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EX-32.2 - EXHIBIT 32.2 - LUBYS INCex32-2_122116.htm
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EX-31.2 - EXHIBIT 31.2 - LUBYS INCex31-2_122116.htm
EX-31.1 - EXHIBIT 31.1 - LUBYS INCex31-1_122116.htm
EX-10.2 - EXHIBIT 10.2 - LUBYS INCex10-2_122116.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 December 21, 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 January 26, 2017, there were 29,043,855 shares of the registrant’s common stock outstanding. 


1



Luby’s, Inc.
Form 10-Q
Quarter ended December 21, 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
 
Item 1. Financial Statements
 
Luby’s, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
 
 
December 21,
2016
 
August 31,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
1,413

 
$
1,339

Trade accounts and other receivables, net
5,665

 
5,919

Food and supply inventories
5,036

 
4,596

Prepaid expenses
3,264

 
3,147

Assets related to discontinued operations

 
1

Deferred income taxes
419

 
540

Total current assets
15,797

 
15,542

Property held for sale
5,235

 
5,522

Assets related to discontinued operations
3,122

 
3,192

Property and equipment, net
191,957

 
193,218

Intangible assets, net
20,630

 
21,074

Goodwill
1,605

 
1,605

Deferred income taxes
10,396

 
8,738

Other assets
3,506

 
3,334

Total assets
$
252,248

 
$
252,225

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
16,883

 
$
17,539

Liabilities related to discontinued operations
384

 
412

Current portion of credit facility debt
2,450

 

Accrued expenses and other liabilities
27,450

 
23,752

Total current liabilities
47,167

 
41,703

Credit facility debt, less current portion
36,622

 
37,000

Liabilities related to discontinued operations
16

 
17

Other liabilities
7,843

 
7,752

Total liabilities
91,648

 
86,472

Commitments and Contingencies

 

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $0.32 par value; 100,000,000 shares authorized; shares issued were 29,461,030 and 29,325,754, respectively; shares outstanding were 28,961,030 and 28,825,754, respectively
9,428

 
9,421

Paid-in capital
30,774

 
30,348

Retained earnings
125,173

 
130,759

Less cost of treasury stock, 500,000 shares
(4,775
)
 
(4,775
)
Total shareholders’ equity
160,600

 
165,753

Total liabilities and shareholders’ equity
$
252,248

 
$
252,225

  
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
 
December 21,
2016
 
December 16,
2015
 
(16 weeks)
 
(16 weeks)
SALES:
 
 
 
Restaurant sales
$
108,082

 
$
113,546

Culinary contract services
4,297

 
4,915

Franchise revenue
1,871

 
2,125

Vending revenue
159

 
158

TOTAL SALES
114,409

 
120,744

COSTS AND EXPENSES:
 
 
 
Cost of food
30,850

 
32,434

Payroll and related costs
38,673

 
39,424

Other operating expenses
19,648

 
18,421

Occupancy costs
6,475

 
6,642

Opening costs
165

 
397

Cost of culinary contract services
3,811

 
4,422

Cost of franchise operations
580

 
612

Depreciation and amortization
6,550

 
7,014

Selling, general and administrative expenses
13,759

 
13,243

Provision for asset impairments
287

 

Net loss (gain) on disposition of property and equipment
85

 
(279
)
Total costs and expenses
120,883

 
122,330

LOSS FROM OPERATIONS
(6,474
)
 
(1,586
)
Interest income
1

 
1

Interest expense
(602
)
 
(696
)
Other income (expense), net
103

 
(118
)
Loss before income taxes and discontinued operations
(6,972
)
 
(2,399
)
Benefit for income taxes
(1,458
)
 
(660
)
Loss from continuing operations
(5,514
)
 
(1,739
)
Loss from discontinued operations, net of income taxes
(72
)
 
(72
)
NET LOSS
$
(5,586
)
 
$
(1,811
)
Loss per share from continuing operations:
 
 
 
Basic
$
(0.19
)
 
$
(0.06
)
Assuming dilution
$
(0.19
)
 
$
(0.06
)
Loss per share from discontinued operations:
 
 
 
Basic
$
(0.00
)
 
$
(0.00
)
Assuming dilution
$
(0.00
)
 
$
(0.00
)
Net loss per share:
 
 
 
Basic
$
(0.19
)
 
$
(0.06
)
Assuming dilution
$
(0.19
)
 
$
(0.06
)
Weighted average shares outstanding:
 
 
 
Basic
29,339

 
29,133

Assuming dilution
29,339

 
29,133

 
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 31, 2016
29,440

 
$
9,421

 
(500
)
 
$
(4,775
)
 
$
30,348

 
$
130,759

 
$
165,753

Net loss

 

 

 

 

 
(5,586
)
 
(5,586
)
Share-based compensation expense
21

 
7

 

 

 
426

 

 
433

Balance at December 21, 2016
29,461

 
$
9,428

 
(500
)
 
$
(4,775
)
 
$
30,774

 
$
125,173

 
$
160,600

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

5



Luby’s, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 
 
Quarter Ended
 
December 21,
2016
 
December 16,
2015
 
(16 weeks)
 
(16 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(5,586
)
 
$
(1,811
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Provision for asset impairments and net (gains) on property sales
372

 
(279
)
Depreciation and amortization
6,550

 
7,021

Amortization of debt issuance cost
67

 
148

Share-based compensation expense
433

 
520

Deferred tax benefit
(1,466
)
 
(927
)
Cash provided by operating activities before changes in operating assets and liabilities
370

 
4,672

Changes in operating assets and liabilities:
 
 
 
Decrease in trade accounts and other receivables
254

 
226

Increase in food and supply inventories
(440
)
 
(968
)
Decrease (Increase) in prepaid expenses and other assets
(59
)
 
364

Increase in accounts payable, accrued expenses and other liabilities
3,116

 
2,049

Net cash provided by operating activities
3,241

 
6,343

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from disposal of assets and property held for sale
38

 
1,916

Decrease in notes receivable

 
17

Purchases of property and equipment
(4,980
)
 
(5,729
)
Net cash used in investing activities
(4,942
)
 
(3,796
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Credit facility borrowings
45,700

 
27,000

Credit facility repayments
(78,300
)
 
(29,500
)
Proceeds from term loan
35,000

 

Debt issuance costs
(625
)
 
(42
)
Proceeds received on the exercise of employee stock options

 
75

Net cash provided by (used in) financing activities
1,775

 
(2,467
)
Net increase in cash and cash equivalents
74

 
80

Cash and cash equivalents at beginning of period
1,339

 
1,501

Cash and cash equivalents at end of period
$
1,413

 
$
1,581

Cash paid for:
 
 
 
Income taxes
$

 
$

Interest
478

 
520

 
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 December 21, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending August 30, 2017.
 
The Consolidated Balance Sheet dated August 31, 2016, 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 audited, year-end 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 31, 2016.

Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs be presented in the balance sheet as a direct deduction from the associated debt liability. Debt issuance costs related to the Company's new 2016 Credit Agreement (defined hereafter) amounted to $0.6 million. The portion of the debt issuance costs associated with the Term Loan (defined hereafter) are setup as a direct deduction from the long-term debt liability. The adoption of this update did not have a material impact on our consolidated financial statements. See Item 2. Management's Discussion and Analysis in this Form-10Q for more discussion on debt issuance cost.
New Accounting Pronouncements - "to be Adopted"
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. Further, in March 2016, the FASB issued ASU No. 2016–08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in ASU No. 2014–09 for evaluating when another party, along with the entity, is involved in providing a good or service to a customer. In April 2016, the FASB issued ASU No. 2016–10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” which clarifies the guidance in ASU No. 2014–09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. The Company plans to adopt the standard in the first quarter of fiscal 2019, which is the first fiscal quarter of the annual reporting period beginning after December 15, 2017. We have not yet decided on a method of transition upon adoption. The Company expects the pronouncement may impact the recognition of the initial franchise fee, which is currently recognized upon the opening of a franchise restaurant. We are further evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU No 2014-15. The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The

7



pronouncement is effective for fiscal years and interim periods within those fiscal years, after December 31, 2016. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). This update requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The update also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020. This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right–of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on our consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We are evaluating the impact on the Company’s consolidated financial statements and have not yet selected a transition method.

In March 2016, the FASB issued ASU No. 2016–04, “Liabilities – Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored–Value Products,” which is intended to eliminate current and future diversity in practice related to derecognition of prepaid stored–value product liability in a way that aligns with the new revenue recognition guidance. The update is effective for fiscal years beginning after December 15, 2017; however, early application is permitted. We are are evaluating the impact on the Company's consolidated financial statements and do not expect the adoption to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This update provides clarification regarding how certain cash receipts and cash payment are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019 using a retrospective approach. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
Subsequent Events
On February 2, 2017, the Company and its lenders entered into a First Amendment (the "Amendment") to the 2016 Credit Agreement dated. The Amendment clarified the definition of Growth Capital Expenditures. We were in compliance with the financial covenants contained in the 2016 Credit Agreement as of the balance sheet dated December 21, 2016 and as of the Form 10–Q filing date. Management has assessed the likelihood of an event of default within the next twelve months and determined that it is possible but not probable that certain leverage and fixed charge ratios will exceed the maximum permitted under our 2016 Credit Agreement.

8



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 was such a year. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically includes three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year.

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 173 at December 21, 2016 and 175 at August 31, 2016.

Culinary Contract Services
 
CCS, branded as Luby’s Culinary Contract Services, consists of a business line servicing healthcare, corporate dining clients, and, as of December 2016, retail grocery. 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 locations was 23 at December 21, 2016 and 24 at August 31, 2016.

In December 2016, CCS began selling Luby's Famous Macaroni & Cheese in the freezer section of H-E-B Grocery Stores, a Texas-born retail grocery store chain. H-E-B stores now stock the family-sized versions (approximately five servings) of Luby's classic cheese and jalapeño cheddar macaroni and cheese varieties.
 
Franchise Operations
 
We only offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Initial franchise agreements have a term of 20 years. Franchise agreements typically grant franchisees an exclusive territorial license to operate a single restaurant within a specified area, usually a four-mile radius surrounding the franchised restaurant.
 
Franchisees bear all direct costs involved in the development, construction, and operation of their restaurants. In exchange for a franchise fee, the Company provides franchise assistance in the following areas: site selection, prototypical architectural plans, interior and exterior design and layout, training, marketing and sales techniques, assistance by a Fuddruckers “opening team” at the time a franchised restaurant opens, and operations, and accounting guidelines set forth in various policies and procedures manuals.
 
All franchisees are required to operate their restaurants in accordance with Fuddruckers’ standards and specifications, including controls over menu items, food quality, and preparation. The Company requires the successful completion of its training program by a minimum of three managers for each franchised restaurant. In addition, franchised restaurants are evaluated

9



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 113 at December 21, 2016 and 113 at August 31, 2016.  
 
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 January 2017, this licensee operated 34 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.

10



 
 
Quarter Ended
 
December 21,
2016
 
December 16,
2015
 
(16 weeks)
 
(16 weeks)
 
(In thousands)
Sales:
 
 
 
Company-owned restaurants (1)
$
108,241

 
$
113,704

Culinary contract services
4,297

 
4,915

Franchise operations
1,871

 
2,125

Total
$
114,409

 
$
120,744

Segment level profit:
 
 
 
Company-owned restaurants
$
12,595

 
$
16,783

Culinary contract services
486

 
493

Franchise operations
1,291

 
1,513

Total
$
14,372

 
$
18,789

Depreciation and amortization:
 
 
 
Company-owned restaurants
$
5,454

 
$
5,809

Culinary contract services
22

 
37

Franchise operations
237

 
256

Corporate
837

 
912

Total
$
6,550

 
$
7,014

Capital expenditures:
 
 
 
Company-owned restaurants
$
4,550

 
$
5,494

Culinary contract services

 

Franchise operations

 

Corporate
430

 
235

Total
$
4,980

 
$
5,729

 
 
 
 
Loss before income taxes and discontinued operations:
 
 
 
Segment level profit
$
14,372

 
$
18,789

Opening costs
(165
)
 
(397
)
Depreciation and amortization
(6,550
)
 
(7,014
)
Selling, general and administrative expenses
(13,759
)
 
(13,243
)
Provision for asset impairments
(287
)
 

Net (loss) gain on disposition of property and equipment
(85
)
 
279

Interest income
1

 
1

Interest expense
(602
)
 
(696
)
Other income (expense), net
103

 
(118
)
Loss before income taxes and discontinued operations
$
(6,972
)
 
$
(2,399
)
 
 
December 21,
2016
 
August 31,
2016
Total assets:
 
 
 
Company-owned restaurants(2)
$
208,582

 
$
211,182

Culinary contract services
3,092

 
3,390

Franchise operations(3)
11,860

 
12,266

Corporate
28,714

 
25,387

Total
$
252,248

 
$
252,225


(1)
Includes vending revenue of $159 thousand and $158 thousand for the quarters ended December 21, 2016 and December 16, 2015, respectively.
(2)
Company-owned restaurants segment includes $9.6 million of Fuddruckers trade name, Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles.
(3)
Franchise operations segment includes approximately $11.2 million in royalty intangibles.

11



Note 4. Derivative Financial Instruments

The Company enters into derivative instruments, from time to time, to manage its exposure to changes in interest rates on a percentage of its long-term variable rate debt. On December 14, 2016, the Company entered into an interest rate swap, pay fixed - receive floating, with a constant notional amount of $17.5 million. The fixed swap rate we pay is 1.965%, plus an applicable margin. The variable rate we receive is one-month LIBOR, plus an applicable margin. The term of the interest rate swap is 5 years. The Company does not apply hedge accounting treatment to this derivative, therefore, changes in fair value of the instrument are recognized in Other income (expense), net.

The Company does not hold or use derivative instruments for trading purposes.

