higher average pricing in the first half of the fiscal year, menu rationalization leading to a favorable change in the mix of menu items purchased by guests, and continued careful cost management, partially offset by higher prices for certain food commodities.

The cost of food as a percentage of restaurant sales in the Luby's cafeteria segment was level at 28.4% in fiscal 2019 compared to fiscal 2018 due in large part to higher average menu pricing in the first half of fiscal 2019 offset by higher prices for certain food commodities. The cost of food as a percentage of restaurant sales for the Fuddruckers restaurants segment decreased 1.0% in fiscal 2019 compared to fiscal 2018 due to higher average menu pricing and a favorable change in the mix of menu items purchased by guests, partially offset by higher input prices of beef and other food commodities. The cost of food as a percentage of restaurant sales for the Cheeseburger in Paradise segment decreased 2.1% in fiscal 2019 compared to fiscal 2018 due primarily to reducing operations to a single location with better food cost economics.



29



Payroll and Related Costs 
 
Fiscal Year 2019 Ended
 
Fiscal Year 2018 Ended
 
Fiscal 2019 vs Fiscal 2018
($000s)
August 28, 2019
 
August 29, 2018
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
Payroll and related Costs:
 
 
 
 
 
Luby's cafeteria segment
$
81,342

 
$
86,264

 
$
(4,922
)
Fuddruckers restaurants segment
25,938

 
32,585

 
(6,647
)
Cheeseburger in Paradise segment
1,229

 
5,629

 
(4,400
)
Total Restaurants
$
108,509

 
$
124,478

 
$
(15,969
)
 
 
 
 
 
 
As a percentage of restaurant sales
 
 
 
 
 
Luby's cafeteria segment
38.0
%
 
37.2
%
 
0.8
 %
Fuddruckers restaurants segment
38.5
%
 
37.2
%
 
1.3
 %
Cheeseburger in Paradise segment
39.5
%
 
43.2
%
 
(3.6
)%
Total Restaurants
38.1
%
 
37.4
%
 
0.7
 %
 
Payroll and related costs includes restaurant-level hourly wages, including overtime pay, and pay while training, as well as management salaries and incentive payments. Payroll and related costs also include the payroll taxes, workers’ compensation expense, group health insurance costs, and 401(k) matching expense for all restaurant-level hourly and management employees. Payroll and related costs decreased approximately $16.0 million, or 12.8%, in fiscal 2019 compared to fiscal 2018 due in part to (1) operating 43 fewer restaurants (closure of 21 restaurants in fiscal 2018 closure of of 17 restaurants in fiscal 2019, and transfer of five Fuddruckers restaurants to a franchisee in fiscal 2019); for stores that continue to operate, payroll and related expense increased less than $0.1 million. The modest increase in payroll and related expenses for stores that continue to operate reflected (1) an increase in average salaries among our restaurant management teams and increased wage rates among our hourly team members; and (2) higher health insurance expense; partially offset by (3) a reduction in scheduled hours as a result of a decline in guest traffic. As a percentage of restaurant sales, payroll and related costs increased 0.7% to 38.1% in fiscal 2019 compared to 37.4% in fiscal 2018, due primarily to (1) the fixed cost component of labor costs (mainly management labor) with lower same-store sales levels and (2) higher health insurance expense.

Payroll and related costs a percentage of restaurant sales in the Luby's cafeteria segment increased 0.8% to 38.0% in fiscal 2019 compared to fiscal 2018 due to (1) increased wage rates among our hourly team members; (2) the fixed component of management labor costs with lower same-store sales levels; (3) increased usage of hourly overtime hours; and (4) higher health insurance expense; partially offset by (5) reduction in scheduled hours as a result of a decline in guest traffic. Payroll and related costs a percentage of restaurant sales in the Fuddruckers restaurants segment increased 1.3% to 38.5% in fiscal 2019 compared to fiscal 2018 due to (1) an increase in staffing and average salary cost for restaurant-level management; (2) higher health insurance expenses; and (3) an increase in average wage rates amount our hourly team members; partially offset by (4) a reduction in scheduled hours as a result of a decline in guest traffic. Payroll and related costs a percentage of restaurant sales in the Cheeseburger in Paradise segment decreased 3.6% to 39.5% in fiscal 2019 compared to fiscal 2018 due primarily to reducing operations to a single location with better labor cost economics and higher average sales volumes.

 


30



Other Operating Expenses 
 
Fiscal Year 2019 Ended
 
Fiscal Year 2018 Ended
 
Fiscal 2019 vs Fiscal 2018
($000s)
August 28, 2019
 
August 29, 2018
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
Other operating expenses:
 
 
 
 
 
Luby's cafeteria segment
$
37,192

 
$
41,653

 
$
(4,461
)
Fuddruckers restaurants segment
12,829

 
17,305

 
(4,476
)
Cheeseburger in Paradise segment
865

 
3,328

 
(2,463
)
Total Restaurants
$
50,886

 
$
62,286

 
$
(11,400
)
 
 
 
 
 
 
As a percentage of restaurant sales
 
 
 
 
 
