UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) | |
| | OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Fiscal Year Ended August 31, 200530, 2006
| o | 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 1-8308
Luby's, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 74-1335253 |
(State of incorporation) | (IRS Employer Identification Number) |
13111 Northwest Freeway, Suite 600 Houston, Texas 77040 |
(Address of principal executive offices, including zip code) |
(713) 329-6800 |
(Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of Class | Name of Exchange on which registered |
Common Stock ($.320.32 par value per share) | New York Stock Exchange |
| | |
| Common Stock Purchase Rights | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one): Page 1Large Accelerated Filer oAccelerated Filer xNon-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
The aggregate market value of the shares of common stock of the registrant held by nonaffiliates of the registrant as of February 9, 2005,15, 2006, was approximately $130,315,279$310,480,406 (based upon the assumption that directors and executive officers are the only affiliates).
As of November 7, 2005,3, 2006, there were 25,964,50526,082,580 shares of the registrant's common stock outstanding, which does not include 1,676,403 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into the designated parts of this Form 10-K:
Definitive Proxy Statement relating to 20062007 annual meeting of shareholders (in Part III)
Luby's, Inc.
Form 10-K
Year ended August 31, 200530, 2006
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Part I |
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Item 1A | | | 65
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Item 2Item 1B
| | 9Unresolved Staff Comments
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Item 3Item 2
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Item 4Item 3
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Item4AItem 4
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Part II |
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Item 9A | | | 5750
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Item9BItem 9B
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Part III |
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Item13Item 13
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Item14Item 14
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Part IV |
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Item15Item 15
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SignaturesSignatures
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Additional Information
The Company'sOur Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge via hyperlink on itsour website at www.lubys.com. The Company makesWe make these reports available as soon as reasonably practicable upon filing with the SEC. Information on the Company'sour website is not incorporated into this report.
Compliance with New York Stock Exchange Requirements
As required byWe submitted to the New York Stock Exchange (“NYSE”) the CEO certification required by Section 303A.12(a) of the NYSE’s Listed Company Manual with respect to our fiscal year ended August 31, 2005. We expect to submit the CEO of the Company submitted the previous year’s certification with respect to our fiscal year ended August 30, 2006 to the NYSE certifying that the CEO is not awarewithin 30 days after our annual meeting of any violation by the Company of the NYSE corporate governance listing standards as of the date of that certification.shareholders.
The Company isWe are filing as an exhibit to this Form 10-K the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Form 10-K, other than statements of historical facts, are “forward-looking statements” for purposes of these provisions, including any statements regarding:
·future operating results;
·future capital expenditures;
·future debt, including liquidity and the sources and availability of funds related to debt;
·future sales of assets and the gains or losses that may be recognized as a result of any such sale; and
·continued compliance with the terms of our Revolving Credit Facility.
In some cases, investors can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “outlook,” “may,” “should,” “will,” and “would” or similar words. Forward-looking statements are based on certain assumptions and analyses made by management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe are relevant. Although management believes that their assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of our control. The following factors, as well as the factors set forth in Item 1A of this Form 10-K and any other cautionary language in this Form 10-K, provide examples of risks, uncertainties, and events that may cause our financial and operational results to differ materially from the expectations described in our forward-looking statements:
·general business and economic conditions;
·the impact of competition;
·our operating initiatives;
·fluctuations in the costs of commodities, including beef, poultry, seafood, dairy, cheese and produce;
·increases in utility costs, including the costs of natural gas and other energy supplies;
·changes in the availability and cost of labor;
·the seasonality of the business;
·changes in governmental regulations, including changes in minimum wages;
·the affects of inflation;
·the availability of credit;
·unfavorable publicity relating to operations, including publicity concerning food quality, illness or other health concerns or labor relations; and
·the continued service of key management personnel.
Each forward-looking statement speaks only as of the date of this Form 10-K, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should be aware that the occurrence of the events described above and elsewhere in this Form 10-K could have material adverse effect on our business, results of operations, cash flows and financial condition.
PART I
Overview
Luby's, Inc. (formerly, Luby's Cafeterias, Inc.) was founded in 1947 in San Antonio, Texas. Our company was originally incorporated in Texas in 1959 and was reincorporated in Delaware on December 31, 1991. The Company’sOur corporate offices are located at 13111 Northwest Freeway, Suite 600, Houston, Texas 77040, and itsour telephone number at that address is (713) 329-6800.
Luby's, Inc. was restructured into a holding company on February 1, 1997, at which time all of the operating assets were transferred to Luby's Restaurants Limited Partnership, a Texas limited partnership composedconsisting of two wholly owned, indirect corporate subsidiaries of the Company.subsidiaries. All restaurant operations are conducted by the partnership. Unless the context indicatesIn this report, unless otherwise the word “Company”, as used herein includesspecified, “Luby’s,” “we,” “our,” “us” and “our company” refer to the partnership and the consolidated corporate subsidiaries of Luby's, Inc. The CompanyOur company operates under only one business segment.
As of November 7, 2005, the Company3, 2006, we operated 131128 restaurants, under the name “Luby's.”of which 126 are traditional cafeterias and two primarily serve seafood. These establishments are located in close proximity to retail centers, business developments and residential areas throughoutin five states (listed under Item 2).states. Of the 131128 restaurants, 93 are located on propertieslocations owned by the Companyus and 3835 are on leased premises. Two of the restaurants primarily serve seafood, four are full-time buffets, seven are cafeteria-style restaurants with all-you-can-eat options, and 118 are traditional cafeterias.
Operations
The Company's operationsWe provide guests with a wide variety of delicious, home-style food, with the majority of locations serving food in a cafeteria-style manner. Daily, each restaurant offers 20 to 22 entrees, 12 to 14 vegetable dishes, 12 to 16 salads, and 16 to 20 varieties of desserts. Food is prepared in small quantities throughout serving hours, and frequent quality checks are conducted.
The Company'sOur historical marketing research has shown that itsour products appeal to a broad range of value-oriented consumers, within particular success among families with children, seniors, shoppers, travelers, and business people looking for a quick, home-style meal at a reasonable price. During fiscal 2005, the Company2006, we spent approximately 1.9%2.1% of itsour sales on traditional marketing venues, including television and radio advertisements in English and Spanish, newsprint, radio, point-of-purchase and local-store marketing.
Luby's restaurants are generally open for lunch and dinner seven days a week. All of theour restaurants sell take-out orders, and many of them have separate food-to-go entrances, which provide guests the option of enjoyingto take complete and flavorful meals at the officeto their home or at home. Take-out orders accountedoffice. We also seek to provide culinary contract services for 14.3% of total sales in fiscal 2005. Twenty-five of the Luby’s restaurants serve breakfast on the weekends, accounting for 1.0% of total sales in fiscal 2005. Those locationsorganizations that offer a wide array of popular breakfast foods served buffet-style. They also feature made-to-order omelet, pancake, and waffle stations.
The Company operates from a centralized purchasing arrangement to obtain the economic benefit of bulk purchasing and lower prices for most of itson-site food products. The arrangement involves a competitively selected prime vendor for each of its three major purchasing regions.service, such as healthcare facilities.
Food is prepared fresh daily at the Company'sour restaurants. Menus are reviewed periodically by a committee of managers and chefs. The committee introduces newly developed recipes to ensure offerings are varied and that seasonal food preferences are incorporated.
Quality control teams also help to maintain uniform standards of food preparation. The teams visit each restaurant as necessary and work with the staff to confirm adherence to Companyour recipes, train personnel in new techniques, and implement systems and procedures used universally throughout our company.
We operate from a centralized purchasing arrangement to obtain the Company.economic benefit of bulk purchasing and lower prices for most of our food products. The arrangement involves a competitively selected prime vendor for each of our three major purchasing regions.
During the fiscal year ended August 31, 2005, the Company30, 2006, we closed seventwo underperforming units.
As of November 7, 2005, the Company3, 2006, we had a workforce of 7,680,8,210 consisting of 7,2007,700 non-management restaurant workers; 330workers, 323 restaurant managers associate managers, and assistant managers; and 150187 clerical, administrative and
executive employees. Each restaurant is operated as a separate unit under the control of a general manager who has responsibility for day-to-day operations, including food production and personnel employment and supervision. The Company’sOur philosophy is to grant authority to its restaurant managers to direct the daily operations of their stores and, in turn, to compensate them on the basis of their performance, believingperformance. We believe this strategy to be a significant factor in restaurant profitability. The majority ofOf the 128 general managers, employed by the company, 89, as of November 7, 2005,84 have more than ten years of experience at Luby’s. This large percentage of tenured general managers enhances the Company’sour execution. Employee relations are considered to be good. The Company hasWe have never had a strike or work stoppage, and iswe are not subject to collective bargaining agreements.
Service Marks
The CompanyLuby’s uses several service marks, including “Luby's,” and believes that such marks are of material importance to its business. The Company has federal registrations for its service marks as deemed appropriate.
The Company is not the sole user of the name Luby's in the cafeteria business. A cafeteria using the name Luby's is being operated in Texas by an unaffiliated company. The Company's legal counsel is of the opinion that the Company has the paramount right to use the name Luby's as a service mark in the United States and that the other user could be precluded from expanding its use of the name as a service mark.
An investment in our common stock involves a high degree of risk. YouInvestors should consider carefully the risks and uncertainties described below, and all other information included in this Annual Report on Form 10-K, before you decidedeciding whether to purchase our common stock. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business, financial condition or results of operations. The occurrence of any of the following risks could harm our business, financial condition and results of operations. The trading price of our common stock could decline due to any of these risks and uncertainties, and youinvestors may lose part or all of yourtheir investment.
We face intense competition, and if we are unable to compete effectively, our business and financial performance will be adversely affected.
The restaurant industry is intensely competitive and is affected by changes in customer tastes and dietary habits and by national, regional and local economic conditions and demographic trends. New menu items, concepts, and trends are constantly emerging. We compete on quality, variety, value, service, concept, price, and location with well-established national and regional chains, as well as with locally owned and operated restaurants. We face significant competition from family-style restaurants, fast-casual restaurants, and buffets as well as fast food restaurants. In addition, we also face growing competition as a result of the trend toward convergence in grocery, deli, and restaurant services, particularly in the supermarket industry, which offers “convenient meals” in the form of improved entrées and side dishes from the deli section. Many of our competitors have significantly greater financial resources than we do. We also compete with other restaurants and retail establishments for restaurant sites and personnel. We anticipate that intense competition will continue. If we are unable to compete effectively, our business, financial condition, and results of operations would be materially adversely affected.
Changes in customer preferences for cafeteria-style dining could adversely affect our financial performance.
Changing customer preferences, tastes and dietary habits can adversely impact our business and financial performance. We offer a large variety of entrees, side dishes and desserts and our continued success depends, in part, on the popularity of our cuisine and cafeteria-style dining. A change away from this cuisine or dining style could have a material adverse effect on our results of operations. In addition, we may lose customers as a result of price increases.
We face the risk of adverse publicity and litigation, the cost of which could have a material adverse effect on our business and financial performance.
We may from time to time be the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Publicity resulting from these allegations may materially adversely affect us, regardless of whether the allegations are valid or whether we are liable. In addition, we are subject to employee claims alleging injuries, wage and hour violations, discrimination, harassment or wrongful termination. In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits,
alleging violations of federal and state law regarding workplace, employment and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our financial performance. A judgment significantly in excess of our insurance coverage, if any, for any claims could materially adversely affect our financial condition or results of operations.
Unfavorable publicity relating to one or more of our restaurants or to the restaurant industry in general may taint public perception of the Luby's brand. Multi-unit restaurant businesses can be adversely affected by publicity resulting from poor food quality, illness or other health concerns or operating issues stemming from one or a limited number of restaurants.
Our business is affected by local, state and federal regulations.
The restaurant industry is subject to extensive federal, state and local laws and regulations. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards, building codes and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act and applicable minimum wage requirements, overtime, unemployment tax rates, family leave, tip credits, working conditions, safety standards and citizenship requirements), federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990. In addition, we are subject to a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission, and disposal of hazardous materials. The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations could increase our compliance and other costs of doing business and therefore, have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability.
If we are unable to anticipate and react to changes in food, utility and other costs, our results of operations could be materially adversely affected.
Many of the food and beverage products we purchase are affected by commodity pricing, and as such, are subject to price volatility caused by production problems, shortages, weather or other factors outside of our control. Our profitability depends, in part, on our successfully anticipating and reacting to changes in the prices of commodities. Therefore, we enter into purchase commitments with suppliers when we believe that it is advantageous for us to do so. Should there be an adverse change in commodity prices, we may be forced to absorb the additional costs rather than transfer the resulting increases in commodity prices to our customers in the form of price increases. Our success also depends, in part, on our ability to absorb increases in utility costs. Our operating results are affected by fluctuations in the price of utilities. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a significant adverse effect on our results of operations.
Because our restaurants are concentrated in Texas, regional events can adversely affect our financial performance.
Approximately 94% of our restaurants were located in Texas as of November 7, 2005. Our remaining restaurants are located in Arizona, Arkansas, Louisiana, and Oklahoma. This concentration could adversely affect our financial performance in a number of ways. For example, our results of operations may be adversely affected by economic conditions in Texas or the Southern United States or the occurrence of an event of terrorism or natural disaster in any of the communities in which we operate. Also, given our geographic concentration, adverse publicity relating to our restaurants could have a more pronounced adverse effect on our overall revenues than might be the case if our restaurants were more broadly dispersed.
Inclement weather can adversely affect our financial performance.
Many of our restaurants are located in the Texas Gulf Coast region. Although we generally maintain property and casualty insurance to protect against property damage caused by casualties and natural disasters, inclement weather, flooding, hurricanes and other acts of God can adversely impact our sales in several ways. For example, poor weather typically discourages potential customers from going out to eat. In addition, a restaurant that is damaged by a natural disaster can be inoperable for a significant amount of time.
Our planned expansion may not be successful.
We plan to beginhave begun development of two new cafeteria restaurants in Texas, which we currently expect to open in 2007. Our ability to open and profitably operate restaurants is subject to various risks such as the identification and availability of suitable and economically viable locations, the negotiation of acceptable lease or purchase terms for new locations, the need to obtain all required governmental permits (including zoning approvals) on a timely basis, the need to comply with other regulatory requirements, the availability of necessary contractors and subcontractors, the availability of construction materials and labor, the ability to meet construction schedules and budgets, the ability to manage union activities such as picketing or hand billing which could delay construction, increases in labor and building materials costs, the availability of financing at acceptable rates and terms, changes in weather or other acts of God that could result in construction delays and adversely affect the results of one or more restaurants for an indeterminate amount of time, our ability to hire and train qualified management personnel and general economic and business conditions. At each potential location, we compete with other restaurants and retail businesses for desirable development sites, construction contractors, management personnel, hourly employees and other resources. If we are unable to successfully manage these risks, we could face increased costs and lower than anticipated revenues and earnings in future periods.
If we lose the services of any of our key management personnel, ourOur business could suffer.is affected by local, state and federal regulations.
The successrestaurant industry is subject to extensive federal, state and local laws and regulations. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards, building codes and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act and applicable minimum wage requirements, overtime, unemployment tax rates, family leave, tip credits, working conditions, safety standards and citizenship requirements), federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990.
In addition, we are subject to a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission, and disposal of hazardous materials. The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations could increase our compliance and other costs of doing business is highly dependent upon our key management personnel, particularly Christopher J. Pappas, our President and Chief Executive Officer, and Harris J. Pappas, our Chief Operating Officer. The loss of the services of any of our key management personnel couldtherefore, have a materiallyan adverse effect uponon our business.results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability.
Labor shortages or increases in labor costs could harm our business.
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including regional managers, restaurant general managers and chefs, in a manner consistent with our standards and expectations. Qualified individuals that we need to fill these positions are in short supply and competition for these employees is intense. If we are unable to recruit and retain sufficient qualified individuals, our operations and reputation could be adversely affected. Additionally, competition for qualified employees could require us to pay higher wages, which could result in higher labor costs. If our labor costs increase, our results of operations will be negatively affected.
An increase in the minimum wage could adversely affect our financial performance.
From time to time, the U.S. Congress considers an increase in the federal minimum wage. The restaurant industry is intensely competitive, and if the federal minimum wage is increased, we may not be able to transfer all of the resulting increases in operating costs to our customers in the form of price increases. In addition, since our business is labor-intensive, shortages in the labor pool or other inflationary pressure could increase labor costs, which could harm our financial performance.
If we are unable to anticipate and react to changes in food, utility and other costs, our results of operations could be materially adversely affected.
Many of the food and beverage products we purchase are affected by commodity pricing, and as such, are subject to price volatility caused by production problems, shortages, weather or other factors outside of our control. Our profitability depends, in part, on our successfully anticipating and reacting to changes in the prices of commodities. Therefore, we enter into purchase commitments with suppliers when we believe that it is advantageous for us to do so. Should there be an adverse change in commodity prices, we may be forced to absorb the additional costs rather than transfer the resulting increases in commodity prices to our customers in the form of price increases. Our success also depends, in part, on our ability to absorb increases in utility costs. Our operating results are affected by fluctuations in the price of utilities. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a significant adverse effect on our results of operations.
Because our restaurants are concentrated in Texas, regional events can adversely affect our financial performance.
Approximately 95% of our restaurants were located in Texas as of November 3, 2006. Our remaining restaurants are located in Arizona, Arkansas, Louisiana, and Oklahoma. This concentration could adversely affect our financial performance in a number of ways. For example, our results of operations may be adversely affected by economic conditions in Texas or the Southern United States or the occurrence of an event of terrorism or natural disaster in any of the communities in which we operate. Also, given our geographic concentration, adverse publicity relating to our restaurants could have a more pronounced adverse effect on our overall revenues than might be the case if our restaurants were more broadly dispersed.
Inclement weather can adversely affect our financial performance.
Many of our restaurants are located in the Texas Gulf Coast region. Although we generally maintain property and casualty insurance to protect against property damage caused by casualties and natural disasters, inclement weather, flooding, hurricanes and other acts of God can adversely impact our sales in several ways. For example, poor weather typically discourages potential customers from going out to eat. In addition, a restaurant that is damaged by a natural disaster can be inoperable for a significant amount of time.
If we lose the services of any of our key management personnel, our business could suffer.
The success of our business is highly dependent upon our key management personnel, particularly Christopher J. Pappas, President and Chief Executive Officer, and Harris J. Pappas, Chief Operating Officer. The loss of the services of any key management personnel could have a materially adverse effect upon our business.
Our business is subject to seasonal fluctuations, and, as a result, our results of operations for any given quarter may not be indicative of the results that may be achieved for the full fiscal year.
Our business is subject to seasonal fluctuations. Historically, our highest earnings have occurred in the third quarter of the fiscal year, as our revenues in most of our restaurants have typically been higher during the third quarter of the fiscal year. Similarly, our results of operations for any single quarter will not necessarily be indicative of the results that may be achieved for a full fiscal year.
General economic factors may adversely affect our results of operations.
National, regional and local economic conditions, such as recessionary economic cycles, a protracted economic slowdown or a worsening economy, could adversely affect disposable consumer income and consumer confidence. Unfavorable changes in these factors or in other business and economic conditions affecting our customers could reduce customer traffic in some or all of our restaurants, impose practical limits on our pricing and increase our costs, any of which could lower our profit margins and have a material adverse affect on our results of operations.
An increase in the minimum wage could adversely affect our financial performance.
From time to time, the U.S. Congress considers an increase in the federal minimum wage. The restaurant industry is intensely competitive, and if the federal minimum wage is increased, we may not be able to transfer all of the resulting increases in operating costs to our customers in the form of price increases. In addition, since our business is labor-intensive, shortages in the labor pool or other inflationary pressure could increase labor costs, which could harm our financial performance.
Inflation can negatively affect our financial performance.
The impact of inflation on food, labor and other aspects of our business can negatively affect our results of operations. Commodity inflation in food, beverages and utilities can also impact our financial performance. Although we attempt to offset inflation through periodic menu price increases, cost controls and incremental improvement in operating margins, we may not be able to completely do so which could negatively affect our results of operations.
Item 1B.Unresolved Staff Comments
None.
The Company'sOur restaurants typically contain 8,000 to 10,500 square feet of floor space and can seat 250 to 300 guests simultaneously.
Luby's our restaurants are well maintained and in good condition. In order to maintain appearance and operating efficiency, the Company refurbisheswe refurbish and updates itsupdate our restaurants and equipment and performsperform scheduled maintenance.
As of November 7, 2005, the Company's3, 2006, our restaurants were regionally located as follows: twoone in Arizona, two in Arkansas, two in Louisiana, two in Oklahoma, and 123121 in Texas.
The Company ownsWe own the underlying land and buildings in which 93 of itsour restaurants are located. Nine of these restaurant properties contain excess building space, which is rentedleased to tenants unaffiliated with the Company.our company.
In addition to the owned locations, 3835 other restaurants are held under leases, including 1411 in regional shopping malls. Most of the leases provide for a combination of fixed-dollar and percentage rentals. Many require the Companyus to pay additional amounts related to property taxes, hazard insurance and maintenance of common areas. Of the 3835 restaurant leases, the current terms of 1612 expire before 2010, 13 expire between 2010 to 2014, and nineten thereafter. Of the 3835 restaurant leases, 3631 can be extended beyond their current terms at the Company'sour option. The Company leasesWe lease approximately 25,000 square feet of corporate office space, which lease extends through 2011. The corporate office space is located off the Northwest Freeway in Houston, Texas in close proximity to many of itsour Houston restaurant locations. The CompanyWe also leaseslease warehouse space in the Houston, Texas area (See “Affiliations(see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Affiliations and Related Parties - Affiliations”) in Item 7 of this report). See Note 11,10, “Operating Leases”, of the Notes to Consolidated Financial Statements in Item 8 of this report for information concerning the Company'sour lease rental expenses and lease commitments.
AsAdditionally, as of November 7, 2005, the Company3, 2006, we had eleventhree owned properties, with a carrying value of $8.3approximately $1.7 million, and fivethree ground lease properties, located on ground leases on the marketwith a zero carrying value, that are held for sale.
The Company maintainsWe maintain public liability insurance and property damage insurance on itsour properties in amounts which management believes to be adequate.
The Company isWe are from time to time subject to claims and lawsuits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of pending claims and lawsuits will not have a material adverse effect on the Company'sour operations or consolidated financial position. There are no material legal proceedings to which any director, officer,of our directors, officers or affiliate of the Company,affiliates, or any associate of any such director or officer, is a party, or has a material interest, adverse to the Company.our company.
| Item 4.Submission of Matters to a Vote of Security Holders |
No matter was submitted during the fourth quarter of the fiscal year ended August 31, 2005,30, 2006, to a vote of our security holders of the Company.holders.
| Executive Officers of the Registrant
|
Certain information is set forth below concerning the executive officers of the Company, each of whom has been elected to serve until his successor is duly elected and qualified:
Name | | Served as Officer Since | | Positions with Company and Principal Occupation Last Five Years | | Age |
| | | | | | | |
| Christopher J. Pappas | | 2001 | | President and CEO (since March 2001), CEO of Pappas Restaurants, Inc. | | 58 |
| | | | | | | |
| Harris J. Pappas | | 2001 | | Chief Operating Officer (since March 2001), President of Pappas Restaurants, Inc. | | 61 |
| | | | | | | |
| Ernest Pekmezaris | | 2001 | | Senior Vice President and CFO (since March 2001), Treasurer and former CFO of Pappas Restaurants, Inc. | | 61 |
| | | | | | | |
| Peter Tropoli | | 2001 | | Senior Vice President-Administration and General Counsel (since March 2001), attorney in private practice. | | 33 |
PART II
| Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Stock Prices
The Company'sOur common stock is traded on the New York Stock Exchange under the symbol “LUB.” The following table sets forth, for the last two fiscal years, the high and low sales prices on the New York Stock Exchange as reported in the consolidated transaction reporting system.
Fiscal Quarter Ended | | High | | Low | | | High | | Low | |
| | | | | | | | | | | |
| November 19, 2003 | | $ | 3.69 | | $ | 2.28 | | |
| February 11, 2004 | | | 3.94 | | | 3.27 | | |
| May 5, 2004 | | | 6.37 | | | 3.60 | | |
| August 25, 2004 | | | 6.95 | | | 4.85 | | |
| November 17, 2004 | | | 8.08 | | | 6.05 | | | $ | 8.08 | | $ | 6.05 | |
| February 9, 2005 | | | 7.99 | | | 5.75 | | | | 7.99 | | | 5.75 | |
| May 4, 2005 | | | 8.39 | | | 5.95 | | | | 8.39 | | | 5.95 | |
| August 31, 2005 | | | 14.80 | | | 7.70 | | | | 14.80 | | | 7.70 | |
| November 23, 2005 | | | | 14.32 | | | 11.69 | |
| February 15, 2006 | | | | 14.90 | | | 11.29 | |
| May 10, 2006 | | | | 16.09 | | | 11.10 | |
| August 30, 2006 | | | | 12.03 | | | 8.18 | |
As of November 7, 2005,3, 2006, there were approximately 3,3843,228 holders of record of the Company'sour common stock. No cash dividends have been paid on the Company’sour common stock in the past twosince fiscal years2000, and the Companywe currently hashave no intention to pay a cash dividend on the Company’sour common stock. The Company’s Revolving Credit Facility imposes limitations on the Company’s ability to pay cash dividends.