Note 5. Fair Value Measurements
 
GAAP establishes a framework for using fair value to measure assets and liabilities, and expands disclosure about fair value measurements. Fair value measurements guidance applies whenever other statements require or permit assets or liabilities to be measured at fair value.
 
GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These 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.
 
 Recurring fair value measurements related to liabilities are presented below:
 
 
 
Fair Value
Measurement Using
 
 
 
Quarter Ended December 21, 2016
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Valuation Method
Recurring Fair Value - Liabilities
 
 
(In thousands)
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
TSR Performance Based Incentive Plan(1)
$
1,129

 
$

 
$
1,129

 
$

 
Monte Carlo Simulation
Derivative - Interest Rate Swap
91

 

 
91

 

 
Discounted Cash Flow
Total liabilities at Fair Value
$
1,220

 
$

 
$
1,220

 
$

 
 
(1) The fair value of the Company's 2015, 2016, and 2017 Performance Based Incentive Plan liabilities were approximately $491 thousand, $526 thousand, and $112 thousand, respectively. See Note 11 to the Company's consolidated financial statements in this Form 10-Q for further discussion of Performance Based Incentive Plan.


12



 
 
 
Fair Value
Measurement Using
 
 
 
Quarter Ended December 16, 2015
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Valuation Method
Recurring Fair Value - Liabilities
 
 
(In thousands)
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
TSR Performance Based Incentive Plan
$
182

 
$

 
$
182

 
$

 
Monte Carlo Simulation

Non-recurring fair value measurements related to impaired property and equipment consisted of the following:
 
 
 
 
Fair Value
Measurement Using
 
 
 
Quarter Ended December 21, 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 held for sale(1)
$
3,330

 
$

 
$

 
$
3,330

 
$
(287
)
(1) In accordance with Subtopic 360-10, long-lived assets held for sale with a carrying value of approximately $3.6 million were written down to their fair value, less costs to sell, of approximately $3.3 million, resulting in an impairment charge of approximately $0.3 million, which was included in Provision for asset impairments in the quarter ended December 21, 2016. No impairments were recorded in the quarter ended December 16, 2015.
 
 
 
 
 
 
 
 
 
 
Note 6. Income Taxes 
 
No cash payments of estimated federal income taxes were made during the quarter ended December 21, 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. If current available information and projected future results raises doubt about the realization of the deferred tax assets, a valuation allowance is necessary. Management established a $6.9 million valuation allowance in the prior year for its deferred tax assets considered more likely than not to expire before being realized. In evaluating our ability to recover our deferred tax assets as of December 21, 2016, we considered available positive and negative evidence, including scheduled reversals of deferred tax liabilities, tax–planning strategies, projected future taxable income, and results of recent operations. Management determined that for the quarter ended December 21, 2016 an increase in the valuation allowance of approximately $1.1 million was necessary. This increase to the valuation allowance was included in the net tax benefit from continuing operations of $1.5 million in the quarter ended December 21, 2016. This compares to a tax benefit from continuing operations of $0.7 million in the quarter ended December 16, 2015.
 
The effective tax rate, (ETR), from continuing operations was 20.9% and 27.9% for the quarters ended December 21, 2016 and December 16, 2015, respectively. The ETR for the quarter ended December 21, 2016 differs from the federal statutory rate of 34% due to the federal jobs credits, state income taxes and other discrete items.
 

13



Management believes that adequate provisions for income taxes have been reflected in the financial statements and is not aware of any significant exposure items that have not been reflected in the financial statements. Amounts considered probable of settlement within one year have been included in the accrued expenses and other liabilities in the accompanying Consolidated Balance Sheet.
 
Note 7. Property and Equipment, Intangible Assets and Goodwill
 
The costs, net of impairment, and accumulated depreciation of property and equipment at December 21, 2016 and August 31, 2016, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:
 
 
December 21,
2016
 
August 31,
2016
 
Estimated
Useful Lives
(years)
 
(In thousands)
 
 
 
 
 
 
Land
$
61,940

 
$
61,940

 
 
 
 
 
Restaurant equipment and furnishings
78,048

 
75,764

 
3
 
to
 
15
Buildings
158,128

 
157,006

 
20
 
to
 
33
Leasehold and leasehold improvements
26,845

 
25,973

 
Lesser of lease term or estimated useful life
Office furniture and equipment
3,536

 
3,277

 
3
 
to
 
10
Construction in progress
211

 
145

 
 
 
 
 
 
328,708

 
324,105

 
 
 
 
 
 
Less accumulated depreciation and amortization
(136,751
)
 
(130,887
)
 
 
 
 
 
 
Property and equipment, net
$
191,957

 
$
193,218

 
 
 
 
 
 
Intangible assets, net
$
20,630

 
$
21,074

 
15
 
to
 
21

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 useful life of 15 years from the date of acquisition, December 6, 2012.
 
The aggregate amortization expense related to intangible assets subject to amortization was approximately $0.4 million for the quarter ended December 21, 2016 and approximately $0.5 million for the quarter ended December 16, 2015. The aggregate amortization expense related to intangible assets subject to amortization is expected to be approximately $1.4 million in each of the next five successive fiscal years.
 

14



The following table presents intangible assets as of December 21, 2016 and August 31, 2016:
 
 
December 21, 2016
 
August 31, 2016
 
(In thousands)
 
(In thousands)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Intangible Assets Subject to Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuddruckers trade name and franchise agreements
$
29,486

 
$
(8,969
)
 
$
20,517

 
$
29,486

 
$
(8,535
)
 
$
20,951

 
 
 
 
 
 
 
 
 
 
 
 
Cheeseburger in Paradise trade name and license agreements
$
421

 
$
(308
)
 
$
113

 
$
421

 
$
(298
)
 
$
123

 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets, net
$
29,907

 
$
(9,277
)
 
$
20,630

 
$
29,907

 
$
(8,833
)
 
$
21,074

 
In fiscal 2010, the Company recorded an intangible asset for goodwill in the amount of approximately $0.2 million related to the acquisition of substantially all of the assets of Fuddruckers. The Company also recorded, in fiscal 2013, an intangible asset for goodwill in the amount of approximately $2.0 million related to the acquisition of Cheeseburger in Paradise. Goodwill is considered to have an indefinite useful life and is not amortized. 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, 2015, and 2014 assessments was impairment of goodwill of $38 thousand, $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 December 21, 2016, of the 23 locations that were acquired, eight locations remain operating as Cheeseburger in Paradise restaurants and of the restaurants closed for conversion to Fuddruckers six locations remain operating as a Fuddruckers restaurant. Three locations were removed due to the option to extend the leases was not exercised, two locations were subleased to franchisees, and the remaining four closed and held for future use.
 
Goodwill, net of accumulated impairments of approximately $0.6 million, was approximately $1.6 million as of December 21, 2016 and as of August 31, 2016, and relates to our Company-owned restaurants reportable segment.
 
Note 8. 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.

