Document


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 March 15, 2017
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
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  x

As of April 20, 2017, there were 29,091,836 shares of the registrant’s common stock outstanding. 

1



Luby’s, Inc.
Form 10-Q
Quarter ended March 15, 2017
Table of Contents
 
 
Page
 
 
  
 
 
  
  
  
  
  
  
 
 
  
 
 
 
 
 
 
 
 



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)
 
 
March 15,
2017
 
August 31,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
1,352

 
$
1,339

Trade accounts and other receivables, net
5,389

 
5,919

Food and supply inventories
4,589

 
4,596

Prepaid expenses
3,035

 
3,147

Assets related to discontinued operations

 
1

Deferred income taxes
255

 
540

Total current assets
14,620

 
15,542

Property held for sale
3,929

 
5,522

Assets related to discontinued operations
2,830

 
3,192

Property and equipment, net
185,067

 
193,218

Intangible assets, net
20,298

 
21,074

Goodwill
1,068

 
1,605

Deferred income taxes
7,011

 
8,738

Other assets
3,278

 
3,334

Total assets
$
238,101

 
$
252,225

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
18,311

 
$
17,539

Liabilities related to discontinued operations
387

 
412

Current portion of credit facility debt
2,450

 

Accrued expenses and other liabilities
26,321

 
23,752

Total current liabilities
47,469

 
41,703

Credit facility debt, less current portion
34,617

 
37,000

Liabilities related to discontinued operations
16

 
17

Other liabilities
8,141

 
7,752

Total liabilities
90,243

 
86,472

Commitments and Contingencies

 

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $0.32 par value; 100,000,000 shares authorized; shares issued were 29,566,355 and 29,440,041, respectively; shares outstanding were 29,066,355 and 28,940,041, respectively
9,461

 
9,421

Paid-in capital
31,178

 
30,348

Retained earnings
111,994

 
130,759

Less cost of treasury stock, 500,000 shares
(4,775
)
 
(4,775
)
Total shareholders’ equity
147,858

 
165,753

Total liabilities and shareholders’ equity
$
238,101

 
$
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
 
Two Quarters Ended
 
March 15,
2017
 
March 9,
2016
 
March 15,
2017
 
March 9,
2016
 
(12 weeks)
 
(12 weeks)
 
(28 weeks)
 
(28 weeks)
SALES:
 
 
 
 
 
 
 
Restaurant sales
$
81,064

 
$
86,314

 
$
189,147

 
$
199,861

Culinary contract services
3,306

 
3,918

 
7,602

 
8,833

Franchise revenue
1,819

 
1,700

 
3,691

 
3,825

Vending revenue
125

 
137

 
284

 
295

TOTAL SALES
86,314

 
92,069

 
200,724

 
212,814

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Cost of food
22,583

 
24,600

 
53,433

 
57,034

Payroll and related costs
29,295

 
29,834

 
67,968

 
69,258

Other operating expenses
13,763

 
13,736

 
33,411

 
32,157

Occupancy costs
5,322

 
5,535

 
11,797

 
12,177

Opening costs
132

 
174

 
298

 
571

Cost of culinary contract services
2,960

 
3,520

 
6,771

 
7,942

Cost of franchise operations
436

 
428

 
1,016

 
1,039

Depreciation and amortization
4,788

 
5,220

 
11,338

 
12,235

Selling, general and administrative expenses
9,008

 
9,843

 
22,767

 
23,086

Provision for asset impairments and restaurant closings, net
5,963

 
37

 
6,250

 
37

Net loss (gain) on disposition of property and equipment
329

 
(556
)
 
414

 
(835
)
Total costs and expenses
94,579

 
92,371

 
215,463

 
214,701

LOSS FROM OPERATIONS
(8,265
)
 
(302
)
 
(14,739
)
 
(1,887
)
Interest income
1

 
1

 
3

 
2

Interest expense
(727
)
 
(495
)
 
(1,330
)
 
(1,191
)
Other income (expense), net
(242
)
 
29

 
(139
)
 
(90
)
Loss before income taxes and discontinued operations
(9,233
)
 
(767
)
 
(16,205
)
 
(3,166
)
Provision (benefit) for income taxes
3,603

 
(185
)
 
2,145

 
(845
)
Loss from continuing operations
(12,836
)
 
(582
)
 
(18,350
)
 
(2,321
)
Loss from discontinued operations, net of income taxes
(343
)
 
(17
)
 
(415
)
 
(89
)
NET LOSS
$
(13,179
)
 
$
(599
)
 
$
(18,765
)
 
$
(2,410
)
Loss per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.44
)
 
$
(0.02
)
 
$
(0.62
)
 
$
(0.08
)
Assuming dilution
$
(0.44
)
 
$
(0.02
)
 
$
(0.62
)
 
$
(0.08
)
Loss per share from discontinued operations:
 
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
(0.00
)
 
$
(0.02
)
 
$
(0.00
)
Assuming dilution
$
(0.01
)
 
$
(0.00
)
 
$
(0.02
)
 
$
(0.00
)
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.45
)
 
$
(0.02
)
 
$
(0.64
)
 
$
(0.08
)
Assuming dilution
$
(0.45
)
 
$
(0.02
)
 
$
(0.64
)
 
$
(0.08
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
29,522

 
29,247

 
29,418

 
29,182

Assuming dilution
29,522

 
29,247

 
29,418

 
29,182


 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

 

 

 

 

 
(18,765
)
 
(18,765
)
Share-based compensation expense
41

 
13

 

 

 
857

 

 
870

Common stock issued under employee benefit plans
3

 
1

 

 

 
(1
)
 

 

Common stock issued under nonemployee benefit plans
83

 
26

 

 

 
(26)

 

 

Balance at March 15, 2017
29,567

 
$
9,461

 
(500
)
 
$
(4,775
)
 
$
31,178

 
$
111,994

 
$
147,858

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

5



Luby’s, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 
 
Two Quarters Ended
 
March 15,
2017
 
March 9,
2016
 
(28 weeks)
 
(28 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(18,765
)
 
$
(2,410
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Provision for asset impairments and net (gains) on property sales
6,664

 
(798
)
Depreciation and amortization
11,338

 
12,250

Amortization of debt issuance cost
283

 
202

Share-based compensation expense
870

 
803

Deferred tax provision (benefit)
2,399

 
(1,247
)
Cash provided by operating activities before changes in operating assets and liabilities
2,789

 
8,800

Changes in operating assets and liabilities:
 
 
 
Decrease (Increase) in trade accounts and other receivables
530

 
(214
)
Decrease (Increase) in food and supply inventories
7

 
(805
)
Decrease in prepaid expenses and other assets
210

 
381

Increase (Decrease) in accounts payable, accrued expenses and other liabilities
3,067

 
(971
)
Net cash provided by operating activities
6,603

 
7,191

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from disposal of assets and property held for sale
1,631

 
4,167

Decrease in notes receivable

 
17

Purchases of property and equipment
(7,962
)
 
(10,970
)
Net cash used in investing activities
(6,331
)
 
(6,786
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Revolver borrowings
65,700

 
50,700

Revolver repayments
(99,700
)
 
(51,200
)
Proceeds from term loan
35,000

 

Term loan repayments
(613
)
 

Debt issuance costs
(646
)
 
(42
)
Proceeds received on the exercise of employee stock options

 
75

Net cash used in financing activities
(259
)
 
(467
)
Net increase (decrease) in cash and cash equivalents
13

 
(62
)
Cash and cash equivalents at beginning of period
1,339

 
1,501

Cash and cash equivalents at end of period
$
1,352

 
$
1,439

Cash paid for:
 
 
 
Income taxes
$

 
$

Interest
679

 
951

 
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 March 15, 2017 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.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017–04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). This guidance eliminates the requirement to determine the implied fair value of goodwill to measure an impairment of goodwill. Rather, goodwill impairment charges will be calculated as the amount by which a reporting unit's carrying amount exceeds its fair value. Adoption of the provisions in ASU 2017-04 is required for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. The Company has adopted ASU 2017-04 effective beginning in the current period. The provisions of ASU 2017-04 did not have a material effect on the Company's financial condition, results of operations, or cash flows.
New Accounting Pronouncements - "to be Adopted"
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. Further, in March 2016, the FASB issued ASU No. 2016–08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in ASU No. 2014–09 for evaluating when another party, along with the entity, is involved in providing a good or service to a customer. In April 2016, the FASB issued ASU No. 2016–10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” which clarifies the guidance in ASU No. 2014–09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. The Company plans to adopt the standard in the first quarter of fiscal 2019, which is the first fiscal quarter of the annual reporting period beginning after December 15, 2017. We have not yet decided on a method of transition upon adoption. The Company expects the pronouncement may impact the recognition of the initial franchise fee, which is currently recognized upon the opening of a franchise restaurant. We are further evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.


7



In August 2014, the FASB issued ASU No 2014-15. The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The pronouncement is effective for fiscal years and interim periods within those fiscal years, after December 31, 2016. 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.

8



Subsequent Events
There are no subsequent events.
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 - World’s Greatest Hamburgers® 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 March 15, 2017 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 March 15, 2017 and 24 at August 31, 2016.

CCS began selling Luby's Famous Fried Fish and Macaroni & Cheese in February 2017 and December 2016, respectively, in the freezer section of H-E-B 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 Macaroni and Cheese and Luby's Jalapeño Macaroni and Cheese varieties and Luby's Fried Fish (two regular size fillets that provide four LuAnn-sized portions).
 
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.
 

9



Franchisees bear all direct costs involved in the development, construction, and operation of their restaurants. In exchange for a franchise fee, the Company provides assistance to franchisees in the following areas: site selection, prototypical architectural plans, interior and exterior design and layout, training, marketing and sales techniques, assistance by a Fuddruckers “opening team” at the time a franchised restaurant opens, and operations, and accounting guidelines set forth in various policies and procedures manuals.
 
All franchisees are required to operate their restaurants in accordance with Fuddruckers’ standards and specifications, including controls over menu items, food quality, and preparation. The Company requires the successful completion of its training program by a minimum of three managers for each franchised restaurant. In addition, franchised restaurants are evaluated regularly by the Company for compliance with franchise agreements, including standards and specifications through the use of periodic, unannounced, on-site inspections, and standard evaluation reports.
 
The number of franchised restaurants was 114 at March 15, 2017 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 April 2017, this licensee operated 35 restaurants that are licensed to use the Fuddruckers Proprietary Marks in Saudi Arabia, Egypt, Lebanon, United Arab Emirates, Qatar, Jordan, Bahrain, Kuwait, Morocco, and Malaysia. The Company does not receive revenue or royalties from these restaurants.