| Item 6.Selected Financial Data |
Five-Year Summary of Operations
| | | Fiscal Year Ended | |
| | | August 31, 2005 (a) | | August 25, 2004 (As adjusted) | | August 27, 2003 (As adjusted) | | August 28, 2002 (As adjusted) | | August 31, 2001 (As adjusted) | |
| | | (371 days) | | (364 days) | | (364 days) | | (362 days) | | (365 days) | |
| | | (In thousands except per share data) | |
| | | | | | | | | | | | |
| SALES | | $ | 322,151 | | $ | 297,849 | | $ | 291,740 | | $ | 307,250 | | $ | 354,265 | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
| Cost of food | | | 86,280 | | | 79,923 | | | 78,921 | | | 77,775 | | | 87,702 | |
| Payroll and related costs | | | 115,481 | | | 112,961 | | | 114,655 | | | 128,680 | | | 155,665 | |
| Other operating expenses | | | 64,796 | | | 59,447 | | | 55,342 | | | 59,282 | | | 71,267 | |
| Depreciation and amortization | | | 15,054 | | | 16,259 | | | 17,204 | | | 17,251 | | | 17,635 | |
| Relocation and voluntary severance costs | | | 669 | | | 860 | | | - | | | - | | | - | |
| General and administrative expenses | | | 20,750 | | | 19,748 | | | 23,301 | | | 21,183 | | | 25,253 | |
| (Reversal of ) provision for asset impairments and restaurant closings/(gains on sales), net | | | (632 | ) | | 413 | | | 1,175 | | | 271 | | | 30,240 | |
| | | | 302,398 | | | 289,611 | | | 290,598 | | | 304,442 | | | 387,762 | |
| INCOME (LOSS) FROM OPERATIONS | | | 19,753 | | | 8,238 | | | 1,142 | | | 2,808 | | | (33,497 | ) |
| Interest expense | | | (11,636 | ) | | (8,094 | ) | | (7,610 | ) | | (7,676 | ) | | (8,135 | ) |
| Other income, net | | | 574 | | | 2,689 | | | 7,069 | | | 2,365 | | | 2,160 | |
| Income (loss) before income taxes | | | 8,691 | | | 2,833 | | | 601 | | | (2,503 | ) | | (39,472 | ) |
| Provision (benefit) for income taxes | | | 117 | | | (2,856 | ) | | (1,441 | ) | | (726 | ) | | (13,668 | ) |
| Income (loss) from continuing operations | | | 8,574 | | | 5,689 | | | 2,042 | | | (1,777 | ) | | (25,804 | ) |
| Discontinued operations, net of taxes | | | (5,126 | ) | | (8,811 | ) | | (31,763 | ) | | (7,699 | ) | | (5,743 | ) |
| NET INCOME (LOSS) | | $ | 3,448 | | $ | (3,122 | ) | $ | (29,721 | ) | $ | (9,476 | ) | $ | (31,547 | ) |
| Income (loss) per share from continuing operations: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.38 | | $ | 0.25 | | $ | 0.09 | | $ | (0.08 | ) | $ | (1.15 | ) |
| Assuming dilution | | $ | 0.37 | | $ | 0.25 | | $ | 0.09 | | $ | (0.08 | ) | $ | (1.15 | ) |
| Loss per share from discontinued operations: | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.23 | ) | $ | (0.39 | ) | $ | (1.41 | ) | $ | (0.34 | ) | $ | (0.26 | ) |
| Assuming dilution | | $ | (0.22 | ) | $ | (0.39 | ) | $ | (1.41 | ) | $ | (0.34 | ) | $ | (0.26 | ) |
| Net income (loss) per share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.15 | | $ | (0.14 | ) | $ | (1.32 | ) | $ | (0.42 | ) | $ | (1.41 | ) |
| Assuming dilution | | $ | 0.15 | | $ | (0.14 | ) | $ | (1.32 | ) | $ | (0.42 | ) | $ | (1.41 | ) |
| Cash dividend declared per common share | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | |
| At year-end: | | | | | | | | | | | | | | | | |
| Total assets | | $ | 206,214 | | $ | 232,281 | | $ | 275,675 | | $ | 339,474 | | $ | 351,209 | |
Long-term debt (including net convertible subordinated debt) (b) | | $ | 13,500 | | $ | 53,561 | | $ | - | | $ | 5,883 | | $ | 127,401 | |
| Total debt | | $ | 13,500 | | $ | 53,561 | | $ | 98,532 | | $ | 124,331 | | $ | 127,401 | |
| Weighted-average shares outstanding | | | | | | | | | | | | | | | | |
| Basic | | | 22,608 | | | 22,470 | | | 22,451 | | | 22,428 | | | 22,422 | |
Assuming dilution (c) | | | 23,455 | | | 22,679 | | | 22,532 | | | 22,428 | | | 22,422 | |
| Number of restaurants at year end | | | 131 | | | 138 | | | 148 | | | 196 | | | 213 | |
(a)
| Fiscal year ended August 31, 2005 consists of 53 weeks, while all other periods presented consist of 52 weeks. |
(b)
| See the “Debt” sections of Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 8 of the Notes to Consolidated Financial Statements. |
(c)
| Potentially dilutive shares that were not included in the computation of net income (loss) per share because to do so would have been antidilutive amounted to 3,219,000 shares in fiscal 2005, 2,216,000 in fiscal 2004, and 2,000,000 in fiscal 2003 (including the dilutive effect of the convertible subordinated notes). Additionally, stock options with exercise prices exceeding current market prices that were excluded from the computation of net income (loss) per share amounted to 484,000 shares in fiscal 2005, 2,495,000 shares in fiscal 2004 and 4,078,000 shares in fiscal 2003. |
| | | Fiscal Year Ended | |
| | | August 30, 2006 | | August 31, 2005 (a) | | August 25, 2004 | | August 27, 2003 | | August 28, 2002 | |
| | | (364 days) | | (371 days) | | (364 days) | | (364 days) | | (362 days) | |
| | | (In thousands except per share data) | |
| | | | | | | | | | | | |
| Sales | | $ | 324,640 | | $ | 318,401 | | $ | 294,235 | | $ | 290,512 | | $ | 306,614 | |
| | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | 21,085 | | | 8,456 | | | 6,063 | | | 2,106 | | | 2,082 | |
| | | | | | | | | | | | | | | | | |
| Loss from discontinued operations | | | (1,524 | ) | | (5,008 | ) | | (9,185 | ) | | (31,827 | ) | | (11,558 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | | 19,561 | | | 3,448 | | | (3,122 | ) | | (29,721 | ) | | (9,476 | ) |
| | | | | | | | | | | | | | | | | |
| Income (loss) per share from continuing operations: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.81 | | $ | 0.37 | | $ | 0.27 | | $ | 0.09 | | $ | 0.09 | |
| Assuming dilution | | $ | 0.77 | | $ | 0.36 | | $ | 0.27 | | $ | 0.09 | | $ | 0.09 | |
| | | | | | | | | | | | | | | | | |
| Loss per share from discontinued operation: | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.06 | ) | $ | (0.22 | ) | $ | (0.41 | ) | $ | (1.42 | ) | $ | (0.52 | ) |
| Assuming dilution | | $ | (0.06 | ) | $ | (0.21 | ) | $ | (0.41 | ) | $ | (1.41 | ) | $ | (0.52 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) per share | | | | | | | | | | | | | | | | |
| Basic | | | 0.75 | | | 0.15 | | | (0.14 | ) | | (1.32 | ) | | (0.42 | ) |
| Assuming dilution | | | 0.71 | | | 0.15 | | | (0.14 | ) | | (1.32 | ) | | (0.42 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted-average shares outstanding | | | | | | | | | | | | | | | | |
| Basic | | | 26,024 | | | 22,608 | | | 22,470 | | | 22,451 | | | 22,428 | |
| Assuming dilution | | | 27,444 | | | 23,455 | | | 22,679 | | | 22,532 | | | 22,428 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | $ | 206,751 | | $ | 206,214 | | $ | 232,281 | | $ | 275,675 | | $ | 339,474 | |
| | | | | | | | | | | | | | | | | |
Long-term debt (including net convertible subordinated debt) (b) | | $ | — | | $ | 13,500 | | $ | 53,561 | | $ | — | | $ | 5,883 | |
| | | | | | | | | | | | | | | | | |
| Total debt | | $ | — | | $ | 13,500 | | $ | 53,561 | | $ | 98,532 | | $ | 124,331 | |
| | | | | | | | | | | | | | | | | |
| Number of restaurants at fiscal year end | | | 128 | | | 131 | | | 138 | | | 148 | | | 196 | |
Five-Year Summary(a)Fiscal year ended August 30, 2005 consists of 53 weeks, while all other periods presented consist of 52 weeks.
(b)See “Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - Debt” in Item 7 of this report and Note 7, “Debt”, of the Notes to Consolidated Financial Statements in Item 8 of this report.
Note: Fiscal year 2002, the year in which the Companywe moved from 12 calendar months to 13 four-week periods, was 362 days in length. Fiscal 2003, 2004 and 20042006 were each 364 days in length. Fiscal 2005, however, was a 53 week year and was 371 days in length. The quarter ended August 31, 2005, consisted of three four-week periods and one five-week period.
Note: The above selected financial data are derived from the Company’s consolidated financial statements and have been adjusted for the retrospective application required under EITF 05-8, “Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature,”(“EITF 05-8”) adopted by the Company, effective for the fiscal year ended August 31, 2005. Retroactive adoption of EITF 05-8 required the recording of increased income tax benefits, which resulted in increased income from continuing operations and net income of $2.9 million in fiscal 2004, $1.4 million in fiscal 2003, $169,000 in fiscal 2002 and $28,000 in fiscal 2001. The adoption had no impact on fiscal 2005. See further discussion in Note 2 of the Notes to the consolidated financial statements, “Change in Method of Accounting for Deferred Income Taxes Related to the Beneficial Conversion Feature of Subordinated Debt” in Item 8, “Financial Statements and Summary Data” of this Form 10-K.
Note: Store management compensation has been reclassified from “Other Operating Expenses” to “Payroll and Related Costs” to provide comparability to financial results reported by our peers in the industry. All prior period results reported have been reclassified to conform to the current year presentation.
Below is a summary of the reclassified expenses:
| | | Fiscal Year Ended | |
| | | August 31, 2005 | | August 25, 2004 | | August 27, 2003 | | August 28, 2002 | | August 31, 2001 | |
| | | (371 days) | | (364 days) | | (364 days) | | (362 days) | | (365 days) | |
| | | (In thousands) | |
| | | | | | | | | | | | |
Payroll and related costs | | | | | | | | | | | |
| Payroll and related costs (previous classification) | | $ | 81,759 | | $ | 82,163 | | $ | 83,676 | | $ | 97,068 | | $ | 123,630 | |
| Manager compensation reclassification | | | 33,722 | | | 30,798 | | | 30,979 | | | 31,612 | | | 32,035 | |
| Payroll and related costs (as reported) | | $ | 115,481 | | $ | 112,961 | | $ | 114,655 | | $ | 128,680 | | $ | 155,665 | |
Other operating expenses | | | | | | | | | | | | | | | | |
| Other operating expenses (previous classification) | | $ | 98,518 | | $ | 90,245 | | $ | 86,321 | | $ | 90,894 | | $ | 103,302 | |
| Manager compensation reclassification | | | (33,722 | ) | | (30,798 | ) | | (30,979 | ) | | (31,612 | ) | | (32,035 | ) |
| Other operating expenses (as reported) | | $ | 64,796 | | $ | 59,447 | | $ | 55,342 | | $ | 59,282 | | $ | 71,267 | |
Note: The Company'sOur business plan, as approved in fiscal 2003, called for the closure of approximately 50 locations. In accordance with the plan, the entire fiscal activity of the applicable stores closed after the inception of the plan have been reclassified to discontinued operations. For comparison purposes, prior fiscal years results related to these same locations have also been reclassified to discontinued operations.
Item 7.
| Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations |
RESULTS OF OPERATIONSManagement's discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and footnotes for the fiscal years ended August 30, 2006, August 31, 2005 and August 25, 2004 included in Item 8 of this report.
Certain Reclassification of ExpensesOverview
Store management compensation has been reclassified from “Other Operating Expenses”As of November 3, 2006, we operated 128 restaurants, of which 126 are traditional cafeterias and two primarily serve seafood. These establishments are located in close proximity to “Payrollretail centers, business developments, and Related Costs” to provide comparability to financial results reportedresidential areas throughout five states. Of the 128 restaurants, 93 are operated on sites owned by our peersus and 35 are on leased premises. Not included in the industry. All prior period results reported have been reclassified128 currently operating units is one leased, traditional cafeteria-style restaurant which was closed and the lease terminated, due to conform to current year presentation (See Item 6. Selected Financial Data-Five -Year Summary of Operations).storm damage.
The Company'sOur business plan, as approved in fiscal 2003, called for the closure of approximatelyover 50 locations. In accordance with the plan, the entire fiscal activity of the applicable stores closed after the inception of the plan havehas been reclassified to discontinued operations. For comparison purposes, prior fiscal yearsperiod results related to these same locations have also been reclassified to discontinued operations.
Accounting Periods
Our fiscal year ends on the last Wednesday in August. As such, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. Each of the first three quarters of each fiscal year consists of three four-week periods, while the fourth quarter normally consists of four four-week periods. Fiscal 2006 was a 52-week year, while fiscal 2005 was a 53-week year for us, with the extra week occurring in the fourth quarter. 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. The Company'sOur same-store sales calculation measures the relative performance of a certain group of restaurants. Specifically, toTo qualify for inclusion in this group, a store must have been in operation for 18 consecutive accounting periods. Although management believes this approach leads to more effective year-over-year comparisons, neither the time frame nor the exact practice may be similar to those used by other restaurant companies.
Same-store sales increased 4.6%, 6.3%, and 1.3% for fiscal years 2006, 2005, and 2004, respectively. Same-store sales removes the additional week of sales in fiscal 2005 and compares sales year-over-year for periods which include approximately the same calendar dates.
This approach was also applied to same-store sales for fiscal quarters, adjusting for the additional week in fiscal fourth quarter 2005. The following table shows the same-store sales change for comparative historical quarters:
| Fiscal 2005 | | Fiscal 2004 | | Fiscal 2003 |
Q4(a) | Q3 | Q2 | Q1 | | Q4 | Q3 | Q2 | Q1 | | Q4 | Q3 | Q2 | Q1 |
| (17 wks) | (12 wks) | (12 wks) | (12 wks) | | (16 wks) | (12 wks) | (12 wks) | (12 wks) | | (16 wks) | (12 wks) | (12 wks) | (12 wks) |
| 13.8% | 6.5% | 5.8% | 4.5% | | 4.2% | 5.3% | 1.0% | (2.8)% | | (3.7)% | (5.8)% | (3.8)% | (7.0)% |
| | Fiscal 2006 | | Fiscal 2005 | | Fiscal 2004 |
| | | Q4 | Q3 | Q2 | Q1 | | Q4 | Q3 | Q2 | Q1 | | Q4 | Q3 | Q2 | Q1 |
| Same-store sales | | 2.0 % | 4.1% | 6.7% | 6.4% | | 7.0% | 6.5% | 5.7% | 5.8% | | 3.8% | 4.5% | 0.0% | (3.9)% |
(a)Hurricane Impact
Hurricane Rita impacted a number of our markets during the first quarter of fiscal 2006 as we were forced to temporarily close many stores due to mandatory evacuations and subsequent power outages. We experienced a store closure impact of 236 store days of operations due to Hurricane Rita. One unit in Port Arthur, Texas suffered permanent damage and the lease has been terminated. All other restaurants impacted by the storm suffered minimal damage and were reopened soon after the storm passed. The store closure impact on our results of operations was offset by increased traffic at certain units and catering events relating to the hurricane relief effort.
RESULTS OF OPERATIONS | Reflects 17 weeks of sales activity. Excluding the seventeenth week for comparability with the sixteen-week fourth quarter of 2004, the same-store sales change for the fourth quarter of fiscal 2005 was an increase of 7.2%. |
Fiscal 2006 (52 weeks) compared to Fiscal 2005 (53 weeks)
Sales increased approximately $6.2 million, or 2.0%, in fiscal 2006 compared to fiscal 2005. On a same-store basis, sales increased approximately $8.5 million, or 2.7%. Excluding the additional, or 53rd, week of sales included in fiscal year 2005, same-store sales growth for fiscal 2006 was approximately $14.2 million, or 4.6%.
Food costs increased approximately $1.3 million, or 1.5%, in fiscal 2006 compared to fiscal 2005 due to slightly higher commodity prices for seafood and produce, which were partially offset by slightly lower commodity prices for poultry and dairy. Our promotion of combination meals have provided favorable cost structures. As a percentage of sales, food costs decreased 0.1%, from 26.7% in fiscal 2005 to 26.6% in fiscal 2006.
Payroll and related costs decreased $1.2 million, or 1.1%, in fiscal 2006 compared to fiscal 2005. As a percentage of sales, these costs decreased 1.0%, from 35.6% in fiscal 2005 to 34.6% in fiscal 2006, due to operational focus and lower workers’ compensation expense, including the effects of reduced actuarial estimates of potential losses resulting from favorable claims experience.
Other operating expenses increased by $5.0 million, or 7.7%, for fiscal 2006 compared to fiscal 2005. As a percentage of sales these costs increased 1.1%, and were driven by higher utilities costs as well as higher restaurant supply and repair and maintenance costs, while being partially offset by a $1.1 million insurance recovery associated with a business interruption claim due to Hurricane Rita, recorded as a reduction to operating expense in the fourth quarter of fiscal 2006. Subsequent to year-end, we collected approximately $1.0 million related to this claim.
Depreciation and amortization expense increased by approximately $0.7 million, or 4.7%, in fiscal 2006 compared to fiscal 2005 due to increased capital expenditures in fiscal 2006.
Relocation and voluntary severance costs decreased by $0.7 million in fiscal 2006 compared to fiscal 2005 since no costs of this nature were incurred during fiscal 2006. During fiscal 2005, we incurred costs of approximately $0.7 million related to the relocation of our corporate headquarters to Houston, Texas.
General and administrative expenses increased by approximately $2.1 million, or 10.6%, in fiscal 2006 compared to fiscal 2005. As a percentage of sales, general and administrative expenses increased to 6.9% in fiscal 2006 compared to 6.4% in fiscal 2005, primarily due to increased staffing and share-based compensation expenses.
The provision for asset impairments and restaurant closings increased by approximately $0.5 million in fiscal 2006 compared to fiscal 2005. This change is primarily due to asset impairment and lease settlement costs in fiscal 2006.
The net loss (gain) on disposition of property and equipment increased by approximately $1.6 million in fiscal 2006 compared to fiscal 2005. This change is primarily due to the retirement of obsolete equipment that was identified during our fiscal 2006 review of restaurant equipment at all of our restaurants and at our Houston Service Center.
Interest expense, net, decreased approximately $10.7 million, or 93.9%, in fiscal 2006 compared to fiscal 2005. This decrease was primarily due to an $8.0 million write-off of the unamortized portion of the discount associated with convertible subordinated notes upon their conversion to common stock in August 2005, in combination with the elimination of outstanding debt and lower interest rates following the refinancing of our outstanding indebtedness in 2005.
Other income, net, increased by approximately $0.3 million in fiscal 2006 compared to fiscal 2005, primarily due to the increase in prepaid state sales tax discounts and the write-off of expired gift certificates.
The income tax benefit for fiscal 2006 primarily represents the recognition of tax benefits for net operating losses not recognized in previous years due to uncertainty regarding our ability to realize them. (See Note 3, “Income Taxes”, of the Notes to Consolidated Financial Statements in Item 8 of this report). Unlike recent fiscal years, when income tax expenses and benefits were not recognized due to unutilized net operating losses and related valuation allowance, our provision for income taxes in future periods will be reflective of the tax effect of the pre-tax income (losses) recognized in those periods once all of our net operating losses are fully utilized. Additionally, the recently-enacted Texas Franchise Tax will impact future income tax provisions.
The net loss from discontinued operations decreased by approximately $3.5 million in fiscal 2006 compared to fiscal 2005, principally because we no longer have any deferred financing costs or interest associated with closed stores in 2006.
Fiscal 2005 (53 weeks) Compared to Fiscal 2004 (52 weeks)
Sales increased $24.3$24.2 million, or 8.2%, in fiscal 2005 compared to fiscal 2004, $6.12004. Approximately $6.0 million of the increase is attributable to an additional, or 53rd, week of sales or a 53rd week included in fiscal year 2005 versus fiscal year 2004 which was 52 weeks in length. Excluding the additional week, same-store sales growth for fiscal 2005 was 6.1%6.3%. Marketing promotions, continued customer appeal of the new combination meals, and improved product and service execution all contributed to the Company’sour same-store sales growth.
All of the Company’sour sales during fiscal 2005 were characterized as same-store sales. In fiscal 2005, seven units were closed and reclassified to discontinued operations.
Cost of foodFood costs increased $6.4$6.3 million, or 8.0%, and waswere relatively flat as a percentage of sales in fiscal 2005 compared to fiscal 2004. Higher commodity prices for beef, seafood and fresh produce and dairy were slightly offset by lower poultry and dairy prices and the continued rollout of new combination meals with favorable costscost structures.
Payroll and related costs increased $2.5$2.3 million, or 2.2%2.1%, in fiscal 2005 compared to fiscal 2004. As a percentage of sales, payroll and related costs were 35.9%35.6% in fiscal 2005 compared to 37.9%37.8% in fiscal 2004. The decrease as a percentage of sales was primarily the result of a reduction in workerworkers’ compensation expense and enhanced productivity due to higher sales and effective labor deployment. The reduction in workersworkers' compensation expense was due to revised reserve requirements resulting from reductions in recent claims experience. Such favorable reserve revisions are not expected to recur in fiscal 2006. These reductions in expense were partially offset by greater store management compensation expense.
Other operating expenses increased $5.3$5.0 million, or 9.0%8.3%, in fiscal 2005 compared to fiscal 2004. As a percentage of sales, other operating expenses increased 0.2%. This increase was driven primarily by increasedremained flat. Increased advertising costs associated with the Company’sour television marketing campaign and increased utility costs due to rising natural gas prices which are expected to continue rising in fiscal 2006. These increases were partially offset by lower repairs and maintenance and insurance costs.
Depreciation and amortization expense decreased $1.2$1.3 million, or 7.4%8.0%, in fiscal 2005 compared to fiscal 2004. This decrease was a result of a reduction in the depreciable base of the Company’sour property and equipment.
Relocation and voluntary severance costs related to the relocation of theour corporate offices to Houston, Texas decreased approximately $0.2 million as the majority of the cost associated with the relocation included voluntary severance costs accrued for in fiscal 2004. The remaining relocation costs were expensed as incurred in fiscal 2005. See Note 6 of the Notes to Consolidated Financial Statements for more information.
General and administrative expenses increased $1.0$1.4 million, or 5.1%7.2%, in fiscal 2005 compared to fiscal 2004. This increase was driven primarily by professional service costs related to compliance with the Sarbanes-Oxley Act of 2002 and consulting fees associated with the implementation of new point-of-sale and accounting systems. As a percentage of sales, general and administrative expenses were 6.4%remained flat in fiscal 2005 compared to 6.6% in fiscal 2004.
The provision for asset impairmentsnet gain on disposition of property and restaurant closings/(gains on sales), netequipment decreased by $1.0approximately $0.3 million as a result of the significant impairment charges incurred in fiscal 20042005 compared to fiscal 2005. Fiscal 2005’s provision is the result of favorable adjustments of previously2004. This change was primarily due to a reduction in gains recorded provisions for two store locations and a gain on the sale of the San Antonio, Texas corporate office.obsolete equipment.
Interest expense, net, increased $3.5 million, or 43.8%44.1%, primarily due to a $7.9an $8.0 million write-off of the unamortized portion of the discount associated with the convertible subordinated notes, which were converted to common stock in August 2005. This increase iswas partially offset partially by a $4.4 million decrease in interest expense due primarily to the continued reduction in outstanding debt under the line of credit.
Other income, net, decreased $2.1approximately $1.5 million primarily due to gains on the sale of assetsrecognition in fiscal 2004 versus fiscal 2005. The Company owns several long-lived assets that are classified as “held for sale” asof a resultgain on a sales and leaseback transaction. (See Note 10, “Operating Leases”, of disposal activities that were initiated priorthe Notes to the initial applicationConsolidated Financial Statements in Item 8 of SFAS 144. Accordingly, gains and losses realized on the sales of these assets are classified as other income, net, in compliance with SFAS 121, under the transition guidance provided in Paragraph 51 of SFAS 144.this report).
The provision (benefit) for income taxes changed by approximately $3.0 million in fiscal 2005 included a $117,000 provision for alternative minimum tax.compared to fiscal 2004. For fiscal 2004, the Companywe recognized a $2.9 million tax benefit related to a reduction in the income tax valuation allowance triggered by the establishment of a deferred tax liability for the modification of the beneficial conversion feature on convertible subordinated debt. Additionally, because the Company’sour loss carryforward more than offset fiscal 2004 income from continuing operations, nowe did not provide for any income tax was provided forwith respect to this income.
The loss from discontinued operations decreased by $3.7$4.2 million in fiscal 2005 compared to fiscal 2004 primarily due to significant losses and impairments associated with discontinued operations incurred and taken in fiscal 2004 related to store closures. During fiscal 2005, impairments and losses associated with discontinued operations were offset by gains recognized on the sale of related properties.
Fiscal 2004 Compared to Fiscal 2003
Sales increased $6.1 million, or 2.1%, in fiscal 2004 compared to fiscal 2003. This increase was offset by a $1.8 million decrease in sales related to five stores closed prior to the adoption of the business plan, which were not reclassified as discontinued operations. Despite store closures and the effects of increased competition in the marketplace, sales performance has improved. Promotions, new combination meals, and improved product and service execution have all contributed to this overall increase in sales.
Cost of food increased $1.0 million, or 1.3%, principally due to the increase in sales in fiscal 2004 compared to fiscal 2003. Upward pressure on beef pricing due to lower production numbers, reduced cattle weights, and an overall higher demand has negatively impacted food cost. Despite general commodity increases in food pricing, specifically related to the beef and dairy markets, food costs have declined slightly. As a percentage of sales, cost of food was 26.8% in fiscal 2004 compared to 27.1% in fiscal 2003. Management's discipline in the utilization of monthly budgeting and protein tracking tools in combination with various promotional offerings have assisted in reducing food costs. More specifically, food costs have declined in a higher commodity climate due to improved execution at each location in combination with carefully selected entree offerings for promotions which overall have very attractive cost structures.
Payroll and related costs decreased $1.7 million, or 1.5%, in fiscal 2004 compared to fiscal 2003. As a percentage of sales, payroll and related costs were 37.9% in fiscal 2004 compared to 39.3% in fiscal 2003. The decrease was due to continued improvements made in labor deployment and efficiency as a result of various Company initiatives to better manage labor costs, offset by an increase in estimated workers' compensation costs.
Other operating expenses increased $4.1 million, or 7.4%, in fiscal 2004 compared to fiscal 2003. As a percentage of sales, other operating expenses increased 1.0%. The increase was primarily due to increased advertising expense resulting from the launch of the Company's new marketing campaign, featuring television advertising. The new
marketing campaign led to an increase in marketing costs. Higher cost of insurance coverage and related premiums also contributed to the increase in other operating expenses. These increases were primarily offset by a reduction in property tax expense due to store closures and related property sales.
Depreciation and amortization expense decreased $945,000, or 5.5%, in fiscal 2004 compared to fiscal 2003 due to fewer depreciable properties resulting from impairments and property sales.
Due to the current-year accrual of voluntary severance costs in relation to the relocation of the corporate offices from San Antonio, Texas, to Houston, Texas, voluntary severance costs increased by $860,000. See Note 6 “Current Accrued Expenses and Other Liabilities”, of the Notes to Consolidated Financial Statements for more information.
General and administrative expenses decreased $3.6 million, or 15.2%, in fiscal 2004 compared to fiscal 2003. This decrease was due to fewer regional management positions as a result of store closures. It is also a result of lower professional and consulting services fees associated with a fixed-asset cost-segregation study on tax depreciation and consulting fees related to the business plan, both of which occurred fiscal 2003. As a percentage of sales, general and administrative expenses were 6.6% in fiscal 2004 compared to 8.0% in fiscal 2003.
The provision for asset impairments and restaurant closings/(gains on sales), net decreased by $762,000 primarily due to a gain realized on the sale of a property which had been previously impaired, coupled with significant impairment charges incurred in the prior year. Fiscal 2004’s provision included write-downs to currently operating restaurants of $900,000 offset by a gain of $500,000 related to one property sale.
Interest expense increased $484,000, or 6.4%, due to the accelerated amortization of the subordinated debt discount resulting from the amended subordinated note agreements, coupled with an increase in the effective interest rate on outstanding debt prior to the debt refinancing in June 2004. Subsequent to the debt refinancing, interest expense has declined principally due to lower amortization of the discount on the restructured subordinated debt, coupled with the effect of a lower senior debt balance.
Other income decreased $4.4 million primarily due to gains on sales of assets recognized in the prior year, which reflected the sale of five previously closed stores. These gains were partially offset by a loan commitment fee expensed in fiscal 2003. The Company owns several long-lived assets that are classified as “held for sale” as a result of disposal activities that were initiated prior to the initial application of SFAS 144. Accordingly, gains and losses realized on the sales of these assets are classified as other income, net, in compliance with SFAS 121, under the transition guidance provided in Paragraph 51 of SFAS 144.
For fiscal 2004, the Company recognized a $2.9 million tax benefit related to a reduction in the income tax valuation allowance triggered by the establishment of a deferred tax liability for the modification of the beneficial conversion feature on its convertible subordinated debt. A $1.4 million tax benefit was recognized in fiscal 2003 as tax benefits associated with the Company’s operating losses were partially offset by the establishment of an income tax valuation allowance against the Company’s deferred tax assets.
The loss from discontinued operations decreased by $23.0 million principally due to numerous impairment charges incurred in the prior year on various locations which were closed as a part of the Company's business plan offset by ongoing periodic property maintenance costs incurred until the properties are sold.
EBITDA
The Company's operating performance is evaluated using several measures. One of those measures, EBITDA, is a non-GAAP financial measure that is derived from the Income (Loss) From Operations, which is a GAAP measurement. EBITDA has historically been used by the Company's lenders to measure compliance with certain financial debt covenants. The Company's Revolving Credit Facility generally defines EBITDA as the consolidated income (loss) from operations set forth in the Company's consolidated statements of operations before depreciation, amortization, other noncash expenses, interest expense, taxes, noncash income and extraordinary gains or losses, and other nonrecurring items of income or expense as approved by the required lenders. EBITDA is the denominator used in determining all of the financial covenant ratios that are measured against predefined limits for compliance under the Company’s Revolving Credit Facility. (See “Debt,” Note 8 of Notes to Consolidated Financial Statements). Noncompliance with any of the financial covenants would constitute an event of default under the Company’s Revolving Credit Facility, requiring the Company to obtain replacement financing to repay amounts owed under these agreements and to meet future working capital requirements. Management believes that such replacement financing would be available and that the cost of such financing would not have a significant effect on the Company’s liquidity or results of operations.
The Company believes that EBITDA provides a meaningful measure of liquidity, providing additional information regarding the Company’s cash earnings from ongoing operations and the Company’s ability to service its long-term debt and other fixed obligations.
EBITDA increased by $8.4 million from fiscal 2004 to 2005 compared to an increase of $5.6 million from fiscal 2003 to 2004. These net changes were due to various reasons noted above. Prior year amounts have been reclassified to conform to the current year presentation.
The following table reconciles the Company’s non-GAAP financial measure, EBITDA, with Income from Operations, prepared in accordance with GAAP.
| | | Fiscal Year Ended | |
| | | August 31, 2005 | | August 25, 2004 (As adjusted) | | August 27 2003 (As adjusted) | |
| | | (371 days) | | (364 days) | | (364 days) | |
| | | (In thousands) | |
| | | | | | | | |
| Income from operations | | $ | 19,753 | | $ | 8,238 | | | 1,142 | |
| Plus excluded items: | | | | | | | | | | |
| (Reversal of) provision for asset impairments and restaurant closings/(gains on sales), net | | | (632 | ) | | 413 | | | 1,175 | |
| Relocation and voluntary severance costs | | | 669 | | | 860 | | | - | |
| Depreciation and amortization | | | 15,054 | | | 16,259 | | | 17,204 | |
| Noncash executive compensation expense | | | - | | | 679 | | | 1,310 | |
| EBITDA | | $ | 34,844 | | $ | 26,449 | | $ | 20,831 | |
As noted previously, prior year amounts have been reclassified to conform to the current year presentation, including the applicable reclassifications of store activity discontinued in accordance with the implementation of the business plan. While the Company and many in the financial community consider EBITDA to be an important measure of operating performance, it should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance prepared in accordance with U.S. generally accepted accounting principles, such as operating income and net income. In addition, the Company's definition of EBITDA is not necessarily comparable to similarly titled measures reported by other companies.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents and Working CapitalShort-Term Investments
Cash and cash equivalents decreased by $522,000 and short-term investments decreasedincreased by $617,000$5.3 million from the end of the prior fiscal year2005 to August 31, 2005,30, 2006, primarily due to payments made to reduce the Company’s debt.cash flows from operations and proceeds from sales of properties, partially offset by debt repayment and capital expenditures.