15



 
The Company recognized the following impairment charges to income from operations:
 
 
Quarter Ended
 
December 21,
2016
 
December 16,
2015
 
(16 weeks)
 
(16 weeks)
 
(In thousands, except per share data)
Provision for asset impairments
$
287

 
$

Net loss (gain) on disposition of property and equipment
85

 
(279
)
 
 
 
 
 
$
372

 
$
(279
)
Effect on EPS:
 
 
 
Basic
$
(0.01
)
 
$
0.01

Assuming dilution
$
(0.01
)
 
$
0.01

 
The approximate $0.3 million impairment charge for the quarter ended December 21, 2016 is related to properties held for sale written down to their fair value.

There was no impairment charge for the quarter ended December 16, 2015.
 
The approximate $0.1 million net loss for the quarter ended December 21, 2016 is related to the sale of property and equipment.
 
The approximate $0.3 million net gain for the quarter ended December 16, 2015 is primarily related to the sale of one property.
 
Discontinued Operations 
 
On March 21, 2014, the Board of Directors of the Company (the "Board) 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 December 21, 2016, no locations were classified as discontinued operations in this plan.
 
As a result of the first quarter fiscal 2010 adoption of the Company’s Cash Flow Improvement and Capital Redeployment Plan, the Company reclassified 24 Luby’s Cafeterias to discontinued operations. As of December 21, 2016, one location remains held for sale.

The following table sets forth the assets and liabilities for all discontinued operations:
 
 
December 21,
2016
 
August 31,
2016
 
(In thousands)
Prepaid expenses
$

 
$
1

Assets related to discontinued operations—current
$

 
$
1

Property and equipment
$
1,872

 
$
1,872

Other assets
1,250

 
1,320

Assets related to discontinued operations—non-current
$
3,122

 
$
3,192

Deferred income taxes
$
361

 
$
361

Accrued expenses and other liabilities
23

 
51

Liabilities related to discontinued operations—current
$
384

 
$
412

Other liabilities
$
16

 
$
17

Liabilities related to discontinued operations—non-current
$
16

 
$
17



16



As of December 21, 2016, under both closure plans, the Company had one property classified as discontinued operations. The asset carrying value of the owned property was approximately $1.9 million and is included in assets related to discontinued operations. The Company is actively marketing this property for sale. 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:
 
 
Quarter Ended
 
December 21,
2016
 
December 16,
2015
 
(16 weeks)
 
(16 weeks)
 
(In thousands, except discontinued locations)
Sales
$

 
$

 
 
 
 
Pretax loss
(7
)
 
(118
)
Income tax benefit (expense) from discontinued operations
(65
)
 
46

Loss from discontinued operations, net of income taxes
$
(72
)
 
$
(72
)
Discontinued locations closed during the period

 


The following table summarizes discontinued operations for the first quarters of fiscal 2017 and 2016
 
Quarter Ended
 
December 21,
2016
 
December 16,
2015
 
(16 weeks)
 
(16 weeks)
 
(In thousands, except per share data)
Discontinued operating loss
$
(7
)
 
$
(118
)
Impairments

 

Net gains (losses)

 

Pretax loss
$
(7
)
 
$
(118
)
Income tax benefit (expense) from discontinued operations
(65
)
 
46

Loss from discontinued operations, net of income taxes
$
(72
)
 
$
(72
)
Effect on EPS from discontinued operations—basic
$
(0.00
)
 
$
(0.00
)
  
Impairment charges included above relate to properties closed and designated for disposal as a result of our two closure plans during fiscal 2010 and 2014.
 
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 December 21, 2016, the Company had five owned properties recorded at approximately $5.2 million in property held for sale.
 
At August 31, 2016, the Company had five owned properties recorded at approximately $5.5 million in property held for sale.
 
The Company is actively marketing the locations currently classified as property held for sale.

17



 
Note 9. 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 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, and contract termination expenses. The Company had two such non-cancelable contracts with an approximate $0.7 million commitment remaining as of December 21, 2016.
 
Cheeseburger in Paradise, Royalty Commitment

The license agreement and trade name relates to a perpetual license to use intangible assets including trademarks, service marks and publicity rights related to Cheeseburger in Paradise owned by Jimmy Buffett and affiliated entities. In return, the Company pays a royalty fee of 2.5% of gross sales, less discounts, at the Company's operating Cheeseburger in Paradise locations to an entity owned or controlled by Jimmy Buffett. The trade name represents a respected brand with positive customer loyalty, and the Company intends to cultivate and protect the use of the trade name.
 
Note 10. 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 dated May 28, 2015 among the Company and the Pappas entities.
 
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities 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 quarters ended December 21, 2016 and December 16, 2015. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of 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.
 

18



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 $103 thousand and $103 thousand in the quarters ended December 21, 2016 and December 16, 2015, respectively. The new lease agreement was approved by the Finance and Audit Committee.
 
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement for one of the Company's Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of approximately six years with two subsequent five-year options. Pursuant to the new ground lease agreement, the Company 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 $41 thousand and $40 thousand in the quarters ended December 21, 2016 and December 16, 2015, respectively.
 
Quarter Ended
 
December 21,
2016
 
December 16,
2015
 
(16 weeks)
 
(16 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
144

 
143

Total
$
144

 
$
143

Relative total Company costs:
 
 
 
Selling, general and administrative expenses
$
13,759

 
$
13,243

Capital expenditures
4,980

 
5,729

Other operating expenses, occupancy costs and opening costs
26,288

 
25,460

Total
$
45,027

 
$
44,432

Affiliated costs incurred as a percentage of relative total Company costs
0.32
%
 
0.32
%
 
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 was a lender and syndication agent under the 2013 Credit Facility (as defined herein).
 
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. 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 11. Share-Based Compensation
 
We have two active share based stock plans, the Luby's Incentive Stock Plan, as amended and restated effective December 5, 2015 (the "Employee Stock Plan") and the Nonemployee Director Stock Plan. Both plans authorize the granting of stock options, restricted stock, and other types of awards consistent with the purpose of the plans.

19



 
Of the 1.1 million shares approved for issuance under the Nonemployee Director Stock Plan, 1.0 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 0.2 million shares remain available for future issuance as of December 21, 2016. Compensation cost for share-based payment arrangements under the Nonemployee Director Stock Plan, recognized in selling, general and administrative expenses for the quarters ended December 21, 2016 and December 16, 2015 were approximately $192 thousand and $197 thousand, respectively.

Of the aggregate 4.1 million shares approved for issuance under the Employee Stock Plan (which amount includes shares authorized under the original plan and shares authorized pursuant to the amended and restated plan effective as of December 5, 2015), 6.1 million options and restricted stock units were granted, and 3.5 million options and restricted stock units were cancelled or expired and added back into the plan, since the plan’s inception in 2005. Approximately 1.5 million shares remain available for future issuance as of December 21, 2016. Compensation cost for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses for the quarters ended December 21, 2016 and December 16, 2015 were approximately $241 thousand and $455 thousand, respectively. Included in the quarter ended December 16, 2015, share based compensation cost was approximately $252 thousand, which represented accelerated share-based compensation expense as a result of the cancellation of 312,663 stock options.
 
