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EX-32.2 - EXHIBIT 32.2 - LUBYS INCex32-2_060116.htm
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EX-31.2 - EXHIBIT 31.2 - LUBYS INCex31-2_060116.htm
EX-31.1 - EXHIBIT 31.1 - LUBYS INCex31-1_060116.htm


 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
__________________________
FORM 10-Q
__________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 1, 2016
or
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 No.)
  
  
13111 Northwest Freeway, Suite 600
Houston, Texas
77040
(Address of principal executive offices)
(Zip Code)
 
(713) 329-6800
(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
Accelerated filer
x
Non-accelerated filer
☐  
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  x
 
As of July 6, 2016 there were 28,940,041 shares of the registrant’s common stock outstanding. 


1



Luby’s, Inc.
Form 10-Q
Quarter ended June 1, 2016
Table of Contents
 



Additional Information
 
We file reports with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The public may read and copy any materials we file with the SEC at its Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and 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 http://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 our 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. 



2



Part I—FINANCIAL INFORMATION
 
Item1. Financial Statements
 
Luby’s, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
 
 
June 1,
2016
 
August 26,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
1,409

 
$
1,501

Trade accounts and other receivables, net
6,142

 
5,175

Food and supply inventories
4,495

 
4,483

Prepaid expenses
3,911

 
3,402

Assets related to discontinued operations
1

 
10

Deferred income taxes
581

 
577

Total current assets
16,539

 
15,148

Property held for sale
4,238

 
4,536

Assets related to discontinued operations
3,667

 
3,671

Property and equipment, net
196,008

 
200,202

Intangible assets, net
21,367

 
22,570

Goodwill
1,605

 
1,643

Deferred income taxes
14,896

 
12,917

Other assets
3,452

 
3,571

Total assets
$
261,772

 
$
264,258

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
19,677

 
$
20,173

Liabilities related to discontinued operations
411

 
408

Accrued expenses and other liabilities
24,704

 
23,967

Total current liabilities
44,792

 
44,548

Credit facility debt
36,000

 
37,500

Liabilities related to discontinued operations
17

 
182

Other liabilities
7,631

 
7,369

Total liabilities
88,440

 
89,599

Commitments and Contingencies

 

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $0.32 par value; 100,000,000 shares authorized; shares issued were 29,420,690 and 29,134,603, respectively; shares outstanding were 28,920,690 and 28,634,603, respectively
9,414

 
9,323

Paid-in capital
30,133

 
29,006

Retained earnings
138,560

 
141,105

Less cost of treasury stock, 500,000 shares
(4,775
)
 
(4,775
)
Total shareholders’ equity
173,332

 
174,659

Total liabilities and shareholders’ equity
$
261,772

 
$
264,258

  
The accompanying notes are an integral part of these Consolidated Financial Statements.

3



Luby’s, Inc.
Consolidated Statements of Operations (unaudited)
(In thousands, except per share data)
 
 
Quarter Ended
 
Three Quarters Ended
 
June 1,
2016
 
May 6,
2015
 
June 1,
2016
 
May 6,
2015
 
(12 weeks)
 
(12 weeks)
 
(40 weeks)
 
(36 weeks)
SALES:
 
 
 
 
 
 
 
Restaurant sales
$
86,476

 
$
88,788

 
$
286,336

 
$
254,832

Culinary contract services
3,892

 
3,624

 
12,726

 
11,993

Franchise revenue
1,586

 
1,578

 
5,411

 
4,764

Vending revenue
143

 
112

 
437

 
355

TOTAL SALES
92,097

 
94,102

 
304,910

 
271,944

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Cost of food
24,221

 
25,218

 
81,256

 
74,171

Payroll and related costs
30,748

 
29,971

 
100,007

 
88,177

Other operating expenses
13,572

 
14,276

 
45,728

 
42,688

Occupancy costs
5,065

 
4,826

 
17,242

 
14,797

Opening costs
117

 
427

 
688

 
2,022

Cost of culinary contract services
3,534

 
3,232

 
11,476

 
10,809

Cost of franchise operations
441

 
410

 
1,480

 
1,147

Depreciation and amortization
5,304

 
4,759

 
17,538

 
14,608

Selling, general and administrative expenses
9,227

 
8,139

 
32,312

 
26,671

Provision for asset impairments
172

 

 
209

 
218

Net loss (gain) on disposition of property and equipment
42

 
(609
)
 
(793
)
 
(1,696
)
Total costs and expenses
92,443

 
90,649

 
307,143

 
273,612

INCOME (LOSS) FROM OPERATIONS
(346
)
 
3,453

 
(2,233
)
 
(1,668
)
Interest income

 
1

 
3

 
3

Interest expense
(482
)
 
(599
)
 
(1,674
)
 
(1,624
)
Other income (expense), net
88

 
24

 
(2
)
 
282

Income (loss) before income taxes and discontinued operations
(740
)
 
2,879

 
(3,906
)
 
(3,007
)
Provision (benefit) for income taxes
(593
)
 
395

 
(1,438
)
 
(1,326
)
Income (loss) from continuing operations
(147
)
 
2,484

 
(2,468
)
 
(1,681
)
Income (loss) from discontinued operations, net of income taxes
13

 
(131
)
 
(77
)
 
(344
)
NET INCOME (LOSS)
$
(134
)
 
$
2,353

 
$
(2,545
)
 
$
(2,025
)
Income (loss) per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
0.09

 
$
(0.09
)
 
$
(0.06
)
Assuming dilution
$
(0.01
)
 
$
0.09

 
$
(0.09
)
 
$
(0.06
)
Income (loss) per share from discontinued operations:
 
 
 
 
 
 
 
Basic
$
0.00

 
$
(0.01
)
 
$
(0.00
)
 
$
(0.01
)
Assuming dilution
$
0.00

 
$
(0.01
)
 
$
(0.00
)
 
$
(0.01
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
0.08

 
$
(0.09
)
 
$
(0.07
)
Assuming dilution
$
(0.01
)
 
$
0.08

 
$
(0.09
)
 
$
(0.07
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
29,259

 
29,009

 
29,207

 
28,940

Assuming dilution
29,259

 
29,111

 
29,207

 
28,940

 
The accompanying notes are an integral part of these Consolidated Financial Statements.