The CompanyWorking Capital
We had a working capital deficit of $17.7 million as of August 30, 2006, which represented an $8.5 million improvement compared to $26.2 million as of August 31, 2005, compared2005. We expect to $24.0 million as of August 25, 2004. The decrease was primarily attributable to the use of cash, as the Company continued to pay down its debt. The Company'smeet our working capital requirements are expected to be met through cash flows from operations and availability under the Revolving Credit Facility.
Capital Expenditures
Capital expenditures for the fiscal year ended August 31, 2005,30, 2006 were $10.1approximately $15.9 million. Consistent with prior fiscal years, the CompanyWe primarily used most of itsour capital funds to maintain itsour investment in existing operating units. The Company again expectsWe expect to be able to fund all capital expenditures in fiscal 20062007 using cash flows from operations and the Revolving Credit Facility.our available credit. Under the Company’s newour credit facility, $25.0 million plus a limited unused prior-year carryover amount, subject to certain terms, are available for funding capital expenditures in fiscal 2006. The Company expects2007. We expect to spend approximately $16$20.0 million to $18$24.0 million on such capital expenditures in fiscal 2006.
DEBT
Revolving Credit Facility
On August 31, 2005, Luby’s, Inc.we entered into an amended and restated, $45.0 million unsecured Revolving Credit Facility (the “Revolving Credit Facility”) among Luby’s, Inc. andwith a syndicate of three independent banks. The Revolving Credit Facility may, subject to certain terms and conditions, be increased by an additional $15.0 million for a total facility size of $60.0 million. The Revolving Credit Facility allows for up to $10.0 million of the available credit to be extended in the form of letters of credit. The Revolving Credit Facility terminates, on, and all amounts owing thereunder must be repaid, on August 31, 2008.
At any time throughout the term of the loan, the Company hasfacility, we have the option to elect one of two bases of interest rates. One interest rate option is the greater of (a) the federal funds effective rate plus 0.5%, or (b) prime, plus, in either case, an applicable spread that ranges from 0% to 0.25% per annum. The other interest rate option is LIBOR (London InterBank Offered Rate) plus an applicable spread that ranges from 1.00% to 1.75% per annum. The applicable spread under each option is dependent upon certain measures of the Company’sour financial performance at the time of election.
The CompanyWe also payspay a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is also dependent upon the Company’sour financial performance, ranging from 0.25% to 0.35% per annum. The CompanyWe also isare obligated to pay certain fees in respect of any letters of credit issued as well as an administrative fee to the lender acting as administrative agent. Finally, the Company waswe were obligated to pay the lenders a one-time fee in connection with the closing of the Revolving Credit Facility.
The Revolving Credit Facility contains customary covenants and restrictions on the Company’sour ability to engage in certain activities, including financial performance covenants and limitations on capital expenditures, asset sales and acquisitions, and contains customary events of default. As of November 7, 2005, the Company wasAugust 30, 2006, we were in full compliance with all covenants.
All amounts owed by Luby’s, Inc.us under the Revolving Credit Facility are guaranteed by itsour subsidiaries.
The CompanyWe primarily used proceeds received on the sale of properties, operating cash flows, short-term investments and the new facility to pay off itsour prior term loan and prior line of credit. As of November 7, 2005, the Company had total debt of $12.5 millionAugust 30, 2006, no amounts were outstanding under the Revolving Credit Facility.
Additionally, asat August 30, 2006, we had a total of August 31, 2005, the Company had approximately $1.7$5.1 million committed under letters of credit through a separate arrangement.which have been issued as security for the payment of insurance obligations classified as accrued expenses on the balance sheet. An additional $4.9 million may be issued under letters of credit.
Conversion of Subordinated Notes
On August 31, 2005, Christopher J. Pappas, the Company’sour President and Chief Executive Office,Officer, and Harris J. Pappas, the Company’sour Chief Operating Officer, each voluntarily converted all of the convertible senior subordinated notes they held into our common stock of the Company.stock. Each of them converted $5.0 million principal amount of convertible senior subordinated notes at a conversion price of $3.10 per share into 1,612,903 shares of our common stock of the Company.stock. In connection with this conversion, the Companywe recognized a one time non-cash charge of approximately $8.0 million representing the write-off of the unamortized portion of the discount associated with the conversion feature of the convertible senior subordinated notes. The shares issued pursuant to the conversion were treasury shares that had previously been reserved for such a conversion.
COMMITMENTS AND CONTINGENCIES
Off-Balance-Sheet Arrangements
The Company hasWe have no off-balance-sheet structured financing arrangements.
Pending Claims
Three wage and hour investigations by the U.S. Department of Labor related to the application of wait staff tip pool sums have recently been consolidated in the Houston district. The Company has not yet received sufficient data to determine the financial impact to the Company, if any, or the probable outcome of the matter. As with all such matters, the Company intends to vigorously defend its position.
The Company is presently, and from time to time becomes, subject to claims and lawsuits arising in the ordinary course of business. In the opinion of management, the resolution of any pending legal proceedings will not have a material adverse effect on the Company's operations or consolidated financial position.
Surety Bonds
At August 31, 2005, surety bonds in the amount of $5.0 million have been issued as security for the payment of insurance obligations classified as accrued expenses and other liabilities on the balance sheet.
Contractual Obligations
At August 31, 2005, the Company30, 2006, we had contractual obligations and other commercial commitments as described below:
| | | Payments due by Period | |
| Contractual Obligations | | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | After 5 Years | |
| | | (In thousands) | |
| | | | | | | | | | | | |
| Long-term debt obligations | | $ | 13,500 | | $ | - | | $ | 13,500 | | $ | - | | $ | - | |
| Capital lease obligations | | | - | | | - | | | - | | | - | | | - | |
Operating lease obligations (a) | | | 37,651 | | | 4,203 | | | 7,933 | | | 6,964 | | | 18,451 | |
| Purchase obligations | | | - | | | - | | | - | | | - | | | - | |
| Other long-term obligations | | | - | | | - | | | - | | | - | | | - | |
| Total | | $ | 51,151 | | $ | 4,203 | | $ | 21,433 | | $ | 6,964 | | $ | 18,451 | |
| | | Payments due by Period | |
| Contractual Obligations | | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | After 5 Years | |
| | | (In thousands) | |
| | | | | | | | | | | | |
Operating lease obligations (a) | | $ | 35,088 | | $ | 4,343 | | $ | 7,962 | | $ | 6,777 | | $ | 16,006 | |
| | | Amount of Commitment by Expiration Period | | | Amount of Commitment by Expiration Period | |
| Other Commercial Commitments | | Total | | Fiscal Year 2005 | | Fiscal Years 2006-2007 | | Fiscal Years 2008-2009 | | Thereafter | | | Total | | Fiscal Year 2007 | | Fiscal Years 2008-2009 | | Fiscal Years 2010-2011 | | Thereafter | |
| | | (In thousands) | | | (In thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Letters of credit | | $ | 1,659 | | $ | 1,659 | | $ | - | | $ | - | | $ | - | | | $ | 5,107 | | $ | — | | $ | 5,107 | | $ | — | | $ | — | |
Surety bonds (b) | | | 4,997 | | - | | - | | - | | 4,997 | | |
| Total | | $ | 6,656 | | $ | 1,659 | | $ | - | | $ | - | | $ | 4,997 | | |
(a)Operating lease obligations contain rent escalations and renewal options ranging from five to thirty years. | Operating lease obligations contain rent escalations and renewal options ranging from five to thirty years. |
(b)
| Surety bonds serve as a means of collateral for certain prior year workers' compensation policies. These surety bonds have an effective date of June 1, 2002, and remain in full force and effect until cancelled. The Company expects to convert the surety bonds to letters of credit early in fiscalWe had no long-term debt, capital lease or purchase obligations at August 30, 2006. |
In addition to the commitments represented in the above tables, the Company enterswe enter into a number of cancelable and noncancelable commitments during the year. Typically, these commitments are for less than a year in duration and are generally focused on food inventory. The Company doesWe do not maintain any long-term or exclusive commitments or arrangements to purchase products from any single supplier. Substantially all of the Company'sour product purchase commitments are cancelable up to 30 days prior to the vendor's scheduled shipment date.
Long-term liabilities reflected in the Company'sour consolidated financial statements as of August 31, 2005,30, 2006 included deferred income taxes ($5.0 million), note payable ($28,000), amounts accrued for benefit payments under the Company'sour supplemental executive retirement plan ($337,000) andof $229,000, deferred compensation agreements ($304,000),of $124,000, accrued insurance reserves ($3.1 million),of $2.6 million, deferred rent liabilities ($4.1 million)of $3.7 million and reserves for restaurant closings ($14,000).of $336,000.
The Company isWe are also contractually obligated to the chief executive officerChief Executive Officer and the chief operating officerChief Operating Officer pursuant to employment agreements. See the section entitled “Affiliations and Related Parties -— Related Parties” for further information.
AFFILIATIONS AND RELATED PARTIES
Affiliations
The CompanyWe entered into an Affiliate Services Agreement effective August 31, 2001 with two companies, Pappas Partners, L.P. and Pappas Restaurants, Inc. (the “Pappas entities”), which are restaurant entities owned by Christopher J. Pappas and Harris J. Pappas, the Company’s CEOour Chief Executive Officer and COO,Chief Operating Officer, respectively. That agreement was amended on July 23, 2002 to limit the scope of expenditures therein to professional and consulting services because there had been a significant decline in the use of professional and consulting services from Pappas entities.services.
Additionally, on July 23, 2002, the Companywe entered into a Master Sales Agreement with the same Pappas entities. Through this agreement, the Companywe contractually separated the design and fabrication of equipment and furnishings from the Affiliate Services Agreement. The Master Sales Agreement covers the costs incurred for modifications to existing equipment, as well as custom fabrication, including stainless steel stoves, shelving, rolling carts, and chef tables. These items are custom-designed and built to fit the designated kitchens and are also engineered to give a longer service life than comparably manufactured equipment.
The pricing of equipment, repair, and maintenance is set and evaluated periodically and is considered by management to be primarily at or below market for comparable goods and services. To assist in periodically monitoring pricing of the transactions associated with the Master Sales Agreement and the Affiliate Services Agreement, the Finance and Audit Committee of the Company'sour Board of Directors has periodically in the past used independent valuation consultants. The Affiliate Services Agreement expired on December 31, 2005.
As part of the affiliation with the Pappas entities, the Company leaseswe lease a facility, the Houston Service Center, in which Luby's haswe have installed a centralized restaurant service center to support field operations. The building at this location has 22,253 square feet of warehouse space and 5,664 square feet of office space. Itspace and is leased from the Pappas entities by the Company at an approximate monthly rate of $0.24 per square foot. From this center, Luby'sour repair and service teams are dispatched to the Company'sour restaurants when facility or equipment maintenance and servicing are needed. The facility is also used for repair and storage of new and used equipment. The amountWe paid by the Companyapproximately $82,000, $88,000, and $82,000 in fiscal 2006, 2005, and 2004, respectively, pursuant to the terms of this lease was approximately $88,000, $82,000, and $79,000 for fiscal 2005, 2004, and 2003, respectively.lease.
The CompanyWe previously leased a location from an unrelated third party. Thatparty a location is used to house increased equipment inventories due to store closures under theour business plan. The CompanyWe considered it more prudent to lease this location rather than to pursue purchasing a storage facility, as itsgiven our strategy is to focus itsour capital expenditures on itsour operating restaurants. In a separate transaction, the third-party property owner sold the location to the Pappas entities during the fourth quarter of fiscal 2003, with the Pappas entities becoming the Company'sour landlord for that location effective August 1, 2003. The storage site complements the Houston Service Center with approximately 27,000 square feet of warehouse space at an approximate monthly rate of $0.21 per square foot. The amountWe paid by the Companyapproximately $67,000, $72,000, and $69,000 in fiscal 2006, 2005, and 2004, respectively, pursuant to the terms of this lease was approximately $72,000 and $69,000 for fiscal 2005 and 2004, respectivelylease.
In another separate contract, pursuant to the terms of a ground lease dated March 25, 1994, the Company paid rent to PHCG Investments for a Luby's restaurant the Company operated in Dallas, Texas, until that location was closed early in the third quarter of fiscal 2003. Christopher J. Pappas and Harris J. Pappas are general partners of PHCG Investments. Preceding the store's closure, the Company entered into a lease termination agreement with a third party unaffiliated with the Pappas entities. That agreement severed the Company's interest in the PHCG property in exchange for a payment of cash to the Company. At that time, the Company recognized a gain of $735,000 as “Other Income, Net,” which represented the excess of the cash received over the carrying amount of the Company’s investment in the related assets. The amount paid by the Company pursuant to the terms of this lease before its termination was approximately $42,000 in fiscal 2003. No costs were incurred under this lease in fiscal 2004 or 2005.
Late in the third quarter of fiscal 2004, ChristopherChris and Harris Pappas became limited partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas own a 50% limited partnership interest and a 50% general partnershipinterest. Neither of Messrs. Pappas own any interest in the general partner of the limited partnership. The general partner of the limited partnership controls the operational decisions of the partnership. One of the Company'sour restaurants has rented approximately 7% of the space in that center since July 1969. No changes were made to the Company'sour lease terms as a result of the transfer of ownership of the center to the new partnership. The amountWe paid by the Companyapproximately $266,000, $276,000 and $83,000 in fiscal 2006, 2005, and 2004, respectively, pursuant to the terms of this lease was approximately $167,000 and $56,000 in fiscal 2005 and 2004, respectively.lease.
Affiliated rents paid for the Houston Service Center, the separate storage facility, the Dallas property and the Houston property leases combined represented 8.4%9.8%, 5.6%8.8%, and 3.7%5.6% of total rents for continuing operations forin fiscal 2006, 2005, and 2004, and 2003, respectively.
The following table compares current and prior fiscal year-to-date charges incurred under the Master Sales Agreement, the Affiliate Services Agreement and affiliated property leases to the Company'sour total capital expenditures, as well as relative general and administrative expenses and occupancy and other operating expenses included in continuing operations:
| | | Year Ended | | | Year Ended | |
| | | August 31, 2005 | | August 25, 2004 | | August 27, 2003 | | | August 30, 2006 | | August 31, 2005 | | August 25, 2004 | |
| | | (371 days) | | (364 days) | | (364 days) | | | (364 days) | | (371 days) | | (364 days) | |
| | | (In thousands) | | | (In thousands) | |
| AFFILIATED COSTS INCURRED: | | | | | | | | | | | | | | | | | |
| General and administrative expenses - professional and other costs | | $ | 5 | | $ | 1 | | $ | - | | | $ | — | | $ | 5 | | $ | 1 | |
| Capital expenditures - custom-fabricated and refurbished equipment | | | 176 | | | 113 | | | 174 | | | | 107 | | | 174 | | | 113 | |
| Other operating expenses, including property leases | | | 345 | | | 170 | | | 136 | | | | 444 | | | 457 | | | 170 | |
| Total | | $ | 526 | | $ | 284 | | $ | 310 | | | $ | 551 | | $ | 636 | | $ | 284 | |
| RELATIVE TOTAL COMPANY COSTS: | | | | | | | | | | | | | | | | | | | | |
| General and administrative expenses | | $ | 20,750 | | $ | 19,748 | | $ | 23,301 | | | $ | 22,373 | | $ | 20,228 | | $ | 18,878 | |
| Capital expenditures | | | 10,058 | | | 8,921 | | | 9,057 | | | | 15,911 | | | 10,058 | | | 8,921 | |
| Other operating expenses | | | 64,796 | | | 59,447 | | | 55,342 | | | | 69,839 | | | 64,857 | | | 59,882 | |
| Total | | $ | 95,604 | | $ | 88,116 | | $ | 87,700 | | | $ | 108,123 | | $ | 95,143 | | $ | 87,681 | |
| AFFILIATED COSTS INCURRED AS A PERCENTAGE OF RELATIVE TOTAL COMPANY COSTS | | | | | | | | | | | | | | | | | | | | |
| Fiscal year to date | | | 0. 55 | % | | 0.32 | % | | 0.35 | % | | | 0.51 | % | | 0.67 | % | | 0.32 | % |
| Inception to date | | | 0.34 | % | | | | | | | |
Christopher J. Pappas, the Company’sour President and Chief Executive Officer, is a member of the Board of Directors of Amegy Bank, National Association, which is a lender under, and Documentation Agent of, the Revolving Credit Facility.
Related Parties
In June 2004, new two-year employment contracts were finalized forNovember 2005, Christopher and Harris Pappas. AsPappas entered into new employment agreements expiring in the past four years, they will bothAugust 2008. Both continue to devote their primary time and business efforts to Luby's, while maintaining their roles at Pappas Restaurants, Inc.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are described in Note 1, “Nature of Operations and Significant Accounting Policies,” of the Notes to the Consolidated Financial Statements.Statements in Item 8 of this report. The Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles. 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. We believeManagement believes the following are the Company’s critical accounting policies due to the significant, subjective and complex judgments and estimates used when preparing our consolidated financial statements. WeManagement regularly review ourreviews these assumptions and estimates with the Finance and Audit Committee of the Company’sour Board of Directors.
Income Taxes
The Company recordsWe record the estimated future tax effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carrybacks and carryforwards. The CompanyWe periodically reviewsreview the recoverability of tax assets recorded on the balance sheet and providesprovide valuation allowances as management deems necessary. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operateswe operate within multiple taxing jurisdictions and isare subject to audit in these jurisdictions. In management's opinion, adequate provisions for income taxes have been made for all years. Historically, the Company has been periodically reviewed by the Internal Revenue Service (“IRS”). The Company is periodically has reviewed our company. We recently settled an audit adjustment with the IRS in connection with the review of fiscal 2003, and we are currently under review for the 2003, 2002, 2001 and 2000 fiscal years. The IRS review may possiblycould result in a reduction of the deductions claimed on our returns and additional income taxes due. In August 2006, we settled an IRS audit of the 2003 fiscal year and agreed to a partial reduction of the loss claimed on the federal income tax return for the year. The result of the audit was a reduction of $7.4 million in the cumulative net operating losses ($10.2 million at August 31, 2005) that are currently being carried forward to offset future taxable income. The total net operating losses being carried forward after the IRS audit adjustment is approximately $12.5 million.
Impairment of Long-Lived Assets
The CompanyWe periodically evaluatesevaluate long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company estimatesWe estimate future cash flows expected to result from the use and possible disposition of the asset and will recognize an impairment loss when the sum of the undiscounted estimated future cash flows is less than the carrying amounts of such assets. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management's subjective judgments. The span of time for which future cash flows are estimated is often lengthy, which increases the sensitivity to assumptions made. 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 considersWe consider the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows or appraisals, if available.
Property Held for Sale
The CompanyWe also periodically reviewsreview long-lived assets against itsour plans to retain or ultimately dispose of properties. If the Company decideswe decide to dispose of a property, it will be moved to property held for sale and actively marketed. Property held for sale is recorded at amounts not in excess of what management currently expects to receive upon sale, less costs of disposal. The CompanyWe routinely monitorsmonitor the estimated value of property held for sale and recordsrecord adjustments to these values as required. The CompanyWe periodically measuresmeasure and analyzes itsanalyze our estimates against third-party appraisals.
Insurance and Claims
The Company self-insuresWe self-insure a significant portion of risks and associated liabilities under itsour employee injury, workersworkers’ compensation and general liability programs. The Company maintainsWe maintain insurance coverage with third party carriers to limit itsour per-occurrence claim exposure. AccruedWe have recorded accrued liabilities have been recordedfor self-insurance based upon analysis of historical data and actuarial estimates, and is reviewed by the Companywe review these amounts on a quarterly basis to ensure that the liability is appropriate.
The significant assumptions made by the actuary to estimate self-insurance reserves, including incurred but not reported claims, are as follows: (1) historical patterns of loss development will continue in the future as they have in the past (Loss Development Method), (2) historical trend patterns and loss cost levels will continue in the future as they have in the past (Bornhuetter-Ferguson Method), and (3) historical claim counts and exposures are used to calculate historical frequency rates and average claim costs are analyzed to get a projected severity (Frequency and Severity Method). The results of these methods are blended by the actuary to provide the reserves estimates. The third party actuary utilizes methods and assumptions that are in accordance with generally accepted actuarial practices and believes the conclusions reached are reasonable.
Actual workers’ compensation and employee injury claims expense may differ from estimated loss provisions. The company cannot make any assurances as to the ultimate level of claims under the in-house safety program or whetherare not known, and declines in incidence of claims as well as claims costs experiences or reductions in reserve requirements under the program willmay not continue in future periods.
Stock-Based Compensation
The Company accounts for its employee stock compensation plans using the intrinsic-value method of accounting set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and the related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. The pro forma disclosures presented in Note 12 - Employee Benefit Plans and Agreements use the fair value method of SFAS 123 to measure compensation expense for stock-based employee compensation plans.
The Company will adoptWe adopted the provisions of SFAS No. 123, “Share-Based Payments (Revised 2004)” (SFAS 123R), effective September 1, 2005. Among other things, SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement on theirutilizing the fair values on the date of the grant. See Note 12 - Employee1, “Employee Benefit Plans and Agreements -Agreements”, of the Notes to Consolidated Financial Statements in Item 8 of this report for additional information.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Emerging Issues Task Force (EITF”) reached a consensus on EITF 03-13, “Applying the ConditionsJuly 2006, FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Paragraph 42Income Taxes - An Interpretation of FABSFinancial Accounting Standards Board Statement No. 144109” (FAS 109) was issued. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in Determining Whether to Report Discontinued Operations,” whichthe financial statements. FIN 48 also provides guidance on howderecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to evaluate the discontinued operations criteria. The consensus should be applied inall tax positions related to income taxes subject to FAS 109. FIN 48 is effective for fiscal periodsyears beginning after December 15, 2004.2006. The Company plans to apply the consensusadopt this guidance effective for fiscal year 2006. The application is2008. We do not expectedexpect the adoption of this interpretation to have a significant effect on reporting of discontinued operations.
In October 2005, the FASB issued FASB Staff Position No. 13-1 (“FSP 13-1”), which addresses the accounting for rental costs associated with building and ground operating leases that are incurred during a construction period. The FASB decided that such rental costs incurred during a construction period shall be recognized as rental expense. A lessee shall cease capitalizing rental costs as of the effective date of FSP 13-1 for operating lease arrangements entered into prior to the effective date of FSP 13-1. The guidance in FSP 13-1 shall be applied to the first reporting period beginning after December 15, 2005. Early adoption is permitted for financial statements or interim financial statements that have not yet been issued. Because it has been the Company’s practice to charge rental costs during construction periods to expense, the adoption of FSP 13-1 will not have anmaterial impact on the Company’sour financial position, results of operations or cash flows.
In May 2005 the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections”. Statement 154 replaces APB No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Changes in Interim Financial Statements”. FASB No. 154 changes the accounting for, and reporting of, a change in accounting principle. FASB No. 154 requires retrospective application to prior period’s financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impractical to do so. FASB No. 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005.
INFLATION
The Company'sOur policy is to maintain stable menu prices without regard to seasonal variations in food costs. General increases in costs of food, wages, supplies, transportation and services make it necessary for the Companymay require us to increase itsour menu prices from time to time. To the extent prevailing market conditions allow, the Company intendswe intend to adjust menu prices to maintain profit margins.
FORWARD-LOOKING STATEMENTSItem 7A.Quantitative and Qualitative Disclosures About Market Risk
This Annual Report on Form 10-K contains statements thatWe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Form 10-K, other than statements of historical facts, are “forward-looking statements” for purposes of these provisions, including any statements regarding:
| · | the Company’s future operating results; |
| · | the Company’s future capital expenditures; |
| · | reducing the Company’s debt, including the Company’s liquidity and the sources and availability of funds to reduce its debt; |
| · | future sales of the Company’s assets and the gains or losses that the Company may recognize as a result of any such sale; and |
| · | the Company’s continued compliance with the terms of its Revolving Credit Facility. |
In some cases, you 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 the Company’s management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors
they believe are relevant. Although management believes that their assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of the Company’s control. The following factors, as well as the factors set forth in Item 1A of this Form 10-K and any other cautionary language in this Form 10-K, provide examples of risks, uncertainties, and events that may cause the Company’s financial and operational results to differ materially from the expectations described in the Company’s forward-looking statements:
| · | general business and economic conditions; |
| · | the impact of competition; |
| · | the Company’s operating initiatives; |
| · | fluctuations in the costs of commodities, including beef, poultry, seafood, dairy, cheese and produce; |
| · | increases in utility costs, including the costs of natural gas and other energy supplies; |
| · | changes in the availability and cost of labor; |
| · | the seasonality of the Company’s business; |
| · | changes in governmental regulations, including changes in minimum wages; |
| · | the affects of inflation; |
| · | the availability of credit; |
| · | unfavorable publicity relating to the Company’s operations, including publicity concerning food quality, illness or other health concerns or labor relations; and |
| · | the continued service of key management personnel. |
Each forward-looking statement speaks only as of the date of this Form 10-K, and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should be aware that the occurrence of the events described above and elsewhere in this Form 10-K could have material adverse effect on the Company’s business, results of operations, cash flows and financial condition.
| Quantitative and Qualitative Disclosures About Market Risk
|
Although the Company iswe are not currently using interest rate swaps, it haswe have previously used and may in the future use these instruments to manage cash flow risk on a portion of itsour variable-rate debt.
Item 8.
| Item 8.Financial Statements and Supplementary Data |
Report of Management
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, wemanagement conducted an evaluation of the effectiveness of our internal control over financial reporting as of August 31, 200530, 2006 based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of August 31, 2005.30, 2006.
Management’s assessment of the effectiveness of our internal control over financial reporting as of August 31, 200530, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.
| /s/Christopher J. Pappas | /s/Ernest Pekmezaris |
| Christopher J. Pappas | Ernest Pekmezaris |
| President and Chief Executive Officer | Senior Vice President and Chief Financial Officer |
LUBY'S, INC.
FINANCIAL STATEMENTS
Years Ended August 31, 2005, August 25, 2004 and August 27, 2003
with Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Luby's, Inc.
We have audited the accompanying consolidated balance sheets of Luby's, Inc. (The “Company”)(the Company) as of August 31, 2005,30, 2006 and August 25, 2004,31, 2005, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended August 31, 2005.30, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Luby's, Inc. at August 31, 200530, 2006 and August 25, 2004,31, 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 2005,30, 2006, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 21 to the consolidated financial statements, in 2005, the Companyfiscal 2006, Luby’s Inc. changed its method of accounting to recognize deferred taxes associatedfor share-based compensation in accordance with guidance provided in the beneficial conversion feature on the Company’s convertible subordinated debt.Statement of Financial Accounting Standards No. 123 (R), “Share-Based Payments”.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of August 31, 2005,30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report, dated November 4, 2005,6, 2006, expressed an unqualified opinion thereon.
| | /s/ERNST & YOUNG LLP |
| San Antonio, Texas | |
November 4, 20056, 2006 | |
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
The Board of Directors and Shareholders of Luby's, Inc.
We have audited management’s assessment included in the accompanying Report of Management, that Luby’s, Inc. (the Company) maintained effective internal control over financial reporting as of August 31, 2005,30, 2006, based on criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Luby’s, Inc.’sThe Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’sCompany’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Luby’s Inc. maintained effective internal control over financial reporting as of August 31, 2005,30, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Luby’s Inc. maintained, in all material respects, effective internal control over financial reporting as of August 31, 2005,30, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Luby’s, Inc. as of August 31, 200530, 2006 and August 25, 2004,31, 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended August 31, 200530, 2006 of Luby’s, Inc., and our report, dated November 4, 2005,6, 2006, expresses an unqualified opinion thereon.
| | /s/ERNST & YOUNG LLP |
| San Antonio, Texas | |
November 4, 20056, 2006 | |
Luby's, Inc.