Luby's cafeteria segment
17.4
%
 
18.0
%
 
(0.6
)%
Fuddruckers restaurants segment
19.1
%
 
19.8
%
 
(0.7
)%
Cheeseburger in Paradise segment
27.8
%
 
25.5
%
 
2.3
 %
Total Restaurants
17.9
%
 
18.7
%
 
(0.8
)%

 Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, and services. Other operating expenses decreased approximately $11.4 million, or 18.3%, in fiscal 2019 compared to fiscal 2018. Of the approximate $11.4 million million decrease in total other operating expenses, approximately $8.9 million is attributed to store closures and approximately $2.5 million is attributed to stores that continue to operate. The $2.5 million reduction in other operating expenses at stores that continue to operate is attributable to (1) an approximate $1.7 million reduction in restaurant supplies expense; (2) an approximate $0.7 million reduction in repairs and maintenance expense; and (3) an approximate $0.4 million reduction in other expenses, including the benefit from the absence of approximately $0.2 million in post-hurricane related repair and other expenses incurred in fiscal 2018; partially offset by (4) an approximate $0.3 million increase in uninsured losses, net of insurance recoveries. As a percentage of restaurant sales, Other operating expenses decreased 0.8% to 17.9% in fiscal 2019 compared to 18.7% in fiscal 2018. The 0.8% decrease in Other operating expenses as a percentage of restaurant sales was due to the net expense items enumerated above and the beneficial impact of store closures where operating expenses were generally higher as percentage of sales than stores that continue to operate.

Other operating expense a percentage of restaurant sales in the Luby's cafeteria segment decreased 0.6% to 17.4% in fiscal 2019 compared to fiscal 2018 due to (1) an approximate $0.7 million insurance recovery recorded in fiscal 2019; (2) a reduction in restaurant supplies expense; (3) the absence of approximately $0.2 million in post-hurricane related repair and other expenses incurred in fiscal 2018; partially offset by (4) increased cost for certain services provided to the cafeteria restaurants, including an increase in delivery fees related to increased usage of third-party delivery platforms. Other operating expense a percentage of restaurant sales in the Fuddruckers restaurants segment decreased 0.7% to 19.1% in fiscal 2019 compared to fiscal 2018 due to (1) the absence of approximately $0.3 million in post-hurricane related repair and other expenses incurred in fiscal 2018; (2) a reduction in restaurant supplies expense; and (3) the beneficial impact of store closures where operating expenses were generally higher as percentage of sales than stores that continue to operate; partially offset by (4) comparison to fiscal 2018 when an approximate $0.7 million insurance recovery was recorded. Other operating expense a percentage of restaurant sales in the Cheeseburger in Paradise segment increased 2.3% to 27.8% in fiscal 2019 compared to fiscal 2018 due to primarily to wind-down operational costs in fiscal 2019 for locations that closed at the end of fiscal 2018, including utilities expense and certain restaurant service costs.




31



Occupancy Costs
 
 
Fiscal Year 2019 Ended
 
Fiscal Year 2018 Ended
 
Fiscal 2019 vs Fiscal 2018
($000s)
August 28, 2019
 
August 29, 2018
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
Occupancy costs:
 
 
 
 
 
Luby's cafeteria segment
$
9,315

 
$
8,935

 
$
380

Fuddruckers restaurants segment
8,529

 
10,420

 
(1,891
)
Cheeseburger in Paradise segment
289

 
1,044

 
(755
)
Total Restaurants
$
18,133

 
$
20,399

 
$
(2,266
)
 
 
 
 
 
 
As a percentage of restaurant sales
 
 
 
 
 
Luby's cafeteria segment
4.4
%
 
3.9
%
 
0.5
%
Fuddruckers restaurants segment
12.7
%
 
11.9
%
 
0.8
%
Cheeseburger in Paradise segment
9.3
%
 
8.0
%
 
1.3
%
Total Restaurants
6.4
%
 
6.1
%
 
0.3
%
 
Occupancy costs include property lease expense, property taxes, and common area maintenance charges, property insurance, and permits and licenses. Occupancy costs decreased $2.3 million in fiscal 2019 compared to fiscal 2018. The decrease was primarily due to a decrease in rent and property taxes associated with operating 43 fewer restaurants in fiscal 2019 compared to fiscal 2018 (closure of 21 restaurants in fiscal 2018 closure of of 17 restaurants in fiscal 2019, and transfer of five Fuddruckers restaurants to a franchisee), partially offset by the additional lease expense at three properties that were sold and leased back. As a percentage of restaurant sales, occupancy costs increased 0.3%, to 6.4%, in fiscal 2019 compared to 6.1% in fiscal 2018 primarily as a result of the change in the mix of the portfolio of owned versus leased stores after the closure of 43 locations and sale of certain owned property locations as well as adjustments to property tax estimates. A significantly higher percentage of our Fuddruckers restaurants are leased properties as compared to our Luby's cafeterias. As a result, our Fuddruckers restaurant segment's occupancy costs as a percentage of sales is higher than our Luby's cafeterias.
 
Fuddruckers Franchise Segment Profit
 
 
Fiscal Year 2019 Ended
 
Fiscal Year 2018 Ended
 
Fiscal 2019 vs Fiscal 2018
($000s)
August 28, 2019
 
August 29, 2018
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
Franchise revenue
$
6,690

 
$
6,365

 
5.1
 %
Cost of franchise operations
1,633

 
1,528

 
6.9
 %
Franchise operations segment profit
$
5,057

 
$
4,837

 
4.5
 %
Franchise profit as percent of Franchise revenue
75.6
%
 
76.0
%
 
(0.4
)%
 
We offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Franchise revenue includes (1) royalties paid to us as the franchisor for the Fuddruckers brand; (2) funds paid to us as the franchisor for pooled advertising expenditures; and (3) franchise fees paid to us when franchise units are opened for business or transferred to new owners and when franchise agreements are renewed or certain milestones in franchise agreements are reached. Cost of franchise operations includes the direct costs associated with supporting franchisees with opening new Fuddruckers franchised restaurants and the corporate overhead expenses associated with generating franchise revenue. These corporate expenses primarily include the salaries and benefits, travel and related expenses, and other expenses for employees whose primary job function involves supporting our franchise owners and the development of new franchise locations