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

10



 
 
Quarter Ended
 
Two Quarters Ended
 
March 15,
2017
 
March 9,
2016
 
March 15,
2017
 
March 9,
2016
 
(12 weeks)
 
(12 weeks)
 
(28 weeks)
 
(28 weeks)
 
(In thousands)
Sales:
 
 
 
 
 
 
 
Company-owned restaurants (1)
$
81,189

 
$
86,451

 
$
189,431

 
$
200,156

Culinary contract services
3,306

 
3,918

 
7,602

 
8,833

Franchise operations
1,819

 
1,700

 
3,691

 
3,825

Total
$
86,314

 
$
92,069

 
$
200,724

 
$
212,814

Segment level profit:
 
 
 
 

 

Company-owned restaurants
$
10,226

 
$
12,746

 
$
22,822

 
$
29,530

Culinary contract services
346

 
398

 
831

 
891

Franchise operations
1,383

 
1,272

 
2,675

 
2,786

Total
$
11,955

 
$
14,416

 
$
26,328

 
$
33,207

Depreciation and amortization:
 
 
 
 

 

Company-owned restaurants
$
3,981

 
$
4,318

 
$
9,435

 
$
10,128

Culinary contract services
15

 
27

 
38

 
64

Franchise operations
178

 
192

 
414

 
448

Corporate
614

 
683

 
1,451

 
1,595

Total
$
4,788

 
$
5,220

 
$
11,338

 
$
12,235

Capital expenditures:
 
 
 
 

 

Company-owned restaurants
$
2,783

 
$
5,128

 
$
7,333

 
$
10,622

Culinary contract services

 

 

 

Franchise operations

 

 

 

Corporate
199

 
113

 
629

 
348

Total
$
2,982

 
$
5,241

 
$
7,962

 
$
10,970

 
 
 
 
 

 

Loss before income taxes and discontinued operations:
 
 
 
 

 

Segment level profit
$
11,955

 
$
14,416

 
$
26,328

 
$
33,207

Opening costs
(132
)
 
(174
)
 
(298
)
 
(571
)
Depreciation and amortization
(4,788
)
 
(5,220
)
 
(11,338
)
 
(12,235
)
Selling, general and administrative expenses
(9,008
)
 
(9,843
)
 
(22,767
)
 
(23,086
)
Provision for asset impairments and restaurant closings, net
(5,963
)
 
(37
)
 
(6,250
)
 
(37
)
Net (loss) gain on disposition of property and equipment
(329
)
 
556

 
(414
)
 
835

Interest income
1

 
1

 
3

 
2

Interest expense
(727
)
 
(495
)
 
(1,330
)
 
(1,191
)
Other income (expense), net
(242
)
 
29

 
(139
)
 
(90
)
Loss before income taxes and discontinued operations
$
(9,233
)
 
$
(767
)
 
$
(16,205
)
 
$
(3,166
)
 
 
March 15,
2017
 
August 31,
2016
Total assets:
 
 
 
Company-owned restaurants(2)
$
201,022

 
$
211,182

Culinary contract services
3,209

 
3,390

Franchise operations(3)
11,797

 
12,266

Corporate
22,073

 
25,387

Total
$
238,101

 
$
252,225

(1)
Includes vending revenue of $125 thousand and $137 thousand for the quarters ended March 15, 2017 and March 9, 2016, respectively, and $284 thousand and $295 thousand for the two quarters ended March 15, 2017 and March 9, 2016, respectively.
(2)
Company-owned restaurants segment includes $9.4 million of Fuddruckers trade name, Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles.
(3)
Franchise operations segment includes approximately $11.0 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. During the two quarters ended March 15, 2017 the changes in the interest rate swap fair value resulted in an expense of approximately $45 thousand.

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
 
 
 
Two Quarters Ended March 15, 2017
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Valuation Method
Recurring Fair Value - Liabilities
 
 
(In thousands)
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
TSR Performance Based Incentive Plan(1)
$
1,381

 
$

 
$
1,381

 
$

 
Monte Carlo Simulation
Derivative - Interest Rate Swap
45

 

 
45

 

 
Discounted Cash Flow
Total liabilities at Fair Value
$
1,426

 
$

 
$
1,426

 
$

 
 
(1) The fair value of the Company's 2015, 2016, and 2017 Performance Based Incentive Plan liabilities were approximately $550 thousand, $634 thousand, and $197 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
 
 
 
Two Quarters Ended March 9, 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
$
267

 
$

 
$
267

 
$

 
Monte Carlo Simulation
(1) The fair value of the Company's 2015 and 2016 Performance Based Incentive Plan liabilities were approximately $207 thousand and $60 thousand, respectively.

Non-recurring fair value measurements related to impaired property held for sale, goodwill, and property and equipment consisted of the following:
 
 
 
 
Fair Value
Measurement Using
 
 
 
Two Quarters Ended March 15, 2017
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Impairments(4)
Nonrecurring Fair Value Measurements
 
 
(In thousands)
 
 
 
 
Continuing Operations
 
 
 
 
 
 
 
 
 
Property held for sale(1)
$
3,213

 
$

 
$

 
$
3,213

 
$
(419
)
Goodwill (2)

 

 

 

 
(537
)
Property and equipment related to company-owned restaurants(3)
1,410

 

 

 
1,410

 
(5,226
)
Total Nonrecurring Fair Value Measurements
$
4,623

 
$

 
$

 
$
4,623

 
$
(6,182
)
(1) In accordance with Subtopic 360-10, long-lived assets held for sale with a carrying value of approximately $4.8 million were written down to their fair value, less approximately $1.2 million proceeds on sales and costs to sell, of approximately $3.2 million, resulting in an impairment charge of approximately $0.4 million.
(2) In accordance with Subtopic 350-20, goodwill with a carrying value of approximately $537 thousand was written down to zero, resulting in an impairment charge of approximately $537 thousand.
(3) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of approximately $6.6 million were written down to their fair value of approximately $1.4 million, resulting in an impairment charge of approximately $5.2 million.
(4) Total impairments are included in Provision for asset impairments in The Consolidated Statement of Operations in the two quarters ended March 15, 2017.


13



 
 
 
Fair Value
Measurement Using
 
 
 
Two Quarters Ended March 9, 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
 
 
 
 
 
 
 
 
 
Goodwill (1)
$

 
$

 
$

 
$

 
$
(38
)
Total Nonrecurring Fair Value Measurements
$

 
$

 
$

 
$

 
$
(38
)
(1) In accordance with Subtopic 350-20, goodwill with a carrying value of approximately $38 thousand was written down to its implied fair value of zero, resulting in an impairment charge of approximately $38 thousand, which is included in Provision for asset impairments in the Consolidated Statement of Operations in the two quarters ended March 9, 2016.

Note 6. Income Taxes 
 
No cash payments of estimated federal income taxes were made during the two quarters ended March 15, 2017
 
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 March 15, 2017, 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 two quarters ended March 15, 2017 an increase in the valuation allowance was necessary and increased the valuation allowance to approximately $15.0 million.

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.
 

14



Note 7. Property and Equipment, Intangible Assets and Goodwill
 
The costs, net of impairment, and accumulated depreciation of property and equipment at March 15, 2017 and August 31, 2016, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:
 
 
March 15,
2017
 
August 31,
2016
 
Estimated
Useful Lives
(years)
 
(In thousands)
 
 
 
 
 
 
Land
$
61,940

 
$
61,940

 
 
 
 
 
Restaurant equipment and furnishings
73,764

 
75,764

 
3
 
to
 
15
Buildings
158,811

 
157,006

 
20
 
to
 
33
Leasehold and leasehold improvements
27,025

 
25,973

 
Lesser of lease term or estimated useful life
Office furniture and equipment
3,634

 
3,277

 
3
 
to
 
10
Construction in progress
934

 
145

 
 
 
 
 
 
326,108

 
324,105

 
 
 
 
 
 
Less accumulated depreciation and amortization
(141,041
)
 
(130,887
)
 
 
 
 
 
 
Property and equipment, net
$
185,067

 
$
193,218

 
 
 
 
 
 
Intangible assets, net
$
20,298

 
$
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 $0.8 million for the two quarters ended March 15, 2017 and approximately $0.8 million for the two quarters ended March 9, 2016. 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.
 

15



The following table presents intangible assets as of March 15, 2017 and August 31, 2016:
 
 
March 15, 2017
 
August 31, 2016
 
(In thousands)
 
(In thousands)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Intangible Assets Subject to Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuddruckers trade name and franchise agreements
$
29,486

 
$
(9,294
)
 
$
20,192

 
$
29,486

 
$
(8,535
)
 
$
20,951

 
 
 
 
 
 
 
 
 
 
 
 
Cheeseburger in Paradise trade name and license agreements
$
421

 
$
(315
)
 
$
106

 
$
421

 
$
(298
)
 
$
123

 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets, net
$
29,907

 
$
(9,609
)
 
$
20,298

 
$
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 2017, 2016, 2015, and 2014 assessments was impairment of goodwill of approximately $537 thousand, $38 thousand, $38 thousand, and $488 thousand, respectively. The Company performs 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 March 15, 2017, 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, three locations were subleased to franchisees, and the remaining three closed and held for future use.
 
Goodwill, net of accumulated impairments of approximately $1.1 million, was approximately $1.1 million as of March 15, 2017 and approximately $1.6 million as of August 31, 2016, and relates to our Company-owned restaurants reportable segment.
 
Note 8. Impairment of Long-Lived Assets, Discontinued Operations, Property Held for Sale and Store Closings
 
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

16



determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows.
 
The Company recognized the following impairment charges to income from operations:
 
 
Two Quarters Ended
 
March 15,
2017
 
March 9,
2016
 
(28 weeks)
 
(28 weeks)
 
(In thousands, except per share data)
Provision for asset impairments and restaurant closings, net
$
6,250

 
$
37

Net loss (gain) on disposition of property and equipment
414

 
(835
)
 
 
 
 
 
$
6,664

 
$
(798
)
Effect on EPS:
 
 
 
Basic
$
0.23

 
$
0.03

Assuming dilution
$
0.23

 
$
0.03

 
The approximate $6.3 million impairment charge for the two quarters ended March 15, 2017 is primarily related to assets at 13 locations, goodwill at six locations, and four properties held for sale written down to their fair value.

The approximate $37 thousand impairment charge for the two quarters ended March 9, 2016 is primarily related to goodwill at one underperforming converted Cheeseburger in Paradise leasehold location.
 
The approximate $0.4 million net loss for the two quarters ended March 15, 2017 is related to the sale of property and equipment.
 
The approximate $0.8 million net gain for the two quarters ended March 9, 2016 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 March 15, 2017, 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 March 15, 2017, one location remains held for sale.


17



The following table sets forth the assets and liabilities for all discontinued operations:
 
 
March 15,
2017
 
August 31,
2016
 
(In thousands)
Prepaid expenses
$

 
$
1

Assets related to discontinued operations—current
$

 
$
1

Property and equipment
$
1,872

 
$
1,872

Deferred tax assets
958

 
1,320

Assets related to discontinued operations—non-current
$
2,830

 
$
3,192

Deferred income taxes
$
384

 
$
361

Accrued expenses and other liabilities
3

 
51

Liabilities related to discontinued operations—current
$
387

 
$
412

Other liabilities
$
16

 
$
17

Liabilities related to discontinued operations—non-current
$
16

 
$
17


As of March 15, 2017, under both closure plans, the Company had one property classified as discontinued operations. The asset carrying value of the owned property was approximately $1.9 million and is included in assets related to discontinued operations. The Company is actively marketing this property for sale. The asset carrying value of the ground lease was previously impaired to zero.
 