4



Luby’s, Inc.
Consolidated Statement of Shareholders’ Equity (unaudited)
(In thousands)
 
 
Common Stock
 
 
 
 
 
Total
 
Issued
 
Treasury
 
Paid-In
 
Retained
 
Shareholders’
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Equity
Balance at August 26, 2015
29,135

 
$
9,323

 
(500
)
 
$
(4,775
)
 
$
29,006

 
$
141,105

 
$
174,659

Net loss

 

 

 

 

 
(2,545
)
 
(2,545
)
Share-based compensation expense
50

 
16

 

 

 
1,127

 

 
1,143

Common stock issued under employee benefit plans
176

 
56

 

 

 
19

 

 
75

Common stock issued under nonemployee benefit plans
60

 
19

 

 

 
(19)

 

 

Balance at June 1, 2016
29,421

 
$
9,414

 
(500
)
 
$
(4,775
)
 
$
30,133

 
$
138,560

 
$
173,332

 
The accompanying notes are an integral part of these Consolidated Financial Statements. 

5



Luby’s, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 
 
Three Quarters Ended
 
June 1,
2016
 
May 6,
2015
 
(40 weeks)
 
(36 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(2,545
)
 
$
(2,025
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Net gain on disposition of property and equipment
(609
)
 
(1,386
)
Depreciation and amortization
17,555

 
14,624

Amortization of debt issuance cost
255

 
127

Share-based compensation expense
1,143

 
1,102

Deferred tax benefit
(1,983
)
 
(1,978
)
Cash provided by operating activities before changes in operating assets and liabilities
13,816

 
10,464

Changes in operating assets and liabilities:
 
 
 
Increase in trade accounts and other receivables
(967
)
 
(108
)
Decrease (Increase) in food and supply inventories
(516
)
 
1,135

Decrease (increase) in prepaid expenses and other assets
(614
)
 
41

Decrease in accounts payable, accrued expenses and other liabilities
(311
)
 
(7,371
)
Net cash provided by operating activities
11,408

 
4,161

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from disposal of assets and property held for sale
4,308

 
5,142

Decrease in notes receivable
17

 
50

Purchases of property and equipment
(14,358
)
 
(16,429
)
Net cash used in investing activities
(10,033
)
 
(11,237
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Credit facility borrowings
77,900

 
80,100

Credit facility repayments
(79,400
)
 
(74,100
)
Debt issuance costs
(42
)
 
(253
)
Proceeds received on the exercise of employee stock options
75

 
115

Net cash provided by (used in) financing activities
(1,467
)
 
5,862

Net decrease in cash and cash equivalents
(92
)
 
(1,214
)
Cash and cash equivalents at beginning of period
1,501

 
2,788

Cash and cash equivalents at end of period
$
1,409

 
$
1,574

Cash paid for:
 
 
 
Income taxes
$

 
$

Interest
1,368

 
1,505

 
The accompanying notes are an integral part of these Consolidated Financial Statements.

6



Luby’s, Inc.
Notes to Consolidated Financial Statements (unaudited)
 
 
Note 1. Basis of Presentation
 
The accompanying unaudited Consolidated Financial Statements of Luby’s, Inc. (the “Company” or “Luby’s”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements that are prepared for the Company’s Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended June 1, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2016.
 
The Consolidated Balance Sheet dated August 26, 2015, included in this Quarterly Report on Form 10-Q (this “Form 10-Q”), has been derived from the audited Consolidated Financial Statements as of that date. However, this Form 10-Q does not include all of the information and footnotes required by GAAP for an annual filing of complete financial statements. Therefore, these financial statements should be read in conjunction with the audited Consolidated Financial Statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 26, 2015.
 
Note 2. Accounting Periods
 
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate; fiscal year 2016 will be such a year. Each of the first three quarters of each fiscal year, prior to fiscal year 2016, consisted of three four-week periods, while the fourth quarter normally consisted of four four-week periods.
  
Beginning in fiscal 2016, we changed our fiscal quarter ending dates with the first fiscal quarter end extended by one accounting period and the fiscal fourth quarter being reduced by one accounting period. The purpose of this change is in part to minimize the Thanksgiving calendar shift by extending the first fiscal quarter until after Thanksgiving. With this change in fiscal quarter ending dates, our first quarter is 16 weeks, and the remaining three quarters will typically be 12 weeks in length. The fourth fiscal quarter will be 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year. Fiscal 2016 is such a year where the fourth quarter will have 13 weeks, resulting in a 53 week fiscal year. Comparability between quarters may be affected by varying lengths of the quarters, as well as the seasonality associated with the restaurant business. 
 
Note 3. Reportable Segments
 
The Company has three reportable segments: Company-owned restaurants, Culinary Contract Services (“CCS”) and Franchise Operations.
 
Company-owned restaurants
 
Company-owned restaurants consists of several brands which are aggregated into one reportable segment because the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, the nature of the regulatory environment and store level profit margin are similar. The chief operating decision maker analyzes Company-owned restaurants at store level profit which is revenue less cost of food, payroll and related costs, other operating expenses and occupancy costs. The primary brands are Luby’s Cafeterias, Fuddruckers and Cheeseburger in Paradise, with a non-core restaurant location operating under the brand name Bob Luby’s Seafood Grill. All company-owned restaurants are casual dining restaurants. Each restaurant is an operating segment because operating results and cash flow can be determined for each restaurant.
 
The total number of Company-owned restaurants was 178 at June 1, 2016 and 177 at August 26, 2015.


7



Culinary Contract Services
 
CCS, branded as Luby’s Culinary Contract Services, consists of a business line servicing healthcare, higher education and corporate dining clients. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service and retail dining. CCS has contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, behavioral hospitals and business and industry clients. CCS has the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food services to our clients. The cost of Culinary Contract Services on the Consolidated Statements of Operations include all food, payroll and related costs and other operating expenses related to CCS sales.
 
The total number of CCS contracts was 26 at June 1, 2016 and 23 at August 26, 2015.  
 
Franchise Operations
 
We offer franchises for only the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Initial franchise agreements have a term of 20 years. Franchise agreements typically grant franchisees an exclusive territorial license to operate a single restaurant within a specified area, usually a four-mile radius surrounding the franchised restaurant.
 
Franchisees bear all direct costs involved in the development, construction and operation of their restaurants. In exchange for a franchise fee, the Company provides franchise assistance in the following areas: site selection, prototypical architectural plans, interior and exterior design and layout, training, marketing and sales techniques, assistance by a Fuddruckers “opening team” at the time a franchised restaurant opens, and operations and accounting guidelines set forth in various policies and procedures manuals.
 