Consolidated Balance Sheets
| | | August 31, 2005 | | August 25, 2004 (As adjusted) | | | August 30, 2006 | | August 31, 2005 | |
| | | (In thousands, except share data) | | | (In thousands, except share data) | |
| ASSETS | | | | | | | | | | | | |
| Current Assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 2,789 | | $ | 3,311 | | | $ | 9,715 | | $ | 2,789 | |
| Short-term investments (see Note 3) | | | 1,667 | | | 2,284 | | |
| Short-term investments | | | | — | | | 1,667 | |
| Trade accounts and other receivables, net | | | 151 | | | 101 | | | | 1,461 | | | 151 | |
| Food and supply inventories | | | 2,215 | | | 2,092 | | | | 2,392 | | | 2,215 | |
| Prepaid expenses | | | 1,639 | | | 1,028 | | | | 1,609 | | | 1,639 | |
| Deferred income taxes (see Note 4) | | | 865 | | | 1,073 | | |
| Deferred income taxes | | | | 1,212 | | | 865 | |
| Total current assets | | | 9,326 | | | 9,889 | | | | 16,389 | | | 9,326 | |
| Property, plant, and equipment, net (see Note 5) | | | 186,009 | | | 194,042 | | |
| Property and equipment, net | | | | 183,990 | | | 186,009 | |
| Property held for sale | | | 9,346 | | | 24,594 | | | | 1,661 | | | 9,346 | |
| Deferred income taxes | | | | 3,600 | | | — | |
| Other assets | | | 1,533 | | | 3,756 | | | | 1,111 | | | 1,533 | |
| Total assets | | $ | 206,214 | | $ | 232,281 | | | $ | 206,751 | | $ | 206,214 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | |
| Current Liabilities: | | | | | | | | | | | | | | |
| Accounts payable | | $ | 17,759 | | $ | 16,821 | | | $ | 10,932 | | $ | 12,534 | |
| Accrued expenses and other liabilities (see Note 6) | | | 17,720 | | | 17,073 | | |
| Accrued expenses and other liabilities | | | | 23,119 | | | 22,945 | |
| Deferred income taxes | | | | 52 | | | — | |
| Total current liabilities | | | 35,479 | | | 33,894 | | | | 34,103 | | | 35,479 | |
| Credit-facility debt (see Note 8) | | | 13,500 | | | 28,000 | | |
| Term debt (see Note 8) | | | - | | | 23,470 | | |
| Convertible subordinated notes, net - related party (see Note 8) | | | - | | | 2,091 | | |
| Other liabilities (see Note 7) | | | 7,910 | | | 10,215 | | |
| Deferred income taxes (see Note 4) | | | 5,039 | | | 5,061 | | |
| Credit-facility debt | | | | — | | | 13,500 | |
| Other liabilities | | | | 7,089 | | | 7,910 | |
| Deferred income taxes | | | | — | | | 5,039 | |
| Total liabilities | | | 61,928 | | | 102,731 | | | | 41,192 | | | 61,928 | |
| Commitments and Contingencies | | | | | | | | |
| SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | |
| Common stock, $.32 par value; authorized 100,000,000 shares, issued 27,610,708 shares and 27,410,567 shares at August 31, 2005 and August 25, 2004, respectively | | | 8,835 | | | 8,771 | | |
| Common stock, $0.32 par value; 100,000,000 shares authorized; 27,748,983 shares and 27,610,708 shares issued and outstanding at August 30, 2006 and August 31, 2005, respectively | | | | 8,880 | | | 8,835 | |
| Paid-in capital | | | 40,032 | | | 39,070 | | | | 41,699 | | | 40,032 | |
| Retained earnings | | | 131,023 | | | 186,480 | | | | 150,584 | | | 131,023 | |
| Less cost of treasury stock, 1,676,403 shares and 4,933,063 shares at August 31, 2005 and August 25, 2004, respectively | | | (35,604 | ) | | (104,771 | ) | |
| Less cost of treasury stock, 1,676,403 shares | | | | (35,604 | ) | | (35,604 | ) |
| Total shareholders' equity | | | 144,286 | | | 129,550 | | | | 165,559 | | | 144,286 | |
| Total liabilities and shareholders' equity | | $ | 206,214 | | $ | 232,281 | | | $ | 206,751 | | $ | 206,214 | |
SeeThe accompanying notes.notes are an integral part of these consolidated financial statements.
Luby's, Inc.
Consolidated Statements of Operations
| | | Year Ended | | | Year Ended | |
| | | August 31, 2005 | | August 25, 2004 (As adjusted) | | August 27, 2003 (As adjusted) | | | August 30, 2006 | | August 31, 2005 | | August 25, 2004 | |
| | | (In thousands except per share data) | | | (In thousands except per share data) | |
| | | | | | | | | | | | | | | |
| SALES | | $ | 322,151 | | $ | 297,849 | | $ | 291,740 | | | $ | 324,640 | | $ | 318,401 | | $ | 294,235 | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | |
| Cost of food | | | 86,280 | | | 79,923 | | | 78,921 | | | | 86,461 | | | 85,166 | | | 78,861 | |
| Payroll and related costs | | | 115,481 | | | 112,961 | | | 114,655 | | | | 112,220 | | | 113,435 | | | 111,103 | |
| Other operating expenses | | | 64,796 | | | 59,447 | | | 55,342 | | | | 69,839 | | | 64,857 | | | 59,882 | |
| Depreciation and amortization | | | 15,054 | | | 16,259 | | | 17,204 | | | | 15,747 | | | 15,042 | | | 16,353 | |
| Relocation and voluntary severance costs (see Note 6) | | | 669 | | | 860 | | | - | | |
| Relocation and voluntary severance | | | | — | | | 669 | | | 860 | |
| General and administrative expenses | | | 20,750 | | | 19,748 | | | 23,301 | | | | 22,373 | | | 20,228 | | | 18,878 | |
| (Reversal of) provision for asset impairments and restaurant closings/(gains on sales), net (see Note 9) | | | (632 | ) | | 413 | | | 1,175 | | |
| | | | 302,398 | | | 289,611 | | | 290,598 | | |
| Provision for asset impairments and restaurant closings | | | | 533 | | | 35 | | | — | |
| Net loss/(gain) on disposition of property and equipment | | | | 1,508 | | | (43 | ) | | (315 | ) |
| Total costs and expenses | | | | 308,681 | | | 299,389 | | | 285,622 | |
| INCOME FROM OPERATIONS | | | 19,753 | | | 8,238 | | | 1,142 | | | | 15,959 | | | 19,012 | | | 8,613 | |
| Interest expense | | | (11,636 | ) | | (8,094 | ) | | (7,610 | ) | | | (697 | ) | | (11,444 | ) | | (7,940 | ) |
| Other income, net | | | 574 | | | 2,689 | | | 7,069 | | | | 1,289 | | | 1,006 | | | 2,534 | |
| Income before income taxes | | | 8,691 | | | 2,833 | | | 601 | | |
| Provision (benefit) for income taxes (see Note 4) | | | 117 | | | (2,856 | ) | | (1,441 | ) | |
| Income before income taxes and discontinued operations | | | | 16,551 | | | 8,574 | | | 3,207 | |
| Provision (benefit) for income taxes | | | | (4,534 | ) | | 118 | | | (2,856 | ) |
| Income from continuing operations | | | 8,574 | | | 5,689 | | | 2,042 | | | | 21,085 | | | 8,456 | | | 6,063 | |
| Discontinued operations, net of taxes (see Note 9) | | | (5,126 | ) | | (8,811 | ) | | (31,763 | ) | |
| Discontinued operations, net of taxes | | | | (1,524 | ) | | (5,008 | ) | | (9,185 | ) |
| NET INCOME (LOSS) | | $ | 3,448 | | $ | (3,122 | ) | $ | (29,721 | ) | | $ | 19,561 | | $ | 3,448 | | $ | (3,122 | ) |
| Income per share from continuing operations: | | | | | | | | | | | | | | | | | | | | |
| Basic (see Note 15) | | $ | 0.38 | | $ | 0.25 | | $ | 0.09 | | |
| Assuming dilution(see Note 15) | | $ | 0.37 | | $ | 0.25 | | $ | 0.09 | | |
| Basic | | | $ | 0.81 | | $ | 0.37 | | $ | 0.27 | |
| Assuming dilution | | | $ | 0.77 | | $ | 0.36 | | $ | 0.27 | |
| Loss per share from discontinued operations: | | | | | | | | | | | | | | | | | | | | |
| Basic (see Note 15) | | $ | (0.23 | ) | $ | (0.39 | ) | $ | (1.41 | ) | |
| Assuming dilution (see Note 15) | | $ | (0.22 | ) | $ | (0.39 | ) | $ | (1.41 | ) | |
| Basic | | | $ | (0.06 | ) | $ | (0.22 | ) | $ | (0.41 | ) |
| Assuming dilution | | | $ | (0.06 | ) | $ | (0.21 | ) | $ | (0.41 | ) |
| Net income (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Basic (see Note 15) | | $ | 0.15 | | $ | (0.14 | ) | $ | (1.32 | ) | |
| Assuming dilution (see Note 15) | | $ | 0.15 | | $ | (0.14 | ) | $ | (1.32 | ) | |
| Basic | | | $ | 0.75 | | $ | 0.15 | | $ | (0.14 | ) |
| Assuming dilution | | | $ | 0.71 | | $ | 0.15 | | $ | (0.14 | ) |
| Weighted-average shares outstanding: | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 22,608 | | | 22,470 | | | 22,451 | | | | 26,024 | | | 22,608 | | | 22,470 | |
| Assuming dilution | | | 23,455 | | | 22,679 | | | 22,532 | | | | 27,444 | | | 23,455 | | | 22,679 | |
SeeThe accompanying notes.notes are an integral part of these consolidated financial statements.
Luby's, Inc.
Consolidated Statements of Shareholders' Equity
(In thousands)
| | | Common Stock | | | | | | | | Total | | | Common Stock | | | | | | | | Total | |
| | | Issued | | Treasury | | Paid-In | | Deferred | | Retained | | Shareholders' | | | Issued | | Treasury | | Paid-In | | Deferred | | Retained | | Shareholders' | |
| | | Shares | | Amount | | Shares | | Amount | | Capital | | Compensation | | Earnings | | Equity | | | Shares | | Amount | | Shares | | Amount | | Capital | | Compensation | | Earnings | | Equity | |
| Balance at August 28, 2002 (As adjusted) | | | 27,403 | | $ | 8,769 | | (4,970 | ) | $ | (105,557 | ) | $ | 35,697 | | $ | (1,989 | ) | $ | 219,323 | | $ | 156,243 | | |
| Balance at August 27, 2003 | | | | 27,403 | | $ | 8,769 | | (4,947 | ) | $ | (105,062 | ) | $ | 35,278 | | $ | (679 | ) | $ | 189,602 | | $ | 127,908 | |
| Net loss for the year | | | - | | - | | - | | - | | - | | - | | (29,721 | ) | | (29,721 | ) | | | | | | | | | | | | | | | | (3,122 | ) | | (3,122 | ) |
| Noncash stock compensation expense | | | - | | - | | - | | - | | - | | 1,310 | | - | | 1,310 | | |
| Common stock issued under nonemployee director benefit plans | | | - | | - | | 23 | | 495 | | (419 | ) | | - | | - | | 76 | | |
| Balance at August 27, 2003 (As adjusted) | | | 27,403 | | $ | 8,769 | | (4,947 | ) | $ | (105,062 | ) | $ | 35,278 | | $ | (679 | ) | $ | 189,602 | | $ | 127,908 | | |
| Net loss for the year | | | - | | - | | - | | - | | - | | - | | (3,122 | ) | | (3,122 | ) | |
| Noncash stock compensation expense | | | - | | - | | - | | - | | - | | 679 | | - | | 679 | | |
| Non-cash stock compensation expense | | | | | | | | | | | | | | | 679 | | | | | 679 | |
| Net change in value of beneficial conversion feature on the convertible subordinated notes, net of taxes | | | - | | - | | - | | - | | 4,045 | | - | | - | | 4,045 | | | | | | | | | | | | 4,045 | | | | | | | | 4,045 | |
| Common stock issued under nonemployee director benefit plans | | | - | | 2 | | 14 | | 291 | | (291 | ) | | - | | - | | 2 | | | | | | 2 | | 14 | | 291 | | (291 | ) | | | | | | | 2 | |
| Common stock issued under employee benefit plans | | | 8 | | - | | - | | - | | 38 | | - | | - | | 38 | | | | 8 | | | | | | | | 38 | | | | | | | | 38 | |
| Balance at August 25, 2004 (As adjusted) | | | 27,411 | | $ | 8,771 | | (4,933 | ) | $ | (104,771 | ) | $ | 39,070 | | $ | - | | $ | 186,480 | | $ | 129,550 | | |
| Balance at August 25, 2004 | | | | 27,411 | | $ | 8,771 | | (4,933 | ) | $ | (104,771 | ) | $ | 39,070 | | $ | | | $ | 186,480 | | $ | 129,550 | |
| Net income for the year | | | - | | - | | - | | - | | - | | - | | 3,448 | | 3,448 | | | | | | | | | | | | | | | | | 3,448 | | | 3,448 | |
| Common stock issued under nonemployee director benefit plans | | | 9 | | 3 | | 31 | | 655 | | (179 | ) | | - | | (393 | ) | | 86 | | | | 9 | | 3 | | 31 | | 655 | | (179 | ) | | | | (393 | ) | | 86 | |
| Common stock issued for conversion of subordinated debt | | | - | | - | | 3,226 | | 68,512 | | - | | - | | (58,512 | ) | | 10,000 | | | | | | | | 3,226 | | 68,512 | | | | | | | (58,512 | ) | | 10,000 | |
| Common stock issued under employee benefit plans | | | 191 | | 61 | | - | | - | | 1,141 | | - | | - | | 1,202 | | | | 191 | | 61 | | | | | | 1,141 | | | | | | | | 1,202 | |
| Balance at August 31, 2005 | | | 27,611 | | $ | 8,835 | | (1,676 | ) | $ | (35,604 | ) | $ | 40,032 | | $ | - | | $ | 131,023 | | $ | 144,286 | | | | 27,611 | | $ | 8,835 | | (1,676 | ) | $ | (35,604 | ) | $ | 40,032 | | $ | — | | $ | 131,023 | | $ | 144,286 | |
| Net income for the year | | | | — | | — | | — | | | — | | — | | | — | | 19,561 | | | 19,561 | |
| Common stock issued under nonemployee director benefit plans | | | | 16 | | 5 | | — | | | — | | 186 | | | — | | — | | | 191 | |
| Common stock issued under employee benefit plans | | | | 122 | | 40 | | — | | | — | | 1,046 | | | — | | — | | | 1,086 | |
| Share-based compensation expense | | | | — | | — | | — | | — | | 435 | | | — | | — | | | 435 | |
| Balance at August 30, 2006 | | | | 27,749 | | $ | 8,880 | | (1,676 | ) | $ | (35,604 | ) | $ | 41,699 | | $ | | | $ | 150,584 | | $ | 165,559 | |
SeeThe accompanying notes.notes are an integral part of these consolidated financial statements.
Luby's, Inc.
Consolidated Statements of Cash Flows
| | | Year Ended | |
| | | August 31, 2005 | | August 25, 2004 (As adjusted) | | August 27, 2003 (As adjusted) | |
| | | (In thousands) | |
| | | | | | | | |
| Cash flows from operating activities: | | | | | | | |
| Net income (loss) | | $ | 3,448 | | $ | (3,122 | ) | $ | (29,721 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | |
| Provision for asset impairments, net of gains on property sales - discontinued operations | | | 389 | | | 1,895 | | | 16,613 | |
| Provision for (reversal of) asset impairments and restaurant closings/(gains on sales), net | | | (189 | ) | | 727 | | | 1,821 | |
| Depreciation and amortization - continuing operations | | | 15,054 | | | 16,259 | | | 17,204 | |
| Depreciation and amortization - discontinued operations | | | (48 | ) | | 1,094 | | | 3,162 | |
| Amortization of discount on convertible subordinated notes | | | 7,909 | | | 2,020 | | | 1,090 | |
| Amortization of debt issuance cost | | | 2,345 | | | 302 | | | - | |
| Gain on disposal of property held for sale | | | - | | | - | | | (3,222 | ) |
| Loss (gain) on disposal of property and equipment | | | 624 | | | (2,154 | ) | | (3,364 | ) |
| Noncash nonemployee directors' fees | | | 86 | | | - | | | 76 | |
| Reduction in the amount of income tax valuation allowance required (Note 2) | | | - | | | (2,856 | ) | | (1,441 | ) |
| Noncash executive compensation expense | | | - | | | 679 | | | 1,310 | |
| Cash provided by operating activities before changes in operating assets and liabilities | | | 29,618 | | | 14,844 | | | 3,528 | |
| Changes in operating assets and liabilities: | | | | | | | | | | |
| (Increase) decrease in trade accounts and other receivables | | | (50 | ) | | 182 | | | (98 | ) |
| (Increase) decrease in food and supply inventories | | | (123 | ) | | (294 | ) | | 399 | |
| Decrease in income tax receivable | | | - | | | - | | | 7,245 | |
| (Increase) decrease in prepaid expenses | | | (611 | ) | | 2,457 | | | (1,818 | ) |
| Decrease (increase) in other assets | | | 2 | | | 408 | | | (201 | ) |
| Increase (decrease) in accounts payable | | | 938 | | | 2,292 | | | (6,589 | ) |
| Decrease in accrued expenses and other liabilities | | | (1,347 | ) | | (2,262 | ) | | (2,183 | ) |
| Increase in deferred income taxes | | | 186 | | | - | | | 4,545 | |
| Decrease in reserve for store closings | | | (486 | ) | | (1,163 | ) | | (210 | ) |
| Net cash provided by operating activities | | | 28,127 | | | 16,464 | | | 4,618 | |
| Cash flows from investing activities: | | | | | | | | | | |
| Proceeds from redemption of short-term investments | | | 617 | | | - | | | - | |
| Purchases of short-term investments | | | - | | | - | | | (2,285 | ) |
| Proceeds from disposal of property held for sale | | | 17,684 | | | 17,068 | | | 19,178 | |
| Proceeds from disposal of property, plant and equipment | | | - | | | 3,585 | | | 7,813 | |
| Purchases of property, plant and equipment | | | (10,058 | ) | | (8,921 | ) | | (9,057 | ) |
| Net cash provided by investing activities | | | 8,243 | | | 11,732 | | | 15,649 | |
| Cash flows from financing activities: | | | | | | | | | | |
| Repayment of debt | | | (45,970 | ) | | (104,290 | ) | | (26,889 | ) |
| Proceeds from issuance of debt | | | 8,000 | | | 64,200 | | | - | |
| Debt issuance cost | | | (124 | ) | | (3,920 | ) | | - | |
| Proceeds received on the exercise of employee stock options | | | 1,202 | | | 41 | | | - | |
| Net cash used in financing activities | | | (36,892 | ) | | (43,969 | ) | | (26,889 | ) |
| Net decrease in cash | | | (522 | ) | | (15,773 | ) | | (6,622 | ) |
| Cash and cash equivalents at beginning of year | | | 3,311 | | | 19,084 | | | 25,706 | |
| Cash and cash equivalents at end of year | | $ | 2,789 | | $ | 3,311 | | $ | 19,084 | |
| | | Year Ended | |
| | | August 30, 2006 | | August 31, 2005 | | August 25, 2004 | |
| | | (In thousands) | |
| | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income (loss) | | $ | 19,561 | | $ | 3,448 | | $ | (3,122 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | |
| Pro Provision for asset impairments, net of gains/losses on property sales | | | 1,871 | | | 824 | | | 468 | |
| Depreciation and amortization | | | 15,755 | | | 15,006 | | | 17,353 | |
| Amortization of discount on convertible subordinated notes | | | — | | | 7,909 | | | 2,020 | |
| Amortization of debt issuance cost | | | 466 | | | 2,345 | | | 302 | |
| Non-cash compensation expense | | | 191 | | | 86 | | | — | |
| Share-based compensation expense | | | 435 | | | — | | | 679 | |
| Income tax benefit | | | (4,759 | ) | | — | | | (2,856 | ) |
| Cash provided by operating activities before changes in operating assets and liabilities | | | 33,520 | | | 29,618 | | | 14,844 | |
| Changes in operating assets and liabilities: | | | | | | | | | | |
| (Increase) decrease in trade accounts and other receivables | | | (1,310 | ) | | (50 | ) | | 182 | |
| (Increase) decrease in food and supply inventories | | | (177 | ) | | (123 | ) | | (294 | ) |
| (Increase) decrease in prepaid expenses and other assets | | | (14 | ) | | (609 | ) | | 2,865 | |
| Increase (decrease) in accounts payable, accrued expenses and other liabilities | | | (6,424 | ) | | (223 | ) | | 30 | |
| Decrease in reserve for store-closings | | | | | | (486 | ) | | (1,163 | ) |
| Net cash provided by operating activities | | | 25,595 | | | 28,127 | | | 16,464 | |
| Cash flows from investing activities: | | | | | | | | | | |
| Proceeds from redemption/maturity of short-term investments | | | 1,667 | | | 617 | | | — | |
| Proceeds from disposal of assets and property held for sale | | | 7,989 | | | 17,684 | | | 20,653 | |
| Purchases of property and equipment | | | (15,911 | ) | | (10,058 | ) | | (8,921 | ) |
| Net cash provided by investing activities | | | (6,255 | ) | | 8,243 | | | 11,732 | |
| Cash flows from financing activities: | | | | | | | | | | |
| Repayment of debt | | | (15,500 | ) | | (45,970 | ) | | (104,290 | ) |
| Proceeds from issuance of debt | | | 2,000 | | | 8,000 | | | 64,200 | |
| Debt issuance cost | | | — | | | (124 | ) | | (3,920 | ) |
| Proceeds received on the exercise of employee stock options | | | 1,086 | | | 1,202 | | | 41 | |
| Net cash used in financing activities | | | (12,414 | ) | | (36,892 | ) | | (43,969 | ) |
| Net increase (decrease) in cash | | | 6,926 | | | (522 | ) | | (15,773 | ) |
| Cash and cash equivalents at beginning of year | | | 2,789 | | | 3,311 | | | 19,084 | |
| Cash and cash equivalents at end of year | | $ | 9,715 | | $ | 2,789 | | $ | 3,311 | |
SeeThe accompanying notes.notes are an integral part of these consolidated financial statements.
Luby's, Inc.
Notes to Consolidated Financial Statements
Fiscal Years 2006, 2005 2004 and 20032004
Note 1.
| Note 1.Nature of Operations and Significant Accounting Policies |
Nature of Operations
Luby's, Inc. is based in Houston, Texas. As of August 31, 2005,30, 2006, the Company owned and operated 131128 restaurants, with 123121 in Texas and the remainder in four other states. The Company's restaurant locations are convenient to shopping and business developments as well as to residential areas. Accordingly, the restaurants appeal primarily to shoppers, travelers, store and office personnel at lunch and to families at dinner.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Luby's, Inc. and its wholly owned subsidiaries. Luby's, Inc. was restructured into a holding company on February 1, 1997, at which time all of the operating assets were transferred to Luby's Restaurants Limited Partnership, a Texas limited partnership composed of two wholly owned, indirect corporate subsidiaries of the Company. All restaurant operations are conducted by the partnership. Unless the context indicates otherwise, the word “Company” as used herein includes Luby's, Inc., the partnership, and the consolidated corporate subsidiaries of Luby's, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments such as money market funds that have a maturity of three months or less. Amounts receivable from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction.
Inventories
The food and supply inventories are stated at the lower of cost (first-in, first-out) or market.
Property Held for Sale
Property held for sale is recorded at amounts not in excess of what management currently expects to receive upon sale, less costs of disposal. The Company routinely monitors the estimated value of property held for sale and records adjustments to these values as required. For certain assets impaired, the Company may record subsequent adjustments for increases in fair value, but not in excess of cumulative losses previously recognized.
Impairment of Long-Lived Assets
Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company evaluates impairments on a restaurant-by-restaurant basis and uses three or more years of negative cash flows and other market conditions as indicators of impairment.
Debt Issuance Costs
Debt issuance costs include costs incurred in connection with the arrangement of long-term financing agreements. These costs are amortized using the effective interest method over the respective term of the debt to which they specifically relate.
Financial Instruments
The estimated fair value of financial instruments held by the Company approximates the carrying value.
Self-Insurance Accrued Expenses
The Company self-insures a significant portion of expected losses under ourits workers' compensation, work injury, and general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred claims, both reported and not yet reported. These recorded estimated liabilities are based on
judgments and independent actuarial estimates, which include the use of claim-development factors based on loss history; economic conditions; the frequency or severity of claims and claim development patterns; and claim reserve, management, and settlement practices.
Revenue Recognition
Revenue from restaurant sales is recognized when food and beverage products are sold. Unearned revenues are recorded as a liability for dining cards that have been sold but not yet redeemed and are recorded at their expected redemption value. When dining cards are redeemed, revenue is recognized and unearned revenue is reduced.
Advertising Expenses
Advertising costs are expensed as incurred. Management changed its strategic focus in fiscal 2004 to an increased emphasis in this area. Total advertising expense was $6.3$6.7 million, $4.1$6.7 million, and $1.1$4.4 million in fiscal 2006, 2005 2004, and 2003,2004, respectively, of which $91,000, $198,000,$24,000, $167,000 and $158,000,$258,000, in fiscal 2006, 2005 2004, and 2003,2004, respectively, related to stores included in discontinued operations and was reclassified accordingly.
Depreciation and Amortization
Property plant and equipment are recorded at cost. The Company depreciates the cost of plant and equipment over theirits estimated useful liveslife using the straight-line method. Leasehold improvements are amortized over the lesser of their estimated useful lives or the related lease terms. Depreciation of buildings is provided on a straight-line basis over the estimated useful lives (generally 20 to 33 years, not to exceed 25 years for buildings located on leased properties).
Operating Leases
The Company leases restaurant and administrative facilities and administrative equipment under operating leases. Building lease agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for a percentage of sales in excess of specified levels. Contingent rental expenses are recognized prior to the achievement of a specified target, provided that the achievement of the target is considered probable. Most of ourthe Company’s lease agreements include renewal periods at the Company’s option. We recognizeThe Company recognizes rent holiday periods and scheduled rent increases on a straight-line basis over the lease term beginning with the date the Company takes possession of the leased space. We recordThe Company records tenant improvement allowances and rent holidays as deferred rent expense on the consolidated statements of operations.
Income Taxes
Deferred income taxes are computed using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In management's opinion, adequate provisions for income taxes have been made for all years. Historically, the CompanyInternal Revenue Service (“IRS”) has been periodically reviewed by the Internal Revenue Service.Company. The Company is currently under review for the 2003, 2002, 2001 and 2000 fiscal years.
Discontinued Operations
In August 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company was required to adopt SFAS No. 144 as of August 29, 2002. The adoption of SFAS No. 144 extended the reporting of discontinued operations to all components of an entity from a segment of an entity. Beginning in fiscal 2003, all qualifying disposal plans were reported as discontinued operations, and operations related to those disposals in prior years were reclassified as required. The results of disposal plans prior to the adoption continue to be included in continuing operations for all periods presented.
Stock-Based Compensation
EmployeeThe Company adopted the provisions of SFAS No. 123, “Share-Based Payments (Revised 2004)” (“SFAS 123R”), effective September 1, 2005. Among other things, SFAS 123R eliminates the ability to account for stock-based compensation expense underusing APB 25 and requires that such transactions be recognized as compensation cost in the stock option plans is reported only if options are granted below market price at grant date in accordance with the intrinsic value method of Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations by accounting standards setters. When the exercise price of the Company’s employee stock options equals the market price of the underlying stockincome statement based on their fair values on the date of the grant, no compensation expense is recognized on options granted. Compensation expense for non-vested stock awards is based on the market price of the stock on the date of grantgrant. See Note 11, “Employee Benefit Plans and is recognized ratably over the service period of the award.Agreements”, below.
Earnings Per Share
The Company presents basic income (loss) per common share and diluted income/loss per common share in accordance with SFAS No. 128, “Earnings Per Share.” Basic income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding during each period presented. In fiscal years 2005 2004, and 2003,2004, dilutive shares had a minimal effect on income (loss) per share.
Accounting Periods
The Company's fiscal year generally consists of 13 four-week periods ending on the last Wednesday in August. Fiscal year 2005 consistsconsisted of 12 four-week periods and one five-week period.
Use of Estimates
In preparing financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from these estimates.
Reclassifications
Store management compensation has been reclassified from “Other Operating Expenses” to “Payroll and Related Costs” to provide comparability to financial results reported by our peers in the industry. All prior period results reported have been reclassified to conform to the current year presentation.
Below is a summary of the reclassified expenses:
| | | Fiscal Year Ended | |
| | | August 31, 2005 | | August 25, 2004 | | August 27, 2003 | |
| | | (371 days) | | (364 days) | | (364 days) | |
| | | (In thousands) | |
| Payroll and related costs | | | | | | | |
| Payroll and related costs (previous classification) | | $ | 81,759 | | $ | 82,163 | | $ | 83,676 | |
| Manager compensation reclassification | | | 33,722 | | | 30,798 | | | 30,979 | |
| Payroll and related costs (as reported) | | $ | 115,481 | | $ | 112,961 | | $ | 114,655 | |
| Other operating expenses | | | | | | | | | | |
| Other operating expenses (previous classification) | | $ | 98,518 | | $ | 90,245 | | $ | 86,321 | |
| Manager compensation reclassification | | | (33,722 | ) | | (30,798 | ) | | (30,979 | ) |
| Other operating expenses (as reported) | | $ | 64,796 | | $ | 59,447 | | $ | 55,342 | |
The Company's business plan, as approved in fiscal 2003, called for the closure of approximately 50 locations. In accordance with the plan, the entire fiscal activity of the applicable stores closed after the inception of the plan havehas been reclassified to discontinued operations. For comparison purposes, prior fiscal years results related to these same locations have also been reclassified to discontinued operations. Certain other reclassifications of prior period results have been made to conform to the current year presentation.
New Accounting Pronouncements
SFASIn July 2006, FASB Interpretation (FIN) No. 123,48, “Accounting for Stock-Based Compensation, as amendedUncertainty in Income Taxes - An Interpretation of Financial Accounting Standards Board Statement No. 109” (FAS 109) was issued. FIN 48 clarifies the accounting for income taxes by SFAS 148, requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. The pro forma disclosures presented in Note 12 - Employee Benefit Plans and Agreements useprescribing the fair value method of SFAS 123minimum recognition threshold a tax position is required to measure compensation expense for stock-based employee compensation plans.
The Company expects to adopt the provisions of SFAS No. 123, “Share-Based Payments (Revised 2004)”, on September 1, 2005. Among other things, SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions bemeet before being recognized as compensation cost in the income statement at their fair values on the date of the grant. See Note 12 - Employee Benefit Plans and Agreements for additional information.