The following table sets forth the sales and pretax losses reported from discontinued operations:
 
 
Two Quarters Ended
 
March 15,
2017
 
March 9,
2016
 
(28 weeks)
 
(28 weeks)
 
(In thousands, except discontinued locations)
Sales
$

 
$

 
 
 
 
Pretax loss
(12
)
 
(147
)
Income tax benefit (expense) from discontinued operations
(403
)
 
58

Loss from discontinued operations, net of income taxes
$
(415
)
 
$
(89
)
Discontinued locations closed during the period

 


The following table summarizes discontinued operations for the two quarters of fiscal 2017 and 2016
 
Two Quarters Ended
 
March 15,
2017
 
March 9,
2016
 
(28 weeks)
 
(28 weeks)
 
(In thousands, except per share data)
Discontinued operating loss
$
(12
)
 
$
(147
)
Impairments

 

Net gains (losses)

 

Pretax loss
$
(12
)
 
$
(147
)
Income tax benefit (expense) from discontinued operations
(403
)
 
58

Loss from discontinued operations, net of income taxes
$
(415
)
 
$
(89
)
Effect on EPS from discontinued operations—basic
$
(0.02
)
 
$
(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.

18



 
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 March 15, 2017, the Company had four owned properties recorded at approximately $3.9 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.

Abandoned Leased Facilities - Reserve for Store Closing

In fiscal 2016, the Company abandoned three Fuddruckers restaurant leased locations in Illinois, Maryland, and New York and one Luby's cafeteria leased location in Arkansas. Although the Company remains obligated under the terms of the leases for the rent and other costs that may be associated with the leases, the Company decided to cease operations and has no foreseeable plans to occupy the spaces in the future. Therefore, in fiscal 2016, the Company recorded a liability for lease termination expense and charged to earnings, in provision for asset impairments, net, of approximately $0.2 million. The liability is equal to the total amount of rent and other direct costs for the remaining period of time the properties will be unoccupied plus the present value of the amount by which the rent paid by the Company to the landlord exceeds any rent paid to the Company by a tenant under a sublease over the remaining period of the lease terms. Accrued lease termination expense was approximately $65 thousand and $151 thousand as of March 15, 2017 and August 31, 2016, respectively. 

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 one such non-cancelable contract with an approximate $73 thousand commitment remaining as of March 15, 2017.
 

19



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. The total costs under the Amended and Restated Master Sales Agreement for custom-fabricated and refurbished equipment in the two quarters ended March 15, 2017 and March 9, 2016 were $4 thousand and zero. 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.
 
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 approximately $207 thousand and approximately $207 thousand in the two quarters ended March 15, 2017 and March 9, 2016, 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 approximately $81 thousand and approximately $80 thousand in the two quarters ended March 15, 2017 and March 9, 2016, respectively.

20



 
Two Quarters Ended
 
March 15,
2017
 
March 9,
2016
 
(28 weeks)
 
(28 weeks)
 
(In thousands, except percentages)
Affiliated costs incurred:
 
 
 
General and administrative expenses—professional and other costs
$

 
$

Capital expenditures
4

 

Other operating expenses, occupancy costs and opening costs, including property leases
288

 
287

Total
$
292

 
$
287

Relative total Company costs:
 
 
 
Selling, general and administrative expenses
$
22,767

 
$
23,086

Capital expenditures
7,962

 
10,970

Other operating expenses, occupancy costs and opening costs
45,506

 
44,905

Total
$
76,235

 
$
78,961

Affiliated costs incurred as a percentage of relative total Company costs
0.38
%
 
0.36
%
 
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.
 
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 canceled 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 March 15, 2017. Compensation cost for share-based payment arrangements under the Nonemployee Director Stock Plan, recognized in selling, general and administrative expenses for the two quarters ended March 15, 2017 and March 9, 2016 were approximately $409 thousand and $357 thousand, respectively.


21



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 canceled 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 March 15, 2017. Compensation cost for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses for the two quarters ended March 15, 2017 and March 9, 2016 were approximately $461 thousand and $653 thousand, respectively. Included in the two quarters ended March 9, 2016, 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 March 15, 2017, the estimated fair value of the performance awards liability for 2015, 2016 and 2017 plan years was $550 thousand, $634 thousand, and $197 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 two quarters ended March 15, 2017 and March 9, 2016, the Company has recorded approximately $588 thousand and $159 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 two quarters ended March 15, 2017. No options to purchase shares were outstanding under this plan as of March 15, 2017.
 
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 two quarters ended March 15, 2017 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 March 15, 2017.
 
A summary of the Company’s stock option activity for the quarter ended March 15, 2017 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
(9,290
)
 
4.49

 

 

Forfeited/Expired
(52,543
)
 
5.13

 

 

Outstanding at March 15, 2017
1,403,274

 
$
4.64

 
6.9

 
$

Exercisable at March 15, 2017
889,251

 
$
4.74

 
5.7

 
$



22



The intrinsic value for stock options is defined as the difference between the current market value, or closing price on March 15, 2017, 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 two quarters ended March 15, 2017 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
200,549

 
4.26

 

Vested
(85,738
)
 
6.43

 

Forfeited
(6,320
)
 

 

Unvested at March 15, 2017
423,324

 
$
4.54

 
2.2

 
At March 15, 2017, there was approximately $1.2 million of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 2.2 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.
 
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 March 15, 2017 include 1,403,274 shares with exercise prices exceeding market prices and no shares whose inclusion would also be anti-dilutive. 


23



The components of basic and diluted net loss per share are as follows:
 
 
Quarter Ended
 
Two Quarters Ended
 
March 15,
2017
 
March 9,
2016
 
March 15,
2017
 
March 9,
2016
 
(12 weeks)
 
(12 weeks)
 
(28 weeks)
 
(28 weeks)
 
(In thousands, expect per share data)
Numerator:
 
 
 
 
 
 
 
Loss from continuing operations
$
(12,836
)
 
$
(582
)
 
$
(18,350
)
 
$
(2,321
)
Loss from discontinued operations, net of income taxes
(343
)
 
(17
)
 
(415
)
 
(89
)
NET LOSS
$
(13,179
)
 
$
(599
)
 
$
(18,765
)
 
$
(2,410
)
Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share—weighted-average shares
29,522

 
29,247

 
29,418

 
29,182

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

 

 

 

Denominator for earnings per share assuming dilution
29,522

 
29,247

 
29,418

 
29,182

Loss per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.44
)
 
$
(0.02
)
 
$
(0.62
)
 
$
(0.08
)
Assuming dilution
$
(0.44
)
 
$
(0.02
)
 
$
(0.62
)
 
$
(0.08
)
Loss per share from discontinued operations:
 
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
(0.00
)
 
$
(0.02
)
 
$
(0.00
)
Assuming dilution
$
(0.01
)
 
$
(0.00
)
 
$
(0.02
)
 
$
(0.00
)
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.45
)
 
$
(0.02
)
 
$
(0.64
)
 
$
(0.08
)
Assuming dilution
$
(0.45
)
 
$
(0.02
)
 
$
(0.64
)
 
$
(0.08
)
   

24




 
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 March 15, 2017 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.


25



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
 
Two Quarters Ended
 
March 15,
2017
 
March 9,
2016
 
March 15,
2017
 
March 9,
2016
 
(12 weeks)
 
(12 weeks)
 
(28 weeks)
 
(28 weeks)
Restaurant sales
93.9
 %
 
93.7
 %
 
94.2
 %
 
93.9
 %
Culinary contract services
3.8
 %
 
4.3
 %
 
3.8
 %
 
4.2
 %
Franchise revenue
2.1
 %
 
1.8
 %
 
1.8
 %
 
1.8
 %
Vending revenue
0.1
 %
 
0.1
 %
 
0.1
 %
 
0.1
 %
TOTAL SALES
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
 
 
 
 
 
 
 
STORE COSTS AND EXPENSES:
 
 
 
 
 
 
 
(As a percentage of restaurant sales)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of food
27.9
 %
 
28.5
 %
 
28.2
 %
 
28.5
 %
Payroll and related costs
36.1
 %
 
34.6
 %
 
35.9
 %
 
34.7
 %
Other operating expenses
17.0
 %
 
15.9
 %
 
17.7
 %
 
16.1
 %
Occupancy costs
6.6
 %
 
6.4
 %
 
6.2
 %
 
6.1
 %
Vending revenue
(0.2
)%
 
(0.2
)%
 
(0.2
)%
 
(0.1
)%
Store level profit
12.6
 %
 
14.8
 %
 
12.1
 %
 
14.8
 %
 
 
 
 
 
 
 
 
COMPANY COSTS AND EXPENSES:
 
 
 
 
 
 
 
(As a percentage of total sales)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Opening costs
0.2
 %
 
0.2
 %
 
0.1
 %
 
0.3
 %
Depreciation and amortization
5.5
 %
 
5.7
 %
 
5.6
 %
 
5.7
 %
Selling, general and administrative expenses
10.4
 %
 
10.7
 %
 
11.3
 %
 
10.8
 %
Net loss (gain) on disposition of property and equipment
0.4
 %
 
(0.6
)%
 
0.2
 %
 
(0.4
)%
 
 
 
 
 
 
 
 
Culinary Contract Services Costs
 
 
 
 
 
 
 
(As a percentage of Culinary Contract Services sales)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of culinary contract services
89.5
 %
 
89.8
 %
 
89.1
 %
 
89.9
 %
Culinary income
10.5
 %
 
10.2
 %
 
10.9
 %
 
10.1
 %
 
 
 
 
 
 
 
 
Franchise Operations Costs
 
 
 
 
 
 
 
(As a percentage of Franchise Operations)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of franchise operations
24.0
 %
 
25.2
 %
 
27.5
 %
 
27.2
 %
Franchise income
76.0
 %
 
74.8
 %
 
72.5
 %
 
72.8
 %
 
 
 
 
 
 
 
 
(As a percentage of total sales)
 
 
 
 
 
 
 
LOSS FROM OPERATIONS
(9.6
)%
 
(0.3
)%
 
(7.3
)%
 
(0.9
)%
Interest income
0.0
 %
 
0.0
 %
 
0.0
 %
 
0.0
 %
Interest expense
(0.8
)%
 
(0.5
)%
 
(0.7
)%
 
(0.6
)%
Other income (expense), net
(0.3
)%
 
0.0
 %
 
(0.1
)%
 
0.0
 %
Loss before income taxes and discontinued operations
(10.7
)%
 
(0.8
)%
 
(8.1
)%
 
(1.5
)%
Provision (benefit) for income taxes
4.2
 %
 
(0.2
)%
 
1.0
 %
 
(0.4
)%
Loss from continuing operations
(14.9
)%
 
(0.6
)%
 
(9.1
)%
 
(1.1
)%
Loss from discontinued operations, net of income taxes
(0.4
)%
 
0.0
 %
 
(0.2
)%
 
0.0
 %
NET LOSS
(15.3
)%
 
(0.6
)%
 
(9.3
)%
 
(1.1
)%

26





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
 
Two Quarters Ended
 
March 15,
2017
 
March 9,
2016
 
March 15,
2017
 
March 9,
2016
 
(12 weeks)
 
(12 weeks)
 
(28 weeks)
 
(28 weeks)
 
(In thousands)
 
(In thousands)
Store level profit
$
10,226

 
$
12,746

 
$
22,822

 
$
29,530

 
 
 
 
 
 
 
 
Plus:
 
 
 
 
 
 
 
Sales from culinary contract services
3,306

 
3,918

 
7,602

 
8,833

Sales from franchise operations
1,819

 
1,700

 
3,691

 
3,825

 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
Opening costs
132

 
174

 
298

 
571

Cost of culinary contract services
2,960

 
3,520

 
6,771

 
7,942

Cost of franchise operations
436

 
428

 
1,016

 
1,039

Depreciation and amortization
4,788

 
5,220

 
11,338

 
12,235

Selling, general and administrative expenses
9,008

 
9,843

 
22,767

 
23,086

Provision for asset impairments and restaurant closings, net
5,963

 
37

 
6,250

 
37

Net loss (gain) on disposition of property and equipment
329

 
(556
)
 
414

 
(835
)
Interest income
(1
)
 
(1
)
 
(3
)
 
(2
)
Interest expense
727

 
495

 
1,330

 
1,191

Other income (expense), net
242

 
(29
)
 
139

 
90

Provision (benefit) for income taxes
3,603

 
(185
)
 
2,145

 
(845
)
Loss from continuing operations
$
(12,836
)
 
$
(582
)
 
$
(18,350
)
 
$
(2,321
)
  
The following table shows our restaurant unit count as of August 31, 2016 and March 15, 2017.
 