All franchisees are required to operate their restaurants in accordance with Fuddruckers’ standards and specifications, including controls over menu items, food quality and preparation. The Company requires the successful completion of its training program by a minimum of three managers for each franchised restaurant. In addition, franchised restaurants are evaluated regularly by the Company for compliance with franchise agreements, including standards and specifications through the use of periodic, unannounced, on-site inspections and standard evaluation reports.
 
The number of franchised restaurants was 114 at June 1, 2016 and 106 at August 26, 2015.  
 
Licensee
 
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 July 2016, this licensee operated 35 restaurants that are licensed to use the Fuddruckers Proprietary Marks in Saudi Arabia, Egypt, Lebanon, United Arab Emirates, Qatar, Jordan, Bahrain, Kuwait, Morocco and Malaysia. The Company does not receive revenue or royalties from these restaurants.

The table on the following page shows segment financial information. The table also lists total assets for each reportable segment. Corporate assets include cash and cash equivalents, property and equipment, assets related to discontinued operations, property held for sale, deferred tax assets and prepaid expenses.
 

8



 
Quarter Ended
 
Three Quarters Ended
 
June 1,
2016
 
May 6,
2015
 
June 1,
2016
 
May 6,
2015
 
(12 weeks)
 
(12 weeks)
 
(40 weeks)
 
(36 weeks)
 
(In thousands)
Sales:
 
 
 
 
 
 
 
Company-owned restaurants (1)
$
86,619

 
$
88,900

 
$
286,773

 
$
255,187

Culinary contract services
3,892

 
3,624

 
12,726

 
11,993

Franchise operations
1,586

 
1,578

 
5,411

 
4,764

Total
$
92,097

 
$
94,102

 
$
304,910

 
$
271,944

Segment level profit:
 
 
 
 

 

Company-owned restaurants
$
13,013

 
$
14,609

 
$
42,540

 
$
35,354

Culinary contract services
358

 
392

 
1,250

 
1,184

Franchise operations
1,145

 
1,168

 
3,931

 
3,617

Total
$
14,516

 
$
16,169

 
$
47,721

 
$
40,155

Depreciation and amortization:
 
 
 
 

 

Company-owned restaurants
$
4,386

 
$
4,047

 
$
14,512

 
$
12,538

Culinary contract services
19

 
28

 
83

 
127

Franchise operations
192

 
177

 
641

 
531

Corporate
707

 
507

 
2,302

 
1,412

Total
$
5,304

 
$
4,759

 
$
17,538

 
$
14,608

Capital expenditures:
 
 
 
 

 

Company-owned restaurants
$
3,217

 
$
5,023

 
$
13,839

 
$
15,368

Culinary contract services

 

 

 

Franchise operations

 

 

 

Corporate
171

 
418

 
519

 
1,061

Total
$
3,388

 
$
5,441

 
$
14,358

 
$
16,429

 
 
 
 
 

 

Loss before income taxes and discontinued operations:
 
 
 
 

 

Segment level profit
$
14,516

 
$
16,169

 
$
47,721

 
$
40,155

Opening costs
(117
)
 
(427
)
 
(688
)
 
(2,022
)
Depreciation and amortization
(5,304
)
 
(4,759
)
 
(17,538
)
 
(14,608
)
Selling, general and administrative expenses
(9,227
)
 
(8,139
)
 
(32,312
)
 
(26,671
)
Provision for asset impairments
(172
)
 

 
(209
)
 
(218
)
Net loss (gain) on disposition of property and equipment
(42
)
 
609

 
793

 
1,696

Interest income

 
1

 
3

 
3

Interest expense
(482
)
 
(599
)
 
(1,674
)
 
(1,624
)
Other income (expense), net
88

 
24

 
(2
)
 
282

Income (loss) before income taxes and discontinued operations
$
(740
)
 
$
2,879

 
$
(3,906
)
 
$
(3,007
)
 
 
June 1,
2016
 
August 26,
2015
Total assets:
 
 
 
Company-owned restaurants(2)
$
213,995

 
$
218,492

Culinary contract services
3,560

 
1,644

Franchise operations(3)
12,538

 
13,034

Corporate
31,679

 
31,088

Total
$
261,772

 
$
264,258

 
(1)
Includes vending revenue of $143 and $112 thousand for the quarters ended June 1, 2016 and May 6, 2015, respectively, and $437 and $355 thousand for the three quarters ended June 1, 2016 and May 6, 2015, respectively.
(2)
Company-owned restaurants segment includes $10.0 million of Fuddruckers trade name, Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles.
(3)
Franchise operations segment includes approximately $11.7 million in royalty intangibles.

9



Note 4. Fair Value Measurements
 
GAAP establishes a framework for using fair value to measure assets and liabilities. Fair value measurements guidance applies whenever other statements require or permit assets or liabilities to be measured at fair value.
 
GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include:

Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2: Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.

Level 3: Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
 
 Non-recurring fair value measurements related to impaired property and equipment consisted of the following:
 
 
 
 
Fair Value
Measurement Using
 
 
 
Three Quarters Ended June 1, 2016
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Impairments
Nonrecurring Fair Value Measurements
 
 
(In thousands)
 
 
 
 
Continuing Operations
 
 
 
 
 
 
 
 
 
Property and equipment related to company-owned restaurants
$

 
$

 
$

 
$

 
$

Goodwill (1)
1,605

 

 

 
1,605

 
(38
)
Total Nonrecurring Fair Value Measurements
$
1,605

 
$

 
$

 
$
1,605

 
$
(38
)
Discontinued Operations
 
 
 
 
 
 
 
 
 
Property and equipment related to company-owned restaurants
$

 
$

 
$

 
$

 
$


(1)    In accordance with Subtopic 360-20, goodwill with a carrying amount of approximately $1.6 million was written down to its implied fair value of approximately $1.6 million, resulting in an impairment charge of $38 thousand, in the quarter ended March 9, 2016.