32



Beginning with the first quarter fiscal 2019, as a result of our adoption of the new revenue accounting standards more fully described in Note 1 to our consolidated financial statements:
We recognize as revenue the amounts due to us from franchisees for pooled advertising expenditures.
We recognize initial and renewal franchise fees evenly over the term of franchise area development agreements and we recognize revenue when a franchise agreement is terminated early.
Additionally, we record an expense and liability in an amount equal to the unspent funds paid to us from franchisees for pooled advertising expenditures that will be incurred in a future period.

Franchise revenue increased approximately $0.3 million, or 5.1%, in fiscal 2019 compared to fiscal 2018. The $0.3 million increase in franchise revenue reflects (1) an approximate $0.3 million increase in franchise fees earned; and (2) recognition of approximately $0.4 million of revenue related to funds owed to us as the franchisor for pooled advertising expenditures; partially offset by (3) an approximate $0.4 million decline in franchise royalties on fewer franchise locations in operation in fiscal 2019.

Cost of franchise operations increased approximately $0.1 million, or 6.9%, in fiscal 2019 compared to fiscal 2018. The increase was due primarily to (1) recording an expense in fiscal 2019 related to pooled advertising expenditures, partially offset by lower salary and benefits expense as well as lower travel expense required to support the franchise system.

Franchise operations segment profit, defined as Franchise revenue less Cost of franchise operations, increased approximately $0.2 million in in fiscal 2019 compared to fiscal 2018, due primarily to the $0.3 million increase in franchise revenue partially offset by the $0.1 million increase in franchise costs, both discussed above.

During fiscal 2019, three new Fuddruckers franchise locations opened, 11 locations closed, and five locations in the San Antonio, Texas area transferred from company operated locations to franchise operated locations. We ended fiscal 2019 with 102 Fuddruckers franchise restaurants.

Culinary Contract Services Segment Profit
 
Culinary Contract Services is a business line servicing healthcare, sport stadiums, corporate dining clients, and sales through retail grocery stores. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service, and retail dining. Culinary Contract Services has contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, behavioral hospitals, sports stadiums, and business and industry clients. Culinary Contract Services has the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food services to our clients. We operated 31 Culinary Contract Services locations at the end of fiscal 2019 and 28 at the end of fiscal 2018. We focus on clients who are able to enter into agreements in which all operating costs are reimbursed to us and we generally charge a fixed fee as opposed to agreements where we retain all revenues and operating costs and we are exposed to the variability of the operating results of the location. The fixed fee agreements typically present lower financial risk to the company.
 
 
Fiscal Year 2019 Ended
 
Fiscal Year 2018 Ended
 
Fiscal 2019 vs Fiscal 2018
($000s)
August 28, 2019
 
August 29, 2018
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
Culinary contract services
$
31,888

 
$
25,782

 
23.7
%
Cost of culinary contract services
28,554

 
24,161

 
18.2
%
CCS segment profit
$
3,334

 
$
1,621

 
105.7
%
Culinary contract profit as percent of Culinary contract services sales
10.5
%
 
6.3
%
 
4.2
%
 
Culinary contract services revenue increased $6.1 million, or 23.7%, in fiscal 2019 compared to fiscal 2018. The $6.1 million increase in revenue was primarily due to (1) an increase in sales of approximately $4.5 million from newer accounts that were not in operation for the entirety of fiscal 2019 and fiscal 2018; (2) approximately $0.6 million from a location that was transferred from our restaurant business segment to our culinary contract services business segment; and (3) approximately $1.1 million increase in sales from locations continually operated over the prior full year; partially offset by loss of sales of approximately $0.1 million for locations that ceased operations.

Cost of culinary contract services includes the food, payroll and related costs, other direct operating expenses, and corporate overhead expenses associated with generating Culinary contract services sales. Cost of culinary contract services increased

33



approximately $4.4 million, or 18.2%, in fiscal 2019 compared to fiscal 2018 due primarily to a net increase in culinary contract sales volume, partially offset by reductions of corporate overhead expenses required to support this business segment. CCS segment profit (defined as Culinary contract cervices revenue less Cost of culinary contract services) increased in dollar terms by approximately $1.7 million and increased as a percent of Culinary contract services revenue to 10.5% in fiscal 2019 from 6.3% in fiscal 2018, due primarily to the change in the mix of culinary contract service agreements with clients.
 
Opening Costs
 
Opening costs includes labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were less than $0.1 million in fiscal 2019 compared to approximately $0.6 million in fiscal 2018. Opening costs of $0.6 million in fiscal 2018 included the re-opening costs associated with one Fuddruckers location that was damaged during Hurricane Harvey and subsequently restored and re-opened for business just prior to the quarter ended June 6, 2018 as well as the carrying costs for one location where we previously operated a Cheeseburger in Paradise restaurant and one location that we lease where we previously intended to open a Fuddruckers restaurant.