The Company previously approved a Total Shareholder Return ("TSR") Performance Based Incentive Plan which provides for a right to receive an unspecified number of shares of common stock under the Employee Stock Plan based on the total shareholder return ranking compared to a selection of peer companies over a three-year cycle, for each plan year. The award value varies from 0% to 200% of a base amount, as a result of the Company’s TSR performance in comparison to its peers over the measurement period. The number of shares at the end of the three-year 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 awards, the plan is accounted for as a liability based plan. As of December 21, 2016, the estimated fair value of the performance awards liability for 2015, 2016 and 2017 plan years was $491 thousand, $526 thousand, and $112 thousand, respectively. 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. For the quarters ended December 21, 2016 and December 16, 2015, the Company has recorded $336 thousand and $74 thousand, respectively, in non-cash compensation expense in selling, general and administrative expenses related to its TSR Performance Based Incentive Plans.
 
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 quarter ended December 21, 2016. No options to purchase shares were outstanding under this plan as of December 21, 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 quarter ended December 21, 2016 were granted under the Employee Stock Plan. Options to purchase 1,427,418 shares at option prices of $3.44 to $11.10 per share remain outstanding as of December 21, 2016.
 

20



A summary of the Company’s stock option activity for the quarter ended December 21, 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 31, 2016
1,169,238

 
$
4.76

 
6.6

 
$
178

Granted
295,869

 
4.26

 

 

Exercised

 

 

 

Cancelled

 

 

 

Forfeited/Expired
(37,689
)
 
5.39

 

 

Outstanding at December 21, 2016
1,427,418

 
$
4.64

 
7.2

 
$
163

Exercisable at December 21, 2016
771,935

 
$
4.78

 
5.6

 
$
142


The intrinsic value for stock options is defined as the difference between the current market value, or closing price on December 21, 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 quarter ended December 21, 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 31, 2016
314,833

 
$
5.23

 
1.9

Granted
194,708

 
4.26

 

Vested

 

 

Forfeited

 

 

Unvested at December 21, 2016
509,541

 
$
4.86

 
2.4

 
At December 21, 2016, there was approximately $1.4 million of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 2.4 years.
 
Restricted Stock Awards
 
Under the Nonemployee Director Stock Plan, directors are granted restricted stock in lieu of cash payments, for all or a portion of their compensation as directors. Directors may receive a 20% premium of additional restricted stock by opting to receive stock over a minimum required amount of stock, in lieu of cash. The number of shares granted is valued at the average of the high and low price of the Company’s stock at the date of the grant. Restricted stock awards vest when granted because they are granted in lieu of a cash payment. However, directors are restricted from selling their shares until after the third anniversary of the date of the grant.
 

21



Note 12. 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 quarter ended December 21, 2016 include 971,549 shares with exercise prices exceeding market prices and no shares whose inclusion would also be anti-dilutive. 

The components of basic and diluted net loss per share are as follows:
 
 
Quarter Ended
 
December 21,
2016
 
December 16,
2015
 
(16 weeks)
 
(16 weeks)
 
(In thousands, expect per share data)
Numerator:
 
 
 
Loss from continuing operations
$
(5,514
)
 
$
(1,739
)
Loss from discontinued operations, net of income taxes
(72
)
 
(72
)
NET LOSS
$
(5,586
)
 
$
(1,811
)
Denominator:
 
 
 
Denominator for basic earnings per share—weighted-average shares
29,339

 
29,133

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

 

Denominator for earnings per share assuming dilution
29,339

 
29,133

Loss per share from continuing operations:
 
 
 
Basic
$
(0.19
)
 
$
(0.06
)
Assuming dilution
$
(0.19
)
 
$
(0.06
)
Loss per share from discontinued operations:
 
 
 
Basic
$
(0.00
)
 
$
(0.00
)
Assuming dilution
$
(0.00
)
 
$
(0.00
)
Net loss per share:
 
 
 
Basic
$
(0.19
)
 
$
(0.06
)
Assuming dilution
$
(0.19
)
 
$
(0.06
)
   

22




 
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 December 21, 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 31, 2016.
 
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.


23



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
 
December 21,
2016
 
December 16,
2015
 
(16 weeks)
 
(16 weeks)
Restaurant sales
94.5
 %
 
94.0
 %
Culinary contract services
3.8
 %
 
4.1
 %
Franchise revenue
1.6
 %
 
1.8
 %
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
28.5
 %
 
28.6
 %
Payroll and related costs
35.8
 %
 
34.7
 %
Other operating expenses
18.2
 %
 
16.2
 %
Occupancy costs
6.0
 %
 
5.8
 %
Vending revenue
(0.1
)%
 
(0.1
)%
Store level profit
11.7
 %
 
14.8
 %
 
 
 
 
COMPANY COSTS AND EXPENSES:
 
 
 
(As a percentage of total sales)
 
 
 
 
 
 
 
Opening costs
0.1
 %
 
0.3
 %
Depreciation and amortization
5.7
 %
 
5.8
 %
Selling, general and administrative expenses
12.0
 %
 
11.0
 %
Net loss (gain) on disposition of property and equipment
0.1
 %
 
(0.2
)%
 
 
 
 
Culinary Contract Services Costs
 
 
 
(As a percentage of Culinary Contract Services sales)
 
 
 
 
 
 
 
Cost of culinary contract services
88.7
 %
 
90.0
 %
Culinary income
11.3
 %
 
10.0
 %
 
 
 
 
Franchise Operations Costs
 
 
 
(As a percentage of Franchise Operations)
 
 
 
 
 
 
 
Cost of franchise operations
31.0
 %
 
28.8
 %
Franchise income
69.0
 %
 
71.2
 %
 
 
 
 
(As a percentage of total sales)
 
 
 
LOSS FROM OPERATIONS
(5.7
)%
 
(1.3
)%
Interest income
0.0
 %
 
0.0
 %
Interest expense
(0.5
)%
 
(0.6
)%
Other income (expense), net
0.1
 %
 
(0.1
)%
Loss before income taxes and discontinued operations
(6.1
)%
 
(2.0
)%
Benefit for income taxes
(1.3
)%
 
(0.6
)%
Loss from continuing operations
(4.8
)%
 
(1.4
)%
Loss from discontinued operations, net of income taxes
(0.1
)%
 
(0.1
)%
NET LOSS
(4.9
)%
 
(1.5
)%

24





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
 
December 21,
2016
 
December 16,
2015
 
(16 weeks)
 
(16 weeks)
 
(In thousands)
Store level profit
$
12,595

 
$
16,783

 
 
 
 
Plus:
 
 
 
Sales from culinary contract services
4,297

 
4,915

Sales from franchise operations
1,871

 
2,125

 
 
 
 
Less:
 
 
 
Opening costs
165

 
397

Cost of culinary contract services
3,811

 
4,422

Cost of franchise operations
580

 
612

Depreciation and amortization
6,550

 
7,014

Selling, general and administrative expenses
13,759

 
13,243

Provision for asset impairments
287

 

Net loss (gain) on disposition of property and equipment
85

 
(279
)
Interest income
(1
)
 
(1
)
Interest expense
602

 
696

Other income (expense), net
(103
)
 
118

Benefit for income taxes
(1,458
)
 
(660
)
Loss from continuing operations
$
(5,514
)
 
$
(1,739
)
  
The following table shows our restaurant unit count as of August 31, 2016 and December 21, 2016.
 