In November 2004, the Emerging Issues Task Force reached a consensus on EITF 03-13, “Applying the Conditions in Paragraph 42 of FABS Statement No. 144 in Determining Whether to Report Discontinued Operations,” whichfinancial statements. FIN 48 also provides guidance on howderecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to evaluate the discontinued operations criteria. The consensus should be applied inall tax positions related to income taxes subject to FAS 109. FIN 48 is effective for fiscal periodsyears beginning after December 15, 2004.2006. The Company plans to apply the consensusadopt this guidance effective for fiscal year 2006.2008. The application isCompany does not expectedexpect the adoption of this interpretation to have a significant effect on reporting of discontinued operations.
In October 2005, the FASB issued FASB Staff Position No. SFAS 13-1 (“FSP 13-1”), which addresses the accounting for rental costs associated with building and ground operating leases that are incurred during a construction period. The FASB decided that such rental costs incurred during a construction period shall be recognized as rental expense. A lessee should cease capitalizing rental costs as of the effective date of ESP 13-1. The guidance in FSP 13-1 shall be applied to the first reporting period beginning after December 15, 2005. Early adoption is permitted for financial statements or interim financial statements that have not yet been issued. A lessee shall cease capitalizing rental costs as of the effective date of FSP 13-1 for operating lease arrangements entered into prior to the effective date of FSP 13-1. Because it has been the Company’s practice to charge rental cost incurred during construction periods to expense, the adoption of FSP 13-1 will not have anmaterial impact on the Company’sits financial position, results of operations or cash flows.
In MayNote 2.Cash and Cash Equivalents and Short-Term Investments
The Company manages its cash and cash equivalents and short-term investments jointly in order to internally fund operating needs. Short-term investments as of August 31, 2005 consisted primarily of held-to-maturity time deposits, which were pledged as collateral for letters of credit.
| | | August 30, 2006 | | August 31, 2005 | |
| | | (In thousands) | |
| | | | | | |
| Cash and cash equivalents | | $ | 9,715 | | $ | 2,789 | |
| Short-term investments | | | — | | | 1,667 | |
| Total cash and cash equivalents and short-term investments | | $ | 9,715 | | $ | 4,456 | |
The Company's combined cash and cash equivalents and short-term investments balance increased to $9.7 million as of August 30, 2006, from $4.5 million as of August 31, 2005. The increase was primarily attributed to cash flows from operations and $8.0 million in proceeds from property held for sale, offset by purchases of assets of approximately $15.9 million and net debt repayments of $13.5 million.
Note 3.Income Taxes
The following is a summarization of deferred income tax assets and liabilities as of the FASB issued FASB Statement No. 154, Accounting Changescurrent and Error Corrections. Statement 154 replaces APB No. 20, Accounting Changes,prior fiscal year-end:
| | | August 30, 2006 | | August 31, 2005 | |
| | | (In thousands) | |
| | | | | | |
| Deferred long-term income tax liability | | $ | — | | $ | (5,039 | ) |
| Deferred short-term income tax liability | | | (52 | ) | | — | |
| Plus: Deferred short-term income tax asset | | | 1,212 | | | 865 | |
Deferred long-term income tax asset | | | 3,600 | | | — | |
| Net deferred income tax asset/(liability) | | $ | 4,760 | | $ | (4,174 | ) |
The following table details the categories of income tax assets and FASB Statement No. 3, Reporting Changesliabilities resulting from the cumulative tax effects of temporary differences as of the end of each period presented:
| | | August 30, 2006 | | August 31, 2005 | |
| | | (In thousands) | |
| Deferred income tax assets: | | | | | | | |
| Workers' compensation, employee injury, and general liability claims | | $ | 1,507 | | $ | 2,085 | |
| Deferred compensation | | | 2,471 | | | 2,277 | |
| Net operating losses | | | 4,503 | | | 10,235 | |
| General business credits | | | 1,087 | | | 940 | |
| Other | | | 2,653 | | | 1,345 | |
| Subtotal | | | 12,221 | | | 16,882 | |
| Valuation allowance | | | — | | | (13,577 | ) |
| Total deferred income tax assets | | | 12,221 | | | 3,305 | |
| Deferred income tax liabilities: | | | | | | | |
| Depreciation and amortization | | | 6,372 | | | 5,406 | |
| Other | | | 1,089 | | | 2,073 | |
| Total deferred income tax liabilities | | | 7,461 | | | 7,479 | |
| Net deferred income tax asset/(liability) | | $ | 4,760 | | $ | (4,174 | ) |
Relative only to continuing operations, the reconciliation of the expense (benefit) for income taxes to the expected income tax expense (benefit), computed using the statutory tax rate, was as follows:
| | | 2006 | | 2005 | | 2004 | |
| | | Amount | | % | | Amount | | % | | Amount | | % | |
| | | (In thousands and as a percent of pretax income) | |
| | | | | | | | | | | | | | |
| Income tax expense from continuing operations at the federal rate | | $ | 5,793 | | | 35.0 | % | $ | 3,001 | | | 35.0 | % | $ | 1,122 | | | 35.0 | % |
| Permanent and other differences | | | | | | | | | | | | | | | | | | | |
| Federal jobs tax credits | | | 39 | | | 0.2 | | | 130 | | | 1.5 | | | 51 | | | 1.6 | |
| Other permanent differences | | | 16 | | | 0.1 | | | (150 | ) | | (1.7 | ) | | 15 | | | 0.5 | |
| Change in valuation allowances | | | (10,382 | ) | | (62.7 | ) | | (2,863 | ) | | (33.4 | ) | | (4,044 | ) | | (126.1 | ) |
Income tax expense (benefit) from continuing operations | | $ | (4,534 | ) | | (27.4 | )% | $ | 118 | | | 1.4 | % | | (2,856 | ) | | (89.1 | )% |
For the fiscal year ended August 30, 2006, including both continuing and discontinued operations, the Company generated gross taxable income of approximately $12.4 million, which will be offset by net operating loss carryforwards from prior years. Current income taxes incurred consisted of income tax expense for the Alternative Minimum Tax (“AMT”) liability of approximately $251,000 for fiscal 2006. The AMT liability may be used as a credit in Interim Financial Statements. FASB No. 154 changes the accountingfuture if regular income tax exceeds future AMT. No current income tax was incurred during fiscal year 2004.
For the fiscal year ended August 31, 2005, including both continuing and discontinued operations, the Company generated gross taxable income of approximately $3.0 million which was offset by net operating loss carryforwards from prior years. However, the Company incurred an AMT liability of approximately $90,000 for fiscal year 2005. The AMT liability may be used as a credit in the future if regular income tax exceeds future AMT.
For fiscal years 2004 and reporting2003, including both continuing and discontinued operations, the Company generated net operating loss carryforwards of approximately $4.0 million and $31.7 million, respectively, which will fully expire in 2024 and 2023, respectively, if not utilized. The balance of the net operating loss carryovers at the end of fiscal year 2005 was approximately $32.3 million; however, as described below, the net operating loss carryforwards were reduced as a change in accounting principle. FASB No. 154 requires retrospective application to prior period’s financial statementsresult of voluntary changes in accounting principlean IRS audit. At the end of fiscal 2006, remaining federal net operating loss carryovers were approximately $12.5 million.
The tax benefits of the operating losses and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impractical to do so. FASB No. 154 is effectiveother deferred tax assets for accounting changes and corrections of errorsbook purposes in fiscal years beginning after December 15, 2005.
Note 2.
| Change in Method2004 and 2003 were netted against a valuation allowance because loss carrybacks were exhausted with the fiscal 2002 tax filing and the future realization of loss carryforwards and the reversal of Accounting for Deferred Income Taxes Related to the Beneficial Conversion Feature of Subordinated Debt
|
In September 2005, the FASB approved EITF Issue 05-8, “Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature” (“EIFT 05-8”). EITF 05-8 provides (i) that the recognition of a beneficial conversion feature creates a difference between the book basis and tax basis (“basis difference”) of a convertible debt instrument, (ii) that basis difference is a temporary difference for which a deferred tax liability should be recorded and (iii) the effect of recognizing the deferred tax liability should be charged to equity in accordance with SFAS No. 109. EITF 05-8 is effective for financial statements for periods beginningassets were uncertain. For book purposes after December 15, 2005, and must be adopted through retrospective application to all periods presented, with early adoption permitted. As a result, EITF 05-8 applies to debt instruments that were converted or extinguished in prior periods as well as to those currently outstanding. The Company has adopted EITF 05-8 and applied it retrospectively to all periods presented herein and all prior periods. Accordingly, effective fiscal year 2001, a deferred2004, tax liability has been recorded,expense and benefits were offset by a charge to paid-in capital, foragainst the temporary difference created by the beneficial conversion feature recognized in connection with the Company’s convertible subordinated debt. The tax effect of subsequent changes to the beneficial conversion feature have also been recorded to the deferred tax liability, with offsetting entries to paid-in capital or income tax expense/benefit, as appropriate.
The retrospective adoption of EITF 05-8 had no impact on periods prior to fiscal 2001. Adjustments for fiscal years 2002 and 2001 included income tax benefits of approximately $169,000 and $28,000, respectively, with commensurate reductions in losses from continuing operations and net losses reported for those years.valuation allowance. Tax benefits of $2.9 million in fiscal 2004 and $1.4 million in fiscal 2003 were realized as a result of reductions in our income tax valuation allowance by the equivalent amount that our deferred tax liabilities increased as a result of the adoption of EITF 05-8. There were no adjustments to05-8 “Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature”.
Because of the consolidated statementCompany’s continued financial profitability and expected future results of operations, forit was determined in fiscal year 2005 pertaining to2006 that it is now more likely than not that these tax assets are realizable and, accordingly, they were recognized as provided under Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes.” Consequently, during fiscal 2006, the applicationCompany offset $4.5 million in fiscal 2006 tax expenses against the valuation allowance. The remaining balance of the new standard. Following is a summary of the effects of the adjustments on the consolidated statements of operations for the two fiscal years ended August 25, 2004 (in thousands):
| Fiscal Year Ended August 25, 2004 | | Previously Reported | | Adjustments | | As adjusted | |
| | | | | | | | |
| Income before income taxes | | $ | 2,833 | | $ | - | | $ | 2,833 | |
| Benefit for income taxes | | | - | | | (2,856 | ) | | (2,856 | ) |
| Income from continuing operations | | | 2,833 | | | 2,856 | | | 5,689 | |
| Discontinued operations, net of taxes | | | (8,811 | ) | | - | | | (8,811 | ) |
| Net loss | | | (5,978 | ) | | 2,856 | | | (3,122 | ) |
| Income per share from continuing operations: | | | | | | | | | | |
| Basic | | | 0.13 | | | 0.12 | | | 0.25 | |
| Assuming dilution | | | 0.12 | | | 0.13 | | | 0.25 | |
| Loss per share from discontinued operations: | | | | | | | | | | |
| Basic | | | (0.39 | ) | | - | | | (0.39 | ) |
| Assuming dilution | | | (0.39 | ) | | - | | | (0.39 | ) |
| Net loss per share: | | | | | | | | | | |
| Basic | | | (0.27 | ) | | 0.13 | | | (0.14 | ) |
| Assuming dilution | | | (0.26 | ) | | 0.12 | | | (0.14 | ) |
| Fiscal Year Ended August 27, 2003 | | Previously Reported | | Adjustments | | As adjusted | |
| | | | | | | | |
| Income before income taxes | | $ | 601 | | $ | - | | $ | 601 | |
| Benefit for income taxes | | | - | | | (1,441 | ) | | (1,441 | ) |
| Income from continuing operations | | | 601 | | | 1,441 | | | 2,042 | |
| Discontinued operations, net of taxes | | | (31,763 | ) | | - | | | (31,763 | ) |
| Net loss | | | (31,162 | ) | | 1,441 | | | (29,721 | ) |
| Income per share from continuing operations: | | | | | | | | | | |
| Basic | | | 0.03 | | | 0.06 | | | 0.09 | |
| Assuming dilution | | | 0.03 | | | 0.06 | | | 0.09 | |
| Loss per share from discontinued operations: | | | | | | | | | | |
| Basic | | | (1.41 | ) | | - | | | (1.41 | ) |
| Assuming dilution | | | (1.41 | ) | | - | | | (1.41 | ) |
| Net loss per share: | | | | | | | | | | |
| Basic | | | (1.39 | ) | | 0.07 | | | (1.32 | ) |
| Assuming dilution | | $ | (1.39 | ) | $ | 0.07 | | $ | (1.32 | ) |
Following is a summary of the effects of these adjustments on the consolidated balance sheetvaluation allowance was reversed as of August 25, 2004 (in thousands):
| August 25, 2004 | | Previously Reported | | Adjustments | | As adjusted | |
| | | | | | | | |
| Total assets | | $ | 232,281 | | $ | - | | $ | 232,281 | |
| Total liabilities | | | 102,731 | | | - | | | 102,731 | |
| Paid-in capital | | | 43,564 | | | (4,494 | ) | | 39,070 | |
| Retained earnings | | | 181,986 | | | 4,494 | | | 186,480 | |
| Total shareholders’ equity | | | 129,550 | | | - | | | 129,550 | |
| Total liabilities and shareholders’ equity | | $ | 232,281 | | $ | - | | $ | 232,281 | |
Note 3.
| Cash and Cash Equivalents and Short-Term Investments
|
The Company manages its cash and cash equivalents and short-term investments jointly in order to internally fund operating needs. Short-term investments as of August 31, 2005, and August 25, 2004, consisted primarily of held-to-maturity time deposits, which were pledged as collateral for four separate letters of credit. During 2005, approximately $617,000 was drawn against one of the letters of credit.
| | | August 31, 2005 | | August 25, 2004 | |
| | | (In thousands) | |
| | | | | | | | |
| Cash and cash equivalents | | $ | 2,789 | | $ | 3,311 | |
| Short-term investments | | | 1,667 | | | 2,284 | |
| Total cash and cash equivalents and short-term investments | | $ | 4,456 | | $ | 5,595 | |
The Company's combined cash and cash equivalents and short-term investments balance declined from $5.6 million as of August 25, 2004, to $4.5 million as of August 31, 2005. The decline was primarily attributed to an approximately $38.0 million net debt paydown in fiscal 2005 and purchases of assets of approximately $10.1 million, offset by proceeds from the sale of assets of closed stores of approximately $17.7 million (including $4.1 million in net proceeds from the sale of the San Antonio, Texas corporate office) and cash flows from operations.
The following is a summarization of deferred income tax assets and liabilities as of the current and prior fiscal year-end:
| | | August 31, 2005 | | August 25, 2004 | |
| | | (In thousands) | |
| | | | | | |
| Deferred long-term income tax liability | | $ | (5,039 | ) | $ | (5,061 | ) |
| Plus: Deferred short-term income tax asset | | | 865 | | | 1,073 | |
| Net deferred income tax liability | | $ | (4,174 | ) | $ | (3,988 | ) |
The following table details the categories of income tax assets and liabilities resulting from the cumulative tax effects of temporary differences as of the end of each period presented:
| | | August 31, 2005 | | August 25, 2004 (As adjusted) | |
| | | (In thousands) | |
| Deferred income tax assets: | | | | | |
| Workers' compensation, employee injury, and general liability claims | | $ | 2,085 | | $ | 2,552 | |
| Deferred compensation | | | 2,277 | | | 2,302 | |
| Net operating losses | | | 10,235 | | | 16,032 | |
| General business credits | | | 940 | | | 529 | |
| Other | | | 1,345 | | | 1,557 | |
| Subtotal | | | 16,882 | | | 22,972 | |
| Valuation allowance | | | (13,577 | ) | | (15,664 | ) |
| Total deferred income tax assets | | | 3,305 | | | 7,308 | |
| Deferred income tax liabilities: | | | | | | | |
| Depreciation and amortization | | | 5,406 | | | 6,657 | |
| Discount on subordinated debt | | | - | | | 2,768 | |
| Other | | | 2,073 | | | 1,871 | |
| Total deferred income tax liabilities | | | 7,479 | | | 11,296 | |
| Net deferred income tax liability | | $ | (4,174 | ) | $ | (3,988 | ) |
Relative only to continuing operations, the reconciliation of the expense (benefit) for income taxes to the expected income tax expense (benefit), computed using the statutory tax rate, was as follows:
| | | 2005 | | 2004 (As adjusted) | | 2003 (As adjusted) | |
| | | Amount | | % | | Amount | | % | | Amount | | % | |
| | | (In thousands and as a percent of pretax income) | |
| | | | | | | | | | | | | | |
| Income tax expense from continuing operations at the federal rate | | $ | 3,042 | | | 35.0 | % | $ | 991 | | | 35.0 | % | $ | 210 | | | 35.0 | % |
| Permanent and other differences | | | | | | | | | | | | | | | | | | | |
| Federal jobs tax credits | | | 130 | | | 1.5 | | | 51 | | | 1.8 | | | 76 | | | 12.6 | |
| Other permanent differences | | | (150 | ) | | (1.7 | ) | | 15 | | | 0.5 | | | 11 | | | 1.8 | |
| Alternative minimum tax | | | 117 | | | 1.3 | | | - | | | - | | | - | | | - | |
| Change in valuation allowance | | | (3,022 | ) | | (34.8 | ) | | (3,913 | ) | | (138.1 | ) | | (1,738 | ) | | (289.2 | ) |
| Income tax expense (benefit) from continuing operations | | $ | 117 | | | 1.3 | % | $ | (2,856 | ) | | (100.8) | % | $ | (1,441 | ) | | (239.8 | )% |
For the fiscal year ended August 31, 2005, including both continuing and discontinued operations, the Company generated gross taxablerecognized a previously unrecognized non-cash income of approximately $6.2 million which will be offset by net operating loss carryforwards from prior years. However, the Company will incur an Alternative Minimum Tax (“AMT”) liability of approximately $117,000 for fiscal year 2005. The AMT liability may be used as a credit in the future if regular income tax exceeds future AMT.
For the 2004 fiscal year, including both continuing and discontinued operations, the Company generated net operating losses of approximately $4.0 million, which will fully expire in 2024 if not utilized. Initial estimates of the losses for 2004 were approximately $14.1 million and were adjusted with the filing of the final tax return for that period.
For the 2003 fiscal year, including both continuing and discontinued operations, the Company generated gross taxable operating losses of approximately $31.7 million, which will fully expire in 2023 if not utilized. Due to the Company’s cumulative loss carryforward position, no federal income taxes were paid in fiscal 2004 or fiscal 2003.
The tax benefit of the operating losses for book purposes in fiscal years 2004 and 2003 was netted againstapproximately $4.8 million, which includes a valuation allowance because loss carrybacks were exhausted with the fiscal 2002 tax filing and the future realization$1.5 million favorable adjustment to that portion of loss carryforwards was uncertain. For book purposes in fiscal years after 2004, tax expense and benefits will be offset against the valuation allowance until such time asthat had previously been reserved for the future realizationestimated settlemet of loss carryforwards becomes reasonably certain. Tax benefits of $2.9 million in fiscal 2004 and $1.4 million inthe fiscal 2003 were realized as a result of reductions in our income tax valuation allowance by the equivalent amount that our deferred tax liabilities increased as a result of the adoption of EITF 05-8.IRS audit discussed below.
The Company's federal income tax returns have been periodically reviewed by the Internal Revenue Service. The Company's 2003, 2002, 2001, and 2000 returns are currently under review. The IRS review may possibly result in a reduction of the deductions claimed on the returns and additional income taxes due. In August 2006, the Company settled an IRS audit of the 2003 fiscal year and agreed to a partial reduction of the loss claimed on the federal income tax return for the year. The result of the audit was a reduction of $7.4 million in the cumulative net operating losses carried forward to offset future taxable income. The total net operating losses being carried forward after the IRS audit adjustment is approximately $12.5 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. The IRS review may possibly resultAmounts considered probable of settlement within one year have been included in a reduction of the cumulative net operating losses that are currently being carried forward to offset future taxable income.accrued expenses and other liabilities in the accompanying consolidated balance sheet.
Note 5.
| Note 4.Property Plant and Equipment |
The cost and accumulated depreciation of property plant and equipment at August 31, 2005,30, 2006 and August 25, 2004,31, 2005, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:
| | | August 31, 2005 | | August 25, 2004 | | Estimated Useful Lives | | | August 30, 2006 | | August 31, 2005 | | Estimated Useful Lives | |
| | | (In thousands) | | | | | (In thousands) | | | |
| Land | | $ | 50,791 | | $ | 51,536 | | | ─ | | | $ | 53,212 | | $ | 50,791 | | | ─ | |
| Restaurant equipment and furnishings | | | 109,488 | | | 107,481 | | | 3 to 15 years | | | | 103,855 | | | 109,488 | | | 3 to 15 years | |
| Buildings | | | 175,912 | | | 180,210 | | | 20 to 33 years | | | | 176,213 | | | 175,912 | | | 20 to 33 years | |
| Leasehold and leasehold improvements | | | 18,738 | | | 20,859 | | | Lesser of lease term or estimated useful life | | | | 17,389 | | | 18,738 | | | Lesser of lease term or estimated useful life | |
| Office furniture and equipment | | | 4,745 | | | 6,845 | | | 5 to 10 years | | | | 4,797 | | | 4,745 | | | 5 to 10 years | |
| Transportation equipment | | | 405 | | | 421 | | | 5 years | | |
| Construction in Progress | | | | 40 | | | 405 | | | 5 years | |
| | | | 360,079 | | | 367,352 | | | | | | | 355,506 | | | 360,079 | | | | |
| Less accumulated depreciation and amortization | | | (174,070 | ) | | (173,310 | ) | | | | | | (171,516 | ) | | (174,070 | ) | | | |
| Property and equipment | | $ | 186,009 | | $ | 194,042 | | | | | |
| Property and equipment, net | | | $ | 183,990 | | $ | 186,009 | | | | |
During fiscal 2006, the Company reviewed the status of restaurant equipment located at all of its restaurants and the capitalized restaurant equipment inventory at its Houston Service Center. In conducting this review, the Company evaluated the condition, location and usefulness of all such assets with respect to their valuation reflected in the Company’s consolidated statement of financial position. As a result of this evaluation, the Company recorded asset retirements, reducing property and equipment by $11.0 million in gross book value and $1.3 million in net book value in fiscal 2006. The resulting $1.3 million charge was reflected in the net loss/(gain) on disposition of property and equipment line item in the Consolidated Statement of Operations.
Note 6.
| Note 5.Current Accrued Expenses and Other Liabilities |
CurrentThe following table sets forth current accrued expenses and other liabilities as of the currentAugust 30, 2006 and prior fiscal year-end consisted of:August 31, 2005:
| | | August 31, 2005 | | August 25, 2004 | |
| | | (In thousands) | |
| | | | | | |
| Salaries, compensated absences, incentives, and bonuses | | $ | 5,115 | | $ | 4,736 | |
| Voluntary severance costs | | | 86 | | | 860 | |
| Taxes, other than income | | | 5,584 | | | 4,074 | |
| Accrued claims and insurance | | | 4,616 | | | 5,979 | |
| Rent, legal, and other | | | 2,202 | | | 1,424 | |
| Federal income tax payable | | | 117 | | | - | |
| | | $ | 17,720 | | $ | 17,073 | |
During the third quarter of fiscal 2004, Luby's announced it would consolidate all of the Company's corporate operations in one city by moving its corporate headquarters to Houston, Texas. This move was completed by the end of the 2004 calendar year. In conjunction with the move, the Company offered voluntary severance agreements to certain employees. In accordance with SFAS No. 88, “Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” the Company recorded, in fiscal year 2004, a liability and reported in accrued expenses and other liabilities and recognized an expense in the Company's consolidated statements of operations of $860,000 under voluntary severance costs. The liability and related expense represent the cost to the Company for the voluntary severance agreements accepted by employees during the fourth quarter of fiscal 2004. Subsequent relocation costs incurred were recognized in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” and expensed as incurred.| | | August 30, 2006 | | August 31, 2005 | |
| | | (In thousands) | |
| Salaries, compensated absences, incentives, and bonuses | | $ | 6,272 | | $ | 5,115 | |
| Operating expenses | | | 1,213 | | | 1,321 | |
| Unredeemed gift cards/certificates | | | 2,166 | | | 2,308 | |
| Taxes, other than income | | | 4,279 | | | 5,584 | |
| Accrued claims and insurance | | | 3,650 | | | 4,616 | |
| Rent, legal, income taxes and other | | | 5,539 | | | 4,001 | |
| | | $ | 23,119 | | $ | 22,945 | |
Recent favorable claims experience resulted in a significant reduction in the Company’s reserve requirements for accrued claims and insurance. The Company does not anticipate any significant adjustments to these reserve requirements for fiscal 2006.
Note 7.
| Other Long-term Liabilities
|
Note 6.Other Long-term Liabilities
The following table sets forth other long-term liabilities as of the currentAugust 30, 2006 and prior fiscal year-end consisted of:August 31, 2005:
| | | August 31, 2005 | | August 25, 2004 | | | August 30, 2006 | | August 31, 2005 | |
| | | (In thousands) | | | (In thousands) | |
| Workers compensation and general liability insurance reserve | | $ | 3,086 | | $ | 3,936 | | | $ | 2,631 | | $ | 3,086 | |
| Note payable | | | 28 | | | 28 | | |
| Deferred rent | | | 4,141 | | | 4,712 | | | | 3,741 | | | 4,141 | |
| Deferred compensation | | | 641 | | | 1,039 | | | | 353 | | | 641 | |
| Reserve for store closings | | | 14 | | | 500 | | | | 336 | | | 14 | |
| Other | | | | 28 | | | 28 | |
| | | $ | 7,910 | | $ | 10,215 | | | $ | 7,089 | | $ | 7,910 | |
Previous Senior Debt
During the mid-1990's, the Company entered into a revolving line-of-credit with a group of four banks. The line was primarily used for financing long-term objectives, including capital acquisitions and a stock repurchase program. These large demands of cash contributed to the capacity under that line-of-credit being fully exhausted in fiscal 2001, at which time the Company received an additional $10$10.0 million in subordinate financing from its CEOChief Executive Officer and COOChief Operating Officer (see “Subordinate—“Subordinated Notes” herein)below).
In the fourth quarter of fiscal 2004, the Company successfully refinanced its existing senior credit facility with two new instruments. The first was a secured, three-year line of credit for $50$50.0 million. Of the total line, only $36.3 million was originally drawn in connection with the refinancing. This instrument was funded by a new syndicate of four independent banks.
In addition to the line of credit, the Company concurrently negotiated another secured, three-year term loan for $27.9 million. The term loan was funded by a third-party financial institution not related to any member of the bank group that funded the line of credit.
Primarily proceeds from property sales of under performing units, along with cash flows from operations and new financing were used to pay down all remaining debt under the term loan through August 31, 2005.
Revolving Credit Facility
On August 31, 2005, Luby’s, Inc. entered into an amended and restated, $45.0 million unsecured Revolving Credit Facility (the “Revolving Credit Facility”) among Luby’s, Inc. and a syndicate of three independent banks. The Revolving Credit Facility may, subject to certain terms and conditions, be increased by an additional $15.0 million for a total facility size of $60.0 million. The Revolving Credit Facility allows for up to $10.0 million of the available credit to be extended in the form of letters of credit. The Revolving Credit Facility terminates, on, and all amounts owing thereunder must be repaid, on August 31, 2008.
At any time throughout the term of the loan,facility, the Company has the option to elect one of two bases of interest rates. One interest rate option is the greater of (a) the federal funds effective rate plus 0.5%, or (b) prime, plus, in either case, an applicable spread that ranges from 0% to 0.25% per annum. The other interest rate option is LIBOR (London InterBank Offered Rate) plus an applicable spread that ranges from 1.00% to 1.75% per annum. The applicable spread under each option is dependent upon certain measures of the Company’s financial performance at the time of election.
The Company also pays a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is also dependent upon the Company’s financial performance, ranging from 0.25% to 0.35% per annum. The Company also is obligated to pay certain fees in respect of any letters of credit issued as well as an administrative fee to the lender acting as administrative agent. Finally, the Company was obligated to pay to the lenders a one-time fee in connection with the closing of the Revolving Credit Facility.
The Revolving Credit Facility contains customary covenants and restrictions on the Company’s ability to engage in certain activities, including financial performance covenants and limitations on capital expenditures, asset sales and acquisitions, and contains customary events of default. As of November 7, 2005,3, 2006, the Company was in full compliance with all covenants.
All amounts owed by Luby’s, Inc. under the Revolving Credit Facility are guaranteed by its subsidiaries.
The Company’s total outstanding debt, if any, is due and payable on August 31, 2008, under the terms of the Revolving Credit Facility. As of August 30, 2006 and August 31, 2005, the total debt outstanding was $0.0 and $13.5 million, respectively. As of August 30, 2006, $39.9 million was available for borrowing.
At August 30, 2006, the Company had a total of approximately $5.1 million committed under letters of credit which have been issued as security for the payment of insurance obligations classified as accrued expenses on the balance sheet. The available amount, to be issued under letters of credit, was $4.9 million.
Subordinated Notes
In the fourth quarter of fiscal 2001, the Company's President and CEO,Chief Executive Officer, Christopher J. Pappas, and the Company's COO,Chief Operating Officer, Harris J. Pappas, loaned the Company a total of $10$10.0 million in exchange for convertible subordinated notes. The notes, as initially executed, bore interest at LIBOR plus 2.0%, payable quarterly. During the fourth quarter of fiscal 2004, these notes were modified in connection with the refinancing of the Company’s senior debt.