Depreciation and Amortization
 
 
Fiscal Year 2019 Ended
 
Fiscal Year 2018 Ended
 
Fiscal 2019 vs Fiscal 2018
($000s)
August 28, 2019
 
August 29, 2018
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
Depreciation and amortization
$
13,998

 
$
17,453

 
(19.8
)%
As a percentage of total sales
4.3
%
 
4.8
%
 
(0.5
)%
 
Depreciation and amortization expense decreased $3.5 million in fiscal 2019 compared to fiscal 2018 due primarily to certain assets reaching the end of their depreciable lives and the removal of certain assets upon sale. As a percentage of total revenue, depreciation and amortization expense decreased to 4.3% in fiscal 2019, compared to 4.8% in fiscal 2018.

Selling, General and Administrative Expenses
 
 
Fiscal Year 2019 Ended
 
Fiscal Year 2018 Ended
 
Fiscal 2019 vs Fiscal 2018
($000s)
August 28, 2019
 
August 29, 2018
 
Higher/(Lower)
 
(52 weeks)
 
(52 weeks)
 
(52 vs 52 weeks)
General and administrative expenses
$
30,257

 
$
35,201

 
(14.0
)%
Marketing and advertising expenses
3,922

 
3,524

 
11.3
 %
Selling, general and administrative expenses
$
34,179

 
$
38,725

 
(11.7
)%
As percent of total sales
10.6
%
 
10.6
%
 
0.0
 %
 
Selling, general and administrative expenses include marketing and advertising expenses, corporate salaries and benefits-related costs, including restaurant area leaders and regional directors, share-based compensation, professional fees, travel and recruiting expenses and other office expenses. Selling, general and administrative expenses decreased by approximately $4.5 million, or 11.7%, in fiscal 2019 compared to fiscal 2018. The approximate $4.5 million decrease in Selling, general and administrative expenses include (1) an approximate $4.6 million decrease in salaries, benefits, and other compensation expenses; (2) an approximate $0.5 million reduction in corporate travel expense; (3) an approximate $0.4 million decrease related to lower general liability insurance expense; partially offset by (4) an approximate $0.4 million increase in marketing and advertising expense; (5) an approximate $0.5 million increase in outside professional services and telecommunications network costs; and (6) an approximate net $0.1 million increase in other corporate overhead costs. As a percentage of total sales, Selling, general and administrative expenses were 10.6% in fiscal 2019 and in fiscal 2018.



34



Other Charges

Other charges includes those expenses that we consider related to our restructuring efforts are not part of our recurring operations. We have identified these expenses amounting to approximately $4.3 million in fiscal 2019 and recorded in Other charges. These expenses were included in our Selling, general, and administrative cost expense line in previously reported quarters of fiscal 2019.
 
Fiscal Year 2019 Ended
($000s)
August 28, 2019
 
(52 weeks)
Proxy communication related
$
1,740

Employee severances
1,325

Restructuring related
1,205

Total Other Charges
$
4,270


In the first half of fiscal 2019, a shareholder of the company proposed alternative nominees to the Board of Directors and other possible changes to the corporate strategy resulting in a contested proxy at the company's annual meeting. We incurred approximately $1.7 million in proxy communication expense which was primarily for outside professional services and related costs in order to communicate with shareholders about management's strategy and the experience of the Company's members on the Board of Directors.

In fiscal 2019, we separated with a number of employees as part of our efforts to streamline our corporate overhead costs and to support a reduced number of restaurants in operation. Employees who were separated from the company were paid severance based on the number of years of service and earnings with the organization, resulting in an approximate $1.3 million charge.

Also, in fiscal 2019, we engaged a professional consulting firm to evaluate initiatives to right-size corporate overhead costs and revenue enhancing measures. In addition, we engaged other outside consultants to evaluate various other components of our strategy. We also incurred cost of other outside professionals as we began efforts to transition portions of our accounting, payroll, operational reporting, and other back-office functions to a leading multi-unit restaurant outsourcing firm.We anticipate completing the transition in the first calendar quarter of 2020 and expect to realize additional cost savings and enhanced capabilities from this transition. Lastly, we incurred expenses related to certain information technology systems that will be replaced by the capabilities of the outsourcing firm. We incurred an expense of $1.2 million for these restructuring efforts.

Other charges, as defined above, were not significant in fiscal 2018.

Provision for Asset Impairments and Restaurant Closings

The provision for asset impairment and restaurant closings of approximately $5.6 million in fiscal 2019 is primarily related to assets at nine property locations held for use, seven properties held for sale, one international joint venture investment, and spare inventory of restaurant equipment and parts at our maintenance facility, each written down to their estimated fair value. The provision for asset impairment and restaurant closings of approximately $8.9 million in fiscal 2018 is primarily related to assets impaired at 21 property locations, goodwill at three property locations, ten properties held for sale written down to their fair value, and a reserve for 15 restaurant closings of approximately $1.3 million.
 
Net Gain on Disposition of Property and Equipment

The approximate $12.8 million net gain on disposition of property and equipment in fiscal 2019 primarily reflects (1) the sale and leaseback of two property locations where we operate a total of three restaurants, including a portion related to amortization of deferred gains; (2) sale of one undeveloped property that was previously held for sale; (3) partially offset by net lease termination costs at other locations as well as routine asset retirement activity.
 
The approximate $5.4 million net gain on disposition of property and equipment in fiscal 2018 is primarily related to the gain on the sale of 10 properties of approximately $4.9 million and approximately $1.3 million of insurance proceeds received for property and equipment damaged by Hurricane Harvey, partially offset by lease termination costs at eight restaurant location closures and routine asset retirements. 