Restaurant Counts:
 
 
August 31,
2016
 
FY17Q1
Openings
 
FY17Q1
Closings
 
December 21,
2016
Luby’s Cafeterias
91

 

 

 
91

Fuddruckers Restaurants
75

 

 
(2
)
 
73

Cheeseburger in Paradise
8

 

 

 
8

Other restaurants(1)
1

 

 

 
1

Total
175

 

 
(2
)
 
173

 
(1) Other restaurants include one Bob Luby’s Seafood Grill.







25




Overview
 
Luby’s, Inc. (“Luby’s” or “Company”) is a multi-branded company operating in the restaurant industry and in the contract food services industry. Our primary brands include Luby’s Cafeteria, Fuddruckers - World’s Greatest Hamburgers®, Luby’s Culinary Contract Services and Cheeseburger in Paradise.
 
Our Company’s vision is that our guests, employees and shareholders stay loyal to our restaurant brands and value them as a significant part of their lives. We want our company’s performance to make it a leader in our industry.
 
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 Form 10-Q or incorporated by reference into any of our other filings with the SEC.
 
As of December 21, 2016, we owned and operated 173 restaurants, of which 91 are traditional cafeterias, 73 are gourmet hamburger restaurants, eight are casual dining restaurants and bars, and one primarily serves seafood. These establishments are located in close proximity to retail centers, business developments and residential areas mostly throughout the United States. Included in the 173 restaurants that we own and operate are 12 restaurants located at six property locations where we operate a side-by-side Luby’s Cafeteria and Fuddruckers on the same property. We refer to these locations as “Combo locations.”
 
As of December 21, 2016, we operated 23 Culinary Contract Services locations; 14 in the Houston, Texas area and one in each of Dallas, Texas and San Antonio, Texas. Outside of Texas we operate one in each of the following states: North Carolina, Florida, Georgia, Oklahoma, Louisiana, Missouri, and Massachusetts. Luby’s Culinary Contract Services currently provides food service management to healthcare corporate dining facilities.
 
As of December 21, 2016, we had 48 franchisees operating 113 Fuddruckers restaurants. Our largest five franchise owners own five to twelve restaurants each. Eighteen franchise owners each own two to four restaurants. The 25 remaining franchise owners each own one restaurant.
 
Accounting Periods
 
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate; fiscal 2016 was such a year. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically includes three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year. 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 restaurant’s sales results are included in the same-store sales calculation in the quarter after a store has been open for six consecutive fiscal quarters. Stores that close on a permanent basis are removed from the group in the quarter when operations cease at the restaurant, but remain in the same-store group for previously reported 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. 


26



RESULTS OF OPERATIONS
 
Quarter Ended December 21, 2016 Compared to Quarter Ended December 16, 2015
 
Comparability between quarters is affected by the varying lengths of the quarters and quarters ending at different points in the calendar year when seasonal patterns for sales are different. Both the quarter ended December 21, 2016 and the quarter ended December 16, 2015 consisted of 16 weeks.

Sales 
 
Quarter
Ended
 
Quarter
Ended
 
Q1FY2017 vs
Q1FY2016
($000s)
December 21,
2016
 
December 16,
2015
 
Increase/
(Decrease)
 
(16 weeks)
 
(16 weeks)
 
(16 weeks vs 16 weeks)
Restaurant sales
$
108,082

 
$
113,546

 
(4.8
)%
Culinary contract services
4,297

 
4,915

 
(12.6
)%
Franchise revenue
1,871

 
2,125

 
(12.0
)%
Vending revenue
159

 
158

 
0.6
 %
TOTAL SALES
$
114,409

 
$
120,744

 
(5.2
)%
 
Total sales decreased approximately $6.3 million, or 5.2%, in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015, consisting primarily of an approximate $5.5 million decrease in restaurant sales, an approximate $0.6 million decrease in Culinary Contract Services sales, and an approximate $0.3 million decrease in franchise revenue. The other component of total sales is vending revenue, which increased $1 thousand in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015.


The Company has three reportable segments: Company-owned restaurants, franchise operations, and culinary contract services.
 
Company-Owned Restaurants
 
Restaurant Sales 
($000s) 
Quarter
Ended
 
Quarter
Ended
 
Q1FY2017 vs
Q1FY2016
Restaurant Brand
December 21,
 
December 16,
 
Increase/(Decrease)
 
2016
 
2015
 
$ Amount
 
% Change
 
(16 weeks)
 
(16 weeks)
 
(16 weeks vs 16 weeks)
Luby’s Cafeterias
$
68,339

 
$
70,905

 
$
(2,566
)
 
(3.6
)%
Fuddruckers
28,748

 
30,880

 
(2,132
)
 
(6.9
)%
Combo locations
6,626

 
7,020

 
(394
)
 
(5.6
)%
Cheeseburger in Paradise
4,369

 
4,741

 
(372
)
 
(7.8
)%
Restaurant Sales
$
108,082

 
$
113,546

 
$
(5,464
)
 
(4.8
)%
 
Restaurant sales decreased approximately $5.5 million in the quarter ended December 21, 2016, compared to the quarter ended December 16, 2015. Sales at stand-alone Luby's Cafeteria restaurants decreased approximately $2.6 million to approximately $68.3 million; sales from stand-alone Fuddruckers locations decreased approximately $2.1 million to approximately $28.7 million; sales at Combo locations decreased approximately $0.4 million to approximately $6.6 million; and sales at Cheeseburger in Paradise restaurants decreased by approximately $0.4 million to approximately $4.4 million.


27



The approximate $2.6 million sales decrease in stand-alone Luby's Cafeteria restaurants was the result of the closure of two locations and a 2.2% decrease in same-store sales. The 2.2% Luby's Cafeteria same-store sales decrease was the result of a 1.4% decrease in guest traffic and a 0.8% decrease in average spend per guest. The approximate $2.1 million sales decrease at stand-alone Fuddruckers restaurants was the result of six restaurant closings (five on a permanent basis and one on a temporary basis for remodeling) and a 1.6% decrease in same-store sales, offset by the opening of three Fuddruckers locations. The 1.6% decrease in Fuddruckers same-store sales was the result of a 2.7% decrease in guest traffic offset by a 1.1% increase in average spend per guest. All eight stores that we operate as Cheeseburger in Paradise are included in our same-store grouping and sales at this group of restaurants decreased 7.8% in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015. Combo location sales decreased $0.4 million and represented 6.1% of total restaurant sales in the quarter ended December 21, 2016. Our sixth Combo location opened in the third quarter fiscal 2015 with a high volume of sales which was sustained through the quarter ended December 16, 2015, creating a challenging comparison for the quarter ended December 21, 2016. The $0.4 million decrease in Combo location sales was due to that comparison and a 2.3% same-store sales decrease at the other five Combo locations.