Restaurant Counts:
 
 
August 31,
2016
 
FY17 YTD Q2
Openings
 
FY17 YTD Q2
Closings
 
March 15,
2017
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.






27





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 March 15, 2017, 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 March 15, 2017, 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 and corporate dining facilities.
 
As of March 15, 2017, we had 49 franchisees operating 114 Fuddruckers restaurants. Our largest five franchise owners own five to twelve restaurants each. Eighteen franchise owners each own two to four restaurants. The 26 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. 


28



RESULTS OF OPERATIONS
 
Quarter Ended March 15, 2017 Compared to Quarter Ended March 9, 2016
 
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 March 15, 2017 and the quarter ended March 9, 2016 consisted of 12 weeks. Both the two quarters ended March 15, 2017 and the two quarters ended March 9, 2016 consisted of 28 weeks.

Sales 
 
Quarter
Ended
 
Quarter
Ended
 
 
($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(12 weeks)
 
(12 weeks)
 
(12 weeks vs 12 weeks)
Restaurant sales
$
81,064

 
$
86,314

 
$
(5,250
)
 
(6.1
)%
Culinary contract services
3,306

 
3,918

 
(612
)
 
(15.6
)%
Franchise revenue
1,819

 
1,700

 
119

 
7.0
 %
Vending revenue
125

 
137

 
(12
)
 
(8.8
)%
TOTAL SALES
$
86,314

 
$
92,069

 
$
(5,755
)
 
(6.3
)%
 
Total sales decreased approximately $5.8 million, or 6.3%, in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016, consisting primarily of an approximate $5.2 million decrease in restaurant sales, an approximate $0.6 million decrease in Culinary Contract Services sales, offset by an approximate $0.1 million increase in franchise revenue. The other component of total sales is vending revenue, which decreased $12 thousand in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016.

 
 
Two Quarters Ended
 
Two Quarters Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(28 weeks)
 
(28 weeks)
 
(28 weeks vs 28 weeks)
Restaurant sales
$
189,147

 
$
199,861

 
$
(10,714
)
 
(5.4
)%
Culinary contract services
7,602

 
8,833

 
(1,231
)
 
(13.9
)%
Franchise revenue
3,691

 
3,825

 
(134
)
 
(3.5
)%
Vending revenue
284

 
295

 
(11
)
 
(3.7
)%
TOTAL SALES
$
200,724

 
$
212,814

 
$
(12,090
)
 
(5.7
)%

Total sales decreased approximately $12.1 million, or 5.7%, in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016, consisting primarily of an approximate $10.7 million decrease in restaurant sales, an approximate $1.2 million decrease in Culinary Contract Services sales, and an approximate $0.1 million decrease in franchise revenue. The other component of total sales is vending revenue, which decreased $11 thousand in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016.

29



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
 
 
Restaurant Brand
March 15,
 
March 9,
 
Increase/(Decrease)
 
2017
 
2016
 
$ Amount
 
% Change
 
(12 weeks)
 
(12 weeks)
 
(12 weeks vs 12 weeks)
Luby’s Cafeterias
$
49,975

 
$
52,915

 
$
(2,940
)
 
(5.6
)%
Fuddruckers
22,860

 
24,567

 
(1,707
)
 
(6.9
)%
Combo locations
4,951

 
5,295

 
(344
)
 
(6.5
)%
Cheeseburger in Paradise
3,278

 
3,537

 
(259
)
 
(7.3
)%
Restaurant Sales
$
81,064

 
$
86,314

 
$
(5,250
)
 
(6.1
)%
 
Restaurant sales decreased approximately $5.2 million in the quarter ended March 15, 2017, compared to the quarter ended March 9, 2016. Sales at stand-alone Luby's Cafeteria restaurants decreased approximately $2.9 million to approximately $50.0 million; sales from stand-alone Fuddruckers locations decreased approximately $1.7 million to approximately $22.9 million; sales at Combo locations decreased approximately $0.3 million to approximately $5.0 million; and sales at Cheeseburger in Paradise restaurants decreased by approximately $0.3 million to approximately $3.3 million.

The approximate $2.9 million sales decrease in stand-alone Luby's Cafeteria restaurants was the result of the closure of two locations and a 4.4% decrease in same-store sales. The 4.4% Luby's Cafeteria same-store sales decrease was the result of a 6.6% decrease in guest traffic partially offset by a 2.2% increase in average spend per guest. The approximate $1.7 million sales decrease at stand-alone Fuddruckers restaurants was the result of six restaurant closings and a 1.1% decrease in same-store sales, offset by the opening of three Fuddruckers locations. The 1.1% decrease in Fuddruckers same-store sales was the result of a 2.8% decrease in guest traffic offset by a 1.7% 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 7.3% in the quarter ended March 15, 2017 compared to the the quarter ended March 9, 2016. All six Combo location stores are included in our same-store grouping and sales at this group of restaurants decreased 6.5%. Approximately half of the decline in sales occurred at one Combo location. Two of the six Combo locations increased sales by 2.2% and 3.4% respectively.

 
Two Quarters Ended
 
Two Quarters Ended
 
 
Restaurant Brand
March 15,
 
March 9,
 
Increase/(Decrease)
($000s) 
2017
 
2016
 
$ Amount
 
% Change
 
(28 weeks)
 
(28 weeks)
 
(28 weeks vs 28 weeks)
Luby’s Cafeterias
$
118,315

 
$
123,821

 
$
(5,506
)
 
(4.4
)%
Fuddruckers
51,608

 
55,447

 
(3,839
)
 
(6.9
)%
Combo locations
11,577

 
12,315

 
(738
)
 
(6.0
)%
Cheeseburger in Paradise
7,647

 
8,278

 
(631
)
 
(7.6
)%
Total Restaurant Sales
$
189,147

 
$
199,861

 
$
(10,714
)
 
(5.4
)%

Restaurant sales decreased approximately $10.7 million in the two quarters ended March 15, 2017, compared to the two quarters ended March 9, 2016. Sales at stand-alone Luby's Cafeteria restaurants decreased approximately $5.5 million to approximately $118.3 million; sales from stand-alone Fuddruckers locations decreased approximately $3.8 million to approximately $51.6 million; sales at Combo locations decreased approximately $0.7 million to approximately $11.6 million; and sales at Cheeseburger in Paradise restaurants decreased approximately $0.6 million to approximately $7.6 million.


30



The approximate $5.5 million sales decrease in stand-alone Luby's Cafeteria restaurants was the result of a 3.1% decrease in same-store sales and the closure of two locations (accounting for approximately $1.7 million of this sale decline) compared to the two quarters ended March 9, 2016. The 3.1% decrease in Luby's Cafeteria same-store sales was the result of a 3.7% decrease in guest traffic partially offset by a 0.6% increase in average spend per guest. The approximate $3.8 million sales decrease at stand-alone Fuddruckers restaurants was the result of six restaurant closures and a same-store sales decrease of 1.4%, offset by the opening of one location. Fuddruckers same-store sales decrease of 1.4% was the result of a 2.7% decline in guest traffic offset by a 1.3% increase in average spend per guest. The approximate $0.7 million decrease in sales at our Combo locations was due to a 4.3% decrease in same-store sales and compares against a high volume sales period in the prior year following the opening of our sixth Combo location. The decline in sales at this sixth Combo location accounted for approximately one-half of the sales decline at Combo locations. All eight stores that we operate as Cheeseburger in Paradise are included in our same-store grouping and this group of restaurants realized a 7.6% decrease in sales in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016.

Cost of Food 
 
Quarter 
Ended
 
Quarter 
Ended
 
 
($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(12 weeks)
 
(12 weeks)
 
(12 weeks vs 12 weeks)
Cost of food
$
22,583

 
$
24,600

 
$
(2,017
)
 
(8.2
)%
As a percentage of restaurant sales
27.9
%
 
28.5
%
 
 
 
(0.6
)%
 
Cost of food decreased approximately $2.0 million, or 8.2%, in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016 with lower guest traffic levels and lower average food commodity prices. As a percentage of restaurant sales, cost of food decreased 0.6% to 27.9% in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016 due to lower average food commodity prices and a lower level of menu price discounting. Food commodity prices for our basket of food commodity purchases decreased approximately 3.0% at our Luby’s Cafeterias locations and approximately 2.0% at our Fuddruckers restaurants in the quarter ended March 15, 2017.

 
Two Quarters Ended
 
Two Quarters Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(28 weeks)
 
(28 weeks)
 
(28 weeks vs 28 weeks)
Cost of food
$
53,433

 
$
57,034

 
$
(3,601
)
 
(6.3
)%
As a percentage of restaurant sales
28.2
%
 
28.5
%
 
 
 
(0.3
)%

Cost of food decreased approximately $3.6 million, or 6.3%, for the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016 with lower guest traffic levels and lower average food commodity prices. As a percentage of restaurant sales, cost of food decreased 0.3% to 28.2% in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016 due to lower average food commodity prices, modest price increases, and a lower level of menu price discounting. Food commodity prices for our basket of food commodity purchases decreased approximately 3.0% at our Luby’s Cafeterias locations and approximately 3.5% at our Fuddruckers restaurants for the two quarters ended March 15, 2017.

Payroll and Related Costs 
 
Quarter 
Ended
 
Quarter 
Ended
 
 
($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(12 weeks)
 
(12 weeks)
 
(12 weeks vs 12 weeks)
Payroll and related costs
$
29,295

 
$
29,834

 
$
(539
)
 
(1.8
)%
As a percentage of restaurant sales
36.1
%
 
34.6
%
 
 
 
1.5
 %
 

31



Payroll and related costs decreased approximately $0.5 million in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016. The decrease reflects operating six fewer restaurants, lower associate hours scheduled and deployed on the decreased level of guest traffic, and reducing overtime hours deployed, partially offset by higher average hourly wage rates. Payroll and related costs includes an approximate $0.5 million reduction in workers' compensation liability estimates in the quarter ended March 9, 2016 and less than an approximate $0.1 million reduction in workers' compensation liability estimates in the quarter ended March 15, 2017. As a percentage of restaurant sales, payroll and related costs increased 1.5% to 36.1% in the quarter ended March 15, 2017 compared to 34.6% in the quarter ended March 9, 2016 due to (1) the fixed cost component of labor costs (mainly management labor) with lower same-store sales levels; (2) comparison to the approximate $0.5 million reduction in workers' compensation liability estimates in the prior year quarter ended March 9, 2016; and (3) higher average hourly wage rates; partially offset by (4) reduced overtime hours deployed.