35



Interest Income
 
Interest income was $30 thousand in fiscal 2019 compared to $12 thousand in fiscal 2018 due to higher net cash balances, including required restricted cash balances.
 
Interest Expense

Interest expense was approximately $6.0 million in fiscal 2019 compared to $3.3 million in fiscal 2018. The increase in interest expense reflects higher average debt balances, higher interest rates in the credit agreement entered into on December 13, 2018, and higher amortization expense related to pre-paid interest and fees association with the credit agreement into on December 13, 2018, as well as acceleration of the expensing of deferred financing fees associated with our previous debt agreement. Interest paid in cash was $4.5 million in fiscal 2019 and $2.5 million in fiscal 2018.

Other Income (Expense), Net
 
Other income, net, consisted primarily of the following components: net rental property income and expenses relating to property for which we are the landlord; prepaid sales tax discounts earned through our participation in state tax prepayment programs; oil and gas royalty income; and changes in the fair value of our interest rate swap agreement prior to its termination in December 2018.

Other income was approximately $0.2 million in fiscal 2019 compared to approximately $0.3 million in fiscal 2018. The approximate $0.2 million of income in fiscal 2019 is primarily net rental income, partially offset by sales tax discount expense and a reduction in the fair value of our interest rate swap in the first quarter. The approximate $0.3 million of income in fiscal 2018 primarily reflects net rental income and an increase in the fair value of our interest rate swap, partially offset by gift card expenses (specifically the expense of discounting gift card sales).

Taxes
 
The income tax provision related to continuing operations for fiscal 2019 was approximately $0.5 million compared to an income tax provision of approximately $7.7 million for fiscal 2018. The income tax provision in fiscal 2019 reflects $0.4 million of current state income tax and $0.1 million of international withholding taxes. The income tax provision in fiscal 2018 reflects the impact of the U.S. tax reform, that is commonly referred to as Tax Cuts and Jobs Act (the "Tax Act"), of $3.2 million in deferred income taxes, an additional $4.1 million of deferred income tax provision, including an incremental valuation allowance, and $0.4 million of current state income taxes.

The effective tax rate ("ETR) for continuing operations was a negative 3.2% for fiscal 2019 and a negative 30.6% for fiscal 2018. The ETR for fiscal 2019 differs from the federal statutory rate of 21% due to the change in the valuation allowance, the federal jobs credits, state income taxes, and other discrete items. The Tax Act lowered the federal statutory tax rate from 35% to 21% effective January 1, 2018. In accordance with the application of Internal Revenue Code, Section 15, the Company's federal statutory tax rate for fiscal 2018 was 25%, representing a blended tax rate for the fiscal year. The ETR for fiscal 2018 differs from the blended federal statutory rate due to the change in the valuation allowance, the federal jobs credits, state income taxes and other discrete items.

Discontinued Operations
 
 
 
Fiscal Year Ended
($000s) 
 
August 28, 2019
 
August 29, 2018
 
 
(52 weeks)
 
(52 weeks)
Discontinued operating losses
 
$
(7
)
 
$
(21
)
Impairments
 

 
(59
)
Gains
 

 

Pretax loss
 
$
(7
)
 
$
(80
)
Income tax benefit (expense) from discontinued operations
 

 
(534
)
Loss from discontinued operations, net of income taxes
 
$
(7
)
 
$
(614
)
  

36



The loss from discontinued operations, net of income taxes was $7 thousand in fiscal 2019 compared to a loss of approximately $0.6 million in fiscal 2018. The loss of $7 thousand in fiscal 2019 primarily reflected net occupancy cost associated with assets that were related to discontinued operations. The loss of $0.6 million in fiscal 2018 included (1) less than $0.1 million in “carrying costs” (typically rent, property taxes, utilities, and maintenance) associated with assets that were related to discontinued operations; (2) less than $0.1 million impairment charges for certain assets related to discontinued operations; and (3) an approximate $0.5 million income tax provision related to increasing the deferred tax asset valuation allowance associated with discontinued operations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash and Cash Equivalents
 
In fiscal 2019 and 2018 our primary sources of short-term and long-term liquidity were proceeds from asset sales and our 2018 and 2016 Credit Facilities (as defined below). Cash and cash equivalents and restricted cash increased approximately $9.0 million from $3.7 million at the end of fiscal 2018 to $12.8 million at the end of fiscal 2019. We expect to continue to invest our available liquidity to reduce our debt, maintain our existing restaurants and infrastructure and provide working capital requirements as necessary. We plan to continue a level of capital and repair and maintenance expenditures to keep our restaurants attractive and operating efficiently. Based upon our level of past and projected capital requirements, we expect that proceeds from the sale of assets, funding available under our 2018 Credit Facility and cash flows from operations, will be sufficient to meet our capital expenditures and working capital requirements during the next twelve months.

As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories and our vendors grant trade credit for purchases such as food and supplies. However, higher levels of accounts receivable are typical in our CCS business segment and Fuddruckers franchise business segment. We also strategically invest in our business through the addition of new restaurant units and refurbishment of existing restaurant units, which are reflected as long-term assets.
 