Cost of Food 
 
Quarter 
Ended
 
Quarter 
Ended
 
Q1FY2017 vs
Q1FY2016
($000s)
December 21,
2016
 
December 16,
2015
 
Increase/
(Decrease)
 
(16 weeks)
 
(16 weeks)
 
(16 weeks vs 16 weeks)
Cost of food
$
30,850

 
$
32,434

 
(4.9
)%
As a percentage of restaurant sales
28.5
%
 
28.6
%
 
(0.1
)%
 
Cost of food decreased approximately $1.6 million in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015. As a percentage of restaurant sales, cost of food decreased 0.1% to 28.5% in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015.


Payroll and Related Costs 
 
Quarter 
Ended
 
Quarter 
Ended
 
Q1FY2017 vs
Q1FY2016
($000s)
December 21,
2016
 
December 16,
2015
 
Increase/(Decrease)
 
(16 weeks)
 
(16 weeks)
 
(16 weeks vs 16 weeks)
Payroll and related costs
$
38,673

 
$
39,424

 
(1.9
)%
As a percentage of restaurant sales
35.8
%
 
34.7
%
 
1.1
 %
 
Payroll and related costs decreased approximately $0.8 million in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015. The decrease includes an approximate $0.5 million reduction in workers' compensation liability estimates as well as lower payroll and related costs associated with operating six fewer restaurants, partially offset by higher average hourly wage rates in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015. As a percentage of restaurant sales, payroll and related costs increased 1.1% to 35.8% in the quarter ended December 21, 2016 compared to 34.7% in the quarter ended December 16, 2015 due to higher average hourly wage rates as well as the fixed cost component of payroll and related costs (mainly management labor) with lower overall sales volumes.


Other Operating Expenses 
 
Quarter 
Ended
 
Quarter 
Ended
 
Q1FY2017 vs
Q1FY2016
($000s)
December 21,
2016
 
December 16,
2015
 
Increase/(Decrease)
 
(16 weeks)
 
(16 weeks)
 
(16 weeks vs 16 weeks)
Other operating expenses
$
19,648

 
$
18,421

 
6.7
%
As a percentage of restaurant sales
18.2
%
 
16.2
%
 
2.0
%

28




Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, local store advertising, property and liability insurance losses above insurance deductibles, services and supplies. Other operating expenses increased approximately $1.2 million, or 6.7%, in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015, due primarily to (1) an approximate $0.7 million increase in repairs and maintenance expense; (2) an approximate $0.4 million increase in restaurant services and supplies, including higher costs for computer network connectivity, point of sale software, restaurant security, and food-to-go delivery charges to third parties; and (3) an approximate $0.1 million increase in utility expense. As a percentage of restaurant sales, other operating expenses increased 2.0%, to 18.2%, in the quarter ended December 21, 2016, compared to 16.2% for the the quarter ended December 21, 2016 due to the cost increases enumerated above on lower overall sales volumes.
 

Occupancy Costs 
 
Quarter 
Ended
 
Quarter 
Ended
 
Q1FY2017 vs
Q1FY2016
($000s)
December 21,
2016
 
December 16,
2015
 
Increase/(Decrease)
 
(16 weeks)
 
(16 weeks)
 
(16 weeks vs 16 weeks)
Occupancy costs
$
6,475

 
$
6,642

 
(2.5
)%
As a percentage of restaurant sales
6.0
%
 
5.8
%
 
0.2
 %
 
Occupancy costs include property lease expense, property taxes, common area maintenance charges, and property insurance expense. Occupancy costs decreased approximately $0.2 million to approximately $6.5 million in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015. The decrease was primarily due to a decrease in property taxes and property insurance expense associated with operating six fewer restaurants in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015.


Franchise Operations  

We only offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Franchise revenue includes (1) royalties paid to us as the franchisor for the Fuddruckers brand and (2) franchise fees paid to us when franchise units are opened for business or transferred to new owners. 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

 
Quarter 
Ended
 
Quarter 
Ended
 
Q1FY2017 vs
Q1FY2016
($000s)
December 21,
2016
 
December 16,
2015
 
Increase/(Decrease)
 
(16 weeks)
 
(16 weeks)
 
(16 weeks vs 16 weeks)
Franchise revenue
$
1,871

 
$
2,125

 
(12.0
)%
Cost of franchise operations
580

 
612

 
(5.2
)%
Franchise profit
$
1,291

 
$
1,513

 
(14.7
)%
Franchise profit as a percentage of franchise revenue
69.0
%
 
71.2
%
 
(2.2
)%

Franchise revenue decreased $254 thousand in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015. The $254 thousand decrease in franchise revenue includes (1) an approximate $151 thousand decrease in franchise royalties due in part to the closure of certain high sales volume franchise locations, lower international royalty income, and same-store sales declines at franchise locations and (2) an approximate $103 thousand decrease in non-royalty related fee income due to fewer openings in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015.

29




Cost of Franchise Operations

Cost of franchise operations decreased $32 thousand in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015, primarily as a result of decreased travel costs to support franchise operations. Franchise profit, defined as Franchise revenue less Cost of franchise operations, decreased $222 thousand in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015 due to lower royalty income and franchise fee income.


Culinary Contract Services
 
Culinary Contract Services is 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. We operated 23 Culinary Contract Services locations at the end of the quarter ended December 21, 2016 and 28 at the end of the quarter ended December 16, 2015. 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. These agreements typically present lower financial risk to the Company.
 
Culinary Contract Services Revenue 
 
Quarter 
Ended
 
Quarter 
Ended
 
Q1FY2017 vs
Q1FY2016
($000s)
December 21,
2016
 
December 16,
2015
 
Increase/(Decrease)
 
(16 weeks)
 
(16 weeks)
 
(16 weeks vs 16 weeks)
Culinary contract services sales
$
4,297

 
$
4,915

 
(12.6
)%
Cost of culinary contract services
3,811

 
4,422

 
(13.8
)%
Culinary contract profit
$
486

 
$
493

 
(1.4
)%
Culinary contract services profit as a percentage of Culinary contract services sales
11.3
%
 
10.0
%
 
1.3
 %
 
Culinary Contract Services revenue decreased approximately $0.6 million, or 12.6%, in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015. The decrease in Culinary Contract Services revenue was primarily the result of a decrease in the number of locations operated.
 
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 decreased approximately $0.6 million, or 13.8%, in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015. Culinary Contract Services profit margin, defined as Culinary Contract Services revenue less Cost of Culinary Contract Services, increased to 11.3% in the quarter ended December 21, 2016 from 10.0% in the the quarter ended December 16, 2015 due to the change in the mix of our Culinary agreements with clients.