 
Two Quarters Ended
 
Two Quarters Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(28 weeks)
 
(28 weeks)
 
(28 weeks vs 28 weeks)
Payroll and related costs
$
67,968

 
$
69,258

 
$
(1,290
)
 
(1.9
)%
As a percentage of restaurant sales
35.9
%
 
34.7
%
 
 
 
1.2
 %

Payroll and related costs decreased approximately $1.3 million in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016 due to operating six fewer restaurants, lower associate hours scheduled and deployed on the decreased level of guest traffic, and reducing overtime hours deployed, partially offset by higher average hourly wage rates. The two quarters ended March 15, 2017 includes an approximate $0.5 million reduction in workers' compensation liability estimates and the two quarters ended March 9, 2016 includes an approximate $0.8 million reduction in workers' compensation liability estimates. As a percentage of restaurant sales, payroll and related costs increased 1.2%, to 35.9% in the two quarters ended March 15, 2017 compared to 34.7% in the two quarters ended March 9, 2016 due to the fixed cost component of labor costs (mainly management labor) with lower same-store sales levels.

Other Operating Expenses 
 
Quarter 
Ended
 
Quarter 
Ended
 
 
($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(12 weeks)
 
(12 weeks)
 
(12 weeks vs 12 weeks)
Other operating expenses
$
13,763

 
$
13,736

 
$
27

 
0.2
%
As a percentage of restaurant sales
17.0
%
 
15.9
%
 
 
 
1.1
%

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 $27 thousand, or 0.2%, in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016, due primarily to (1) an approximate $0.2 million increase in restaurant services including higher computer network connectivity, point of sale software, and food-to-go delivery charges to third parties; (2) an approximate $0.2 million increase in repairs and maintenance expense; partially offset by (3) an approximate $0.4 million decrease in restaurant supplies expense, including cleaning supplies, kitchen supplies, paper supplies, and office supplies due to operating six fewer restaurants and implementation of cost savings initiatives. As a percentage of restaurant sales, other operating expenses increased 1.1%, to 17.0%, in the quarter ended March 15, 2017, compared to 15.9% for the the quarter ended March 15, 2017 due to the net cost increases enumerated above on lower overall same-store sales volumes.


32



 
 
Two Quarters Ended
 
Two Quarters Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(28 weeks)
 
(28 weeks)
 
(28 weeks vs 28 weeks)
Other operating expenses
$
33,411

 
$
32,157

 
$
1,254

 
3.9
%
As a percentage of restaurant sales
17.7
%
 
16.1
%
 
 
 
1.6
%

Other operating expenses increased by approximately $1.3 million, or 3.9%, in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016, due primarily to (1) an approximate $1.0 million increase in repairs and maintenance expense; (2) an approximate $0.6 million increase in restaurant services expenses including higher computer network connectivity, point of sale software, restaurant security, and food-to-go delivery charges to third parties; (3) an approximate $0.2 million increase in utilities expense; partially offset by (4) an approximate $0.5 million decrease in restaurant supplies expense, including cleaning supplies, kitchen supplies, paper supplies, and office supplies due to operating six fewer restaurants and implementation of cost savings initiatives. As a percentage of restaurant sales, other operating expenses increased 1.6%, to 17.7%, in the two quarters ended March 15, 2017, compared to 16.1% for the two quarters ended March 9, 2016 due to cost increases enumerate above on lower overall same-store sales volumes.

Occupancy Costs 
 
Quarter 
Ended
 
Quarter 
Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(12 weeks)
 
(12 weeks)
 
(12 weeks vs 12 weeks)
Occupancy costs
$
5,322

 
$
5,535

 
$
(213
)
 
(3.8
)%
As a percentage of restaurant sales
6.6
%
 
6.4
%
 
 
 
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 $5.3 million in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016. The decrease was primarily due to a decrease in rent and property taxes associated with operating six fewer restaurants in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016, partially offset by higher property insurance costs. As a percentage of restaurant sales, other occupancy costs increased 0.2%, to 6.6%, in the quarter ended March 15, 2017, compared to 6.4% in the the quarter ended March 9, 2016.

 
Two Quarters Ended
 
Two Quarters Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(28 weeks)
 
(28 weeks)
 
(28 weeks vs 28 weeks)
Occupancy costs
$
11,797

 
$
12,177

 
$
(380
)
 
(3.1
)%
As a percentage of restaurant sales
6.2
%
 
6.1
%
 
 
 
0.1
 %

Occupancy costs decreased approximately $0.4 million to approximately $11.8 million in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016. The decrease was primarily due to a decrease in rent and property taxes associated with operating six fewer restaurants in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016 as well as comparison to the two quarters ended March 9, 2016 when rent reserves and property tax estimates were increased, partially offset by higher property insurance costs.


33



 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
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(12 weeks)
 
(12 weeks)
 
(12 weeks vs 12 weeks)
Franchise revenue
$
1,819

 
$
1,700

 
$
119

 
7.0
%
Cost of franchise operations
436

 
428

 
8

 
1.9
%
Franchise profit
$
1,383

 
$
1,272

 
$
111

 
8.7
%
Franchise profit as a percentage of franchise revenue
76.0
%
 
74.8
%
 
 
 
1.2
%

Franchise revenue increased $119 thousand in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016. The $119 thousand increase in franchise revenue includes (1) an approximate $291 thousand increase in non-royalty related fee income due primarily to realized franchise development fees, partially offset by (2) an approximate $172 thousand decrease in franchise royalties due in part to the closure of certain franchise locations, lower international royalty income, and same-store sales declines at franchise locations.

 
 
Two Quarters Ended
 
Two Quarters Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(28 weeks)
 
(28 weeks)
 
(28 weeks vs 28 weeks)
Franchise revenue
$
3,691

 
$
3,825

 
$
(134
)
 
(3.5
)%
Cost of franchise operations
1,016

 
1,039

 
(23
)
 
(2.2
)%
Franchise profit
$
2,675

 
$
2,786

 
$
(111
)
 
(4.0
)%
Franchise profit as a percentage of franchise revenue
72.5
%
 
72.8
%
 
 
 
(0.3
)%

Franchise revenue decreased $134 thousand in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016. The $134 thousand decrease in franchise revenue includes (1) an approximate $323 thousand decrease in franchise royalties due in part to the closure of certain franchise locations, lower international royalty income, and same-store sales declines at franchise locations, partially offset by (2) an approximate $189 thousand increase in non-royalty related fee income due primarily to realized franchise development fees, partially offset by lower fee income related to fewer franchise openings.


34



Cost of Franchise Operations
 
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. Cost of franchise operations increased $8 thousand in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016. Franchise profit, defined as Franchise revenue less Cost of franchise operations, increased $111 thousand in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016 due to the higher non-royalty fee income discussed above in franchise revenue. Franchisees opened two international locations (in Canada and Panama) and one domestic location (in Nevada) in the quarter ended March 15, 2017. Two locations also closed in the quarter ended March 15, 2017.

Cost of franchise operations decreased approximately $23 thousand, or 2.2%, in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016. Franchise profit, defined as Franchise revenue less Cost of franchise operations, decreased approximately $111 thousand in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016. Franchisees opened seven locations and closed six locations in the two quarters ended March 15, 2017.

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 March 15, 2017 and 28 at the end of the quarter ended March 9, 2016. 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.
 
 
Quarter 
Ended
 
Quarter 
Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(12 weeks)
 
(12 weeks)
 
(12 weeks vs 12 weeks)
Culinary contract services sales
$
3,306

 
$
3,918

 
$
(612
)
 
(15.6
)%
Cost of culinary contract services
2,960

 
3,520

 
(560
)
 
(15.9
)%
Culinary contract profit
$
346

 
$
398

 
$
(52
)
 
(13.1
)%
Culinary contract services profit as a percentage of Culinary contract services sales
10.5
%
 
10.2
%
 
 
 
0.3
 %
 
Culinary Contract Services sales decreased approximately $0.6 million, or 15.6%, in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016. The decrease in Culinary Contract Services revenue was primarily the result of a decrease in the number of locations operated and a change in the mix of our Culinary agreements with clients.
 
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 15.9%, in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016. Culinary Contract Services profit margin, defined as Culinary Contract Services sales less Cost of Culinary Contract Services, increased to 10.5% in the quarter ended March 15, 2017 from 10.2% in the the quarter ended March 9, 2016 due to the change in the mix of our Culinary agreements with clients.
 

35



 
Two Quarters Ended
 
Two Quarters Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(28 weeks)
 
(28 weeks)
 
(28 weeks vs 28 weeks)
Culinary contract services sales
$
7,602

 
$
8,833

 
$
(1,231
)
 
(13.9
)%
Cost of culinary contract services
6,771

 
7,942

 
(1,171
)
 
(14.7
)%
Culinary contract profit
$
831

 
$
891

 
$
(60
)
 
(6.7
)%
Culinary contract services profit as a percentage of Culinary contract services sales
10.9
%
 
10.1
%
 
 
 
0.8
 %

Culinary Contract Services sales decreased approximately $1.2 million, or 13.9%, in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016. The decrease in Culinary Contract Services sales was the result of higher sales volume locations ceasing operations over the past 12 months, replaced with locations that are smaller in nature and thus generate lower sales volumes and a decrease in overall locations in operation.  

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 $1.2 million, or 14.7%, in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016, consistent with a decrease in Culinary Contract Services sales. Culinary Contract Services profit margin, defined as Culinary Contract Services sales less Cost of Culinary Contract Services, increased to 10.9% in the two quarters ended March 15, 2017 from 10.1% in the two quarters ended March 9, 2016.
 
 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 $0.1 million in the quarter ended March 15, 2017 compared to approximately $0.2 million in the quarter ended March 9, 2016. Both quarters included carrying costs of locations to be developed for future restaurant openings. The approximate $0.1 million in opening costs in the quarter ended March 15, 2017 included the carrying costs for two locations where we previously operated as Cheeseburger in Paradise restaurants and the pre-opening costs for one Fuddruckers that opened after the quarter ended March 15, 2017. The approximate $0.2 million in opening costs in the quarter ended March 9, 2016 included the carrying costs for two locations where we previously operated Cheeseburger in Paradise restaurants and the opening cost for one Fuddruckers location.

Opening costs were approximately $0.3 million in the two quarters ended March 15, 2017 compared to approximately $0.6 million in the two quarters ended March 9, 2016. Both two-quarter periods included carrying costs of locations to be developed for future restaurant openings. The approximate $0.3 million in opening costs in the two quarters ended March 15, 2017 included the carrying costs for two locations where we previously operated as Cheeseburger in Paradise restaurants and the pre-opening costs for one Fuddruckers that opened after the two quarters ended March 15, 2017. The approximate $0.6 million in opening costs in the two quarters ended March 9, 2016 included the carrying costs for five locations where we previously operated Cheeseburger in Paradise restaurants and the opening costs for three Fuddruckers restaurants that opened in the two quarters ended March 9, 2016.