The following table summarizes our cash flows from operating, investing and financing activities: 
 
 
Fiscal Year Ended
 
 
August 28, 2019
 
August 29, 2018
 
 
 
(52 weeks)
 
(52 weeks)
 
 
 
(In thousands)
Total cash provided by (used in):
 
 
 
 
 
Operating activities
 
$
(13,130
)
 
$
(8,453
)
 
Investing activities
 
17,849

 
3,014

 
Financing activities
 
4,315

 
8,065

 
Increase (Decrease) in cash and cash equivalents
 
$
9,034

 
$
2,626

 
 
Operating Activities. Cash flow from operating activities decreased from a use of cash of $8.5 million in fiscal 2018 to a use of cash of $13.1 million in fiscal 2019. The $4.7 million decrease in operating cash flow was primarily due to a $4.4 million decrease in cash used in operations before changes in operating assets and liabilities and a $0.3 million increase in cash used in changes in operating assets and liabilities.
 
The $4.4 million decrease in cash used in operating activities before changes in operating assets and liabilities was primarily due to uses of cash from a $1.8 million decrease total in total segment level profit and a $2.6 million increase in interest expense.

The $0.3 million increase in cash used in changes in operating assets and liabilities was primarily due to a $2.0 million higher decrease in accounts payable, accrued expenses and other liabilities, partially offset by a $0.7 million decrease in the change in trade accounts receivable and other receivables, a $0.2 million decrease in the change of food and supply inventories, and a $0.8 million decrease in the change of prepaid expenses and other assets, in fiscal 2019 compared to fiscal 2018.
  
Investing Activities. Cash provided by investing activities was $17.8 million in fiscal 2019, an increase of $14.8 million compared to cash used in investing activities of $3.0 million in fiscal 2018, primarily due to the proceeds from disposal of assets and property held for sale and proceeds from property and equipment insurance claims. We used cash to invest $4.0 million in the purchase of property and equipment in fiscal 2019, a decrease of $9.3 million from our investment of $13.2 million in fiscal 2018. Proceeds from disposal of assets and property held for sale was $21.8 million in fiscal 2019, an increase of $7.6 million from proceeds of $14.2 million in fiscal 2018. Proceeds on property and equipment insurance claims of $2.1 million was a source of cash in fiscal

37



2018. The purchases of property and equipment of $4.0 million in fiscal 2019 included $3.7 million for our Company-owned restaurants and $0.3 million in corporate related capital expenditures,. The purchases of property and equipment of $13.2 million in fiscal 2018 included $11.1 million for our Company-owned restaurants, $1.9 million in corporate related capital expenditures and $0.2 million for our CCS business segment.
 
Financing Activities. Cash provided by financing activities was $4.3 million in fiscal 2019, a decrease of $3.8 million from cash provided by financing activities of $8.1 million in fiscal 2018. Cash flows from financing activities was primarily the result of our 2016 Credit facility, as amended through December 13, 2018 and our 2018 Credit Facility thereafter. During fiscal 2019, net cash provided by our 2018 term loan was $58.4 million and by Revolver borrowings was $42.3 million. Cash used for Revolver repayments was $57.0 million, for repayments of our 2016 term loan was $36.1 million and for debt issuance costs was $3.3 million.

Net cash provided by financing activities of fiscal 2018 of $8.1 million consisted of net borrowings from our Revolver of $15.6 million, partially offset by payments on our 2015 term loan of $7.1 million and debt issuance costs paid of $0.4 million.
 
STATUS OF LONG-TERM INVESTMENTS AND LIQUIDITY
 
At August 28, 2019, we did not hold any long-term investments.
 
STATUS OF TRADE ACCOUNTS AND OTHER RECEIVABLES, NET
 
We monitor the aging of our receivables, including Fuddruckers franchising related receivables, and record provisions for uncollectability, as appropriate. Credit terms of accounts receivable associated with our CCS business vary from 30 to 45 days based on contract terms.
 
WORKING CAPITAL
 
At fiscal year-end 2019, current assets increased $7.6 million including an decrease of $0.1 million in cash and an increase in restricted cash of $9.1 million. Trade accounts and other receivables increased $0.1 million while food and supply inventory and prepaid expenses decreased $0.6 million and $0.9 million, respectively. The $0.6 million decrease in food and supply inventory was primarily due to lower spending for restaurant supplies and food supplies on lower sales volumes and the $0.9 million decrease in prepaid expenses was primarily due to reduction in prepayments of expenses.
 
At fiscal year-end 2019, current liabilities decreased $48.6 million due primarily to a $39.3 million decrease in Credit facility debt, a $7.3 million decrease in accrued expenses and other liabilities and a $2.0 million decrease in accounts payable. The decrease of $39.3 million in Credit facility debt due to the retirement of the 2016 Credit Facility debt with the proceeds from the long-term 2018 Credit Facility. The $7.3 million decrease in accrued expenses and other liabilities is primarily a result of lower payroll related liabilities of $1.8 million, lower insurance claim and premium liabilities of $1.2 million, lower lease termination costs reserves of $0.6 million, and lower unredeemed gift and dining card liability of $3.4 million, partially offset by higher accrued interest payable of $0.3 million. The lower unredeemed gift and dining card liability includes $3.1 million related to the cumulative effect of adopting the new revenue recognition accounting standard as more fully described at Note 1 to the consolidated financial statements included in Item 8. of this Form 10-K. The $2.0 million decrease in accounts payable was due to a $1.6 million decrease in checks in transit, a $0.8 million decrease in trade payables, and a $0.4 million increase in accrued purchases.
 