10



 
 
 
Fair Value
Measurement Using
 
 
 
Three Quarters Ended May 6, 2015
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Impairments
Nonrecurring Fair Value Measurements
 
 
(In thousands)
 
 
 
 
Continuing Operations
 
 
 
 
 
 
 
 
 
Property and equipment related to company-owned restaurants (1)
$
1,323

 
$

 
$

 
$
1,323

 
$
(180
)
Goodwill (2)
1,643

 

 

 
1,643

 
(38
)
Total Nonrecurring Fair Value Measurements
$
2,966

 
$

 
$

 
$
2,966

 
$
(218
)
Discontinued Operations
 
 
 
 
 
 
 
 
 
Property and equipment related to company-owned restaurants
$

 
$

 
$

 
$

 
$

 
(1)    In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of approximately $1.5 million were written down to their fair value of approximately $1.3 million, resulting in an impairment charge of approximately $0.2 million, which was included in earnings for the period.
(2)    In accordance with Subtopic 360-20, goodwill with a carrying amount of approximately $1.7 million was written down to its implied fair value of approximately $1.6 million, resulting in an impairment charge of $38 thousand.

Note 5. Income Taxes 
 
No cash payments of estimated federal income taxes were made during the three quarters ended June 1, 2016
 
Deferred tax assets and liabilities are recorded based on differences between the financial reporting basis and the tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are recognized to the extent future taxable income is expected to be sufficient to utilize those assets prior to their expiration.

The effective tax rate, (ETR), from continuing operations was 80% and 37% for the quarter and three quarters ended June 1, 2016, respectively. The ETR for the quarter and three quarters ended June 1, 2016 differs from the federal statutory rate of 34% due to the federal jobs credits, state income taxes and other discrete items. The additional deferred income tax benefit recognized in the quarter ended June 1, 2016 was attributable to the increase in the full year estimated pre-tax loss and a discrete deferred income tax benefit concerning the extension of the federal jobs credit.
 
Management believes that adequate provisions for income taxes have been reflected in the financial statements and is not aware of any significant exposure items that have not been reflected in the financial statements. Amounts considered probable of settlement within one year have been included in the accrued expenses and other liabilities in the accompanying Consolidated Balance Sheet.
 

11



Note 6. Property and Equipment, Intangible Assets and Goodwill
 
The costs, net of impairment, and accumulated depreciation of property and equipment at June 1, 2016 and August 26, 2015, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:
 
 
June 1,
2016
 
August 26,
2015
 
Estimated
Useful Lives
(years)
 
(In thousands)
 
 
 
 
 
 
Land
$
62,498

 
$
63,298

 
 
 
 
 
Restaurant equipment and furnishings
74,876

 
85,679

 
3
 
to
 
15
Buildings
157,122

 
159,391

 
20
 
to
 
33
Leasehold and leasehold improvements
25,679

 
29,229

 
Lesser of lease term or estimated useful life
Office furniture and equipment
3,281

 
3,559

 
3
 
to
 
10
Construction in progress
145

 
810

 
 
 
 
 
 
323,601

 
341,966

 
 
 
 
 
 
Less accumulated depreciation and amortization
(127,593
)
 
(141,764
)
 
 
 
 
 
 
Property and equipment, net
$
196,008

 
$
200,202

 
 
 
 
 
 
Intangible assets, net
$
21,367

 
$
22,570

 
15
 
to
 
21
Goodwill
$
1,605

 
$
1,643

 
 
 
 
 

Intangible assets, net, consist of the Fuddruckers trade name and franchise agreements and will be amortized. The Company believes the Fuddruckers brand name has an expected accounting life of 21 years from the date of acquisition based on the expected use of its assets and the restaurant environment in which it is being used. The trade name represents a respected brand with customer loyalty and the Company intends to cultivate and protect the use of the trade name. The franchise agreements, after considering renewal periods, have an estimated accounting life of 21 years from the date of acquisition and will be amortized over this period of time.
 
Intangible assets, net, also includes the license agreement and trade name related to Cheeseburger in Paradise and the value of the acquired licenses and permits allowing the sales of beverages with alcohol. These assets have an expected accounting life of 15 years from the date of acquisition, December 6, 2012.
 
The aggregate amortization expense related to intangible assets subject to amortization was $1.2 million for the three quarters ended June 1, 2016 and $1.0 million for the three quarters ended May 6, 2015. The aggregate amortization expense related to intangible assets subject to amortization is expected to be $1.4 million in each of the next five successive fiscal years.
 

12



The following table presents intangible assets as of June 1, 2016 and August 26, 2015:
 
 
June 1, 2016
 
August 26, 2015
 
(In thousands)
 
(In thousands)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Intangible Assets Subject to Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuddruckers trade name and franchise agreements
$
29,607

 
$
(8,333
)
 
$
21,274

 
$
29,607

 
$
(7,166
)
 
$
22,441

 
 
 
 
 
 
 
 
 
 
 
 
Cheeseburger in Paradise trade name and license agreements
$
421

 
$
(328
)
 
$
93

 
$
421

 
$
(292
)
 
$
129

 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets, net
$
30,028

 
$
(8,661
)
 
$
21,367

 
$
30,028

 
$
(7,458
)
 
$
22,570

 
In fiscal 2010, the Company recorded an intangible asset for goodwill in the amount of approximately $0.2 million related to the acquisition of substantially all of the assets of Fuddruckers. The Company also recorded, in fiscal 2013, an intangible asset for goodwill in the amount of approximately $2.0 million related to the acquisition of Cheeseburger in Paradise. Goodwill is considered to have an indefinite useful life and is not amortized. Management performs its formal annual assessment as of the second quarter each fiscal year. The individual restaurant level is the level at which goodwill is assessed for impairment under ASC 350. In accordance with our understanding of ASC 350, we have allocated the goodwill value to each reporting unit in proportion to each location’s fair value at the date of acquisition. The result of these second quarter fiscal 2016 assessments was impairment of goodwill of $38 thousand. Goodwill impairments in fiscal years 2015 and 2014 were $38 thousand and $0.5 million, respectively. The Company will formally perform additional assessments on an interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists. As of June 1, 2016, of the 23 locations that were acquired, eight locations remain operating as Cheeseburger in Paradise restaurants, seven locations were closed and converted to Fuddruckers restaurants, three locations where the option to extend the lease was not exercised, two locations subleased to franchisees and three closed and held for future use.
 
Goodwill, net of accumulated impairments of approximately $0.6 million, was approximately $1.6 million as of June 1, 2016 and as of August 26, 2015, and relates to our Company-owned restaurants reportable segment.
 