 Company-wide Expenses
 
Opening Costs
 
Opening costs include labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were approximately $0.2 million in the quarter ended December 21, 2016 compared to approximately $0.4 million in the quarter ended December 16, 2015. Both quarters included carrying costs of locations to be developed for future restaurant openings. The approximate $0.2 million in opening costs in the quarter ended December 21, 2016 included the carrying costs for two locations where we previously operated as Cheeseburger in Paradise restaurants. The $0.4 million in opening costs in the quarter ended December 16, 2015 included the carrying costs for five locations where we previously operated Cheeseburger in Paradise restaurants. Two of these locations opened as Fuddruckers restaurants in the quarter ended December 16, 2015 and one opened after the end of the quarter ended December 16, 2015. The other two locations remain available for possible future restaurant openings.



30



Depreciation and Amortization Expense 
 
Quarter 
Ended
 
Quarter 
Ended
 
Q1FY2017 vs
Q1FY2016
($000s)
December 21,
2016
 
December 16,
2015
 
Increase/(Decrease)
 
(16 weeks)
 
(16 weeks)
 
(16 weeks vs 16 weeks)
Depreciation and amortization
$
6,550

 
$
7,014

 
(6.6
)%
As a percentage of total sales
5.7
%
 
5.8
%
 
(0.1
)%
 
Depreciation and amortization expense decreased by approximately $0.5 million, or 6.6%, in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015 due primarily to reduced capital investment, certain assets reaching the end of their depreciable lives, and timing of depreciation charges within fiscal 2016.

 
Selling, General and Administrative Expenses 
 
Quarter 
Ended
 
Quarter 
Ended
 
Q1FY2017 vs
Q1FY2016
($000s)
December 21,
2016
 
December 16,
2015
 
Increase/(Decrease)
 
(16 weeks)
 
(16 weeks)
 
(16 weeks vs 16 weeks)
General and administrative expenses
$
11,433

 
$
11,455

 
(0.2
)%
Marketing and advertising expenses
2,326

 
1,788

 
30.1
 %
Selling, general and administrative expenses
$
13,759

 
$
13,243

 
3.9
 %
As a percentage of total sales
12.0
%
 
11.0
%
 
1.0
 %
 
Selling, general and administrative expenses include corporate salaries and benefits-related costs, including restaurant area leaders, share-based compensation, marketing and advertising expense, professional fees, travel and recruiting expenses and other office expenses. Selling, general and administrative expenses increased approximately $0.5 million, or 3.9%, in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015. Increases in selling, general and administrative expense include (1) an approximate $0.5 million increase in marketing and advertising expense; (2) an approximate $0.3 million increase in outside professional service fees costs; (3) a net increase of approximately $0.2 million increase in liability insurance, travel, bank charges, and other administrative costs; offset by (4) a decrease of approximately $0.5 million in salaries and benefits expense. The approximate $0.5 million increase in marketing and advertising expenses is intended to motivate increased guest visits, increased frequency of visits, and increased overall brand awareness. This includes sponsorships and partnerships with sports teams that we believe enhance our visibility and appeal within our core markets as well as other marketing commitments entered into prior to the start of the quarter ended December 21, 2016. As a percentage of total revenue, selling, general and administrative expenses increased to 12.0% in the quarter ended December 21, 2016, compared to 11.0% in the the quarter ended December 16, 2015.

 
Provision for Asset Impairments
 
The provision for asset impairments of approximately $0.3 million in the quarter December 21, 2016 related to property held for sale written down to its fair value. There was no impairment charge for the quarter ended December 16, 2015.

 
Net (Gain) Loss on Disposition of Property and Equipment
 
Loss on disposition of property and equipment was $85 thousand in the quarter ended December 21, 2016 and primarily reflects normal asset retirement activity. The gain on disposition of property and equipment was approximately $0.3 million in the quarter ended December 16, 2015 and primarily reflects the gain on the sale of one property that we had previously acquired for possible development offset by normal asset retirement activity.


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Interest Income
 
Interest income was $1 thousand in the quarter ended December 21, 2016 and in the quarter ended December 16, 2015.


Interest Expense
 
Interest expense decreased approximately $0.1 million, or 13.5%, to approximately $0.6 million in the quarter ended December 21, 2016 compared to the quarter ended December 16, 2015. This decrease was due primarily to higher interest expense in the quarter ended December 16, 2015 related to accelerating deferred financing fees upon amending the 2013 Credit Agreement.
 

Other Income, 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; and oil and gas royalty income. Other income, net, in the quarter ended December 21, 2016 increased approximately $0.2 million compared to the quarter ended December 16, 2015 primarily due to (1) higher net rental income and (2) a decrease in discounts related to the volume of sales of pre-paid gift cards.


Taxes
 
For the quarter ended December 21, 2016, the income taxes related to continuing operations resulted in a tax benefit of approximately $1.5 million compared to a tax benefit of approximately $0.7 million for the quarter ended December 16, 2015.

 
Discontinued Operations
 
Loss from discontinued operations was $72 thousand in the quarter ended December 21, 2016 compared to a loss of $72 thousand in the quarter ended December 16, 2015. Loss from discontinued operations of $72 thousand in the quarter ended December 21, 2016 consisted of $7 thousand in carrying costs associated with assets related to discontinued operations and a $65 thousand tax provision. The loss from discontinued operations of approximately $72 thousand in the quarter ended December 16, 2015 consisted of $118 thousand in carrying costs associated with assets related to discontinued offset by a $46 thousand tax benefit.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash and Cash Equivalents
 
General. Our primary sources of short-term and long-term liquidity are cash flows from operations, our Revolver (as defined below), and our Term Loan (as defined below). During the quarter ended December 21, 2016, cash provided by operating activities was approximately $3.2 million and cash provided by financing activities was approximately $1.8 million offset by cash used in investing activities of approximately $4.9 million. Cash and cash equivalents increased approximately $0.1 million in the quarter ended December 21, 2016 compared to an approximate $0.1 million increase in the quarter ended December 16, 2015. We plan to continue the level of capital and repair and maintenance expenditures necessary to keep our restaurants attractive and operating efficiently.
 
Our cash requirements consist principally of:
 
payments to reduce our debt;
capital expenditures for construction, restaurant renovations and upgrades, information technology and culinary contract services development; and
working capital primarily for our Company-owned restaurants and obligations under our Culinary Contract Services agreements.


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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 for culinary contract services and franchises. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets. 

The following table summarizes our cash flows from operating, investing and financing activities:
 
 
Quarter Ended
 
December 21,
2016
 
December 16,
2015
 
(16 weeks)
 
(16 weeks)
 
(In thousands)
Total cash provided by (used in):
 
 
 
Operating activities
$
3,241

 
$
6,343

Investing activities
(4,942
)
 
(3,796
)
Financing activities
1,775

 
(2,467
)
Net increase in cash and cash equivalents
$
74

 
$
80

 
Operating Activities. Cash provided by operating activities was approximately $3.2 million in the quarter ended December 21, 2016, an approximate $3.1 million decrease from the