CAPITAL EXPENDITURES
 
Capital expenditures generally consist of purchases of real estate for future restaurant sites, culinary contract services investments, new unit construction, purchases of new and replacement restaurant furniture and equipment, and ongoing remodeling programs. Capital expenditures for fiscal 2019 were approximately $4.0 million primarily related to recurring maintenance of our restaurant properties and information technology infrastructure. In fiscal 2020, we expect to invest up to $4.0 million for recurring maintenance for our restaurant properties and information technology investments. We expect to be able to fund all planned capital expenditures in fiscal 2020 using cash flows from operations, proceeds from the sale of assets, and our available credit. 


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DEBT
2018 Credit Agreement
On December 13, 2018, the Company entered into a credit agreement (as amended by the First Amendment (as defined below), the “2018 Credit Agreement”) among the Company, the lenders from time to time party thereto, and MSD as Administrative Agent, pursuant to which the lenders party thereto agreed to make loans to the Company from time to time up to an aggregate principal amount of $80 million consisting of a $10 million revolving credit facility (the “2018 Revolver”), a $10 million delayed draw term loan (“2018 Delayed Draw Term Loan”), and a $60 million term loan (the “2018 Term Loan”, and together with the 2018 Revolver and the 2018 Delayed Draw Term Loan, the “2018 Credit Facility”). The 2018 Credit Facility terminates on, and all amounts owing thereunder must be repaid on, December 13, 2023.
On July 31, 2019, the Company entered into the First Amendment to the 2018 Credit Agreement (the “First Amendment”) to extend the 2018 Delayed Draw Term Loan expiration date for up to one year to the earlier to occur of (a) the date on which the commitments under the 2018 Delayed Draw Term Loan have been terminated or reduced to zero in accordance with the terms of the 2018 Credit Agreement and (b) September 13, 2020.
Borrowings under the 2018 Revolver, 2018 Delayed Draw Term Loan, and 2018 Term Loan will bear interest at the London InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest is payable quarterly and accrues daily. Under the terms of the 2018 Credit Agreement, the maximum amount of interest payable, based on the aggregate principal amount of $80 million and interest rates in effect at December 13, 2018, in the next 12 months was required to be pre-funded at the closing date of the 2018 Credit Agreement. The pre-funded amount at August 28, 2019 of approximately $6.4 million is recorded in restricted cash and cash equivalents on our consolidated balance sheet and is not available for other purposes. The interest rate for the 2018 Term Loan and the 2018 Revolver was approximately 10.1% as of November 15, 2019.
The 2018 Credit Facility is subject to the following minimum amortization payments: 1st anniversary: $10 million; 2nd anniversary: $10 million; 3rd anniversary: $15 million; and 4th anniversary: $15 million.
The Company also pays a quarterly commitment fee based on the unused portion of the 2018 Revolver and the 2018 Delayed Draw Term Loan at 0.5% per annum. Voluntary prepayments, refinancing and asset dispositions constituting a sale of all or substantially all assets, under the 2018 Delayed Draw Term Loan and the 2018 Term Loan are subject to a make whole premium during years one and two equal to the present value of all interest otherwise owed on the prepaid amount from the date of the pre-payment through the end of year two, a 2.0% fee during year three, and a 1.0% fee during year four. Finally, the Company paid to the lenders a one-time fee of $1.6 million in connection with the closing of the 2018 Credit Facility.
Indebtedness under the 2018 Credit Facility is secured by a security interest in, among other things, all of the Company’s present and future personal property (other than certain excluded assets) and all Mortgaged Property (as defined in the 2018 Credit Agreement) of the Company and its subsidiaries.
The 2018 Credit Facility contains customary covenants and restrictions on the Company’s ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and contains customary events of default. Specifically, among other things, the Company is required to maintain minimum Liquidity (as defined in the 2018 Credit Agreement) of $3.0 million as of the last day of each fiscal quarter and a minimum Asset Coverage Ratio (as defined in the 2018 Credit Agreement) of 2.50 to 1.00.
In conjunction with entering into the 2018 Credit Agreement in December 2018, we obtained third party appraisals on all property used as collateral to maintain the debt covenant requirement of a minimum of 2.50 to 1.00 asset coverage ratio . The asset coverage ratio is defined as the aggregate value of all mortgaged property divided by the outstanding principle amount of term loans plus the average aggregate outstanding principle amount of revolving credit loans during the last full month prior to such date of determination. At August 28, 2019, our asset coverage ratio was 4.23 to 1.00.
All amounts owing by the Company under the 2018 Credit Facility are guaranteed by the subsidiaries of the Company.
As of August 28, 2019, we had no amounts due within the next 12 months under the 2018 Credit Facility due to principal repayments in excess of the required minimum. As of August 28, 2019 we had approximately $1.3 million committed under letters of credit, which is used as security for the payment of insurance obligations and are fully cash collateralized, and approximately $0.1 million in other indebtedness.
At August 28, 2019, the Company had $4.7 million available to borrow under the 2018 Revolver and $10.0 million available to borrow under the 2018 Delayed Draw Term Loan.
As of November 26, 2019, the Company was in compliance with all covenants under the terms of the 2018 Credit Agreement.