Note 7. Impairment of Long-Lived Assets, Discontinued Operations and Property Held for Sale
 
Impairment of Long-Lived Assets and Store Closings
 
The Company periodically evaluates long-lived assets held for use and held for sale whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. The Company analyzes historical cash flows of operating locations and compares results of poorer performing locations to more profitable locations. The Company also analyzes lease terms, condition of the assets and related need for capital expenditures or repairs, as well as construction activity and the economic and market conditions in the surrounding area.

For assets held for use, the Company estimates future cash flows using assumptions based on possible outcomes of the areas analyzed. If the undiscounted future cash flows are less than the carrying value of the location’s assets, the Company records an impairment loss based on an estimate of discounted cash flows. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s subjective judgments. Assumptions and estimates used include operating results, changes in working capital, discount rate, growth rate, anticipated net proceeds from disposition of the property and, if applicable, lease terms. The span of time for which future cash flows are estimated is often lengthy, increasing the sensitivity to assumptions made. The time span could be 20 to 25 years for newer properties, but only 5 to 10 years for older properties. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. The Company considers the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows.

13



 
The Company recognized the following impairment charges to income from operations:
 
 
Three Quarters Ended
 
June 1,
2016
 
May 6,
2015
 
(40 weeks)
 
(36 weeks)
 
(In thousands, except per share data)
Provision for asset impairments
$
209

 
$
218

Net loss (gain) on disposition of property and equipment
(793
)
 
(1,696
)
 
 
 
 
 
$
(584
)
 
$
(1,478
)
Effect on EPS:
 
 
 
Basic
$
0.02

 
$
0.05

Assuming dilution
$
0.02

 
$
0.05

 
The $0.2 million impairment charge for the three quarters ended June 1, 2016 is primarily related to goodwill at one underperforming converted Cheeseburger in Paradise leasehold location and approximately $0.2 million in lease termination costs at two property locations.

The $0.2 million impairment charge for the three quarters ended May 6, 2015 is related to assets at three Fuddruckers locations and included $38 thousand in goodwill related to one underperforming converted Cheeseburger in Paradise leasehold location.
 
The $0.8 million net gain for the three quarters ended June 1, 2016 is related to the sale of property and equipment.
 
The $1.7 million net gain for the three quarters ended May 6, 2015 is related to the sale of property and equipment.
 
Discontinued Operations 
 
On March 21, 2014, the Board of Directors of the Company approved a plan focused on improving cash flow from the acquired Cheeseburger in Paradise leasehold locations. This underperforming Cheeseburger in Paradise leasehold disposal plan called for certain Cheeseburger in Paradise restaurants closure or conversion to Fuddruckers restaurants. As of June 1, 2016, two locations were reclassified to continuing operations. Of the two locations, one location reopened as a Company-owned Fuddruckers restaurant and one location was sub-leased to a Fuddruckers franchisee. Additionally, one lease was terminated and one lease expired during the three quarters ended June 1, 2016. As of June 1, 2016, no locations were classified as discontinued operations in this plan.
 
As a result of the first quarter fiscal year 2010 adoption of the Company’s Cash Flow Improvement and Capital Redeployment Plan, the Company reclassified 24 Luby’s Cafeterias to discontinued operations. As of June 1, 2016, one location remains held for sale.


14



The following table sets forth the assets and liabilities for all discontinued operations:
 
 
June 1,
2016
 
August 26,
2015
 
(In thousands)
Prepaid expenses
1

 
10

Assets related to discontinued operations—current
$
1

 
$
10

Property and equipment
1,872

 
1,872

Other assets
1,795

 
1,799

Assets related to discontinued operations—non-current
$
3,667

 
$
3,671

Deferred income taxes
$
343

 
$
343

Accrued expenses and other liabilities
68

 
65

Liabilities related to discontinued operations—current
$
411

 
$
408

Other liabilities
$
17

 
$
182

Liabilities related to discontinued operations—non-current
$
17

 
$
182


As of June 1, 2016, under both closure plans, the Company had one property classified as discontinued operations. The asset carrying value of the owned property was $1.9 million and is included in assets related to discontinued operations. The Company is actively marketing this property for sale. The asset carrying values of the ground leases were previously impaired to zero.
 
The following table sets forth the sales and pretax losses reported from discontinued operations:
 
 
Three Quarters Ended
 
June 1,
2016
 
May 6,
2015
 
(40 weeks)
 
(36 weeks)
 
(In thousands, except discontinued locations)
Sales
$

 
$

 
 
 
 
Pretax loss
(131
)
 
(642
)
Income tax benefit from discontinued operations
54

 
298

Income (loss) from discontinued operations, net of income taxes
$
(77
)
 
$
(344
)
Discontinued locations closed during the period

 


The following table summarizes discontinued operations for the first three quarters of fiscal 2016 and 2015
 
Three Quarters Ended
 
June 1,
2016
 
May 6,
2015
 
(40 weeks)
 
(36 weeks)
 
(In thousands, except per share data)
Discontinued operating loss
$
(156
)
 
$
(550
)
Impairments

 
(90
)
Net gains (losses)
25

 
(2
)
Pretax loss
$
(131
)
 
$
(642
)
Income tax benefit from discontinued operations
54

 
298

Income (loss) from discontinued operations, net of income taxes
$
(77
)
 
$
(344
)
Effect on EPS from discontinued operations—basic
$
(0.00
)
 
$
(0.01
)
  

15



Impairment charges included above relate to properties closed and designated for immediate disposal. The assets of these individual operating units have been written down to their net realizable values. In turn, the related properties have either been sold or are being actively marketed for sale. Dispositions are expected to be completed within one to three years. Within discontinued operations, the Company also recorded the related fiscal year-to-date net operating results, employee terminations and carrying costs of the closed units.
 
Property Held for Sale
 
The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of properties. If the Company decides to dispose of a property, it will be moved to property held for sale, actively marketed and recorded at fair value less transaction costs. The Company analyzes market conditions each reporting period and records additional impairments due to declines in market values of like assets. The fair value of the property is determined by observable inputs such as appraisals and prices of comparable properties in active markets for assets like the Company’s. Gains are not recognized until the properties are sold.
 
Property held for sale includes unimproved land, closed restaurant properties and related equipment for locations not classified as discontinued operations. The specific assets are valued at the lower of net depreciable value or net realizable value.
 
At June 1, 2016, the Company had four owned properties recorded at approximately $4.2 million in property held for sale.
 
At August 26, 2015, the Company had four owned properties recorded at approximately $4.5 million in property held for sale.
 