Depreciation and Amortization Expense 
 
Quarter 
Ended
 
Quarter 
Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(12 weeks)
 
(12 weeks)
 
(12 weeks vs 12 weeks)
Depreciation and amortization
$
4,788

 
$
5,220

 
$
(432
)
 
(8.3
)%
As a percentage of total sales
5.5
%
 
5.7
%
 
 
 
(0.2
)%
 

36



Depreciation and amortization expense decreased by approximately $0.4 million, or 8.3%, in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016 due primarily to reduced capital investment and certain assets reaching the end of their depreciable lives.

 
Two Quarters Ended
 
Two Quarters Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(28 weeks)
 
(28 weeks)
 
(28 weeks vs 28 weeks)
Depreciation and amortization
$
11,338

 
$
12,235

 
$
(897
)
 
(7.3
)%
As a percentage of total sales
5.6
%
 
5.7
%
 
 
 
(0.1
)%

Depreciation and amortization expense decreased by approximately $0.9 million, or 7.3%, in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016 due primarily to reduced capital investment and certain assets reaching the end of their depreciable lives.
 
Selling, General and Administrative Expenses 
 
Quarter 
Ended
 
Quarter 
Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(12 weeks)
 
(12 weeks)
 
(12 weeks vs 12 weeks)
General and administrative expenses
$
7,517

 
$
8,325

 
$
(808
)
 
(9.7
)%
Marketing and advertising expenses
1,491

 
1,518

 
(27
)
 
(1.8
)%
Selling, general and administrative expenses
$
9,008

 
$
9,843

 
$
(835
)
 
(8.5
)%
As a percentage of total sales
10.4
%
 
10.7
%
 
 
 
(0.3
)%
 
Selling, general and administrative expenses include corporate salaries and benefits-related costs, including restaurant area leaders, share-based compensation, marketing and advertising expenses, professional fees, travel and recruiting expenses and other office expenses. Selling, general and administrative expenses decreased approximately $0.8 million, or 8.5%, in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016. The decrease in selling, general and administrative expenses include (1) an approximate $0.6 million decrease in salaries, benefits, and other compensation expenses; (2) an approximate $0.1 million decrease in corporate travel expenses; and (3) and approximate $0.1 million decrease in group health insurance costs.

As a percentage of total revenue, selling, general and administrative expenses decreased to 10.4% in the quarter ended March 15, 2017, compared to 10.7% in the the quarter ended March 9, 2016.

 
 
Two Quarters Ended
 
Two Quarters Ended
 

($000s)
March 15,
2017
 
March 9,
2016
 
Increase/
(Decrease)
 
(28 weeks)
 
(28 weeks)
 
(28 weeks vs 28 weeks)
General and administrative expenses
$
18,950

 
$
19,780

 
$
(830
)
 
(4.2
)%
Marketing and advertising expenses
3,817

 
3,306

 
511

 
15.5
 %
Selling, general and administrative expenses
$
22,767

 
$
23,086

 
$
(319
)
 
(1.4
)%
As a percentage of total sales
11.3
%
 
10.8
%
 
 
 
0.5
 %


37



Selling, general and administrative expenses decreased approximately $0.3 million, or 1.4%, in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016. The decrease in selling, general and administrative expenses include (1) an approximate $1.1 million decrease in salaries, benefits, and other compensation expenses; and (2) an approximate $0.4 million reduction in corporate travel expenses; partially offset by (3) an approximate $0.4 million increase in outside professional service fees; (4) an approximate $0.5 million increase in marketing and advertising expenses; and (5) an approximate $0.3 million increase in other corporate overhead expenses. The approximate $0.5 million increase in marketing and advertising expenses 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 two quarters ended March 15, 2017. As a percentage of total sales, selling, general and administrative expenses increased to 11.3% in the two quarters ended March 15, 2017, compared to 10.8% in the two quarters ended March 9, 2016.

Provision for Asset Impairments and Restaurant Closings, net

The approximate $6.0 million impairment charge for the quarter ended March 15, 2017 is related to assets at 13 locations, goodwill at six locations, and two properties held for sale written down to their fair value. The approximate $37 thousand impairment charge for the quarter ended March 9, 2016 is primarily related to goodwill at one underperforming converted Cheeseburger in Paradise leasehold location.

The approximate $6.3 million impairment charge for the two quarters ended March 15, 2017 is related to assets at 13 locations, goodwill at six locations, and four properties held for sale written down to their fair value. The approximate $37 thousand impairment charge for the two quarters ended March 9, 2016 is primarily related to goodwill at one underperforming converted Cheeseburger in Paradise leasehold location.

Net (Gain) Loss on Disposition of Property and Equipment
 
Loss on disposition of property and equipment was approximately $0.3 million in the quarter ended March 15, 2017 and reflects normal asset retirement activity and a write-off at one location. The gain on disposition of property and equipment was approximately $0.6 million in the quarter ended March 9, 2016 and primarily reflects the gain on the sale of one property that previously operated as a Luby's cafeteria, partially offset by normal asset retirement activity.

Loss on disposition of property and equipment was approximately $0.4 million in the two quarters ended March 15, 2017 and primarily reflects reflects normal asset retirement activity and a write-off at one location. The gain on disposition of property and equipment was approximately $0.8 million in the two quarters ended March 9, 2016 related primarily to the gain on the sale of one property that previously operated as a Luby's cafeteria and the sale of one property that we had previously acquired for possible development, offset by normal asset retirement activity.

Interest Income
 
Interest income was $1 thousand in the quarter ended March 15, 2017 and in the quarter ended March 9, 2016 .

Interest income was $3 thousand in the two quarters ended March 15, 2017 and $2 thousand in the two quarters ended March 9, 2016.

Interest Expense
 
Interest expense increased approximately $0.2 million to approximately $0.7 million in the quarter ended March 15, 2017 compared to the quarter ended March 9, 2016. The increase in interest expense reflects acceleration of deferred financing fees related to the extinguishment of debt as well as higher average debt balances.

Interest expense increased $0.1 million to approximately $1.3 million in the two quarters ended March 15, 2017 compared to the two quarters ended March 9, 2016. The increase in interest expense reflects higher average debt balances. Both the two quarters ended March 15, 2017 and the two quarters ended March 9, 2016 include acceleration of deferred financing fees.
 

38



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; oil and gas royalty income; and changes in the fair value of our interest rate swap agreement. Other income, net, in the quarter ended March 15, 2017 decreased $0.3 million compared to the quarter ended March 9, 2016 due primarily to (1) lower net rental income and (2) a decrease in sales tax discounts as we did not participate in state tax prepayment programs fully in the quarter ended March 15, 2017.

Other income, net, in the two quarters ended March 15, 2017 decreased approximately $49 thousand compared to the two quarters ended March 9, 2016 due primarily to (1) lower net rental income; (2) a decrease in sales tax discounts as we did not participate in state tax prepayment programs fully in the quarter ended March 15, 2017; and (3) recording a net reduction in the fair value of our interest rate swap agreement; offset by (4) a decrease in discounts related to a lower volume of sales of pre-paid gift cards.

Taxes
 
For the quarter ended March 15, 2017, the income taxes related to continuing operations resulted in a tax provision of approximately $3.6 million compared to a tax benefit of approximately $0.2 million for the quarter ended March 9, 2016. For the two quarters ended March 15, 2017, the income taxes related to continuing operations resulted in a tax provision of approximately $2.1 million compared to a tax benefit of approximately $0.8 million for the two quarters ended March 9, 2016.

The effective tax rate, (ETR), from continuing operations was a negative 39.0% and a negative 20.2% for the quarter and two quarters ended March 15, 2017, respectively. The ETR for the quarter ended March 15, 2017 differs from the federal statutory rate of 34% due to the federal jobs credits, state income taxes and other discrete items.
 
Discontinued Operations
 
Loss from discontinued operations was approximately $0.3 million in the quarter ended March 15, 2017 compared to a loss of $17 thousand in the quarter ended March 9, 2016. The loss from discontinued operations of approximately $0.3 million in the quarter ended March 15, 2017 was related to an approximate $0.3 million tax provision. The loss from discontinued operations of $17 thousand in the quarter ended March 9, 2016 consisted of $29 thousand in carrying costs associated with assets related to discontinued operations partially offset by a $12 thousand tax benefit.

Loss from discontinued operations was approximately $0.4 million in the two quarters ended March 15, 2017 compared to a loss of $89 thousand in the two quarters ended March 9, 2016. The loss from discontinued operations of approximately $0.4 million in the two quarters ended March 15, 2017 was related to a tax provision of approximately $0.4 million. The loss from discontinued operations of $89 thousand in the two quarters ended March 9, 2016 consisted of $147 thousand in carrying costs associated with assets related to discontinued operations partially offset by a $58 thousand tax benefit. 

 

39



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 two quarters ended March 15, 2017, cash provided by operating activities was approximately $6.6 million offset by cash used in investing activities of approximately $6.3 million and cash used in financing activities of approximately $0.3 million. Cash and cash equivalents remained relatively unchanged in the two quarters ended March 15, 2017 compared to an approximate $0.1 million decrease in the two quarters ended March 9, 2016. 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.

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:
 
 
Two Quarters Ended
 
March 15,
2017
 
March 9,
2016
 
(28 weeks)
 
(28 weeks)
 
(In thousands)
Total cash provided by (used in):
 
 
 
Operating activities
$
6,603

 
$
7,191

Investing activities
(6,331
)
 
(6,786
)
Financing activities
(259
)
 
(467
)
Net increase (decrease) in cash and cash equivalents
$
13

 
$
(62
)
 
Operating Activities. Cash provided by operating activities was approximately $6.6 million in the two quarters ended March 15, 2017, an approximate $0.6 million decrease from the two quarters ended March 9, 2016. The $0.6 million decrease in cash provided by operating activities is due to an approximate $6.0 million decrease in cash provided by operations before changes in operating assets and liabilities less an approximate $5.4 million increase in cash provided by changes in operating assets and liabilities for the two quarters ended March 15, 2017.
  
Cash provided by operating activities before changes in operating assets and liabilities was approximately $2.8 million in the two quarters ended March 15, 2017, an approximate $6.0 million decrease compared to the two quarters ended March 9, 2016. The $6.0 million decrease in cash provided by operating activities before changes in operating assets and liabilities was primarily due to decreased store-level profit from our Company-owned restaurants.
 

40



Changes in operating assets and liabilities was an approximate $3.8 million source of cash in the two quarters ended March 15, 2017 and an approximate $1.6 million use of cash in the two quarters ended March 9, 2016. The $5.4 million increase in the source of cash was due to differences in the change in asset and liability balances between the two quarters ended March 15, 2017 and the two quarters ended March 9, 2016. Increases in current asset accounts are a use of cash while decreases in current asset accounts are a source of cash. During the two quarters ended March 15, 2017, the change in trade accounts and other receivables was an approximate $0.5 million source of cash which was an approximate $0.7 million increase over the use of cash in the two quarters ended March 9, 2016. The change in food and supplies inventory during the quarter ended March 15, 2017 was approximately zero which was an approximate $0.8 million increase from the use of cash in the two quarters ended March 9, 2016. The change in prepaid expenses and other assets was an approximate $0.2 million source of cash during the two quarters ended March 15, 2017, which was an approximate $0.2 million decrease in the source of cash from the two quarters ended March 9, 2016.
 