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2016 Credit Agreement (paid in full and terminated in December 2018)
On November 8, 2016, the Company entered into a $65.0 million Senior Secured Credit Facility with Wells Fargo Bank, National Association, as Administrative Agent and Cadence Bank, NA and Texas Capital Bank, NA, as lenders (“2016 Credit Agreement”). The 2016 Credit Agreement, prior to the amendments discussed below, was comprised of a $30.0 million 5-year Revolver (the “Revolver”) and a $35.0 million 5-year Term Loan (the “Term Loan”), and it also included sub-facilities for swingline loans and letters of credits. The original maturity date of the 2016 Credit Agreement was November 8, 2021.
Borrowings under the Revolver and Term Loan bore interest at (1) a base rate equal to the greater of (a) the federal funds effective rate plus one-half of 1% (the “Base Rate”), (b) prime and (c) LIBOR for an interest period of 1 month, plus, in any case, an applicable spread that ranges from 1.50% to 2.50% per annum the (“Applicable Margin”), or (2) the LIBOR, as adjusted for any Eurodollar reserve requirements, plus an applicable spread that ranges from 2.50% to 3.50% per annum. Borrowings under the swingline loan bore interest at the Base Rate plus the Applicable Margin. The applicable spread under each option was dependent upon certain measures of the Company’s financial performance at the time of election. Interest was payable quarterly, or in more frequent intervals if LIBOR applies.
The Company was obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based on the average daily unused amount of the commitment of such lender, ranged from 0.30% to 0.35% per annum depending upon the Company's financial performance.
The proceeds of the 2016 Credit Agreement were available for the Company to (i) pay in full all indebtedness outstanding under the 2013 Credit Agreement as of November 8, 2016, (ii) pay fees, commissions, and expenses in connection with our repayment of the 2013 Credit Agreement, initial extensions of credit under the 2016 Credit Agreement, and (iii) for working capital and general corporate purposes of the Company.
The 2016 Credit Agreement, as amended, contained the customary covenants and was secured by an all asset lien on all of the Company's real property and also included customary events of default. On December 13, 2018, the 2016 Credit Agreement was terminated with all outstanding amounts paid in full. 
COMMITMENTS AND CONTINGENCIES
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements except for operating leases for our corporate office, facility service warehouse and certain restaurant properties.
 
Claims
 
From time to time, we are subject to various other private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to issues common to the restaurant industry. We currently believe that the final disposition of these types of lawsuits, proceedings and claims will not have a material adverse effect on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims.
 
Construction Activity
 
From time to time, we enter into non-cancelable contracts for the construction of our new restaurants and restaurant remodels. This construction activity exposes us to the risks inherent in this industry including but not limited to rising material prices, labor shortages, delays in getting required permits and inspections, adverse weather conditions, and injuries sustained by workers.
 
Contractual Obligations
 
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide the contractual obligations table.
 


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AFFILIATIONS AND RELATED PARTIES 

Affiliate Services
 
The Company’s Chief Executive Officer, Christopher J. Pappas, and Harris J. Pappas, a former Director of the Company, own restaurant entities (the “Pappas entities”) that may, from time to time, provide services to the Company and its subsidiaries, as detailed in the Amended and Restated Master Sales Agreement dated August 2, 2017 among the Company and the Pappas entities. Collectively, Messrs. Pappas and the Pappas entities own greater than 5% of the Company's common stock.
 
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities continue to provide specialized (customized) equipment fabrication, primarily for new construction, and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. The total costs under the Master Sales Agreement of custom-fabricated and refurbished equipment in fiscal 2019 and 2018 were approximately $19 thousand and $31 thousand, respectively. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Company’s Board of Directors.
 
Operating Leases
 
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partner interest and a 50% general partner interest in the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented approximately 7% of the space in that center since July 1969. No changes were made to the Company’s lease terms as a result of the transfer of ownership of the center to the new partnership.
 
On November 22, 2006, the Company executed a new lease agreement with respect to this property. Effective upon the Company’s relocation and occupancy into the new space in July 2008, the new lease agreement provides for a primary term of approximately 12 years with two subsequent five-year options. The new lease also gave the landlord an option to buy out the tenant on or after the calendar year 2015 by paying the then unamortized cost of improvements to the tenant. The Company is paying rent of $22.00 per square foot plus maintenance, taxes, and insurance for the remaining primary term of the lease. Thereafter, the lease provides for increases in rent at set intervals. The new lease agreement was approved by the Finance and Audit Committee of our Board of Directors in 2006.
 
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement for one of the Company’s Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of approximately six years with two subsequent five-year options. Pursuant to the new ground lease agreement, the Company is paying $28.53 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until May 31, 2020. Thereafter, the new ground lease agreement provides for increases in rent at set intervals.
 
Affiliated rents paid for the Houston property lease represented 2.9% and 3.1% of total rents for continuing operations for fiscal 2019 and 2018, respectively. Rent payments under the two lease agreements described above were $593 thousand and $628 thousand in fiscal 2019 and 2018, respectively.



41



The following table compares current and prior two fiscal years charges incurred under the Amended and Restated Master Sales Agreement, affiliated property leases, and other related party agreements to our total capital expenditures, as well as relative Selling, general and administrative expenses, and other operating expenses included in continuing operations:  
 
Fiscal Year Ended
 
August 28,
2019
 
August 29,
2018
 
 
(364 days)
 
(364 days)
 
 
(In thousands, except percentages)
AFFILIATED COSTS INCURRED:
 
 
 
 
Selling, general and administrative expenses—professional and other costs
$

 
$

 
Capital expenditures—custom-fabricated and refurbished equipment
19

 
31

 
Other operating expenses, occupancy costs and opening costs, including property leases
593

 
628

 
Total
$
612

 
$
659

 
RELATIVE TOTAL COMPANY COSTS:
 
 
 
 
Selling, general and administrative expenses
$
34,179

 
$
38,725

 
Capital expenditures
3,987

 
13,247