The Company is actively marketing the locations currently classified as property held for sale
 
Note 8. Commitments and Contingencies
 
Off-Balance Sheet Arrangements
 
The Company has no off-balance sheet arrangements, except for operating leases. 
 
Pending Claims
 
From time to time, the Company is subject to various private lawsuits, administrative proceedings and claims that arise in the ordinary course of its business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to issues common to the restaurant industry. The Company currently believes that the final disposition of these types of lawsuits, proceedings and claims will not have a material adverse effect on the Company’s financial position, results of operations or liquidity. It is possible, however, that the Company’s future results of operations for a particular fiscal quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims.

Construction Activity
 
From time to time, the Company enters into non-cancelable contracts for the construction of its new restaurants. This construction activity exposes the Company to the risks inherent in new construction, 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 and contract termination expenses. The Company had four non-cancelable contracts as of June 1, 2016.
 
 
Note 9. Related Parties
 
Affiliate Services
 
Christopher J. Pappas, the Company’s Chief Executive Officer, and Harris J. Pappas, director and former Chief Operating Officer of the Company, own two restaurant entities (the “Pappas entities”) that from time to time may provide services to the Company and its subsidiaries, as detailed in the Amended and Restated Master Sales Agreement effective November 8, 2013 among the Company and the Pappas entities.
 

16



Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities may provide specialized (customized) equipment fabrication and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. There were no costs incurred under the Amended and Restated Master Sales Agreement of custom-fabricated and refurbished equipment in the three quarters ended June 1, 2016 and May 6, 2015. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Board of Directors of the Company (the “Board”).
 
Operating Leases
 
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partnership interest and a 50% general partnership interest in the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented approximately 7% of the space in that center since July 1969. No changes were made to the Company’s lease terms as a result of the transfer of ownership of the center to the new partnership.
 
On November 22, 2006, the Company executed a new lease agreement with respect to this shopping center. Effective upon the Company’s relocation and occupancy into the new space in July 2008, the new lease agreement provides for a primary term of approximately 12 years with two subsequent five-year options and gives the landlord an option to buy out the tenant on or after the calendar year 2015 by paying the then unamortized cost of improvements to the tenant. The Company is currently obligated to pay rent of $22.00 per square foot plus maintenance, taxes, and insurance during the remaining primary term of the lease. Thereafter, the lease provides for increases in rent at set intervals. The Company made payments of $314,000 and $278,000 in the three quarters ended June 1, 2016 and May 6, 2015, respectively. The new lease agreement was approved by the Finance and Audit Committee.
 
In the third quarter of fiscal year 2014, on March 12, 2014, the Company executed a new lease agreement in which one of the Company’s Houston Fuddruckers locations was purchased from a prior landlord by Pappas Restaurants, Inc., a 100% undivided interest. No changes were made to our lease terms as a result of the transfer of ownership. 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 currently obligated to pay $27.56 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until November 30, 2016. Thereafter, the new ground lease agreement provides for increases in rent at set intervals. The Company made payments of $120,000 and $107,000 in the three quarters ended June 1, 2016 and May 6, 2015, respectively
 
Three Quarters Ended
 
June 1,
2016
 
May 6,
2015
 
(40 weeks)
 
(36 weeks)
 
(In thousands, except percentages)
AFFILIATED COSTS INCURRED:
 
 
 
General and administrative expenses—professional and other costs
$

 
$

Capital expenditures

 

Other operating expenses, occupancy costs and opening costs, including property leases
434

 
385

Total
$
434

 
$
385

RELATIVE TOTAL COMPANY COSTS:
 
 
 
Selling, general and administrative expenses
$
32,312

 
$
26,671

Capital expenditures
14,358

 
16,429

Other operating expenses, occupancy costs and opening costs
63,658

 
59,507

Total
$
110,328

 
$
102,607

AFFILIATED COSTS INCURRED AS A PERCENTAGE OF RELATIVE TOTAL COMPANY COSTS
0.39
%
 
0.38
%
 
Board of Directors
 
Christopher J. Pappas is a member of the Advisory Board of Amegy Bank, a Division of ZB, N.A. (formerly, Amegy Bank, N.A.), which is a lender and syndication agent under the Company’s 2013 Revolving Credit Facility.
 

17



Key Management Personnel
 
The Company entered into a new employment agreement with Christopher Pappas on January 24, 2014. The employment agreement was amended on February 4, 2016, to extend the termination date thereof to August 31, 2017, unless earlier terminated. Mr. Pappas continues to devote his primary time and business efforts to the Company while maintaining his role at Pappas Restaurants, Inc.
 
Peter Tropoli, a director of the Company and the Company’s Chief Operating Officer, and formerly the Company’s Senior Vice President, Administration, General Counsel and Secretary, is an attorney and stepson of Frank Markantonis, who is a director of the Company.
 
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas, who is a director of the Company.
 
Note 10. Share-Based Compensation
 
We have two active share based stock plans, the Employee Stock Plan and the Nonemployee Director Stock Plan. Both plans authorize the granting of stock options, restricted stock and other types of awards consistent with the purpose of the plans.
 
Of the 1.1 million shares approved for issuance under the Nonemployee Director Stock Plan, 0.9 million options, restricted stock units and restricted stock awards were granted, and 0.1 million options were cancelled or expired and added back into the plan, since the plan’s inception. Approximately 0.3 million shares remain available for future issuance as of June 1, 2016. Compensation cost for share-based payment arrangements under the Nonemployee Director Stock Plan, recognized in selling, general and administrative expenses for the three quarters ended June 1, 2016 and May 6, 2015 were approximately $524,000 and $472,000, respectively.

Of the 4.1 million shares approved for issuance under the Employee Stock Plan, 5.7 million options and restricted stock units were granted, and 3.4 million options and restricted stock units were cancelled or expired and added back into the plan, since the plan’s inception. Approximately 1.8 million shares remain available for future issuance as of June 1, 2016. Compensation cost for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses for the three quarters ended June 1, 2016 and May 6, 2015 were approximately $827,000 and $543,000, respectively. Included in the quarter ended December 16, 2015, share based compensation cost was approximately $252,000, which represented accelerated share-based compensation expense as a result of the cancellation of 312,663 stock options.
 