Increase in current liability accounts are a source of cash, while decreases in current liability accounts are a use of cash. During the two quarters ended March 15, 2017, changes in the balances of accounts payable, accrued expenses and other liabilities was an approximate $3.1 million source of cash, compared to a use of cash of approximately $1.0 million during the two quarters ended March 9, 2016.
 
Investing Activities. We generally reinvest available cash flows from operations to develop new restaurants, maintain and enhance existing restaurants and support Culinary Contract Services. Cash used by investing activities was approximately $6.3 million in the two quarters ended March 15, 2017 and approximately $6.8 million in the two quarters ended March 9, 2016. Capital expenditures were approximately $8.0 million in the two quarters ended March 15, 2017 and approximately $11.0 million in the two quarters ended March 9, 2016. Proceeds from the disposal of assets were approximately $1.6 million in the two quarters ended March 15, 2017 and approximately $4.2 million in the two quarters ended March 9, 2016.
 
Financing Activities. Cash used in financing activities was approximately $0.3 million in the two quarters ended March 15, 2017 compared to an approximate $0.5 million use of cash during the two quarters ended March 9, 2016. Cash flows from financing activities was primarily the result of borrowings and repayments related to the 2013 Credit Facility, our Revolver, and our Term Loan. During the two quarters ended March 15, 2017, cash provided by financing activities was approximately $1.0 million based on our total net borrowings. As a result of our first quarter 2017 refinancing, repayments on the 2013 Credit Facility and the Revolver exceeded borrowings by approximately $34.0 million and borrowing from the Term Loan provided $35.0 million. Principal payments on our Term Loan amounted to $0.6 million in the two quarters ended March 15, 2017. During the two quarters ended March 9, 2016, borrowings exceeded repayments of the 2013 Credit Facility by approximately $0.5 million.
 
Status of Long-Term Investments and Liquidity
 
At March 15, 2017, we did not hold any long-term investments.

Status of Trade Accounts and Other Receivables, Net
 
We monitor the aging of our receivables, including Fuddruckers franchising related receivables, and record provisions for uncollectable accounts, as appropriate. Credit terms of accounts receivable associated with our CCS business vary from 30 to 45 days based on contract terms.
 
Working Capital
 
Current assets decreased approximately $0.9 million in the two quarters ended March 15, 2017 compared to a decrease of approximately $0.1 million in the quarter ended March 9, 2016. In the two quarters ended March 15, 2017, trade accounts and other receivables, net, decreased approximately $0.5 million, deferred income taxes decreased approximately $0.3 million, and prepaid expenses decreased approximately $0.1 million. In the two quarters ended March 9, 2016, food and supply inventories and trade accounts and other receivables, net increased approximately $0.3 million and $0.2 million, respectively, partially offset by decreases in prepaid expenses and cash of approximately $0.5 million and $0.1 million, respectively.
 

41



Current liabilities increased approximately $5.8 million in the two quarters ended March 15, 2017 compared to a decrease of approximately $0.6 million in the two quarters ended March 9, 2016. In the two quarters ended March 15, 2017, current portion of credit facility debt increased approximately $2.5 million, salaries and incentives increased approximately $1.2 million, unredeemed gift cards increased approximately $0.9 million, accounts payable increased approximately $0.8 million, accrued taxes other than income taxes increased approximately $0.3 million and accrued professional fees increased approximately $0.2 million; partially offset by an approximate $0.1 million decrease in operating expenses. In the two quarters ended March 9, 2016, unredeemed gift cards increased approximately $1.0 million, salaries and incentives increased approximately $0.7 million, income taxes and other increased approximately $0.3 million and accrued claims and insurance increased approximately $0.1 million; partially offset by decreases in taxes other than income of approximately $1.4 million, accounts payable of approximately $1.1 million and accrued operating expenses of approximately $0.2 million.
 
Capital Expenditures
 
Capital expenditures consist of purchases of real estate for future restaurant sites, Culinary Contract Services investments, new unit construction, purchases of new and replacement restaurant furniture and equipment, and ongoing remodeling programs. Capital expenditures for the two quarters ended March 15, 2017 were approximately $8.0 million and related to recurring maintenance of our existing units, existing restaurant remodels and rollout of new point of sale and network equipment, improvement of our culinary contract services business and the development of future restaurant sites. We expect to be able to fund all capital expenditures in fiscal 2017 using proceeds from the sale of assets, cash flows from operations and our 2016 Credit Agreement. We expect to spend less than $14.0 million on capital expenditures in fiscal 2017.
 
DEBT

The following table summarizes credit facility debt, less current portion at March 15, 2017 and August 31, 2016
 
 
 
March 15,
2017
 
August 31,
2016
 
(In thousands)
2013 Credit Agreement - Revolver
$

 
$
37,000

2016 Credit Agreement - Revolver
3,000

 

2016 Credit Agreement - Term Loan
34,388

 

Total credit facility debt
37,388

 
37,000

Less unamortized debt issue costs
(321
)
 

Total credit facility debt, less unamortized debt issuance costs
37,067

 
37,000

Current portion of credit facility debt
(2,450
)
 

Total
$
34,617

 
$
37,000


On November 8, 2016, we refinanced our 2013 Credit Facility (as defined below) with a new $65.0 million Senior Secured Credit Agreement. The debt issue costs we incurred on the new 2016 Credit Agreement (as defined below) financing amounted to $0.6 million of which $0.3 million was applicable to the Term Loan and was setup on a pro-rata basis as a liability, which is included in credit facility debt, less current portion.
 
Senior Secured Credit Agreement
On November 8, 2016, we entered into a $65.0 million Senior Secured Credit Facility with Wells Fargo Bank, National Association, as Administrative Agent and Cadence Bank, NA and Texas Capital Bank, NA, as lenders (“2016 Credit Agreement”). The 2016 Credit Agreement, as amended, is comprised of a $30.0 million 5-year Revolver (the “Revolver”) and a $35.0 million 5-year Term Loan (the “Term Loan”). The maturity date of the 2016 Credit Agreement is November 8, 2021. For this section of this Form 10-Q, capitalized terms that are used but not otherwise defined shall have the meanings given to such terms in the 2016 Credit Agreement.
The Term Loan and/or Revolver commitments may be increased by up to an additional $10.0 million in the aggregate.
The 2016 Credit Agreement also provides for the issuance of letters of credit in an aggregate amount equal to the lesser of $5.0 million and the Revolving Credit Commitment, which is $30.0 million as of March 15, 2017. The 2016 Credit Agreement is guaranteed by all of the Company’s present subsidiaries and will be guaranteed by our future subsidiaries.

42



At any time throughout the term of the 2016 Credit Agreement, we have the option to elect one of two bases of interest rates. One interest rate option is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) 30-day LIBOR plus 1%, plus, in each case, the Applicable Margin, which ranges from 1.50% to 2.50% per annum. The other interest rate option is the LIBOR plus the Applicable Margin, which ranges from 2.50% to 3.50% per annum. The Applicable Margin under each option is dependent upon our Consolidated Total Lease Adjusted Leverage Ratio ("CTLAL") at the most recent quarterly determination date.
The Term Loan amortizes 7.0% per year (35.0% in 5 years) which includes the quarterly payment of principal. On December 14, 2016, we entered into an interest rate swap with a notional amount of $17.5 million, representing 50% of the initial outstanding Term Loan.
We are obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based on the average daily unused amount of the commitment of such lender, ranging from 0.30% to 0.35% per annum depending on the CTLAL at the most recent quarterly determination date.
The proceeds of the 2016 Credit Agreement are available for us to (i) pay in full all indebtedness outstanding under the 2013 Credit Agreement as of November 8, 2016, (ii) pay fees, commissions, and expenses in connection with our repayment of the 2013 Credit Agreement, initial extensions of credit under the 2016 Credit Agreement, and (iii) for working capital and general corporate purposes of the Company.
The 2016 Credit Agreement, as amended, contains the following covenants among others:
CTLAL of not more than (i) 5.00 to 1.00, at the end of each fiscal quarter, through and including the third fiscal quarter of the Borrower’s fiscal year 2018, and (ii) 4.75 to 1.00 thereafter,
Consolidated Fixed Charge Coverage Ratio of not less than 1.25 to 1.00, at the end of each fiscal quarter,
Limit on Growth Capital Expenditures so long as the CTLAL is at least 0.25x less than the then-applicable permitted maximum CTLAL,
restrictions on mergers, acquisitions, consolidations, and asset sales,
restrictions on the payment of dividends, redemption of stock, and other distributions,
restrictions on incurring indebtedness, including certain guarantees, and capital lease obligations,
restrictions on incurring liens on certain of our property and the property of our subsidiaries,
restrictions on transactions with affiliates and materially changing our business,
restrictions on making certain investments, loans, advances, and guarantees,
restrictions on selling assets outside the ordinary course of business,
prohibitions on entering into sale and leaseback transactions, and
restrictions on certain acquisitions of all or a substantial portion of the assets, property and/or equity interests of any person, including share repurchases and dividends.

The 2016 Credit Agreement is secured by an all asset lien on all of our real property and also includes customary events of default. If a default occurs and is continuing, the lenders’ commitments under the 2016 Credit Agreement may be immediately terminated, and, or we may be required to repay all amounts outstanding under the 2016 Credit Agreement.
As of March 15, 2017, we had $37.4 million in total outstanding loans and approximately $1.3 million committed under letters of credit, which we use as security for the payment of insurance obligations, and approximately $0.2 million in other indebtedness.
We were in compliance with the covenants contained in the 2016 Credit Agreement as of March 15, 2017 and after applying the CTLAL, the available borrowing capacity was $3.0 million. At any determination date, if certain leverage and fixed charge ratios exceed the maximum permitted under our 2016 Credit Agreement, we would be considered in default under the terms of the agreement. Due to negative results in the first two quarters of fiscal 2017, continued under performance in the current fiscal year could cause our financial ratios to exceed the permitted limits under the terms of the 2016 Credit Agreement.
2013 Credit Facility
 
In August 2013, we entered into a $70.0 million revolving credit facility with Wells Fargo Bank, National Association, as Administrative Agent, and ZB, N.A. dba Amegy Bank (formerly Amegy Bank, N.A.), as Syndication Agent. Pursuant to the October 2, 2015 amendment, the total aggregate amount of the lenders' commitments was lowered to $60.0 million from $70.0 million. The following description summarizes the material terms of the revolving credit facility, as subsequently amended on March 21, 2014, November 7, 2014 and October 2, 2015, (the revolving credit facility is referred to as the “2013 Credit Facility”). The 2013 Credit Facility is governed by the credit agreement dated as of August 14, 2013 (the “2013 Credit Agreement”) among us, the lenders from time to time party thereto, Wells Fargo Bank, National Association, as Administrative

43



Agent, and ZB, N.A. dba Amegy Bank (formerly Amegy Bank, N.A.), as Syndication Agent. The maturity date of the 2013 Credit Facility was September 1, 2017.
 