On June 7, 2005, the subordinated notes became convertible at a price of $3.10 per share for approximately 3.2 million shares of common stock. The market price of the Company's common stock on the commitment date (as determined by the closing price on the New York Stock Exchange) was $5.63 per share. The difference between the market price and the lowest possible strike price of $3.10, or $2.53 per share, multiplied by the relative number of convertible shares equals approximately $8.2 million, which represents the beneficial conversion feature. This amount was recorded as both a component of paid-in capital and a discount from the $10$10.0 million in subordinated notes. The note discount was being amortized using the effective interest method as non-cash interest expense over the original term of the subordinated notes. On August 31,30, 2005 the notes were converted into 3.2 million shares of the Company’s common stock, under the terms of the amended note agreements discussed further herein. Upon conversion, the unamortized book value of the discount ($7.9 million)of $8.0 million was written off with a charge to interest expense.
The shares issued pursuant to the conversion were treasury shares that had previously been reserved for such a conversion. At conversion, the excess of the book value of the treasury shares ($69 million)of $69.0 million over the $10 million debt converted resulted in a $59$59.0 million charge to retained earnings.
Schedule of Outstanding Debt
| | | Year Ended | |
| | | August 31, 2005 | | August 25, 2004 | |
| | | (In thousands) | |
| | | | | | |
| Line of credit | | $ | 13,500 | | $ | 28,000 | |
| Term loan | | | - | | | 23,470 | |
| Subordinated notes | | | - | | | 10,000 | |
| Total debt | | | 13,500 | | | 61,470 | |
| Less discount on subordinated notes | | | - | | | (7,909 | ) |
| Total | | $ | 13,500 | | $ | 53,561 | |
The Company’s total outstanding debt of $13.5 million as of August 31, 2005, is due and payable on August 31, 2008, under the terms of the Revolving Credit Facility.
Interest Expense
Total interest expense incurred for 2006, 2005, and 2004 and 2003 was $14.4$1.2 million, $10.3$14.4 million and $10.3 million, respectively. Interest paid approximated $0.8 million, $4.1 million $7.9 million, and $8.8$7.9 million in fiscal 2006, 2005 and 2004, and 2003, respectively. Unamortized debt issuance costs amounting to $2.3 million, incurred in connection with previous senior debt, were written off in the fourth quarter of 2005, upon the full repayment of that debt.
Interest expense of approximately $0.1 million, $2.7 million, $2.2 million, and $2.7$2.2 million in fiscal years 2006, 2005, 2004, and 2003,2004, respectively, has been allocated to discontinued operations based upon the debt that iswas required to be repaid as a result of the disposal transactions. After the initiation of the debt refinancing in the fourth quarter of fiscal 2004, only the interest relating to the term loan is reclassified to discontinued operations. No interest was capitalized on qualifying properties in 2006, 2005 2004, or 2003.2004.
Note 9.
| Note 8.Impairment of Long-Lived Assets and Store Closings /Discontinued Operations |
Impairment of Long-Lived Assets and Store Closings
In accordance with Company guidelines, management periodically reviews the financial performance of each store for indicators of impairment or indicators that closure would be appropriate. Where indicators are present, such as three full fiscal years of negative cash flows or other unfavorable market conditions, the carrying values of assets are written down to the estimated future discounted cash flows or fully written off in the case of negative cash flows anticipated in the future. Estimated future cash flows are based upon regression analyses generated from similar Company restaurants, discounted at the Company's weighted-average cost of capital.
Estimated lease settlements under the Company’s 2001 disposal plan were originally charged to expense under “Provision for Asset Impairments and Restaurant Closings.” Subsequent adjustments to these lease settlements for actual exit costs incurred are also reflected in the “Provision for Asset Impairments and Restaurant Closings.”
The Company recognized the following impairment (credits)/charges to income from operations:
| | | Year Ended | |
| | | August 31, 2005 | | August 25, 2004 | | August 27, 2003 | |
| | | (371 days) | | (364 days) | | (364 days) | |
| | | (In thousands, except per share data) | |
| | | | | | | | |
| (Reversal of) provision for asset impairments and restaurant closings/(gains on sales), net | | $ | (632 | ) | $ | 413 | | $ | 1,175 | |
| | | Year Ended | |
| | | August 30, 2006 | | August 31, 2005 | | August 25, 2004 | |
| | | (364 days) | | (371 days) | | (364 days) | |
| | | (In thousands, except per share data) | |
| | | | | | | | |
| Provision for asset impairments and restaurant closings | | $ | 533 | | $ | 35 | | $ | — | |
| Net loss/(gain) on disposition of property and equipment | | | 1,508 | | | (43 | ) | | (315 | ) |
| | | $ | 2,041 | | $ | (8 | ) | $ | (315 | ) |
| Effect on EPS: | | | | | | | | | | |
| Basic | | $ | 0.08 | | $ | — | | $ | (0.01 | ) |
| Assuming dilution | | $ | 0.07 | | $ | — | | $ | (0.01 | ) |
The $1.0 million favorable change from fiscal year 2004 to fiscal year 2005 is attributed to a gain on the sale of the corporate office building in San Antonio, Texas and the settlement of a lease on a previously closed restaurant in Lubbock, Texas, both of which occurred during fiscal 2005. The reduction in impairment charges from fiscal year 2003 to fiscal year 2004 is primarily the result of a gain recognized in 2004 for the sale of a property that had previously been impaired.
Discontinued Operations
From the inception of the currentCompany’s business plan in fiscal 2003 through the plan's completion as of August 31, 2005,30, 2006, the Company has closed 6264 operating stores. The operating results of these locations have been reclassified and reported as discontinued operations for all periods presented as required by Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sales and broadens the presentation of discontinued operations to include more disposal transactions. The Company adopted SFAS No. 144 in the first quarter of fiscal 2003, as required. The following aretable sets forth the sales and pretax losses reported for all discontinued locations:
| | | Year Ended | |
| | | August 30, 2006 | | August 31, 2005 | | August 25, 2004 | |
| | | (364 days) | | (371 days) | | (364 days) | |
| | | (In thousands, except locations) | |
| | | | | | | | |
| Sales | | $ | 1,091 | | $ | 4,471 | | $ | 15,143 | |
| Pretax losses | | $ | (1,524 | ) | $ | (5,008 | ) | $ | (9,185 | ) |
| Effect on EPS from pretax losses: | | | | | | | | | | |
| Basic | | $ | (0.06 | ) | $ | (0.22 | ) | $ | (0.41 | ) |
| Assuming dilution | | $ | (0.06 | ) | $ | (0.21 | ) | $ | (0.41 | ) |
| | | | | | | | | | | |
| Discontinued locations closed during year | | | 2 | | | 7 | | | 10 | |
| | | Year Ended | |
| | | August 31, 2005 | | August 25, 2004 | | August 27, 2003 | |
| | | (371 days) | | (364 days) | | (364 days) | |
| | | (In thousands, except locations) | |
| | | | | | | | |
| Sales | | $ | 4,471 | | $ | 15,143 | | $ | 67,731 | |
| Pretax losses | | $ | (5,126 | ) | $ | (8,811 | ) | $ | (31,763 | ) |
| Discontinued locations closed during year | | | 7 | | | 10 | | | 45 | |
36
Pursuant to the Company’s business plan, and expectations of its bank group, the Company has continued to apply the proceeds from the sale of closed restaurants to pay down its senior debt. Of the total paid down in fiscal 2006, 2005 and 2004, and 2003,$3.6 million, $13.4 million $15.3 million and $10.6$15.3 million, respectively, resulted from sales proceeds related to business plan assets. Proceeds from the sale of properties held for sale as of August 31, 2005,30, 2006, may also be applied to pay down senior debt, if any, but under the terms of the Company’s new credit facility, there is no requirement to do so.
In accordance with EITF 87-24, “Allocation of Interest to Discontinued Operations,” interest on debt that is required to be repaid as a result of a disposal transaction should be allocated to discontinued operations. For fiscal 2006, 2005 and 2004, and 2003, respectively,approximately $137,000, $2.7 million and $2.2 million, and $2.7 millionrespectively, were allocated to discontinued operations. The basis of the allocation to discontinued operations was an application of the credit facility's historical effective interest rates to the portion of the estimated total debt that equals the amount related to current and future business plan disposals as explained in the previous paragraph.
Relative to the business plan, as the Company has formally settled lease terminations or has reached definitive agreements to terminate leases, the related charges have been recorded. For fiscal 2006 and 2005, no lease exit costs associated with the business plan met these criteria and, consequently, were not accrued as of that date. Furthermore, the Company did not accrue future rental costs in instances where locations closed; however, management has the ability to sublease at amounts equal to or greater than the rental costs. The Company does not accrue employee settlement costs; these charges are expensed as incurred.
The following table summarizes discontinued operations for fiscal years2006, 2005, 2004, and 2003:
| | | Year Ended | | | Year Ended | |
| | | August 31, 2005 | | August 25, 2004 | | August 27, 2003 | | | August 30, 2006 | | August 31, 2005 | | August 25, 2004 | |
| | | (371 days) | | (364 days) | | (364 days) | | | (364 days) | | (371 days) | | (364 days) | |
| | | (In thousands, except per share data) | | | (In thousands, except per share data) | |
| Impairments | | $ | (1,981 | ) | $ | (5,985 | ) | $ | (19, 376 | ) | | $ | (778 | ) | $ | (1,981 | ) | $ | (5,985 | ) |
| Gains | | | 1,592 | | | 4,090 | | | 2,190 | | | | 745 | | | 1,592 | | | 4,090 | |
| Net impairments | | | (389 | ) | | (1,895 | ) | | (17,186 | ) | | | (33 | ) | | (389 | ) | | (1,895 | ) |
| Other | | | (4,737 | ) | | (6,916 | ) | | (14,577 | ) | | | (1,491 | ) | | (4,619 | ) | | (7,290 | ) |
| Discontinued operations, net of taxes | | | (5,126 | ) | | (8,811 | ) | | (31,763 | ) | | | (1,524 | ) | | (5,008 | ) | | (9,185 | ) |
| | | | | | | | | | | | |
| Effect on EPS from net impairments - decrease - basic | | $ | (0.02 | ) | $ | (0.08 | ) | $ | (0.77 | ) | | $ | (0.00 | ) | $ | (0.02 | ) | $ | (0.08 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Effect on EPS from discontinued operations - decrease - basic | | $ | (0.23 | ) | $ | (0.39 | ) | $ | (1.41 | ) | | $ | (0.06 | ) | $ | (0.22 | ) | $ | (0.41 | ) |
Within discontinued operations, the Company offsets gains from applicable property disposals against total impairments as noteddescribed above. The amounts in the table noteddescribed as Other actually include several items. Those items include allocated interest, lease settlements, employment termination and shut-down costs, as well as operating losses through each restaurant's closing date and carrying costs until the locations are finally disposed of.
The impairment charges included above relate to properties closed and designated for immediate disposal. The assets of these individual operating units have been written down to their net realizable values. In turn, the related properties have either been sold or are being actively marketed for sale. All dispositions are expected to be completed within one year. Within discontinued operations, the Company also recorded the related fiscal year-to-date net operating results, allocated interest expense, employee terminations, lease settlements, and basic carrying costs of the closed units.
Property Held for Sale
At August 30, 2006, the Company had a total of three properties recorded at approximately $1.7 million in property held for sale. Of the three properties remaining, one is related to prior disposal plans. On August 31, 2005, the Company had a total of twelvethirteen properties recorded at $9.3 million in property held for sale. Of the twelve totalTwo properties two are related to prior disposal plans. In the fourth quarter of fiscal 2005, one property in Oklahoma City, Oklahoma was transferred towere reclassified from property held for sale. Atsale to property, plant and equipment during the beginning of thefirst quarter fiscal year the Company had a total of 262006. These reclassified properties recorded at $24.6 million in property held for sale.are intended to be used to support operations. During fiscal year 2006, eight properties were sold.
The Company is actively marketing the locations currently classified as property held for sale. When sold, proceeds from properties that have been identified asProperty held for sale shall be used to reduce outstanding debt. All property held for sale consists primarily of already-closed restaurant properties. Property held for sale is valued at the lower of net depreciable value or net realizable value.
The Company’s results of operations (“Other income, net”) will be affected to the extent proceeds from the sale of assets held for sale under the prior disposal plans exceed or are less than net book value. For all other properties held for sale, the Company’s results of discontinued operations will be affected to the extent proceeds from the sales exceed or are less than net book value.
A rollforward of property held for sale for fiscal 20042006 and 2005 is provided below (in thousands):
| Property Held for Sale | | |
| Balance as of August 27,2003 | | $ | 32,946 | | |
| | | | |
| Balance as of August 25, 2004 | | | $ | 24,594 | |
| Net transfers to/from property held for sale | | | 11,366 | | | | 1,693 | |
| Disposals | | | (13,253 | ) | | | (17,088 | ) |
| Net impairment charges | | | (6,465 | ) | | | 147 | |
| Balance as of August 25,2004 | | | 24,594 | | |
| Balance as of August 31, 2005 | | | | 9,346 | |
| Net transfers to/from property held for sale | | | 1,693 | | | | (1,582 | ) |
| Disposals | | | (17,088 | ) | | | (6,686 | ) |
| Net increase in net realizable value | | | 147 | | | | 583 | |
| Balance as of August 31, 2005 | | $ | 9,346 | | |
| Balance as of August 30, 2006 | | | $ | 1,661 | |
Reserve for Restaurant ClosingsNote 9.
At August 31, 2005, and August 25, 2004, the Company had a reserve for restaurant closings of $14,450 and $500,000, respectively, included in “Other Liabilities” on the Company’s consolidated balance sheet. The reserve balances as of the end of both periods related to the 2001 asset disposal plan and were comprised of estimated lease settlement costs. The settlement costs were accrued in accordance with EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity,” which was appropriate for disposal plans initiated before the Company's fiscal 2003 adoption of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Since the implementation of SFAS No. 146, lease settlement costs have been expensed as incurred.
Relative to the fiscal 2001 disposal plan, the following summarizes the amounts recognized as cash payments, including actual lease settlements, as well as other reductions. Other reductions include certain accrual reversals for settlements that have been more favorable than originally expected and were recorded in discontinued operations after their eventual closure.
| | | Reserve Balance (2001 Disposal Plan) | |
| | | Lease Settlement Costs | | Other Exit Costs | | Total Reserve | |
| | | (In thousands) | |
| | | | | | | | |
| Balances at August 31, 2001 | | $ | 4,206 | | $ | 300 | | $ | 4,506 | |
| Additions (reductions) | | | (373 | ) | | - | | | (373 | ) |
| Cash payments | | | (856 | ) | | (163 | ) | | (1,019 | ) |
| Balances at August 28, 2002 | | | 2,977 | | | 137 | | | 3,114 | |
| Additions (reductions) | | | (1,163 | ) | | (78 | ) | | (1,241 | ) |
| Cash payments | | | (151 | ) | | (59 | ) | | (210 | ) |
| Balances at August 27, 2003 | | | 1,663 | | | - | | | 1,663 | |
| Additions (reductions) | | | (518 | ) | | - | | | (518 | ) |
| Cash payments | | | (645 | ) | | - | | | (645 | ) |
| Balances at August 25, 2004 | | $ | 500 | | $ | - | | $ | 500 | |
| Additions (reductions) | | | (195 | ) | | - | | | (195 | ) |
| Cash payments | | | (291 | ) | | - | | | (291 | ) |
| Balances at August 31, 2005 | | $ | 14 | | $ | - | | $ | 14 | |
Note 10.
| Commitments and Contingencies |
Off-Balance-Sheet Arrangements
The Company has no off-balance-sheet structured financing arrangements.
Pending Claims
Three wage and hour investigations by the U.S. Department of Labor related to the application of wait staff tip pool sums have recently been consolidated in the Houston district. The Company has not yet received sufficient data to determine the financial impact to the Company, if any, or the probable outcome of the matter. As with all such matters, the Company intends to vigorously defend its position.
The Company is presently, and from time to time, is subject to pending claims and lawsuits arising in the ordinary course of business. In the opinion of management, the resolution of any pending legal proceedings will not have a material adverse effect on the Company's operations or consolidated financial position.
Surety Bonds
At August 31, 2005,By February 15, 2006, the Company replaced the $5 million in surety bonds with letters of credit under the Company’s Revolving Credit Facility. See Note 7, “Debt”, above. This replacement allowed for a reduction in the required amount of $5.0 million have been issuedsecurity to cover the estimated insurance obligations and provide the Company with a more cost-effective collateral option as security for the payment of insurance obligations classified as accrued expenses on the balance sheet.these obligations.
Note 11.
| Note 10.Operating Leases |
The Company conducts part of its operations from facilities that are leased under noncancelable lease agreements. Approximately 88% of the leases contain renewal options ranging from one to thirty years.
Most leases include periodic escalation clauses. Accordingly, the Company follows the straight-line rent method of recognizing lease rental expense, as prescribed by SFAS No. 13, “Accounting for Leases.”
In fiscal 2005, the Company entered into noncancelable operating lease agreements for certain office equipment, with terms ranging from 48 to 60 months.
Annual future minimum lease payments under noncancelable operating leases with terms in excess of one year as of August 31, 2005,30, 2006, are as follows:
| Year Ending: | | (In thousands) | | | (In thousands) | |
| August 30, 2006 | | | 4,203 | | |
| August 29, 2007 | | | 4,045 | | | | 4,343 | |
| August 27, 2008 | | | 3,888 | | | | 4,113 | |
| August 26, 2009 | | | 3,683 | | | | 3,849 | |
| August 25, 2010 | | | 3,281 | | | | 3,457 | |
| August 24, 2011 | | | | 3,320 | |
| Thereafter | | | 18,451 | | | | 16,006 | |
| Total minimum lease payments | | $ | 37,651 | | | $ | 35,088 | |
Most of the leases are for periods of ten to twenty-five years and provide for contingent rentals based on sales in excess of a base amount. Total rent expense for operating leases for the last three fiscal years was as follows:
| | | Year Ended | | |
| | | August 31, 2005 | | August 25, 2004 | | August 27, 2003 | | | Year Ended | |
| | | (In thousands, except percentages) | | | August 30, 2006 | | August 31, 2005 | | August 25, 2004 | |
| | | | | | | | | | (In thousands, except percentages) | |
| | | | | | | | | | | | | | | |
| Minimum rent-facilities | | $ | 4,109 | | $ | 4,574 | | $ | 4,576 | | | $ | 3,985 | | $ | 4,109 | | $ | 4,574 | |
| Contingent rentals | | | 192 | | | 290 | | | 507 | | | | — | | | 192 | | | 290 | |
| Minimum rent-equipment | | | 68 | | | - | | | - | | | | 423 | | | 68 | | | — | |
| Total rent expense (including amounts in discontinued operations) | | $ | 4,369 | | $ | 4,864 | | $ | 5,083 | | | $ | 4,408 | | $ | 4,369 | | $ | 4,864 | |
| Percent of sales | | | 1.4 | % | | 1.6 | % | | 1.7 | % | | | 1.4 | % | | 1.4 | % | | 1.7 | % |
See Note 1312, “Related Parties”, below for lease payments associated with related parties.
Sales and Leaseback
In June 2004, the Company executed a sale and leaseback of land and improvements at one of its Corpus Christi locations with a third party buyer. This particular location featured a restaurant, as well as additional shopping center space leased to tenants. The Company sold the entire property but only leased back the restaurant. The terms of the lease provide for a primary term of five years commencing July 1, 2005, a basic monthly rental of $7,500. The lease also provides for two five-year renewal option periods.
Proceeds received on the sale of the property totaled $2.85 million and the total gain on the property was $2.37 million. In accordance with FAS 13, the present value of the minimum lease payments, an amount totaling $395,000, was booked as a deferred rent liability to be amortized over the five-year primary term life of the lease. The remaining balance of the gain, $1.98 million, was recognized as other income in fiscal year 2004.
Note 12.
| Note 11.Employee Benefit Plans and Agreements |
Executive Stock Options
The Company has an Executive Stock Option Plan as well as Incentive Stock Plans for officers and employees together (“Employee Stock Plans”) and a Non-employee Director Stock Option Plan for non-employee directors. These plans authorize the granting of stock options, restricted stock, and other types of awards consistent with the purpose of the plans. The number of shares authorized for issuance under the Company's plans as of August 30, 2006 totals approximately 5.2 million, of which approximately 2.1 million shares are available for future issuance. Stock options granted under the Incentive Stock Plans and the Non-employee Director Stock Option Plan have an exercise price equal to the market price of the Company's common stock at the date of grant. Option awards under the Executive Stock Option Plan vest 50% on the first anniversary of the grant date, 25% on the second anniversary of the grant date, and the remaining 25% on the third anniversary of the grant date and expire ten years from the grant date. Option awards under the Employee Stock Plans generally vest 25% each year on the anniversary of the grant date and expire six to ten years from the grant date. Option awards under the Non-employee Director Stock Option Plan generally vest 100% on the first anniversary of the grant date and expire ten years from the grant date.
In connection with their employment agreements effective March 9, 2001, the CEO and the COO were granted approximately 2.2 million stock options at a strike price of $5.00 per share, which was below the quoted market price on the date of grant. From that date through the end of fiscal 2004, the Company recognized a total of $5.2 million in noncashnon-cash compensation expense associated with these options. Total expenses of $0, $679,000 and $1.3 million were recognized in fiscal 2005, 2004, and 2003, respectively.
2004. The Company has agreed to reserve shares held in treasury for issuance upon exercise of these options. In accordance with an agreement between Messrs. Pappas and the Company dated June 7, 2004, Christopher and Harris Pappas have agreed to limit their exercise of stock options to a number that will ensure the “net treasury shares available” are not exceeded. Pursuant to the terms of that agreement, the Company indicated that it will use reasonable efforts to listlisted on the New York Stock Exchange additional shares which would permit full exercise of the options. (See the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations - Subordinated Notes” for definition of “net treasury shares”.) As of November 7, 2005,3, 2006, neither individualthe Chief Executive Officer nor the Chief Operating Office has exercised any of these options.
All Stock OptionsEffective September 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123R using the modified prospective method. Under this method, compensation cost in fiscal 2006 includes the portion of awards vesting in the period for (a) all share-based payments granted prior to, but not vested as of August 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No.123 and (b) all share-based payments granted subsequent to August 31, 2005, based on the grant date fair value estimated using the Black-Scholes option pricing model. Before adoption of SFAS No. 123R, pro forma disclosures reflected the fair value of each option grant estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
| | Fiscal Year Ended | |
| | August 30, 2006 | |
| Dividend yield | 0.0 | % |
| Expected volatility range | | | 35.0 | % | | to 90.6 | % |
| Risk-free interest rate range | | | 3.01 | % | | to 4.44 | % |
| Expected life (in years) | 5.01 to 8.70 |
Results of prior periods do not reflect any restated amounts, and the Company had no cumulative effect adjustment upon adoption of SFAS No. 123R under the modified prospective method. The Company's policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight line basis over the requisite service period for the entire award.
The adoption of SFAS No. 123R increased general and administrative expenses, thereby decreasing the Company's reported operating income, income before income taxes and reported net income for fiscal year 2006 by approximately $386,000, and reduced both basic and diluted net income per share by $0.01. The expense, before income tax effect, is reflected in general and administrative expenses. The Company's adoption of SFAS No. 123R did not affect operating income, income before income taxes, net income, cash flow from operations, cash flow from financing activities, or basic and diluted net income per share in the comparable periods of fiscal years 2005 and 2004.
Prior to August 31, 2005, the Company has incentiveaccounted for its stock plansbased compensation under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to provideEmployees," and related interpretations, the disclosure-only provisions of SFAS No. 123, "Accounting for market-based incentive awards, includingStock-Based Compensation" and the disclosures required by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." In accordance with APB Opinion No. 25, no stock-based compensation cost was reflected in the Company's prior year net income for grants of stock options stock appreciation rights, and restricted stock. Under these plans,to employees because the Company granted stock options may be granted at prices not less than 100%with an exercise price equal to the market value of fair market valuethe stock on the date of grant. Options grantedThe reported stock based compensation expense, net of related tax effects, in the table below represents compensation costs associated with restricted stock grants.
If the Company had used the fair value based accounting method for stock compensation expense prescribed by SFAS Nos. 123 and 148 for fiscal years 2005 and 2004, the Company's consolidated net income and net income per share would have been decreased to the participantspro-forma amounts illustrated as follows:
| | | August 31, 2005 | | August 25, 2004 | |
| | (in thousands, except per share data) |
| | | | | | |
| Net income (loss), as reported | | $ | 3,448 | | $ | (3,122 | ) |
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects (a) | | | - | | | 679 | |
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects (a) | | | (277 | ) | | (1,208 | ) |
| Pro forma net income (loss) | | $ | 3,171 | | $ | (3,651 | ) |
| Net income (loss) per share as reported: | | | | | | | |
| Basic | | $ | 0.15 | | $ | (0.14 | ) |
| Assuming dilution | | $ | 0.15 | | $ | (0.14 | ) |
| Pro forma net income (loss) per share: | | | | | | | |
| Basic | | $ | 0.14 | | $ | (0.16 | ) |
| Assuming dilution | | $ | 0.14 | | $ | (0.16 | ) |
(a)Income taxes were offset by a valuation allowance. See Note 3, “Income Taxes”, above.
Partly in anticipation of the plans are exercisable over staggered periodsadoption of SFAS No.123R, in recent years the Company has adjusted the mix of employee long-term incentive compensation by reducing stock options awarded and expire, depending uponincreasing certain cash-based compensation and other equity based awards. Compensation cost for share-based payment arrangements recognized in general and administrative expenses for fiscal 2006 was approximately $386,000 for stock options and $49,000 for restricted stock. The total income tax effect of these expenses was offset by a valuation allowance and, therefore, no benefit was recognized in the type of grant, in five to ten years. The plans provideincome statement for various vesting methods, depending upon the category of personnel.fiscal 2006 for share-based compensation arrangements.
Under the Company’s Nonemployee Director Stock Option Plan, as previously amended and restated, (the “Option Plan”), nonemployee directors are periodically awarded restricted stock and granted nonqualified options to purchase sharesThe fair value of the Company’s common stock at aneach option price equal to 100% of fair market valueaward is estimated on the date of grant. A totalgrant using the Black-Scholes option pricing model, which determines inputs as shown in the following table. Because of 400,000 sharesdifferences in option terms and historical exercise patterns among the plans, the Company has segregated option awards into three homogenous groups for the purpose of common stock have been authorizeddetermining fair values for issuance underits options. Valuation assumptions are determined separately for the three groups which represent, respectively, the Executive Stock Option Plan, the Employee Stock Plans and the Non-employee Director Stock Option Plan. Each option terminates upon the expiration of ten years from the date of grant or one year after the optionee ceases to be a director, whichever first occurs. An option may not be exercised prior to the expiration of one year from the date of grant, subject to certain exceptions specified in the Option Plan. As of August 31, 2005, 116,332 options were outstanding under the Option Plan, and 262,477 common shares remained available for issuance under the Option Plan.The assumptions are as follows:
| · | The Company estimated volatility using its historical share price performance over the expected life of the option. Management considered the guidance in SFAS No. 123R and believes the historical estimated volatility is materially indicative of expectations about expected future volatility. |
| · | The Company uses the simplified method outlined in SEC Staff Accounting Bulletin No. 107 to estimate expected lives for options granted during the period. |
| · | The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. |
| · | The expected dividend yield is based on the Company's current dividend yield and the best estimate of projected dividend yield for future periods within the expected life of the option. |
| | Fiscal Year Ended | |
| | August 30, 2006 | |
| Dividend yield | | | 0.0 | % |
| Volatility | | | 61.9 | % |
| Risk-free interest rate | | | 4.27 | % |
| Expected life (in years) | | | 4.25 | |
Altogether, under the executive stock options and the stock plans, nonqualified stock options, incentive stock options, and other types of awards for not more than 5.1 million shares of the Company's common stock may be granted to eligible employees and nonemployee directors of the Company.
The following is aA summary of activity in the Company's stock option plans and the executive stock optionsactivity for the three years ended August 30, 2006, August 31, 2005 and August 25, 2004 and August 27, 2003:is presented in the following table:
| | | Weighted- Average Exercise Price Per Share - Options Outstanding | | Options Outstanding | |
| | | | | | |
| Balances at August 28, 2002 | | $ | 8.31 | | | 4,195,335 | |
| Granted | | | 1.98 | | | 28,000 | |
| Cancelled or expired | | | 12.49 | | | (302,737 | ) |
| Exercised | | | -- | | | - | |
| Balances at August 27, 2003 | | | 7.96 | | | 3,920,598 | |
| Granted | | | 4.47 | | | 20,000 | |
| Cancelled or expired | | | 14.30 | | | (399,569 | ) |
| Exercised | | | 5.44 | | | (7,500 | ) |
| Balances at August 25, 2004 | | | 7.22 | | | 3,533,529 | |
| Granted | | | 6.45 | | | 16,000 | |
| Cancelled or expired | | | 14.66 | | | (606,047 | ) |
| Exercised | | | 6.29 | | | (190,850 | ) |
| Balances at August 31, 2005 | | $ | 5.65 | | | 2,752,632 | |
| | | Shares Under Fixed Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value | |
| | | | | | | (Years) | | (In thousands) | |
| Outstanding at August 27, 2003 | | | 3,920,598 | | $ | 7.96 | | | 5.35 | | $ | 11 | |
| Granted | | | 20,000 | | | 4.47 | | | | | | | |
| Exercised | | | (7,500 | ) | | 5.44 | | | | | | | |
| Forfeited/Expired | | | (399,569 | ) | | 14.30 | | | | | | | |
| Outstanding at August 25, 2004 | | | 3,533,529 | | | 7.22 | | | 4.81 | | | 3,962 | |
| Granted | | | 16,000 | | | 6.45 | | | | | | | |
| Exercised | | | (190,850 | ) | | 6.29 | | | | | | | |
| Forfeited/Expired | | | (606,047 | ) | | 14.66 | | | | | | | |
| Outstanding at August 31, 2005 | | | 2,752,632 | | | 5.65 | | | 4.92 | | | 20,747 | |
| Granted | | | 228,900 | | | 12.84 | | | | | | | |
| Exercised | | | (122,450 | ) | | 8.87 | | | | | | | |
| Forfeited/Expired | | | (128,000 | ) | | 11.18 | | | | | | | |
| Outstanding at August 30, 2006 | | | 2,731,082 | | $ | 5.85 | | | 4.39 | | $ | 11,475 | |
| Exercisable at August 30, 2006 | | | 2,502,182 | | $ | 5.21 | | | 4.32 | | $ | 11,475 | |
Balances of Exercisable Options as of: | |
| | | |
August 28, 2002 | | | 2,243,095 | |
August 27, 2003 | | | 3,030,098 | |
August 25, 2004 | | | 3,395,029 | |
August 31, 2005 | | | 2,721,382 | |
The weighted-average grant-date fair value of options granted during fiscal year 2006 was $6.72 per share. The intrinsic value for stock options is defined as the difference between the current market value and the grant price. The total intrinsic value of options exercised during fiscal 2006 was approximately $496,000.