In 2015, the Company approved a Total Shareholder Return, (TSR), Performance Based Incentive Plan which provides for a right to receive an unspecified number of shares of common stock under the Employee Stock Plan based on the total shareholder return ranking compared to a selection of peer companies over a three-year cycle. The award value varies from 0% to 200% of a base amount, as a result of the Company’s TSR performance in comparison to its peers over the measurement period. The number of shares at the end of the three-year period will be determined as the award value divided by the closing stock price on the last day of each fiscal year accordingly. Since the plan provides for an undeterminable number of shares, the plan is accounted for as a liability based plan. As of June 1, 2016, the estimated fair value of the performance shares liability at the end of fiscal 2017 and fiscal 2018, was $0.5 million for both years. The estimated liability has been determined based on a Monte Carlo simulation model. Based on this estimate, management accrues expense ratably over the three-year service periods. A valuation estimate of the future liability associated with each fiscal year's performance award plan will be performed periodically with adjustments made to the outstanding liability at each reporting period, as appropriate. As of June 1, 2016, the Company has recorded $243,000 in non-cash compensation expense in selling, general and administrative expenses related to its TSR Performance Based Incentive Plans.
 

18



Stock Options
 
Stock options granted under either the Employee Stock Plan or the Nonemployee Director Stock Plan have exercise prices equal to the market price of the Company’s common stock at the date of the grant.
 
Option awards under the Nonemployee Director Stock Plan generally vest 100% on the first anniversary of the grant date and expire ten years from the grant date. No options were granted under the Nonemployee Director Stock Plan in the three quarters ended June 1, 2016. No options to purchase shares remain outstanding under this plan as of June 1, 2016.
 
Options granted under the Employee Stock Plan generally vest 50% on the first anniversary date of the grant date, 25% on the second anniversary of the grant date and 25% on the third anniversary of the grant date, with all options expiring ten years from the grant date. All options granted in the three quarters ended June 1, 2016 were granted under the Employee Stock Plan. Options to purchase 1,208,590 shares at option prices of $3.44 to $11.10 per share remain outstanding as of June 1, 2016.
 
A summary of the Company’s stock option activity for the three quarters ended June 1, 2016 is presented in the following table:
 
 
Shares
Under
Fixed
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
 
 
(Per share)
 
(In years)
 
(In thousands)
Outstanding at August 26, 2015
1,288,099

 
$
4.76

 
6.5

 
$
460

Granted
279,944

 
4.89

 

 

Exercised
(21,249
)
 
3.51

 

 

Cancelled
(312,663
)
 
4.98

 

 

Forfeited/Expired
(25,541
)
 
4.34

 

 

Outstanding at June 1, 2016
1,208,590

 
$
4.76

 
6.8

 
$
421

Exercisable at June 1, 2016
661,099

 
$
4.76

 
5.2

 
$
333


The intrinsic value for stock options is defined as the difference between the current market value, or closing price on June 1, 2016, and the grant price on the measurement dates in the table above. 
 
Restricted Stock Units
 
Grants of restricted stock units consist of the Company’s common stock and generally vest after three years. All restricted stock units are cliff-vested. Restricted stock units are valued at the closing market price of the Company’s common stock at the date of grant.
 
A summary of the Company’s restricted stock unit activity during the three quarters ended June 1, 2016 is presented in the following table:
 
 
Restricted
Stock
Units
 
Weighted
Average
Fair Value
 
Weighted-
Average
Remaining
Contractual
Term
 
 
 
(Per share)
 
(In years)
Unvested at August 26, 2015
409,417

 
$
5.98

 
1.6

Granted
172,212

 
4.87

 

Vested
(257,482
)
 
6.19

 

Forfeited
(4,202
)
 
5.95

 

Unvested at June 1, 2016
319,945

 
$
5.22

 
2.1

 

19



At June 1, 2016, there was approximately $1.0 million of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 2.1 years.
 
Restricted Stock Awards
 
Under the Nonemployee Director Stock Plan, directors are granted restricted stock in lieu of cash payments, for all or a portion of their compensation as directors. The number of shares granted is valued at the closing market price of the Company’s stock at the date of the grant. Restricted stock awards vest when granted because they are granted in lieu of a cash payment. However, directors are restricted from selling their shares until after the third anniversary of the date of the grant. Directors may receive a 20% premium of additional restricted stock by opting to receive stock over a minimum required amount of stock, in lieu of cash. 
 
Note 11. Earnings Per Share
 
Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding and unvested restricted stock for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options determined using the treasury stock method. Stock options excluded from the computation of net income per share for the three quarters ended June 1, 2016 include approximately 513,000 shares with exercise prices exceeding market prices and approximately 98,000 shares whose inclusion would also be anti-dilutive. 

The components of basic and diluted net income per share are as follows:
 
 
Quarter Ended
 
Three Quarters Ended
 
June 1,
2016
 
May 6,
2015
 
June 1,
2016
 
May 6,
2015
 
(12 weeks)
 
(12 weeks)
 
(40 weeks)
 
(36 weeks)
 
(In thousands, expect per share data)
Numerator:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(147
)
 
$
2,484

 
$
(2,468
)
 
$
(1,681
)
Income (loss) from discontinued operations, net of income taxes
13

 
(131
)
 
(77
)
 
(344
)
NET INCOME (LOSS)
$
(134
)
 
$
2,353

 
$
(2,545
)
 
$
(2,025
)
Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share—weighted-average shares
29,259

 
29,009

 
29,207

 
28,940

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
Employee and non-employee stock options

 
102

 

 

Denominator for earnings per share assuming dilution
29,259

 
29,111

 
29,207

 
28,940

Income (loss) per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
0.09

 
$
(0.09
)
 
$
(0.06
)
Assuming dilution
$
(0.01
)
 
$
0.09

 
$
(0.09
)
 
$
(0.06
)
Income (loss) per share from discontinued operations:
 
 
 
 
 
 
 
Basic
$
0.00

 
$
(0.01
)
 
$
(0.00
)
 
$
(0.01
)
Assuming dilution
$
0.00

 
$
(0.01
)
 
$
(0.00
)
 
$
(0.01
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
0.08

 
$
(0.09
)
 
$
(0.07
)
Assuming dilution
$
(0.01
)
 
$
0.08

 
$
(0.09
)
 
$
(0.07
)
   

20




 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and footnotes for the quarter ended June 1, 2016 included in Item 1 of Part I of this Quarterly Report on Form 10 (this “Form 10-Q”), and the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 26, 2015.
 
The following presents an analysis of the results and financial condition of our continuing operations. Except where indicated otherwise, the results of discontinued operations are excluded from this discussion.