The 2013 Credit Facility also provided for the issuance of letters of credit in a maximum aggregate amount of $5.0 million outstanding as of August 14, 2013 and $15.0 million outstanding at any one time with prior written consent of the Administrative Agent and the Issuing Bank.

At any time throughout the term of the 2013 Credit Facility, we had the option to elect one of two bases of interest rates. One interest rate option was the greater of (a) the Federal Funds Effective Rate plus 0.50% or (b) prime plus, in either case, an applicable spread that ranged from 0.75% to 2.25% per annum. The other interest rate option is the London InterBank Offered Rate plus a spread that ranged from 2.50% to 4.00% per annum. The applicable spread under each option is dependent upon the ratio of our debt to EBITDA at the most recent determination date.
 
We were obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based on the average daily unused amount of the commitment of such lender, ranging from 0.30% to 0.40% per annum depending on the Total Leverage Ratio at the most recent determination date.
 
The proceeds of the 2013 Credit Facility were available for our general corporate purposes, general working capital purposes and capital expenditures.
 

The 2013 Credit Agreement, as amended, contained the following covenants among others:

Debt Service Coverage Ratio of not less than (i) 1.10 to 1.00 at all times during the first, second and third fiscal quarters of the Borrower’s fiscal year 2015, (ii) 1.25 to 1.00 at all times during the fourth fiscal quarter of the Borrower’s fiscal year 2015, and (iii) 1.50 to 1.00 at all times thereafter,
Lease Adjusted Leverage Ratio of not more than (i) 5.75 to 1.00 at all times during the first, second and third fiscal quarters of the Borrower’s fiscal year 2015, (ii) 5.50 to 1.00 at all times during the fourth fiscal quarter of the Borrower’s fiscal year 2015, (iii) 5.25 to 1.00 at all times during the first fiscal quarter of the Borrower’s fiscal year 2016, (iv) 5.00 to 1.00 at all times during the second fiscal quarter of the Borrower’s fiscal year 2016, and (v) 4.75 to 1.00 at all times thereafter,
capital expenditures limited to $25.0 million per year, 
restrictions on incurring liens on certain of our property and the property of our subsidiaries,
restrictions on transactions with affiliates and materially changing our business,
restrictions on making certain investments, loans, advances and guarantees,
restrictions on selling assets outside the ordinary course of business,
prohibitions on entering into sale and leaseback transactions, and
restrictions on certain acquisitions of all or a substantial portion of the assets, property and/or equity interests of any person, including share repurchases and dividends.
  
The 2013 Credit Agreement also included customary events of default. If a default occurred and was continuing, the lenders’ commitments under the 2013 Credit Facility may have been immediately terminated and, or we could have been required to repay all amounts outstanding under the 2013 Credit Facility.

The 2013 Credit Facility was secured by a perfected first priority lien on certain of our real property and all of the material personal property owned by us or any of our subsidiaries, other than certain excluded assets (as defined in the Credit Agreement).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The Consolidated Financial Statements included in Item 1 of Part 1 of this Form 10-Q were prepared in conformity with GAAP. Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods. Due to the significant, subjective and complex judgments and estimates used when preparing our Consolidated Financial Statements, management regularly reviews these assumptions and estimates with the Finance and Audit Committee of our Board. Management believes the following are critical accounting policies used in the preparation of these financial statements. Actual results may differ from these estimates, including our estimates of future cash flows, which are subject to the current economic environment and changes in estimates. We had no changes in our critical accounting policies and estimates which were disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016.   

44



 
NEW ACCOUNTING PRONOUNCEMENTS
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. Further, in March 2016, the FASB issued ASU No. 2016–08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in ASU No. 2014–09 for evaluating when another party, along with the entity, is involved in providing a good or service to a customer. In April 2016, the FASB issued ASU No. 2016–10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” which clarifies the guidance in ASU No. 2014–09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. The Company plans to adopt the standard in the first quarter of fiscal 2019, which is the first fiscal quarter of the annual reporting period beginning after December 15, 2017. We have not yet decided on a method of transition upon adoption. The Company expects the pronouncement may impact the recognition of the initial franchise fee, which is currently recognized upon the opening of a franchise restaurant. We are further evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU No 2014-15. The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The pronouncement is effective for fiscal years and interim periods within those fiscal years, after December 31, 2016. 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.


45



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.
INFLATION
 
It is generally our policy to maintain stable menu prices without regard to seasonal variations in food costs. Certain increases in costs of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.
 
FORWARD-LOOKING STATEMENTS
 
This Form 10-Q contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Form 10-Q, other than statements of historical facts, are forward-looking statements for purposes of these provisions, including any statements regarding:
 
future operating results,
future capital expenditures and expected sources of funds for capital expenditures,
future debt, including liquidity and the sources and availability of funds related to debt, and expected repayment of debt, as well as our ability to refinance the existing credit facility or enter into a new credit facility on a timely basis,
expected sources of funds for working capital requirements,
plans for our new prototype restaurants,
plans for expansion of our business,
scheduled openings of new units,
closing existing units,
future sales of assets and the gains or losses that may be recognized as a result of any such sales, and
continued compliance with the terms of our 2016 Credit Facility.


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In some cases, investors can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “outlook,” “may,” “should,” “will,” and “would” or similar words. Forward-looking statements are based on certain assumptions and analyses made by management in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are relevant. Although management believes that its assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of its control. The following factors, as well as the factors set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended August 31, 2016 and any other cautionary language in this Form 10-Q, provide examples of risks, uncertainties, and events that may cause our financial and operational results to differ materially from the expectations described in our forward-looking statements:
 
general business and economic conditions,
the impact of competition,
our operating initiatives, changes in promotional, couponing and advertising strategies and the success of management’s business plans,
fluctuations in the costs of commodities, including beef, poultry, seafood, dairy, cheese, oils and produce,
ability to raise menu prices and customer acceptance of changes in menu items,
increases in utility costs, including the costs of natural gas and other energy supplies,
changes in the availability and cost of labor, including the ability to attract qualified managers and team members,
the seasonality of the business,
collectability of accounts receivable,
changes in governmental regulations, including changes in minimum wages and health care benefit regulation,
the effects of inflation and changes in our customers’ disposable income, spending trends and habits,
the ability to realize property values,
the availability and cost of credit,
effectiveness of the Cheeseburger in Paradise conversions to Fuddruckers restaurants,
the effectiveness of our credit card controls and PCI compliance,
weather conditions in the regions in which our restaurants operate,
costs relating to legal proceedings,
impact of adoption of new accounting standards,
effects of actual or threatened future terrorist attacks in the United States,
unfavorable publicity relating to operations, including publicity concerning food quality, illness or other health concerns or labor relations, and
the continued service of key management personnel.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to interest rate risk due to changes in interest rates affecting our variable-rate debt, Term Loan and borrowings under our 2016 Revolver. As of March 15, 2017, the total amount of debt subject to interest rate fluctuations outstanding under our Revolver and Term Loan was $19.9 million. Assuming an average debt balance with interest rate exposure of $19.9 million, a 100 basis point increase in prevailing interest rates would increase our annual interest expense by $0.2 million. The interest rate on our remaining $17.5 million in outstanding debt is fixed plus an applicable margin based on our CTLAL at each determination date, beginning December 14, 2016, under the terms of our interest rate swap agreement.
 
We have exposure to various foreign currency exchange rate fluctuations for revenues generated by our operations outside of the United States, which can adversely impact our net income and cash flows. Sales to customers and royalties from franchisees outside the contiguous United States as a percentage of our total revenues was approximately 0.14% and 0.18% in the quarter ended March 15, 2017 and March 9, 2016, respectively and 0.11% and 0.15% in the two quarters ended March 15, 2017 and March 9, 2016, respectively.

Many ingredients in the products sold in our restaurants are commodities subject to unpredictable price fluctuations. We attempt to minimize price volatility by negotiating fixed price contracts for the supply of key ingredients and in some cases by passing increased commodity costs through to the customer by adjusting menu prices or menu offerings. Our ingredients are available from multiple suppliers so we are not dependent on a single vendor for our ingredients.
 

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Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), as of March 15, 2017. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 15, 2017, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
Changes in Internal Control over Financial Reporting 
 
There were no changes in our internal control over financial reporting during the two quarters ended March 15, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Part II—OTHER INFORMATION
 
Item 1. Legal Proceedings
 
There have been no material changes to our legal proceedings as disclosed in “Legal Proceedings” in Item 3 of Part I of our Annual Report on Form 10-K for the fiscal year ended August 31, 2016.
 
Item 1A. Risk Factors
 
There have been no material changes during the two quarters ended March 15, 2017 to the Risk Factors discussed in Item1A of Part I of our Annual Report on Form 10-K for the fiscal year ended August 31, 2016.
 
Item 6. Exhibits
10.1
First Amendment to Credit Agreement, dated as of February 2, 2017, among the Company, the other credit parties thereto, the lenders from time to time party thereto, Cadence Bank, N.A. and Texas Capital Bank, N.A., as co-syndication agents and Wells Fargo Bank, National Association, as administrative agent, swingline lender, issuing lender, sole lead arranger and sole bookrunner (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on February 6, 2017 (File No. 001-08308)).
 
 
31.1
Rule 13a-14(a)/15d-14(a) certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Rule 13a-14(a)/15d-14(a) certification of the Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Section 1350 certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Section 1350 certification of the Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Schema Document
 
 
101.CAL
XBRL Calculation Linkbase Document
 
 
101.DEF
XBRL Definition Linkbase Document
 
 
101.LAB
XBRL Label Linkbase Document
 
 
101.PRE
XBRL Presentation Linkbase Document

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
  
LUBY’S, INC.
(Registrant)
 
  
  
  
Date:
4/24/2017
By:
/s/ Christopher J. Pappas
 
  
  
Christopher J. Pappas
 
  
  
President and Chief Executive Officer
 
  
  
(Principal Executive Officer)
 
  
  
  
Date:
4/24/2017
By:
/s/ K. Scott Gray
 
  
  
K. Scott Gray
 
  
  
Senior Vice President and Chief Financial Officer
 
  
  
(Principal Financial and Accounting Officer)

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EXHIBIT INDEX  
10.1
First Amendment to Credit Agreement, dated as of February 2, 2017, among the Company, the other credit parties thereto, the lenders from time to time party thereto, Cadence Bank, N.A. and Texas Capital Bank, N.A., as co-syndication agents and Wells Fargo Bank, National Association, as administrative agent, swingline lender, issuing lender, sole lead arranger and sole bookrunner (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on February 6, 2017 (File No. 001-08308)).
 
 
31.1
Rule 13a-14(a)/15d-14(a) certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
 
31.2
Rule 13a-14(a)/15d-14(a) certification of the Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
 
32.1
Section 1350 certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
 
32.2
Section 1350 certification of the Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
 
101.INS
XBRL Instance Document
  
 
101.SCH
XBRL Schema Document
  
 
101.CAL
XBRL Calculation Linkbase Document
  
 
101.DEF
XBRL Definition Linkbase Document
  
 
101.LAB
XBRL Label Linkbase Document
  
 
101.PRE
XBRL Presentation Linkbase Document


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