Exercise prices for options outstanding as of August 31, 2005,30, 2006, range from $1.98 to $21.625$17.125 per share. The weighted-average remaining contractual life of these options is 4.94.39 years. Excluding 2,240,000 executive stock options with an exercise price of $5.00 per share, the exercisable options as of August 31, 2005,30, 2006, have a weighted-average exercise price of $8.62$6.987 per share.
During fiscal year 2006, cash received from options exercised was approximately $1.1 million, and the calculated but unrecognized tax benefit for the tax deductions from stock options exercised totaled approximately $173,000.
Options Outstanding and Exercisable by Price Range
As of August 31, 200530, 2006
| | | | | | | | | |
| Options Outstanding | Options Outstanding | | Options Exercisable | | Options Outstanding | | Options Exercisable | |
Range of Exercise Prices | Range of Exercise Prices | | Number Outstanding | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Number Exercisable | | Weighted Average Exercise Price | | Range of Exercise Prices | | Number Outstanding | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Number Exercisable | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ | 1.9800 | | - | | $ | 4.4700 | | 42,000 | | 7.88 | | $ | 3.0471 | | 42,000 | | $ | 3.0471 | | 1.9800 | — | $ | 4.4700 | | | 38,000 | | | 6.87 | | $ | 3.0284 | | 38,000 | | $ | 3.0284 | |
| | 5.0000 | | - | | 5.0000 | | 2,240,000 | | 5.52 | | 5.0000 | | 2,240,000 | | 5.0000 | | 5.0000 | — | | 5.0000 | | | 2,240,000 | | | 4.52 | | | 5.0000 | | 2,240,000 | | | 5.0000 | |
| | 5.4375 | | - | | 9.4200 | | 291,500 | | 2.47 | | 6.7921 | | 260,250 | | 6.8472 | | 5.4375 | — | | 8.6400 | | | 192,850 | | | 1.92 | | | 6.8976 | | 192,850 | | | 6.8976 | |
| | 9.7500 | | - | | 10.8125 | | 38,000 | | 1.18 | | 10.1069 | | 38,000 | | 10.1069 | | 9.4200 | — | | 9.4200 | | | 14,000 | | | 0.90 | | | 9.4200 | | 14,000 | | | 9.4200 | |
| | 11.5625 | | - | | 11.5625 | | 5,000 | | 0.22 | | 11.5625 | | 5,000 | | 11.5625 | | 10.8125 | — | | 10.8125 | | | 4,000 | | | 3.38 | | | 10.8125 | | 4,000 | | | 10.8125 | |
| | 12.0625 | | - | | 12.0625 | | 107,800 | | 0.12 | | 12.0625 | | 107,800 | | 12.0625 | | 12.3000 | — | | 12.3000 | | | 61,900 | | | 5.21 | | | 12.3000 | | — | | | — | |
| | 15.4375 | | - | | 15.4375 | | 15,000 | | 3.36 | | 15.4375 | | 15,000 | | 15.4375 | | 12.9200 | — | | 12.9200 | | | 131,000 | | | 5.19 | | | 12.9200 | | — | | | — | |
| | 17.1250 | | - | | 17.1250 | | 3,332 | | 2.90 | | 17.1250 | | 3,332 | | 17.1250 | | 13.4500 | — | | 13.4500 | | | 36,000 | | | 5.11 | | | 13.4500 | | — | | | — | |
| | 20.2500 | | - | | 20.2500 | | 5,000 | | 1.37 | | 20.2500 | | 5,000 | | 20.2500 | | 15.4375 | — | | 15.4375 | | | 10,000 | | | 2.36 | | | 15.4375 | | 10,000 | | | 15.4375 | |
| | 21.6250 | | - | | 21.6250 | | | 5,000 | | 0.37 | | 21.6250 | | | 5,000 | | 21.6250 | | 17.1250 | — | | 17.1250 | | | 3,332 | | | 1.90 | | | 17.1250 | | 3,332 | | | 17.1250 | |
| $ | 1.9800 | | - | | $ | 21.6250 | | | 2,752,632 | | 4.92 | | $ | 5.6484 | | | 2,721,382 | | $ | 5.6406 | | 1.9800 | — | $ | 17.1250 | | | 2,731,082 | | | 4.39 | | $ | 5.8475 | | 2,502,182 | | $ | 5.2082 | |
At August 31, 200530, 2006 and August 25, 2004,31, 2005, the number of incentive stock option shares available to be granted under the plans was 1,907,2501,875,000 and 1,315,2021,907,250 shares, respectively.
The Company accounts for its employeeRestricted Stock
Restricted stock compensation plans using the intrinsic value method of accounting set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and the related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any,grants consist of the quotedCompany's common stock and generally vest after three years, with the exception of current grants under the Nonemployee Director Stock Option Plan, which vest when granted due to the fact that they are granted in lieu of a cash payment. All restricted stock grants are cliff-vested. Restricted stock awards are valued at the average market price of the Company's common stock at the date of grant over the amount an employee must pay to acquire the stock.grant.
TheA summary of the Company's restricted stock activity during the fiscal year 2006 is presented in the following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had converted to the fair-value method of expensing stock options, as alternatively allowed under SFAS No. 123:
| | | August 31, 2005 | | August 25, 2004 (As adjusted) | | August 27, 2003 (As adjusted) | |
| | | (In thousands, except per share data) | |
| | | | | | | | |
| Net income (loss), as reported | | $ | 3,448 | | $ | (3,122 | ) | $ | (29,721 | ) |
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects (a) | | | - | | | 679 | | | 1,310 | |
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects (a) | | | (277 | ) | | (1,208 | ) | | (2,861 | ) |
| Pro forma net income (loss) | | $ | 3,171 | | $ | (3,651 | ) | $ | (31,272 | ) |
| Net income (loss) per share as reported: | | | | | | | | | | |
| Basic | | $ | 0.15 | | $ | (0.14 | ) | $ | (1.32 | ) |
| Assuming dilution | | $ | 0.15 | | $ | (0.14 | ) | $ | (1.32 | ) |
| Pro forma net income (loss) per share: | | | | | | | | | | |
| Basic | | $ | 0.14 | | $ | (0.16 | ) | $ | (1.39 | ) |
| Assuming dilution | | $ | 0.14 | | $ | (0.16 | ) | $ | (1.39 | ) |
(a)Income taxes have been offset by a valuation allowance. See Note 4 of Notes to Consolidated Financial Statements.| | | Restricted Stock Units | | Fair Value | | Weighted-Average Remaining Contractual Term | | Weighted-Average Grant Date | |
| | | | | (Per share) | | (In years) | | | |
| Unvested at September 1, 2005 | | | — | | | — | | | — | | | — | |
| Granted | | | 32,175 | | $ | 12.24 | | | 0.79 | | | 1/12/06 | |
| Vested | | | (15,825 | ) | | 12.17 | | | | | | 3/06/06 | |
| Forfeited | | | — | | | — | | | — | | | — | |
| Unvested at August 30, 2006 | | | 16,350 | | | 12.32 | | | 1.55 | | | 11/21/05 | |
At August 30, 2006, there was approximately $1.4 million of total unrecognized compensation cost related to unvested share-based compensation arrangements that is expected to be recognized over a weighted-average period of 2.75 years.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, “Share-Based Payments (Revised 2004).” SFAS 123R establishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods or services, or (ii) incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of the equity instruments. SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant. The Company will transition to fair-value based accounting for stock-based compensation using a modified version of prospective application (“modified prospective application”). Under modified prospective application, as it is applicable to the Company, SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after September 1, 2005. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (generally referring to non-vested awards) that are outstanding as of September 1, 2005 must be recognized as the remaining requisite service is rendered during the period of and/or the periods after the adoption of SFAS 123R. The attribution of compensation cost for those earlier awards will be based on the same method and on the same grant-date fair values previously determined for the pro forma disclosures required for companies that did not adopt the fair value accounting method for stock-based employee compensation. Based on the stock-based compensation awards outstanding as of August 31, 2005 for which the requisite service is not expected to be fully rendered prior to September 1, 2005, the Company expects additional pre-tax, quarterly compensation cost recognized beginning in the first quarter of fiscal year 2006 as a result of the adoption of SFAS 123R to be immaterial. Future levels of compensation cost recognized related to stock-based compensation awards (including the aforementioned expected costs during the period of adoption) may be impacted by new awards and/or modifications, repurchases and cancellations of existing awards before and after the adoption of this standard.
The weighted-average fair value of the individual options granted during 2005, 2004, and 2003 was estimated at $2.69, $2.32, and $0.94, respectively, on the date of grant. The fair values were determined using a Black-Scholes option pricing model with the following assumptions:
| | | 2005 | | 2004 | | 2003 | |
| Dividend yield | | | - | % | | - | % | | - | % |
| Volatility | | | 0.75 | | | 0.57 | | | 0.51 | |
| Risk-free interest rate | | | 3.70 | % | | 3.01 | % | | 3.02 | % |
| Expected life | | | 5.00 | | | 5.00 | | | 5.00 | |
Supplemental Executive Retirement Plan
The Company has a Supplemental Executive Retirement Plan (SERP)(“SERP”) designed to provide benefits for key executives and officers. The SERP is a “target” benefit plan,selected officers at normal retirement age with the annual lifetime benefit based upon a percentage of average salary during the final five25 years of service at age 65,equal to 50% of their final average compensation offset by several sourcesSocial Security, profit sharing benefits, and deferred compensation. Some of income includingthe officers designated to participate in the plan have retired and are receiving benefits payable under deferred compensation agreements, if applicable,the plan. Accrued benefits of all actively employed participants become fully vested upon termination of the plan or a change in control (as defined in the plan). The plan is unfunded, and Social Security.the Company is obligated to make benefit payments solely on a current disbursement basis. None of the named executive officers participate in the Supplemental Executive Retirement Plan. On December 6, 2005, the Board of Directors voted to amend the SERP and suspend the further accrual of benefits will be paid fromand participation.
As a result a curtailment gain of approximately $88,000 was recognized, as required under the Company's assets.provisions of FASB Statement No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits". The net expense (benefit) incurredbenefit recognizes for this plan for the years ended August 30, 2006, August 31, 2005, and August 25, 2004 was approximately $86,000, $129,000, and August 27, 2003, was $(129,000), $(188,000), and $67,000,$188,000, respectively, and the unfunded accrued liability included in “Other Liabilities” on the Company’s consolidated balance sheet as of August 30, 2006 and August 31, 2005 August 25, 2004, and August 27, 2003, was approximately $229,000 and $337,000, $488,000, and $709,000, respectively.
Nonemployee Director Phantom Stock Plan
Under the Company’s Nonemployee Director Phantom Stock Plan (“Phantom Stock Plan”), nonemployee directors deferred portions of their retainer and meeting fees which, along with certain matching incentives, were credited to phantom stock accounts in the form of phantom shares priced at the market value of the Company’s common stock on the date of grant. Additionally, the phantom stock accounts were credited with dividends, if any, paid on the common stock represented by phantom shares. Authorized shares (100,000 shares) under the Phantom Stock Plan were fully depleted in early fiscal year 2003 and as such, no deferrals, incentives or dividends have been credited to phantom stock accounts since then. As participants cease to be directors, their phantom shares are converted into an equal number of shares of common stock and issued from the Company’s treasury stock. As of August 31, 2005,30, 2006, approximately 29,600 phantom shares remained unissued under the Phantom Stock Plan.
401(k) Plan
The Company has a voluntary 401(k) employee savings plan to provide substantially all employees of the Company an opportunity to accumulate personal funds for their retirement. These contributions may be made on a pre-tax basis to the plan, and the Company matches 25% of participants' contributions of up to 4% of their salary. The net expense recognized in connection with the employer match feature of the voluntary 401(k) employee savings plan for the years ended August 30, 2006, August 31, 2005, and August 25, 2004, was $178,000, $192,000, and August 27, 2003, was $192,000, $201,000, and $252,000, respectively.
Deferred Compensation Plans
During 1999, the Company established a nonqualified deferred compensation plan for highly compensated executives which was terminated in fiscal 2004. The plan allowed deferral of a portion of annual salary and up to 100% of bonuses before taxes. The Company did not match any deferral amounts and retained ownership of all assets until distributed. The funds from the terminated plan were distributed in fiscal 2004.
The Company continuedcontinues to make payments to former employees or their beneficiaries under a previous plan that provides retirement, death, and disability benefits for certain highly compensated executives. All benefits under this plan were fully accrued prior to fiscal year 2000, and future benefits payable amount to approximately $273,000 as of$91,000 at August 31, 2005.30, 2006.
Profit Sharing Plan
In fiscal 2004, the Company terminated its profit sharing and retirement plan (the Plan)“Plan”) and is in the process of making distributions to all Plan participants. The Plan covered substantially all employees who had attained the age of 21 years and had completed one year of continuous service. It was administered by a corporate trustee, was a “qualified plan” under Section 401(a) of the Internal Revenue Code, and provided for the payment of the employee's vested portion of the Plan upon retirement, termination, disability, or death. The Plan had been funded by contributions of a portion of the net earnings of the Company and was amended effective August 31, 2001 to make all contributions discretionary. No annual contributions to the Plan were made in fiscal 2006, 2005, 2004, or 2003.2004.
Note 13.
| Note 12.Related Parties |
Affiliate Services
The CEOChief Executive Officer and COOChief Operating Officer of the Company, Christopher J. Pappas and Harris J. Pappas, respectively, own two restaurant entities (the “Pappas entities”) that may provide services to Luby's, Inc. as detailed in the Affiliate Services Agreement and the Master Sales Agreement. Under the terms of the Affiliate Services Agreement, the Pappas entities may provide accounting, architectural, and general business services. No costs were incurred relative to the Affiliate Services Agreement in fiscal 2003.2006. The total costs incurred relative to the Affiliate Services Agreements, which expired on December 31, 2005, were $5,000 and $1,000 in fiscal 2005 and 2004, respectively.
Under the terms of the 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 Master Sales Agreement of custom-fabricated and refurbished equipment in fiscal 2006, 2005, 2004, and 20032004 were approximately $176,000,$107,000, $174,000, and $113,000, and $174,000, respectively.
Operating Leases
In a separate contract from the Affiliate Services Agreement and the Master Sales Agreement, theThe Company also entered into a three-year lease which commenced on June 1, 2001 and expired on May 31, 2004. This lease is currently effective on a month-to-month basis. The leased property, referred to as the Houston Service Center, is used to accommodate the Company's own in-house repair and fabrication center. The amountCompany paid by the Companyapproximately $82,000, $88,000, and $82,000, in fiscal 2006, 2005, and 2004, respectively, pursuant to the terms of this lease was approximately $88,000, $82,000, and $79,000, in fiscal 2005, 2004, and 2003, respectively.lease.
FromThe Company previously leased from an unrelated third party the Company previously leased a location used to house increased equipment inventories due to store closures under the business plan. The Company considered it more prudent to lease this location rather than to pursue purchasing a storage facility, as its strategy is to focus its capital expenditures on its operating restaurants. In a separate transaction, the third-party property owner sold the location to the Pappas entities during the fourth quarter of fiscal 2003, with the Pappas entities becoming the Company's landlord for that location effective August 1, 2003. The storage site complements the Houston Service Center with approximately 27,000 square feet of warehouse space at an approximate monthly rate of $0.21 per square foot. The amountCompany paid by the Companyapproximately $67,000, $72,000 and $69,000 in fiscal 2006, 2005 and 2004, respectively, pursuant to the terms of this lease was approximately $72,000 and $69,000 in fiscal 2005 and 2004, respectively.lease.
In another separate contract, pursuant to the terms of a ground lease dated March 25, 1994, the Company paid rent to PHCG Investments for a Luby's restaurant the Company operated in Dallas, Texas, until that location was closed early in the third quarter of fiscal 2003. Christopher J. Pappas and Harris J. Pappas are general partners of PHCG Investments. Preceding the store's closure, the Company entered into a lease termination agreement with a third party unaffiliated with the Pappas entities. That agreement severed the Company's interest in the PHCG property in exchange for a payment of cash to the Company. At that time, the Company recognized a gain of $735,000 as “Other Income, Net”, which represented the excess of the cash received over the carrying amount of the Company’s investment in the related assets. The amount paid by the Company pursuant to the terms of this lease before its termination was approximately $42,000 in fiscal 2003. No costs were incurred under this lease in fiscal 2004 or 2005.
Late in the third quarter of fiscal 2004, Christopher J. and Harris J. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas own a 50% limited partnership and a 50% general partnership interest. 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. The amountCompany paid by the Companyapproximately $266,000, $276,000 and $83,000 in fiscal 2006, 2005 and 2004, respectively, pursuant to the terms of this lease was approximately $167,000 and $56,000 for fiscal 2005 and fiscal 2004, respectively.lease.
Affiliated rents paid for the Houston Service Center, the separate storage facility, the Dallas property and the Houston property leases combined represented 8.4%9.8%, 5.6%8.8%, and 3.7%5.6% of total rents for continuing operations for fiscal 2006, 2005, 2004, and 2003,2004, respectively.
Subordinated Notes
Refer to Note 87, “Debt”, above for information on the subordinated notes.
Board of Directors
Pursuant to the terms of a separate Purchase Agreement dated March 9, 2001, entered into by and among the Company, Christopher J. Pappas and Harris J. Pappas, the Company agreed to submit three persons designated by Christopher J. Pappas and Harris J. Pappas as nominees for election at the 2002 Annual Meeting of Shareholders. Messrs. Pappas designated themselves and Frank Markantonis as their nominees for directors, all of whom were subsequently elected. Christopher J. Pappas and Harris J. Pappas are brothers. As disclosed in the proxy statement for the February 26, 2004, annual meeting of shareholders, Frank Markantonis is an attorney whose principal client is Pappas Restaurants, Inc., an entity owned by Harris J. Pappas and Christopher J. Pappas.
Under the terms of the amended Purchase Agreement dated June 7, 2004, the right to nominate directors for election was modified to provide that Messrs. Pappas may continue to nominate persons for election to the board which, if such nominees are elected, would result in Messrs. Pappas having nominated three of the then-serving directors of the Company. Messrs. Pappas retain their right for so long as they both are executive officers of the Company.
Christopher J. Pappas, the Company’s President and Chief Executive Officer, is a member of the Board of Directors of Amegy Bank, National Association, which is a lender under, and Documentation Agent of, the Revolving Credit Facility.
Key Management Personnel
As ofIn November 2005, new three-year employment contracts were finalized for Christopher J. Pappas and Harris J. Pappas.Pappas entered into new employment agreements expiring in August 2008. Both continue to devote their primary time and business efforts to Luby's, while maintaining their roles at Pappas Restaurants, Inc.
Ernest Pekmezaris, Chief Financial Officer of the Company, is also the Treasurer of Pappas Restaurants, Inc. Compensation for the services provided by Mr. Pekmezaris to Pappas Restaurants, Inc. is paid entirely by that entity.
Peter Tropoli, Senior Vice President-AdministrationPresident, General Counsel and General CounselSecretary of the Company, is an attorney who, from time to time, has provided litigation services to entities controlled by Christopher J. Pappas and Harris J. Pappas. Mr. Tropoli is the stepson of Frank Markantonis, who, as previously mentioned, 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, the Chief Operating Officer.
In 1991, the Board of Directors adopted a Shareholder Rights Plan and declared a dividend of one common stock purchase right for each outstanding share of common stock. The rights are not initially exercisable. The Company amended the Shareholder Rights Plan effective February 27, 2004, to extend the expiration date to April 16, 2007. The rights may become exercisable under circumstances described in the plan if any person or group becomes the beneficial owner of 15% or more of the common stock or announces a tender or exchange offer, the completion of which would result in the ownership by a person or group of 15% or more of the common stock (either, an Acquiring Person)“Acquiring Person”). Once the rights become exercisable, each right will be exercisable to purchase, for $27.50 (the Purchase Price)“Purchase Price”), one-half of one share of common stock, par value $.32$0.32 per share, of the Company. If any person becomes an Acquiring Person, each right will entitle the holder, other than the Acquiring Person, to acquire for the Purchase Price a number of shares of the Company's common stock having a market value of four times the Purchase Price.
In connection with the employment of Christopher J. Pappas, the Company's President and Chief Executive Officer, and Harris J. Pappas, the Company's Chief Operating Officer, the Shareholder Rights Plan, as amended, exempts from the operation of the plan Messrs. Pappas' ownership of the Company's common stock to March 8, 2001 (and certain additional shares permitted to be acquired) and, shares acquired upon their election to convert the subordinated notes on August 31, 2005, and certain shares of common stock which may be acquired in connection with options issued on the date of their employment.
In the past, the Board of Directors periodically authorized the purchase, in the open market, of shares of the Company's outstanding common stock. The most recent authorization was a purchase of 850,300 shares of the Company's common stock at a cost of $12,919,000 in 1999, which are being held as treasury stock. There have been no treasury shares purchased since 1999.
The Company has approximately 3.2 million shares of common stock reserved for issuance upon the exercise of outstanding stock options.
Treasury Shares
The Company's treasury shares have beenare reserved for the recent conversion of subordinated debt (See Note 8, “Debt”) and for two other purposes -purposes: the issuance of shares to Messrs. Pappas upon exercise of the options granted to them on March 9, 2001, and forthe issuance of shares issuable under the Company's Nonemployee Director Phantom Stock Plan. In accordance with their agreement with theThe Company dated June 7, 2004, Messrs. Pappas have agreed to limit their exercise of stock options to a number that will ensure the “net treasury shares available” are not exceeded. Pursuant to the terms of that agreement, the Company indicated that it will use reasonable efforts to listhas listed on the New York Stock Exchange additional shares which wouldto permit full exercise of thoseMessrs. Pappas options. “Net Treasury Shares Available” is defined in the debt agreements as the number of shares of common stock then held by the Company in treasury, minus the number of shares of common stock issuable or issued after June 7, 2004, under the Nonemployee Director Phantom Stock Plan, minus the number of shares of common stock issuable or issued upon conversion of the subordinated notes, as calculated assuming the lowest conversion price stated in the subordinated notes.
Note 15.
| Note 14.Per Share Information |
A reconciliation of the numerators and denominators of basic earnings per share and earnings per share assuming dilution is shown in the table below:
| | | Year Ended | | | Year Ended | |
| | | August 31, 2005 | | August 25, 2004 (As adjusted) | | August 27, 2003 (As adjusted) | | | August 30, 2006 | | August 31, 2005 | | August 25, 2004 | |
| | | (In thousands, except per share data) | | | (In thousands, except per share data) | |
| Numerator: | | | | | | | | | | | | | | |
| Income from continuing operations | | $ | 8,574 | | $ | 5,689 | | $ | 2,042 | | | $ | 21,085 | | $ | 8,456 | | $ | 6,063 | |
| Net income (loss) | | $ | 3,448 | | $ | (3,122 | ) | $ | (29,721 | ) | | $ | 19,561 | | $ | 3,448 | | $ | (3,122 | ) |
| Denominator: | | | | | | | | | | | | | | | | | | | | |
| Denominator for basic earnings per share - weighted-average shares | | | 22,608 | | | 22,470 | | | 22,451 | | | | 26,024 | | | 22,608 | | | 22,470 | |
| Effect of potentially dilutive securities: | | | | | | | | | | | | | | | | | | | | |
| Employee and nonemployee stock options | | | 802 | | | 149 | | | 1 | | |
| Employee and non-employee stock options | | | | 1,377 | | | 802 | | | 149 | |
| Phantom stock | | | 43 | | | 60 | | | 80 | | | | 30 | | | 43 | | | 60 | |
| Restricted stock | | | 2 | | | - | | | - | | | | 13 | | | 2 | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Denominator for earnings per share -assuming dilution | | | 23,455 | | | 22,679 | | | 22,532 | | | | 27,444 | | | 23,455 | | | 22,679 | |
| Income from continuing operations: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.38 | | $ | 0.25 | | $ | 0.09 | | | $ | 0.81 | | $ | 0.37 | | $ | 0.27 | |
Assuming dilution (a) | | $ | 0.37 | | $ | 0.25 | | $ | 0.09 | | | $ | 0.77 | | $ | 0.36 | | $ | 0.27 | |
| Net income (loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.15 | | $ | (0.14 | ) | $ | (1.32 | ) | | $ | 0.75 | | $ | 0.15 | | $ | (0.14 | ) |
Assuming dilution (a) | | $ | 0.15 | | $ | (0.14 | ) | $ | (1.32 | ) | | $ | 0.71 | | $ | 0.15 | | $ | (0.14 | ) |
(a)Potentially dilutive shares that were not included in the computation of net income (loss) per share because to do so would have been antidilutive amounted to zero shares in fiscal 2006, 3,219,000 shares in fiscal 2005, and 2,216,000 in fiscal 2004 (including the dilutive effect of the convertible subordinated notes). Additionally, stock options with exercise prices exceeding current market prices that were excluded from the computation of net income (loss) per share amounted to 207,000 shares in fiscal 2006, 484,000 shares in fiscal 2005, and 2,495,000 shares in fiscal 2004.
(a)
| Potentially dilutive shares that were not included in the computation of net income (loss) per share because to do so would have been antidilutive amounted to 3,219,000 shares in fiscal 2005, 2,216,000 in fiscal 2004, and 2,000,000 in fiscal 2003 (including the dilutive effect of the convertible subordinated notes). Additionally, stock options with exercise prices exceeding current market prices that were excluded from the computation of net income (loss) per share amounted to 484,000 shares in fiscal 2005, 2,495,000 shares in fiscal 2004 and 4,078,000 shares in fiscal 2003. |
Note 16.Note 15.Quarterly Financial Information
| Quarterly Financial Information (Unaudited)
|
The Company's quarterly financial information has been affected by reclassifications to discontinued operations in accordance with the disposal of operating units under the Company's business plan. The following is a summary of quarterly unaudited financial information for 2005fiscal 2006 and 2004,2005, including those reclassificationsreclassifications.
| | | Quarter Ended (a) | |
| | | August 30, 2006 | | May 10, 2006 | | February 15, 2006 | | November 23, 2005 | |
| | | (112 days) | | (84 days) | | (84 days) | | (84 days) | |
| | | (In thousands except per share data) | |
| | | | |
| Sales | | $ | 99,070 | | $ | 77,954 | | $ | 75,034 | | $ | 72,582 | |
Gross profit (c) | | | 39,347 | | | 30,749 | | | 28,757 | | | 27,106 | |
| Income from continuing operations | | | 7,605 | | | 6,825 | | | 3,341 | | | 3,314 | |
| Discontinued operations | | | (465 | ) | | 77 | | | (45 | ) | | (1,091 | ) |
| Net income | | | 7,140 | | | 6,902 | | | 3,296 | | | 2,223 | |
| Net income per share: | | | | | | | | | | | | | |
| Basic | | | 0.27 | | | 0.26 | | | 0.13 | | | 0.09 | |
| Assuming dilution | | | 0.26 | | | 0.25 | | | 0.12 | | | 0.08 | |
| | | Quarter Ended (a) | |
| | | August 31, 2005(b) | | May 4, 2005 | | February 9, 2005 | | November 17, 2004 | |
| | | (119 days) | | (84 days) | | (84 days) | | (84 days) | |
| | | (In thousands except per share data) | |
| | | | | | | | | | |
| Sales | | $ | 104,293 | | $ | 75,371 | | $ | 70,969 | | $ | 67,768 | |
Gross profit (c) | | | 40,564 | | | 29,157 | | | 26,477 | | | 23,602 | |
| Income (loss) from continuing operations | | | 177 | | | 6,040 | | | 2,666 | | | (427 | ) |
| Discontinued operations | | | (2,037 | ) | | (2,336 | ) | | (39 | ) | | (596 | ) |
| Net income (loss) | | | (1,860 | ) | | 3,704 | | | 2,627 | | | (1,023 | ) |
| Net income (loss) per share: | | | | | | | | | | | | | |
| Basic | | | (0.08 | ) | | 0.16 | | | 0.12 | | | (0.05 | ) |
| Assuming dilution | | | (0.08 | ) | | 0.15 | | | 0.11 | | | (0.05 | ) |
(a)The quarter ended August 30, 2006 consists of four four-week periods and restatements.the quarter ended August 31, 2005 consisted of three four-week periods and one five-week period. All other quarters presented represent three four-week periods.