21



The following table 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 income.
 
Percentages may not total due to rounding. 
 
Quarter Ended
 
Three Quarters Ended
 
June 1,
2016
 
May 6,
2015
 
June 1,
2016
 
May 6,
2015
 
(12 weeks)
 
(12 weeks)
 
(40 weeks)
 
(36 weeks)
Restaurant sales
93.9
 %
 
94.4
 %
 
93.9
 %
 
93.7
 %
Culinary contract services
4.2
 %
 
3.9
 %
 
4.2
 %
 
4.4
 %
Franchise revenue
1.7
 %
 
1.7
 %
 
1.8
 %
 
1.8
 %
Vending revenue
0.2
 %
 
0.1
 %
 
0.1
 %
 
0.1
 %
TOTAL SALES
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
 
 
 
 
 
 
 
STORE COSTS AND EXPENSES:
 
 
 
 
 
 
 
(As a percentage of restaurant sales)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of food
28.0
 %
 
28.4
 %
 
28.4
 %
 
29.1
 %
Payroll and related costs
35.6
 %
 
33.8
 %
 
34.9
 %
 
34.6
 %
Other operating expenses
15.7
 %
 
16.1
 %
 
16.0
 %
 
16.8
 %
Occupancy costs
5.9
 %
 
5.4
 %
 
6.0
 %
 
5.8
 %
Vending revenue
(0.2
)%
 
(0.1
)%
 
(0.2
)%
 
(0.1
)%
Store level profit
15.0
 %
 
16.4
 %
 
14.9
 %
 
13.9
 %
 
 
 
 
 
 
 
 
COMPANY COSTS AND EXPENSES:
 
 
 
 
 
 
 
(As a percentage of total sales)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Opening costs
0.1
 %
 
0.5
 %
 
0.2
 %
 
0.7
 %
Depreciation and amortization
5.8
 %
 
5.1
 %
 
5.8
 %
 
5.4
 %
Selling, general and administrative expenses
10.0
 %
 
8.6
 %
 
10.6
 %
 
9.8
 %
Net loss (gain) on disposition of property and equipment
 %
 
(0.6
)%
 
(0.3
)%
 
(0.6
)%
 
 
 
 
 
 
 
 
Culinary Contract Services Costs
 
 
 
 
 
 
 
(As a percentage of Culinary Contract Services sales)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of culinary contract services
90.8
 %
 
89.2
 %
 
90.2
 %
 
90.1
 %
Culinary income
9.2
 %
 
10.8
 %
 
9.8
 %
 
9.9
 %
 
 
 
 
 
 
 
 
Franchise Operations Costs
 
 
 
 
 
 
 
(As a percentage of Franchise Operations)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of franchise operations
27.8
 %
 
26.0
 %
 
27.4
 %
 
24.1
 %
Franchise income
72.2
 %
 
74.0
 %
 
72.6
 %
 
75.9
 %
 
 
 
 
 
 
 
 
(As a percentage of total sales)
 
 
 
 
 
 
 
INCOME (LOSS) FROM OPERATIONS
(0.4
)%
 
3.7
 %
 
(0.7
)%
 
(0.6
)%
Interest income
 %
 
 %
 
 %
 
 %
Interest expense
(0.5
)%
 
(0.6
)%
 
(0.5
)%
 
(0.6
)%
Other income (expense), net
0.1
 %
 
 %
 
 %
 
0.1
 %
Income (loss) before income taxes and discontinued operations
(0.8
)%
 
3.1
 %
 
(1.2
)%
 
(1.1
)%
Provision (benefit) for income taxes
(0.6
)%
 
0.4
 %
 
(0.5
)%
 
(0.5
)%
Income (loss) from continuing operations
(0.2
)%
 
2.7
 %
 
(0.7
)%
 
(0.6
)%
Income (loss) from discontinued operations, net of income taxes
 %
 
(0.1
)%
 
 %
 
(0.1
)%
NET INCOME (LOSS)
(0.2
)%
 
2.6
 %
 
(0.7
)%
 
(0.7
)%

22




Although store level profit, defined as restaurant sales 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 results of our most significant reportable segment.   The following table reconciles between store level profit, a non-GAAP, measure to loss from continuing operations, a GAAP measure:
  
 
Quarter Ended
 
Three Quarters Ended
 
June 1,
2016
 
May 6,
2015
 
June 1,
2016
 
May 6,
2015
 
(12 weeks)
 
(12 weeks)
 
(40 weeks)
 
(36 weeks)
 
(In thousands)
 
(In thousands)
Store level profit
$
13,013

 
$
14,609

 
$
42,540

 
$
35,354

 
 
 
 
 
 
 
 
Plus:
 
 
 
 
 
 
 
Sales from culinary contract services
3,892

 
3,624

 
12,726

 
11,993

Sales from franchise operations
1,586

 
1,578

 
5,411

 
4,764

 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
Opening costs
117

 
427

 
688

 
2,022

Cost of culinary contract services
3,534

 
3,232

 
11,476

 
10,809

Cost of franchise operations
441

 
410

 
1,480

 
1,147

Depreciation and amortization
5,304

 
4,759

 
17,538

 
14,608

Selling, general and administrative expenses
9,227

 
8,139

 
32,312

 
26,671

Provision for asset impairments
172

 

 
209

 
218

Net loss (gain) on disposition of property and equipment
42

 
(609
)
 
(793
)
 
(1,696
)
Interest income

 
(1
)
 
(3
)
 
(3
)
Interest expense
482

 
599

 
1,674

 
1,624

Other income (expense), net
(88
)
 
(24
)
 
2

 
(282
)
Provision (benefit) for income taxes
(593
)
 
395

 
(1,438
)
 
(1,326
)
Income (loss) from continuing operations
$
(147
)
 
$
2,484

 
$
(2,468
)
 
$
(1,681
)
  
The following table shows our restaurant unit count as of August 26, 2015 and June 1, 2016.
 
Restaurant Counts:
 
 
August 26,
2015
 
FY16 YTD Q3 Openings
 
FY16 YTD Q3 Closings
 
June 1,
2016
Luby’s Cafeterias
93

 

 
(1
)
 
92

Fuddruckers Restaurants
75

 
3

 
(1
)
 
77

Cheeseburger in Paradise
8

 

 

 
8

Other restaurants(1)
1

 

 

 
1