(b)Results include a write-off of $8.0 million associated with the conversion of the Company’s convertible subordinated debt (see Note 7, “Debt”, above).
(c)Represents “Sales” less “Cost of Food” and “Payroll and Related Costs”, as classified in the Consolidated Statement of Operation for each period presented.
| | Quarter Ended (a)
| |
| | August 31,
2005 (b)
| | May 4,
2005
| | February 9,
2005
| | November 17,
2004
| |
| | (119 days)
| | (84 days)
| | (84 days)
| | (84 days)
| |
| | (In thousands except per share data)
| |
| | | |
Sales | | $ | 105,423Note 16.Subsequent Events
| | $
| 76,241
| | $
| 71,904
| | $
| 68,583
| |
Gross profit (c)
| | | 40,754
| | | 29,228
| | | 26,591
| | | 23,817
| |
Income (loss) from continuing operations | | | 188
| | | 6,060
| | | 2,733
| | | (407
| )
|
Discontinued operations | | | (2,048
| )
| | (2,356
| )
| | (106
| )
| | (616
| )
|
Net (loss) income | | | (1,860
| )
| | 3,704
| | | 2,627
| | | (1,023
| )
|
Net (loss) income per share: | | | | | | | | | | | | | |
Basic | | | (0.08
| )
| | 0.16
| | | 0.12
| | | (0.05
| )
|
Assuming dilution | | | (0.08
| )
| | 0.15
| | | 0.11
| | | (0.05
| )
|
On October 19, 2006, pursuant to the Luby’s Incentive Stock Plan, the Company’s Board of Directors approved grants of options to purchase shares of the Company’s common stock for the following executive officers: Christopher J. Pappas, President and Chief Executive Officer (86,089 options); Harris J. Pappas, Chief Operating Officer (86,089 options); Ernest Pekmezaris, Senior Vice President and Chief Financial Officer (23,658 options); and Peter Tropoli, Senior Vice President, General Counsel and Secretary (23,658 options). The exercise price of each stock option is $10.18, the closing market price on the date of the grant, and the options vest and become exercisable in equal installments on each of the first four anniversaries of the date of grant. Vested options must be exercised within six years of the grant date.
The Board also approved grants of the Company’s common stock in the form of restricted stock. Mr. Pekmezaris received 3,286 shares of restricted stock, and Mr. Tropoli received 3,154 shares of restricted stock. The restricted stock fully vests and becomes unrestricted on October 19, 2009. The restricted stock is valued at the closing price of the Company’s common stock of $10.18 per share on October 19, 2006. If not vested, the restricted stock will automatically expire and terminate, and will be forfeited to the Company, on the date that the grantee’s employment is terminated, except upon retirement on or after the grantee’s 65th birthday, death, permanent and total disability, a leave of absence by the grantee or a change of control of the Company, as defined in the award agreement.
| | | Quarter Ended (a) | |
| | | August 25, 2004 (As adjusted) | | May 5, 2004 (As adjusted) | | February 11, 2004 (As adjusted) | | November 19, 2003 (As adjusted) | |
| | | (112 days) | | (84 days) | | (84 days) | | (84 days) | |
| | | (In thousands except per share data) | |
| | | | | | | | | | |
| Sales | | $ | 92,646 | | $ | 71,572 | | $ | 67,996 | | $ | 65,635 | |
Gross profit (c) | | | 31,921 | | | 26,427 | | | 23,767 | | | 22,850 | |
| Income (loss) from continuing operations | | | 6,394 | | | 2,680 | | | (1,498 | ) | | (1,887 | ) |
| Discontinued operations | | | (529 | ) | | (2,305 | ) | | (3,531 | ) | | (2,446 | ) |
| Net income (loss) | | | 5,865 | | | 375 | | | (5,029 | ) | | (4,333 | ) |
| Net income (loss) per share: | | | | | | | | | | | | | |
| Basic | | | 0.26 | | | 0.02 | | | (0.22 | ) | | (0.19 | ) |
| Assuming dilution | | | 0.25 | | | 0.02 | | | (0.22 | ) | | (0.19 | ) |
(a)
| The quarter ended August 31, 2005, consists of four four-week periods and one five-week period and the quarter ended August 25, 2004, consist of four four-week periods. All other quarters presented represent three four-week periods. |
(b)
| Results include a writeoff of $7.9 million associated with the conversion of the Company’s convertible subordinated debt (see Note 8. “Debt”). |
(c)
| Represents “Sales” less “Cost of Food” and “Payroll and Related Costs”, as classified in the Consolidated Statement of Operation for each period presented. |
| Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A.Controls and Procedures Evaluation of Disclosure Control and Procedures
The Company’sOur management, under the supervision and with the participation of the Company’sour Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’sour disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of August 31, 2005.30, 2006. Based on suchthat evaluation, the Company’sour Chief Executive Officer and Chief Financial Officer have concluded that, as of August 31, 2005, the Company’s30, 2006, our disclosure controls and procedures were effective in recording, processing, summarizing and reportingproviding reasonable assurance that information required to be disclosed by the Companyus in the reports that it fileswe file or submitssubmit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. For Management’s Report on Internal Control over Financial Report, see Item 8. Financial“Financial Statements and Supplementary Data - Report of Management.Management” in Item 8 of this report.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting during the quarter ended August 31, 200530, 2006 that have materially affected, or are reasonably likely to materially affect, the Company'sour internal control over financial reporting.
| Item 9B.Other Information |
None.
PART III
| Item 10.Directors and Executive Officers of the Registrant |
There is incorporated in this Item 10 by reference that portion of the Company'sour definitive proxy statement for the 20062007 annual meeting of shareholders appearing therein under the captions “Election of Directors,” “Information Concerning Meetings, Committees of the Board, and Compensation of Directors - Finance and Audit Committee,“Corporate Governance,” ”Section“Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Officers,” and “Corporate Governance.“Certain Relationships and Related Transactions.” Information regarding executive officers of the Company is set forth in Item 4A of Part I of this Report.
The Company hasWe have in place a Policy Guide on Standards of Conduct and Ethics applicable to all employees, as well as the board of directors, and Supplemental Standards of Conduct and Ethics for the CEO, CFO, Controller, and all senior financial officers. This Policy Guide and the Supplemental Standards were filed as exhibits to the Annual Report on Form 10-K for the fiscal year ended August 27, 2003. The Company intends2003 and can be found on our website at www.lubys.com. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendments to or waivers from the code of ethics or supplementary code of ethics by posting such information on the Company'sour website at www.lubys.com.
| Item 11.Executive Compensation |
There is incorporated in this Item 11 by reference that portion of the Company'sour definitive proxy statement for the 20062007 annual meeting of shareholders appearing therein under the captions “Compensation of Directors,“Director Compensation,” “Executive Compensation Committee Report,” “Executive Compensation,Officers,” “Deferred Compensation,” and”“Certainand “Certain Relationships and Related Transactions.”
| Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
There is incorporated in this Item 12 by reference that portion of the Company'sour definitive proxy statement for the 20052007 annual meeting of shareholders appearing therein under the captions “Ownership of Equity Securities in the Company” and “Principal Shareholders.”
Securities authorized under our equity compensation plans as of August 31, 2005,30, 2006, were as follows:
| | | (a) | | (b) | | (c) | | | (a) | | (b) | | (c) | |
| | | | | | | | | | | | | | | |
| Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Excluding Securities Reflected in Column (a)) | | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans Excluding Securities Reflected in Column (a)) | |
| | | | | | | | | | | | | | | |
| Equity compensation plans previously approved by security holders | | | 481,382 | | $ | 8.62 | | | 1,907,250 | | | | 262,182 | | $ | 6.99 | | | 1,875,000 | |
| Equity compensation plans not previously approved by security holders | | | 2,269,625 | | | 5.02 | | | - | | | | 2,269,625 | | | 5.02 | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | | 2,751,007 | | $ | 5.65 | | | 1,907,250 | | | | 2,531,807 | | $ | 5.23 | | | 1,875,000 | |
Item 13.
| Item 13.Certain Relationships and Related Transactions |
There is incorporated in this Item 13 by reference that portion of the Company'sour definitive proxy statement for the 20062007 annual meeting of shareholders appearing therein under the caption “Certain Relationships and Related Transactions.”
| Item 14.Principal Accountant Fees and Services |
There is incorporated in this Item 14 by reference that portion of the Company'sour definitive proxy statement for the 20062007 annual meeting of shareholders appearing therein under the caption “Principal Accountant Fees and Services.“Fees Paid To The Independent Auditor.”
PART IV
| Item 15. Exhibits, and Financial Statement Schedules |
| The following financial statements are filed as part of this Report: |
| Consolidated balance sheets at August 30, 2006, and August 31, 2005 and August 25, 2004 |
| Consolidated statements of operations for each of the three years in the period ended August 31, 2005 |
Consolidated statements of operations for each of the three years in the period ended August 30, 2006
| Consolidated statements of shareholders' equity for each of the three years in the period ended August 31, 2005 |
Consolidated statements of shareholders' equity for each of the three years in the period ended August 30, 2006
| Consolidated statements of cash flows for each of the three years in the period ended August 31, 2005 |
Consolidated statements of cash flows for each of the three years in the period ended August 30, 2006
| Notes to consolidated financial statements |
| Attestation Reports of Independent Registered Public Accounting Firm |
2.
| 2.Financial Statement Schedules |
| All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto. |
| The following exhibits are filed as a part of this Report: |
| 3(a) | | Certificate of Incorporation of Luby's, Inc. as currently in effect (filed as Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1999, and incorporated herein by reference). |
| | | |
| 3(b) | | Bylaws of Luby's, Inc. as currently in effect (filed as Exhibit 3(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference). |
| | | |
| 4(a) | | Description of Common Stock Purchase Rights of Luby's Cafeterias, Inc., in Form 8-A (filed April 17, 1991, effective April 26, 1991, File No. 1-8308, and incorporated herein by reference). |
| | | |
| 4(b) | | Amendment No. 1 dated December 19, 1991, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, and incorporated herein by reference). |
| | | |
| 4(c) | | Amendment No. 2 dated February 7, 1995, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995, and incorporated herein by reference). |
| | | |
| 4(d) | | Amendment No. 3 dated May 29, 1995, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995, and incorporated herein by reference). |
| | | |
| 4(e) | | Amendment No. 4 dated March 8, 2001, to Rights Agreement dated April 16, 1991 (filed as Exhibit 99.1 to the Company's Report on Form 8-A12B/A on March 22, 2001, and incorporated herein by reference). |
| 4(f) | | Credit Agreement dated August 31, 2005, among Luby's, Inc., the lenders party thereto, Wells Fargo Bank, National Association and Amegy Bank, National Association, as Documentation Agents, and JPMorgan Chase Bank, National Association, as Administrative Agent.Agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 31, 2005, and incorporated herein by reference). |
| | | |
| 10(a) | | Management Incentive Stock Plan of Luby's Cafeterias, Inc. (filed as Exhibit 10(i) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1989, and incorporated herein by reference).* |
| | | |
| 10(b) | | Amendment to Management Incentive Stock Plan of Luby's Cafeterias, Inc. adopted January 14, 1997 (filed as Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference).* |
| | | |
| 10(c) | | Nonemployee Director Deferred Compensation Plan of Luby's Cafeterias, Inc. adopted October 27, 1994 (filed as Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1994, and incorporated herein by reference).* |
| | | |
| 10(d) | | Amendment to Nonemployee Director Deferred Compensation Plan of Luby's Cafeterias, Inc. adopted January 14, 1997 (filed as Exhibit 10(m) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference).* |
| | | |
| 10(e) | | Amendment to Nonemployee Director Deferred Compensation Plan of Luby's Cafeterias, Inc. adopted March 19, 1998 (filed as Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference).* |
| | | |
| 10(f) | | Amended and Restated Nonemployee Director Stock Option Plan of Luby's, Inc. approved by the shareholders of Luby's, Inc. on January 14, 2000 (filed as Exhibit 10(j) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 2000, and incorporated herein by reference).* |
| | | |
| 10(g) | | Amended and Restated Non-employee Director Stock Plan of Luby's, Inc. approved by the shareholders of Luby's, Inc. on January 20, 2005 (filed as Exhibit 10(ee) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 9, 2005, and incorporated herein by reference).* |
| | |
| 10(h) | | Luby's Cafeterias, Inc. Supplemental Executive Retirement Plan dated May 30, 1996 (filed as Exhibit 10(j) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, and incorporated herein by reference).* |
| | | |
10(h)10(i) | | Amendment to Luby's Cafeterias, Inc. Supplemental Executive Retirement Plan adopted January 14, 1997 (filed as Exhibit 10(r) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference).* |
| | | |
10(i)10(j) | | Amendment to Luby's Cafeterias, Inc. Supplemental Executive Retirement Plan adopted January 9, 1998 (filed as Exhibit 10(u) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference).* |
| | | |
10(j)10(k) | | Amendment to Luby's Cafeterias, Inc. Supplemental Executive Retirement Plan adopted May 21, 1999 (filed as Exhibit 10(q) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1999, and incorporated herein by reference.)* |
| | | |
10(k)10(l) | | Luby's Incentive Stock Plan adopted October 16, 1998 (filed as Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, and incorporated herein by reference).* |
| | | |
10(l)10(m) | | Amended and Restated Luby’s Incentive Stock Plan adopted January 19, 2006 (filed as Exhibit 10(ee) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 15, 2006, and incorporated herein by reference).* |
| | |
| 10(n) | | Registration Rights Agreement dated March 9, 2001, by and among Luby's, Inc., Christopher J. Pappas, and Harris J. Pappas (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated March 9, 2001, and incorporated herein by reference). |
| | | |
10(m)10(o) | | Purchase Agreement dated March 9, 2001, by and among Luby's, Inc. Harris J. Pappas, and Christopher J. Pappas (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 9, 2001, and incorporated herein by reference). |
| | | |
10(n)10(p) | | Luby's, Inc. Stock Option granted to Christopher J. Pappas on March 9, 2001 (filed as Exhibit 10(w) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 2001, and incorporated herein by reference).* |
10(o)10(q) | | Luby's, Inc. Stock Option granted to Harris J. Pappas on March 9, 2001 (filed as Exhibit 10(x) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 2001, and incorporated herein by reference).* |
| | | |
10(p)10(r) | | Affiliate Services Agreement dated August 31, 2001, by and among Luby's, Inc., Christopher J. Pappas, Harris J. Pappas, Pappas Restaurants, L.P., and Pappas Restaurants, Inc. (filed as Exhibit 10(y) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2001, refiled as Exhibit 10(y) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 13, 2002, to include signature reference and an exhibit that were inadvertently omitted, and incorporated herein by reference). |
| | | |
10(q)10(s) | | Lease Agreement dated June 1, 2001, by and between Luby's, Inc. and Pappas Restaurants, Inc. (filed as Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2001, and incorporated herein by reference). |
| | | |
10(r)10(t) | | Luby's, Inc. Amended and Restated Nonemployee Director Phantom Stock Plan effective September 28, 2001 (filed as Exhibit 10(dd) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 13, 2002, and incorporated herein by reference).* |
| | | |
10(s)10(u) | | Form of Indemnification Agreement entered into between Luby's, Inc. and each member of its Board of Directors initially dated July 23, 2002 (filed as Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the fiscal year ended August 28, 2002, and incorporated herein by reference). |
| | | |
10(t)10(v) | | Amended and Restated Affiliate Services Agreement dated July 23, 2002, by and among Luby's, Inc., Pappas Restaurants, L.P., and Pappas Restaurants, Inc. (filed as Exhibit 10(hh) to the Company's Annual Report on Form 10-K for the fiscal year ended August 28, 2002, and incorporated herein by reference). |
| | | |
10(u)10(w) | | Master Sales Agreement dated July 23, 2002, by and among Luby's, Inc., Pappas Restaurants, L.P., and Pappas Restaurants, Inc. and Procedure adopted by the Finance and Audit Committee of the Board of Directors on July 23, 2002, pursuant to Section 2.3 of the Master Sales Agreement (filed as Exhibit 10(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended August 28, 2002, and incorporated herein by reference). |
| | | |
10(v)10(x) | | Lease Agreement dated October 15, 2002, by and between Luby's, Inc. and Rush Truck Centers of Texas, L.P. and Amendment dated August 1, 2003, by and between Luby's, Inc. and Pappas Restaurants, Inc. (filed as Exhibit 10(gg) to the Company's Annual Report on Form 10-K/A for the fiscal year ended August 27, 2003, and incorporated herein by reference). |
| | | |
10(w)10(y) | | Agreement dated June 7, 2004, by and among Luby's, Inc., Christopher J. Pappas, and Harris J. Pappas (filed as Exhibit 4(s) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 5, 2004, and incorporated herein by reference). |
| | | |
10(x)10(z) | | First Amendment to Purchase Agreement dated June 7, 2004, by and among Luby's, Inc., Harris J. Pappas, and Christopher J. Pappas (filed as Exhibit 4(s) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 5, 2004, and incorporated herein by reference). |
| | | |
10(y)10(aa) | | Employment Agreement dated November 9, 2005, between Luby's, Inc. and Christopher J. Pappas.Pappas (filed as Exhibit 10(y) to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2005, and incorporated herein by reference).* |
| | | |
10(z)10(bb) | | Employment Agreement dated November 9, 2005, between Luby's, Inc. and Harris J. Pappas.Pappas (filed as Exhibit 10(z) to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2005, and incorporated herein by reference).* |
| | | |
| 11 | | Statement regarding computation of Per Share Earnings. ** |
| | | |
| 14(a) | | Policy Guide on Standards of Conduct and Ethics applicable to all employees, as well as the board of directors (filed as Exhibit 14(a) to the Company's Annual Report on Form 10-K for the fiscal year ended August 27, 2003, and incorporated herein by reference). |
| 14(b) | | Supplemental Standards of Conduct and Ethics for the CEO, CFO, Controller, and all senior financial officers (filed as Exhibit 14(b) to the Company's Annual Report on Form 10-K for the fiscal year ended August 27, 2003, and incorporated herein by reference). |
| | | |
| 21 | | Subsidiaries of registrant. |
| | | |
| 23 | | Consent of Ernst & Young LLP. |
| | | |
| 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 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 Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 99(a) | | Corporate Governance Guidelines of Luby's, Inc., as amended March 5, 2003 (filed as Exhibit 99(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 13, 2003, and incorporated herein by reference).October 28, 2004. |
| * | Denotes management contract or compensatory plan or arrangement. |
| ** | Information required to be presented in Exhibit 11 is provided in note 8Note 14 “Per Share Information” of the Notes to the consolidated financial statementsConsolidated Financial Statements under Part II, Item 8 of this Form 10-K in accordance with the provisions of FASB Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. |
Pursuant to the requirements of Section 13 or 15(d) 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.
November 11, 200513, 2006 | | LUBY'S, INC. |
| Date | | (Registrant) |
| By: | /s/Christopher J. Pappas | |
| | Christopher J. Pappas | |
| | President and Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature and Date | | Name and Title |
| | | |
| /s/GASPER MIR, III | | Gasper Mir, III, Director and Chairman of the Board |
November 11, 200513, 2006 | | |
| | | |
| /s/CHRISTOPHER J. PAPPAS | | Christopher J. Pappas, Director, President and Chief Executive Officer |
November 11, 200513, 2006 | | |
| | | |
| /s/HARRIS J. PAPPAS | | Harris J. Pappas, Director, and Chief Operating Officer |
November 11, 200513, 2006 | | |
| | | |
| /s/ERNEST PEKMEZARIS | | Ernest Pekmezaris, Senior Vice President and Chief Financial Officer |
November 11, 200513, 2006 | | |
| | | |
| /s/JUDITH B. CRAVEN | | Judith B. Craven, Director |
November 11, 200513, 2006 | | |
| | | |
| /s/ARTHUR R. EMERSON | | Arthur R. Emerson, Director |
November 11, 200513, 2006 | | |
| | | |
| /s/JILL GRIFFIN | | Jill Griffin, Director |
November 11, 200513, 2006 | | |
| | | |
| /s/J.S.B. JENKINS | | J.S.B. Jenkins, Director |
November 11, 200513, 2006 | | |
| | | |
| /s/FRANK MARKANTONIS | | Frank Markantonis, Director |
November 11, 200513, 2006 | | |
| | | |
| /s/JOE C. MC KINNEY | | Joe C. McKinney, Director |
November 11, 200513, 2006 | | |
| | | |
| /s/JIM W. WOLIVER | | Jim W. Woliver, Director |
November 11, 200513, 2006 | | |
| 3(a) | | Certificate of Incorporation of Luby's, Inc. as currently in effect (filed as Exhibit 3(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1999, and incorporated herein by reference). |
| | | |
| 3(b) | | Bylaws of Luby's, Inc. as currently in effect (filed as Exhibit 3(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference). |
| | | |
| 4(a) | | Description of Common Stock Purchase Rights of Luby's Cafeterias, Inc., in Form 8-A (filed April 17, 1991, effective April 26, 1991, File No. 1-8308, and incorporated herein by reference). |
| | | |
| 4(b) | | Amendment No. 1 dated December 19, 1991, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991, and incorporated herein by reference). |
| | | |
| 4(c) | | Amendment No. 2 dated February 7, 1995, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1995, and incorporated herein by reference). |
| | | |
| 4(d) | | Amendment No. 3 dated May 29, 1995, to Rights Agreement dated April 16, 1991 (filed as Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995, and incorporated herein by reference). |
| | | |
| 4(e) | | Amendment No. 4 dated March 8, 2001, to Rights Agreement dated April 16, 1991 (filed as Exhibit 99.1 to the Company's Report on Form 8-A12B/A on March 22, 2001, and incorporated herein by reference). |
| | | |
| 4(f) | | Credit Agreement, dated August 31, 2005, among Luby’s, Inc., the lenders party thereto, Wells Fargo Bank, National Association and Amegy Bank, National Association, as Documentation Agents, and JPMorgan Chase Bank, National Association, as Administrative Agent.Agent (filed as Exhibit 10.1, to the Company’s current report on Form 8-K dated August 31, 2005, and incorporated herein by reference. |
| | | |
| 10(a) | | Management Incentive Stock Plan of Luby's Cafeterias, Inc. (filed as Exhibit 10(i) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1989, and incorporated herein by reference).* |
| | | |
| 10(b) | | Amendment to Management Incentive Stock Plan of Luby's Cafeterias, Inc. adopted January 14, 1997 (filed as Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference).* |
| | |
| | | |
| 10(c) | | Nonemployee Director Deferred Compensation Plan of Luby's Cafeterias, Inc. adopted October 27, 1994 (filed as Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 1994, and incorporated herein by reference).* |
| | | |
| 10(d) | | Amendment to Nonemployee Director Deferred Compensation Plan of Luby's Cafeterias, Inc. adopted January 14, 1997 (filed as Exhibit 10(m) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference).* |
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| 10(e) | | Amendment to Nonemployee Director Deferred Compensation Plan of Luby's Cafeterias, Inc. adopted March 19, 1998 (filed as Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference).* |
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| 10(f) | | Amended and Restated Nonemployee Director Stock Option Plan of Luby's, Inc. approved by the shareholders of Luby's, Inc. on January 14, 2000 (filed as Exhibit 10(j) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 29, 2000, and incorporated herein by reference).* |
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| 10(g) | | Luby's Cafeterias, Inc. Supplemental Executive Retirement Plan dated May 30, 1996 (filed as Exhibit 10(j) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, and incorporated herein by reference).* |
| 10(h) | | Amendment to Luby's Cafeterias, Inc. Supplemental Executive Retirement Plan adopted January 14, 1997 (filed as Exhibit 10(r) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997, and incorporated herein by reference).* |
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| 10(i) | | Amendment to Luby's Cafeterias, Inc. Supplemental Executive Retirement Plan adopted January 9, 1998 (filed as Exhibit 10(u) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998, and incorporated herein by reference).* |
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| 10(j) | | Amendment to Luby's Cafeterias, Inc. Supplemental Executive Retirement Plan adopted May 21, 1999 (filed as Exhibit 10(q) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 1999, and incorporated herein by reference.)* |
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| 10(k) | | Luby's Incentive Stock Plan adopted October 16, 1998 (filed as Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, and incorporated herein by reference).* |
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| 10(l) | | Registration Rights Agreement dated March 9, 2001, by and among Luby's, Inc., Christopher J. Pappas, and Harris J. Pappas (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated March 9, 2001, and incorporated herein by reference). |
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| 10(m) | | Purchase Agreement dated March 9, 2001, by and among Luby's, Inc. Harris J. Pappas, and Christopher J. Pappas (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 9, 2001, and incorporated herein by reference). |
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| 10(n) | | Luby's, Inc. Stock Option granted to Christopher J. Pappas on March 9, 2001 (filed as Exhibit 10(w) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 2001, and incorporated herein by reference).* |
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| 10(o) | | Luby's, Inc. Stock Option granted to Harris J. Pappas on March 9, 2001 (filed as Exhibit 10(x) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 2001, and incorporated herein by reference).* |
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| 10(p) | | Affiliate Services Agreement dated August 31, 2001, by and among Luby's, Inc., Christopher J. Pappas, Harris J. Pappas, Pappas Restaurants, L.P., and Pappas Restaurants, Inc. (filed as Exhibit 10(y) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2001, refiled as Exhibit 10(y) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 13, 2002, to include signature reference and an exhibit that were inadvertently omitted, and incorporated herein by reference). |
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| 10(q) | | Lease Agreement dated June 1, 2001, by and between Luby's, Inc. and Pappas Restaurants, Inc. (filed as Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2001, and incorporated herein by reference). |
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| 10(r) | | Luby's, Inc. Amended and Restated Nonemployee Director Phantom Stock Plan effective September 28, 2001 (filed as Exhibit 10(dd) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 13, 2002, and incorporated herein by reference).* |
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| 10(s) | | Form of Indemnification Agreement entered into between Luby's, Inc. and each member of its Board of Directors initially dated July 23, 2002 (filed as Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the fiscal year ended August 28, 2002, and incorporated herein by reference). |
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| 10(t) | | Amended and Restated Affiliate Services Agreement dated July 23, 2002, by and among Luby's, Inc., Pappas Restaurants, L.P., and Pappas Restaurants, Inc. (filed as Exhibit 10(hh) to the Company's Annual Report on Form 10-K for the fiscal year ended August 28, 2002, and incorporated herein by reference). |
| 10(u) | | Master Sales Agreement dated July 23, 2002, by and among Luby's, Inc., Pappas Restaurants, L.P., and Pappas Restaurants, Inc. and Procedure adopted by the Finance and Audit Committee of the Board of Directors on July 23, 2002, pursuant to Section 2.3 of the Master Sales Agreement (filed as Exhibit 10(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended August 28, 2002, and incorporated herein by reference). |
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| 10(v) | | Lease Agreement dated October 15, 2002, by and between Luby's, Inc. and Rush Truck Centers of Texas, L.P. and Amendment dated August 1, 2003, by and between Luby's, Inc. and Pappas Restaurants, Inc. (filed as Exhibit 10(gg) to the Company's Annual Report on Form 10-K/A for the fiscal year ended August 27, 2003, and incorporated herein by reference). |
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| 10(w) | | Agreement dated June 7, 2004, by and among Luby's, Inc., Christopher J. Pappas, and Harris J. Pappas (filed as Exhibit 4(s) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 5, 2004, and incorporated herein by reference). |
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| 10(x) | | First Amendment to Purchase Agreement dated June 7, 2004, by and among Luby's, Inc., Harris J. Pappas, and Christopher J. Pappas (filed as Exhibit 4(s) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 5, 2004, and incorporated herein by reference). |
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| 10(y) | | Employment Agreement dated November 9, 2005, between Luby's, Inc. and Christopher J. Pappas*Pappas. (filed as Exhibit 10(y) to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2005, and incorporated herein by reference).* |
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| 10(z) | | Employment Agreement dated November 9, 2005, between Luby's, Inc. and Harris J. Pappas*Pappas (filed as Exhibit 10(z) to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2005, and incorporated herein by reference).* |
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| 11 | | Statement regarding computation of Per Share Earnings.** |
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| 14(a) | | Policy Guide on Standards of Conduct and Ethics applicable to all employees, as well as the board of directors (filed as Exhibit 14(a) to the Company's Annual Report on Form 10-K for the fiscal year ended August 27, 2003, and incorporated herein by reference). |
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| 14(b) | | Supplemental Standards of Conduct and Ethics for the CEO, CFO, Controller, and all senior financial officers (filed as Exhibit 14(b) to the Company's Annual Report on Form 10-K for the fiscal year ended August 27, 2003, and incorporated herein by reference). |
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| 21 | | Subsidiaries of Registrant |
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| 23 | | Consent of Ernst & Young LLP. |
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| 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. |
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| 31.2 | | Rule 13a-14(a)/15d-14(a) certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 32.1 | | Section 1350 certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| 32.2 | | Section 1350 certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| 99(a) | | Corporate Governance Guidelines of Luby's, Inc., as amended March 5, 2003 (filed as Exhibit 99(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended February 13, 2003, and incorporated herein by reference).October 28, 2004. |
| * | Denotes management contract or compensatory plan or arrangement. |
| ** | Information required to be presented in Exhibit 11 is provided in note 8Note 14 “Per Share Information” of the Notes to the consolidated financial statementsConsolidated Financial Statements under Part II, Item 8 of this Form 10-K in accordance with the provisions of FASB Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. |